Automotive manufacturers of 2009: Numbers convey their Supply Chain behavior
So the “Report cards” of the automotive manufacturers in US are out!! There are contrasting realities and some startling facts!!!. Do the Japanese and American car manufacturers behave the same way in the face of recession? How do their manufacturing and supply chain strategies reflect on their overall performance? Are there any “dark horses” among the American manufacturers who would pose the biggest threats to the Japanese in future? Are there laggards among the Japanese who would have to face the threat of survival in future? The numbers convey their behavior!!
Figure-1: The numbers of 2009 which tell a story in US Automotive market
As sales were slashed by an average 20% due to the plummeting consumer confidence and the tightened credit, most automotive manufacturers saw erosion of their capacities. Utilization which had reached 70% levels now declined to 30% levels for most manufacturers. The Capacity utilization changes for other Japanese manufacturers have reduced in the range of 20%. This is in line with the Japanese philosophy of evening out utilization so that there are no major roadblocks during capacity ramp-up or ramp-down. In contrast, the capacities of Chrysler and GM have been slashed by above 50%, which lead to instances of plant closure, huge layoffs and the like. This provides a behavioral difference between the Japanese and the American manufacturers. In this pack Ford is a startling contrast, which has only reduced capacities by 17% and is in league with the Japanese. Also to be noted is the trend of Nissan which is drifting away from the Japanese philosophy of being frugal on capacities.
In these times of excruciating pressure of sales dip, Hyundai has kept its flag aloft with an 8% growth in volumes. Corporate philosophy says it was due to sharp focus, but industry practitioners know that most it was driven from the 1,00,000 kms warranty sop they provided to their customers.
From the Inventory position, the drop in sales has driven the drastic decimation of the inventories by about 50%. A closer look at the Sales change and Inventory change rates show that Hyundai is away from the pack. This is the only manufacturer which has shown boldness to reduce inventory in the face of increase in sales. This is only possible when a manufacturer is able to device lean supply chain. This is possibly the major cause of profits displayed by Hyundai. This does not in any way indicate that others who could not emulate Hyundai were non-profitable. It only demonstrates that the opportunity which Hyundai utilized to derive margins from a lean supply chain could not be used to that level by others.
Not trailing far behind Hyundai are the Japanese biggies Toyota and Honda which have shown discipline in large cuts in inventory against sales decline. This ratio is to the tune of 2.5. This is a core “Japanese behavior”. Even though Toyota had drifted away from its lean principles when it built up components inventory in the wake of supplier bankruptcies, but is has never left its lean principles when it comes to vehicle supply chain. A sharp contrast to this trend is observed with Nissan, which has shed inventories in a very conservative manner. Against a sales decline of about 20% in Honda and Toyota, they registered an inventory decline of 50%, but Nissan could only achieve a decrease of 35%. Nissan shows a ratio of 1.78 against average Japanese trend of 2.5. These ratios are shown in Figure-2.
Compare this with the trend of Chrysler (ratio of 1.39) and GM (ratio of 1.65). Whereas GM has been able to manage their inventories better than Chrysler, but they are far away from their Japanese stalwarts, Honda and Toyota. This is what I say is an “American behavior” in vehicle supply chain management. Nissan, being a Japanese manufacturer shows a more “American behavior” with conservative inventory declines against the sales decline. And for those who prefer eyeballing trends than getting into the mess of data crunching, this behavior is very well displayed when we plot the sales change% with Inventory DoS change% in Figure-2
Figure-2: The Correlation Trend of Sales decline and Inventory decline
Whereas Chrysler, Ford, GM and Nissan show similar movements, when this is compared with the trends of Honda and Toyota, there is a sharp change in alignment. This is similarity is accentuated by Correlation coefficient (r) calculations as shown in the Figure-2 above. This coefficient denotes that if the values are positive and closes to 1, there is a very strong converging trend. The lower the value of the coefficient from 1, the weaker is the similarity of trend. So a value of r = 0.97 shows that with the decline in sales trend, these organizations (Chrysler, Ford, GM and Nissan) show similar rates of decline in their inventory DoS trend. The value of coefficient r = 0.61 means that when we club this group with the Group of Toyota and Honda, the value deteriorates, as the behavior of these two groups are different.
Just like Nissan has adopted an American behavior in supply chain, Ford shows a contrast and displays a close-to Japanese behavior in supply chain. Their ratio of 2.11 tells the difference.
These figures bring out the basic cultural mind-shift among the American and Japanese manufacturers operating in US. The prudent capacity utilization and the lean supply chain philosophies are going to be the “Guru Mantra” for these manufacturers to survive in the US market. Ford has shown drift in the right direction and promises of bright future ahead. This is borne out by the fact that their present Executive Chairman Bill Ford Jr. is personally attached to make structural changes to make things happen. Chrysler and GM are still to settle with their new leadership. It will be interesting to watch how the new leadership of these two heritage carmakers are able to make path-breaking breakthroughs. And with this is a challenge to Nissan to re-invent their Japanese basics to continue “hold fort” in the US market.