Dan Markovitz is our guest blogger today, with a post asking yet again if GM’s leadership really gets it. Dan has been a regular contributor of articles to the Superfactory website and to the Evolving Excellence blog.
Last week, the Wall Street Journal had an article on year-end inventory levels for Detroit’s automakers. Sadly, it seems that top management at GM doesn’t really understand the lessons of lean, despite some of the improvements made on assembly lines.
Bank of America analyst Ron Tadross noted that GM will likely end 2006 with an inventory of about one million vehicles.
In a recent interview, GM Chief Financial Officer Frederick "Fritz" Henderson said GM thinks that level is "appropriate" given its large dealer network and broad product line. "Our dealers like inventory," he said. "They like having the vehicles customers want right on the lot."
But, Mr. Tadross pointed out in a report, GM’s inventory has remained in the range of one million vehicles over the last several years as its market share has declined by four percentage points.
GM, Ford and Chrysler each stock roughly 40,000 vehicles on dealer lots for each point of market share — more than twice the level stocked by Toyota Motor Corp.
Fritz Henderson maintains that their "dealers like inventory." But his claim shows that he neither understands who GM’s customer really is, nor does he understand the concept of true customer value.
First, who is GM’s real customer? Is it the dealership, or is it the end user who actually buys and drives the cars? Leaving aside for a moment the legal arrangements between GM and its dealers, I think it’s incontrovertibly the end user. Yes, it’s true that GM has to convince dealers to stay with the company, and in that sense, GM has to "sell" dealers on their cars. But dealers are in business to sell cars, and they’ll stick with the manufacturer that gives them the best chance of doing so. So, the consumer is the real customer for GM.
Now that we know who the customer is, we can ask the central question of lean: what does the customer value, and how can we deliver it with a minimum of waste? Does the consumer value large inventories? Does the consumer want to pay the cost to build those large inventories? Or the cost to store those large inventories on the lot? No. Of course not. Consumers want to buy the car they want, when they want it, and at the lowest possible cost. Having large inventories on dealer lots is irrelevant to them; all they care about is that the dealer has the one model they want. (For that matter, the dealers would surely prefer to have the one car each customer wants, without having to inventory all the irrelevant cars the customer doesn’t want.)
In a perfect world, of course, we’d have true one-piece flow, with each piece being pulled by the customer. But we’re not there yet, so we need to have inventories all along the value stream to ensure a level flow of production. A lean organization sees these inventories as a necessary evil, not a good thing in and of themselves. And that’s where GM’s CFO errs. He seems to view inventory as a good thing. (Perhaps because as the CFO, he’s accustomed to accounting for inventory as an asset, not a liability.)
To be fair to Mr. Henderson, dealers do like "having the vehicles customer want right on the lot." Well, yes. Who wouldn’t? However, the key issue is not what the dealer wants, but what the customer wants.
Does the customer want to wait, say, two or three days to pick up his car? Probably not. Ideally, the car would be right there ready to drive off the lot. But customers aren’t stupid either. They know that sometimes they have to wait. And Toyota and GM sales trends are crystal clear on one point: that consumers recognize automotive value, and are willing to pay for it. If that means they have to trade off a few days of waiting in order to get a car that provides greater value, they’ll do so.
The average car buyer can’t calculate the cost of GM’s excess inventory, of course, but they don’t need to. That cost manifests itself in higher prices, or cheaper materials, or fewer features in the actual cars. So when consumers choose a Toyota over a Chevy, they’re making a clear statement about what they value and what they want to pay for.
In this light, is GM’s inventory level really "appropriate," as the CFO claims?