Chinese automakers should focus on Inventory management

Background:
Affected by the global economic crises, China's automobile sales fell for several months in the second half of 2008, and the downtrend continued even to the first one or two months of 2009. Many automakers didn't dare to expect high in forecasting the 2009 China auto market, and didn't prepare more output for a possible boom. So when the sales have been accelerating in recent months, they rush to increase capacity to fulfill the rising demand, but their Tier-1,-2 or-3 suppliers may not have enough capacity to follow.

Gasgoo.com: How was the automakers' supply chain impacted by the Boom and Bust in the market?

Duane Bolinger: Because of a general lack of implementation of best practices in China like Inventory Management & Control and Supply Risk Management, the bust conditions have resulted in many suppliers seeing an increased pressure on their balance sheets and Cash Flow. With regards to Chinese manufacturers, 15% are now considered as financially distressed. This is up from 9% in 2008.

The recent boom conditions in the Chinese Auto sector since late 1st Quarter have been met with unbalanced inventories, shortages and considerable number of internal resources diverted to work on resolving capacity constraints within many of the automakers' supply chains.

We see Inventory Management as perhaps the single greatest opportunity for operational improvement in China and, an area where many Chinese Manufacturers should begin to immediately focus their attention! End-to-end supply chain involvement is critical for auto manufacturers if they are to create a competitive advantage versus their competitors.

Gasgoo.com: What types of strategies have the automakers taken to address the supply chain challenge brought by the Boom and Bust?

Duane Bolinger: The goal of any enterprise should be to increase the speed at which orders can be converted to cash. This speed reduces delays in customer requests, and can reduce resources consumed in the order-to-delivery process. Excessive inventory is wasteful and shortages impede the firm’s ability to meet customer requirements. Excess inventory or inventory shortages are the result of poor business process performance. Suboptimal business processes include lack of strong replenishment rules, control of carrier movements and carrier contracted delivery lead times, poor shop floor control, dock-management, slow or bureaucratic decision making and lack of pipeline visibility. The key metrics to reducing inventory is order-to-delivery lead time, and rate of order fulfillment, and inventory turns.

Statistics reported by BBK show that inventory turns at Chinese suppliers significantly lag the performance of its peers in other countries. Inventory turns is measured as Annual sales / Inventory (Finished, WIP & raw material). China suppliers have on average inventory turns of 3 versus their peers in Korea, Japan, U.S. & Europe where averages are greater than 10. Reducing inventory levels frees up cash and improves a firm’s liquidity which is most crucial in this environment. For many firms this also reduces its need for bank borrowings and their associated interest expense. One of the first places we look for improvement in financially distressed companies is Inventory Management

Our experience with distressed suppliers has demonstrated that the lack of integrated business processes, lack of change control and lack of management visibility to performance often leads to a typical “knee-jerk” financial reaction to simply reduce inventory in times of bust. When inventory reduction becomes the objective (rather than an out-come of synchronized business processes), then the reduction in inventory simply reduces critical buffers within the delivery process. The inability to effectively manage material flow with sub-optimal business processes will accelerate financial distress, and result is loss of customer deliveries and confidence.

Gasgoo.com: Why can some automakers choose and implement some strategy, while others can not? On what supply chain management structure is their choice of strategy based?

Duane Bolinger: Our experience points to there typically being two basic root causes to poor Inventory Management:

1)Either a supplier/plant does not have visibility to a respond to change in business conditions (i.e.; Sales decline, accumulation of inventory, etc.) or

2)The supplier/plant can see a change, but are not sophisticated enough to know what caused the change; (i.e.; order-production management, poor supply execution, delayed material delivery, purchasing risk-aversion, clutter warehousing, or pipeline delays due to sourcing strategies)

Generally, inventory can be addressed by improving the integration of demand, supply, and distribution management and this often does not require lots of money and time.

Gasgoo.com: What strategy should Chinese automakers (other than the JVs) choose in the current situation and in the future competition?

Duane Bolinger: The volatility seen recently in volumes will cause companies to increase their focus on inventory and capacity management. Those companies that understand and can manage their supply chains effectively can create a competitive advantage versus their competitors.

The future will require companies to adjust to remain competitive and in some cases stay alive. Those adjustments will include implementing best practices like Supply Risk Management, Lean principles and Inventory Management.