<a target="_blank" rel="noopener noreferrer" href="https://auto.economictimes.indiatimes.com/news/industry/turning-the-tide-effective-strategies-for-mitigating-inventory-excess-in-indian-dealerships/114215434 ">Published in ETAuto.com, 15 October, 2024. </a>The Indian auto dealerships are facing significant challenges as a recent decline in car sales in India has left them burdened with a substantial inventory surplus - equivalent to approximately 85 days of sales. Despite receiving clear signals of slowing demand, many OEMs (Original Equipment Manufacturers), driven by the pressure to maintain full capacity utilisation, continued production at maximum levels. This is not the first time the auto industry has faced excess inventory. Similar situations have occurred  several times in the past and have been widely reported in the media. This chronic problem underscores broader inefficiencies in the industry's inventory management.   In this article, we examine the root causes behind the surge in inventory levels at dealerships and explore strategies that companies can implement to align production more effectively with demand. This would enable a more efficient and win-win inventory management for both OEMs and dealerships while ensuring that supplier partners are not adversely affected. Let’s first explore why this situation occurs.  <h5> </h5><h2>The genesis of the inventory crisis</h2>Inventory issues at dealerships stem from two key factors. First, companies set annual targets, which are then broken down into monthly goals for regional sales teams. The sales force is expected to meet these targets consistently. These targets also drive manufacturing forecasts and production plans, as companies strive to meet their internal projections. Second, to demonstrate that market share is either maintained or gained, as reported by industry bodies such as SIAM, based on wholesale data, companies need to show strong primary sales performance.   To protect market share and meet planned targets, companies continue producing based on monthly forecasts. However, these forecasts are often inaccurate, leading to a mismatch between production and actual retail demand. Nevertheless, to achieve primary sales targets, companies push available stock to dealerships, regardless of whether it matches dealership requirements. This creates a disconnect between what dealerships hold in inventory and what customers actually want. For instance, despite having 85 days' worth of inventory, dealerships may still be unable to provide customers with the specific models, colours or configurations they are looking for, resulting in excess inventory.   The cumulative effect of this target-driven inventory push, combined with the need to protect primary sales numbers, is evident in the widening gap between retail(2) and wholesale sales data. To make matters worse, pushing inventory into dealerships in this manner delays real market feedback reaching the company. The production and procurement departments  have little visibility into actual retail demand because they rely primarily on internal forecasts. As a result, they remain unaware of changing market preferences. Although there may be clear indications that the market is slowing, demand patterns are shifting, and different SKUs are required, this information is not reflected in the internal MIS of OEM plants or their suppliers.   The current situation did not develop in a single month. It may have started several months ago. There is a cumulative effect - small amounts of excess inventory accumulate over time, increasing gradually from manageable levels of 20-30 days to the current 80-85 days. At this stage, dealers are under significant financial strain, with a large portion of their working capital tied up in excess inventory. In addition, they face inevitable margin erosion, as clearing this excess stock often requires heavy discounting. This operational pressure has sparked protests from dealerships and fuelled an ongoing debate within the auto industry about whether wholesale or retail sales numbers truly reflect the industry’s health. Several leading auto manufacturers have argued that the actual retail sales to customers are a better indicator of consumer sentiment and have urged the industry to shift towards reporting retail sales numbers. However, the implementation of this paradigm has remained elusive.(3)             <h2>Supply chain impact of this crisis</h2>The situation at dealerships has now reached a point where companies are being forced to scale back production to prevent further inventory accumulation. However, halting production will not be an easy decision for OEMs, as it could create significant disruption - not only to their primary sales targets but also across the entire supply chain. When OEMs cut production, suppliers bear the brunt of the bullwhip effect triggered by this decision.   Suppliers are already burdened with significant inventory, often holding more than a month's worth of stock despite being just a couple of days away from the OEMs they serve. If OEM production reduces, inventories across suppliers - including finished goods, work-in-progress, and raw materials - will continue to accumulate, potentially doubling or tripling in terms of inventory days, forcing suppliers to cut their production as well.Meanwhile, with reduced offtake, payments from OEMs may slow or even cease, leading to liquidity issues. Some suppliers may have invested in additional capacity using borrowed capital during the period of rising OEM demand and will now struggle to service interest payments and meet other operating expenses. Many suppliers will cut back on purchases and may be forced to lay off workers. The disruption to their working capital cycle will make material procurement more difficult, creating a vicious cycle of reduced production and constrained cash flow. Even during a slowdown, while an OEM may have finished goods inventory within its supply chain, it may not match specific customer demands. This mismatch may still necessitate OEMs to continue production and procurement to fulfil those specific orders despite holding excess inventory. However, suppliers with strained working capital may be unable to meet this demand, with some even defaulting. This would further dampen OEM sales.   When demand eventually returns and OEMs try to ramp up production, suppliers may still struggle to respond quickly because of workforce constraints and limited working capital. Since OEMs depend on all component suppliers ramping up simultaneously to increase vehicle production, they too will be affected until the last supplier fully recovers, resulting in a lose-lose situation for both parties.   <h5> </h5><h2>What should be done going forward so that the situation does not arise?</h2><h5>Peg market share/internal targets to retail numbers:</h5>As some leading OEMs have emphasised, manufacturers must recognise what Eliyahu Goldratt said: "Until the end consumer has bought the vehicle, no one in the supply chain has truly made a sale.”Basing performance metrics on wholesale figures is misleading because it leads to inflated production and artificial demand projections. Instead, market share measurement and internal targets should be pegged to retail sales. The sales team must also shift its focus from pushing inventory to dealerships towards creating demand and driving actual customer purchases.   Second, to sustainably address excess inventory problem at dealerships and the broader supply chain, the forecast-based approach to inventory creation and movement must be abandoned. Instead, companies should adopt a systematic approach grounded in actual market consumption signals. This method will better align the supply chain with actual market demand by reducing the lag in reaction by OEMs and suppliers to actual demand signals.  The solution involves: <h5>Defining inventory limits:</h5>Defining maximum inventory limits means setting an upper limit for inventory for every SKU at each stocking location, including dealerships as well as company warehouses, and halting additional shipments once that limit is reached. By doing so, companies can identify and respond quickly to changes in demand or market conditions before problems escalate. Setting maximum inventory levels across various stocking locations - such as dealers and vehicle yards for finished goods, and plants for components - while prioritising production and logistics based on the risk of stockouts helps ensure product availability throughout the supply chain. At the same time, halting manufacturing or procurement once inventory limits are reached for individual SKU prevents overstocking in the supply chain and keeps production aligned with actual market demand. Dynamically adjusting these limits in response to changing demand patterns over time ensures continued alignment with market requirements.  <h5> </h5><h5>Supplier alignment:</h5>To enhance responsiveness across the supply chain, suppliers must be provided with visibility into OEMs' component buffers. By sharing real-time signals on component stock levels, along with a risk-of-stock-out-based priority system, suppliers can proactively adjust their production schedules and supply in line with changes in OEM’s production.   Since the OEM plant serves as an aggregation point, sales fluctuations across dealerships nationwide tend to average out, resulting in a fairly stable daily load for each SKU. This naturally smooths out demand spikes, thereby reducing the need for suppliers to carry excessive protective inventory, which is typically required in a forecast-based system. If market demand slows and the offtake of finished goods from OEMs decreases, there will be a corresponding drop in parts consumption. Since suppliers have visibility into this, they will be able to take pre-emptive steps to adjust their production plans 6-8 months in advance, rather than relying on the current forecast-driven inventory management system. While suppliers can accommodate occasional dips in demand, they are wary of prolonged or severe downturns. Thus, this proactive approach will help mitigate the bullwhip effect during market fluctuations, fostering healthier vendor relationships, and create a more agile supply chain.<h5> </h5><h5>Optimising the use of dealer working capital:</h5>By having a defined upper limit for each SKU, dealers’ working capital is not locked into specific items but remains available for a broader range of colour and model variants. This allows dealers to stock a wider variety of items, enhancing their ability to fulfil diverse customer needs and improving delivery times, thereby reducing customer wait times for less common items and meeting overall market demand more effectively. Certain OEMs are already exploring models that minimise inventory at dealerships. For instance, a leading luxury auto OEM has implemented a zero-inventory-at-the-dealership model called ‘Retail of the Future’,(5) allowing customers to purchase directly from the company. This shift eliminates dealer inventory, enabling dealers to reduce their financial risks and focus on customer relationships rather than managing inventory.  <h5> </h5><h2>What to do to mitigate the immediate crisis?</h2>While these strategies provide long-term solutions, OEMs must address the immediate crisis by making difficult decisions regarding reduced production, particularly if car sales in India decline during the Diwali season. However, because there are mismatches between inventory at dealerships and customer demand, OEMs still need to produce vehicles to bridge the gaps in finished goods availability. To protect their sales, however limited they may be, OEMs need to ensure that suppliers are able to continue supplying parts despite facing a working capital crunch. In order to maintain business continuity, suppliers need to pay for raw materials as well as labour. Given their tight working capital and high receivables, their business continuity could be seriously jeopardised.   Hence, it is in the interest of larger and more financially stable auto OEMs to facilitate a robust, win-win-win ‘bill discounting’ mechanism with the help of a financial institution by leveraging their own high credit rating. This will help suppliers get paid faster without draining OEMs’ cash.   However, as mentioned, this is not a long-term solution. The strategic steps discussed in this article must be taken to sustainably address the challenges faced by OEMs, their supply chain partners, and dealerships.   <h2>A final word</h2>By adopting strategies that emphasise end-to-end flexibility and agility, auto supply chains can meet customer demand without increasing inventory levels, fostering healthier relationships among all stakeholders in the supply chain. By doing so, the Indian auto sector can establish a compelling narrative for itself. While other markets may emphasise technology, quality, or value for money, India's narrative should centre on providing flexibility and reducing lead times to enhance customer satisfaction. This alignment with market needs will better position companies to respond effectively to evolving consumer preferences and demands, ultimately fostering long-term resilience and competitiveness.

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Delve into the chronic issue of inventory surplus at Indian auto dealerships in this article. Uncover the root causes and explore effective strategies to align production with demand, promoting more efficient inventory management.

Turning the tide: Effective strategies for mitigating inventory excess in Indian auto dealerships

<h5>Turning the tide: Effective strategies for mitigating inventory excess in Indian auto dealerships</h5>

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High dealership inventory and falling car sales are straining India's auto sector. Here is how OEMs can align production with real retail demand.