By January 8, 2007 0 Comments Read More →

GM Goes Big with Inventory

WSJ: At GM, Curbing Inventories Calls For Juggling Act

From the article:

At the end of December, GM had more than one million vehicles in stock in the U.S. That’s equivalent to about 41,000 vehicles for every point of its 24.6% U.S. market share. By contrast, Toyota Motor Corp. of Japan, one of the world’s most profitable auto makers, carried about 16,000 vehicles of inventory per point of its 15.4% market share.

GM says it is comfortable with its inventories…

More than 2x the dealer inventory… and GM is “comfortable” with it.

Maybe that’s 1/2 the problem?

Really, they are damned either way, with their slowing sales and union contracts (see Jobs Bank):

GM still needs to generate huge sums each year to cover the more than a million people, mostly retirees and their dependents, who depend on the company for health benefits. That means that GM can’t simply shrink its U.S. operations to meet reduced demand without risking making GM North America too small to finance its debts and obligations to workers.

“It’s a very delicate balance,” says Frederick “Fritz” Henderson, GM’s chief financial officer.

Slowing production would stop the inventory buildup and prop up prices. But it would sacrifice revenue at a time when GM needs every dollar in sales it can bring in. If GM continues to run North American plants at the current pace, it may have to resort to rebates and discounts to spur sales, which would hurt profit margins and undermine prices.

And they’re comfortable with this? I’ve written before about GM has to do more than try cut costs or complain about their cost gap. The price gap (Toyota being able to charge more for similar, or sometimes identical products — Pontiac Vibe and Toyota Matrix) is larger than the price gap. GM’s CFO is admitting as much, below. This comes back mainly to GM’s quality reputation (an unfair reputation, GM would say, but it’s their fault). People perceive a Toyota to be worth more because of quality and resale value (which isn’t so much of a perception, really). The market sets the price of your product, and the market values Toyota higher than Pontiac.

Cost cutting alone isn’t enough to put GM back on solid footing, says Mr. Henderson, the CFO. The company also has to improve what he and other GM insiders call “contribution margin,” basically the profits left over after the costs of building the car are deducted from the revenue realized after discounts. The main way for GM to do that, he says, is to keep prices firm and avoid incentives and low-margin sales to rental fleets that artificially boost sales, damage the image of GM’s brands and undermine resale values.

This is a dilly of a pickle that GM has been in. There’s no easy, quick solution, but to be “comfortable” with the situation seems the opposite of Toyota Production System thinking. Toyota is much harder on themselves than GM ever is, and I guess we see the results of that.

Toyota: Today is the worst we will ever be

GM: We’re comfortable with today

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Mark Graban's passion is creating a better, safer, more cost effective healthcare system for patients and better workplaces for all. Mark is a consultant, author, and speaker in the "Lean healthcare" methodology. He is author of the Shingo Award-winning books Lean Hospitals and Healthcare Kaizen, as well as The Executive Guide to Healthcare Kaizen. His most recent project is an eBook titled Practicing Lean that benefits the Louise H. Batz Patient Safety Foundation, where Mark is a board member. Mark is also the VP of Improvement & Innovation Services for the technology company KaiNexus.

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