Clunker-Mania Challenges the Automotive Supply Chain

Yesterday, Ford reported better sales for the month of July 2009 than it did one year prior, a sign that was viewed as positive news by not only Ford but its competitors as well.  US automakers have been desperately trying to increase sales volumes throughout the year, but with little success.  It took the US government's Cash for Clunkers program, which took effect on July 24th, to provide the much needed catalyst for the industry.  To qualify, car owners must trade in a vehicle less than 25 years old which averages 18 mpg or less.  And the "clunker" must be replaced with a newer car that boasts a 10mpg increase or a larger truck with at least 2mpg to receive the $4,500 rebate.

While the two-year-highs in sales reported over the past few weeks have been welcome news for automakers, the program is causing considerable stress for supply chain planners.  Vehicle manufacturers must attempt to forecast sales and production volumes for the upcoming months with little certainty about the Clunker program's future.  The original vision for the Clunker program was to offer incentives through October with a total of $4B in funding.  However, the program which was rolled out only included $1B in government allocated funds, which are nearing depletion.  The House of Representatives rushed to secure an additional $2B for the program on Friday.  The bill will be voted on by the Senate this week.  There have been no issues with product availability during the first few weeks of the Clunker program.  The automotive supply chain has a higher than average level of excess inventory due to the sluggish sales experienced throughout the year.  In fact, there have been numerous attempts to right-size inventory in the channel, most notably the numerous plant shutdowns that occurred during the GM and Chrysler bankruptcy filings. 

Clunker1 

Source: Automotive News – Courtesy of Ed Lain of David Chrysler Jeep

To put the supply chain forecasting challenge in perspective, consider that last month the US auto industry was on a pace to sell only 9.7M vehicles in 2009.  That is considerably lower than the peak of 16M sold earlier this decade.  However, based upon the past recent sales results experts such as J.D. Power and Associates and Credit Suisse are now predicting that auto sales will grow to an annualized rate of 10.7M to 12.4M vehicles in the upcoming months.   Such forecasts translate into a 10-27% sales uplift as compared to June.  In just 60 days, automakers are having to transition from the bottom of the demand curve to a short-term sales spike.  Because the sales boost is being driven by government incentive and not the natural economic forces that cause consumer demand, there is widespread uncertainty about what will occur after the government funding ends.  Will sales return to the lower rates experienced from January to June?  Or will the government incentives along with the growing optimism about the economy lead to a sustainable rebound in automotive sales?  How can automotive OEMs and their suppliers accurately forecast demand in such an unpredictable environment?

More thoughts in my next post…