The battle of the bulge: the intricacies and lessons of day's supply

Automotive Industries,  Nov, 2003  by Ray Windecker

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One of the factory analysis, pundits and journalists use to justify their comments, predictions and advice is "day's supply" of inventory. The "general rule" is that low days indicate a hot product and high days point to a sluggish product. But general rules can cloud the reality that a good new product, moving up in both sales and share of segment, could be faulted for high inventory due to unrealistically high original demand forecasts and production schedules.

Technically, day's supply is clear cut. Example assumptions are: First 12 months production, 120,000; first 12 months sales, 100,000; ending inventory 20,000; last month sales, 10,000. Ergo, inventory equals two months, or the accepted norm of 60 days sales.

Unfortunately, in this multinational world, finding the start and stop points of production and sales thus allowing the tracking of day's supply data through differing borders is generally not feasible. Also, the usual domestic procedure is to divulge vehicle line inventory information that includes all units in U. S. yards, in transit and at the dealership. Some importers/transplaters have used different systems, often providing only brand, not vehicle-line inventories and some have reported only at-dealership data. Obviously, comparisons are not always meaningful.

Occasionally, a recently introduced vehicle can be used as the basis for a short course in day's supply calculations and movements. Toyota's Tundra, confirmed by Toyota as built only in the United States and sold only in the United States and Canada, can be traced with considerable accuracy from Toyota-issued sales and production data and therefore is a workable day's supply subject.

As shown in the accompanying table, Tundra's start-up years through December, 2001, brought a low 37 day's U.S.-Canada supply. At the end of 2002, rising production and fewer sales brought the days' supply up to a moderately above-norm 72 days. Sales and production both declined in the early months of 2003, with sales declining at a faster rote than production, pushing the supply up to an uncomfortable 105 days at the end of April, 2003.

Toyota reacted vigorously, if a bit belatedly, keeping 2003 production below a year ago, partially in anticipation of 2004 model product changes and partially to control inventories. As Toyota reported strong Tundra sales beginning in May, 2003, a small-sample survey of Toyota dealers from New England to California was undertaken in June to find the root of the sales increase. Toyota dealers reported increasing Tundra stocks and consumer/dealer incentives ranging up to $3,000. Some mentioned moderate sales gains in May.

Continued incentives and sales efforts brought May-August Tundra sales up five percent from the year-ago period compared to a 14 percent decline in the January-April months. These late-month sales-rate gains, plus lower production, brought the inventory down to 51 days by the end of August, moderately below the 60-day norm.

Toyota, a prudent company with great sensitivity for public image, carefully used production cuts and strong incentives to correct an inventory bulge. It was also helpful that the analysts, pundits and media were not sniping at Toyota during the high-inventory time as Toyota inventories are not generally reported by vehicle line. Perhaps there is a lesson here for the providers of full-disclosure information.

TUNDRA PRODUCTION, SALES AND DAYS' SUPPLY
(Combined U.S. and Canada)

                                            Last
Period      Total       Total               Month   Day's
Ending      Production  Sales    Inventory  Sales   Supply

Dec. 2001   269,034     257,233  11,801     9,415   37
Dec.2002    378,012     358,739  19,273     8,066   72
April2003   414,441     387,254  27,187     7,689   105
Aug.2003    448,499     428,688  19,811     11,691  51

Sources: Toyota U.S., Toyota Canada, Automotive News,
R. L. Polk Company, DeRoslers Automotive Consultants
of Canada, and American Autodatum.

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