COVID-19 Related Factory Shutdowns Adversely Impact Vehicle Allocation
The ongoing COVID-19 pandemic has impacted, rather severely, the OEM’s ability to turn out new product. Shortly after the pandemic hit, plants were limited and/or closed, and new motor vehicle production ground to a halt. The downstream impacts to dealers may have been minimal at the outset due to the drastic decrease in consumer demand, but now that demand has rebounded, inventory is short across many makes and models. There is a ramp-up period for production to rebound, and even then, production may not achieve pre-COVID levels for some time. So, what is a dealer to do in the interim when consumer demand exists, but product availability does not keep up? And, could the lack of available allocation harm not only sales, but also perceived performance as measured by the factory?
The starting point is to know your rights with respect to allocation and inventory. Every dealer agreement, and many state statutes, address a dealer’s right to access new vehicle inventory. For example, GM’s dealer sales and service agreement standard provisions (Article 6.4.1) provides that “General Motors agrees to make available, subject to Article 6.1, a mix of models and series of Motor Vehicles identified in the Motor Vehicle Addendum in quantities adequate to enable Dealer to fulfill its obligations in its Area of Primary Responsibility.” Similarly, most state franchise protections impose requirements on the OEM’s to allocate and distribute vehicles in a fair manner. In summary, a dealer has a right to receive inventory and that amount often correlates to customer demand in the marketplace.
So, how does that translate into the COVID impacted world? The short answer is that attention to detail in inventory management is as crucial as ever. Monitoring inventory on hand and upcoming allocation should be constant. Similarly, monitoring orders in the pipeline to insure that they have not been cancelled and/or delayed is crucial.
Likewise, communication with the factory is vital. Staying updated on their plans for each month’s allocation and the potential changes to the product pipeline are extremely important so that you can manage your inventory. Making the factory aware, in writing, of the need for additional inventory should be an ongoing task. And, even if you are told that no additional inventory is available, it is worth making them aware that more is needed, because your store(s) is still being measured by how many sales are made. The one caveat to that is FCA, which has announced it suspended performance monitoring for a period of time.
There are numerous specific examples (more than fit in this space) of circumstances to monitor and then convey to the factory that could impact your operations. For example, if you are a dealer of a certain brand whose sales are heavy in truck and SUV segments and that brand is slow to ramp back production of those models, your store may not necessarily be at a competitive disadvantage to other same brand dealers. But, you could be losing significant market share to competitive brands whose truck and SUV products are flowing more freely. That is an example of a circumstance beyond your control that could be cause for concern. Similarly, if you notice your days’ supply in a particular model is lower than average, ask the factory why and how that can be rectified as soon as possible. Most OEMs set aside some percentage of vehicle production to be distributed at the discretion of regional personnel. Monitoring your days’ supply by model line will assist in determining whether you are receiving your fair share of the discretionary pool of vehicles.
In short, there may be no easy way out of the current (and still to come) inventory shortage, but that does not mean that the shortage is correct or fair. Dealers should monitor inventory and future allocation information with an eye on same brand and competitive brand availability constantly, and communicate with the factory to convey concerns.