A supply chain of pain

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This story originally appeared in the Dealernews August 2010 issue.

This month I’m Writing about suppliers skipping steps in the supply chain to sell directly to your customers. I’m mainly talking about PG&A, but I don’t think vehicle sales are far behind.

Why are manufacturers doing this? Why would they radically alter the supply chain to sell direct? Basically, they don’t think you’re doing a good job meeting demand, so they are going to do it themselves.

Some of these suppliers use Shopatron, but I think they are doing so (instead of actually selling direct) for two reasons: self-serving interests and political cover. The former relates to Shopatron’s policy that dealers must have the product in stock to “bid.” This forces inventory into the shops and helps suppliers’ books through increased revenue and freed-up cash. Shopatron even tells manufacturers that driving more inventory into the channel is one reason for them to sign up! But this pushes the inventory risk to the retailers and violates modern supply chain management practices. The deeper a product is, the more likely it will become somebody’s overstock.

If dealers don’t bite at the carrot and cover Shopatron’s sales, the suppliers will make the sale themselves anyway at full retail. Once they realize they can fulfill so much demand directly, why wouldn’t they step up the direct-sales efforts? Someone high up is going to ask, “Why do we need the dealers at all?”

The suppliers defense is “Hey, we offered the olive branch to participate in Shopatron and make this sale. Don’t be mad at us!” That’s the political cover keeping the pitchfork-and-torch crowd from running them out of the village. I get it. Shopatron is a win-win for the manufacturers. There is no downside for them. However, there’s plenty of downside potential for the dealers. We’ve looked at the issue of inventory risk, but what about the direct competition? Let’s say that I’m a dealer spending considerable resources building an e-commerce operation selling Brand X’s stuff. That includes SEO to make sure my site shows up high in the search results. I’ve managed several top-five Google rankings for several Brand X-related keywords (see table). Studies show lower- ranking results get dramatically fewer clicks. Now Brand X comes along with a naturally high-ranked domain name (BrandX.com) and running its store at a subdomain (store.brandx.com). Now my previous No. 5 rank is No. 6 because Brand X’s site has displaced mine. This is not hypothetical. There are dealers who are losing online sales because of their OEMs.

The situation is even worse if the manufacturer is not using Shopatron. If you’re competing directly with a supplier for retail sales, you may wonder why you’re doing business with it in the first place.

Why have we gotten to this point? It comes down to the failure of our industry to develop a retail supply chain that meets the needs of the modern marketplace. Combine this with conflicting motivations and incentives among OEMs, distributors and dealers.

What can you do? The first thing is be pragmatic and sign up for Shopatron. You need to monitor it for any orders that you can fulfill. These are already lost sales. Only by being in Shopatron can you attempt to recapture them. Unless you have a strategic interest to jump into Shopatron, don’t increase your inventory stocking levels until you get a feel for what the market is like for the brands and products. Use Shopatron like a line in the water initially and see what happens.

Next, pressure suppliers selling direct to come up with a better business model, one that helps dealers meet demand without forcing them to assume all the risk, as they are now with Shopatron.

I don’t think there’s anything nefarious about Shopatron, or suppliers trying to fulfill what they see as underserved demand in the market. Supplier reps with whom I’ve spoken say they have been pushed into this position.

Customers are contacting them directly wanting to buy because they can’t find what they want in the retail channel. If that’s the case, then dealers are in fact not doing their job from the suppliers’ perspective. I just think that Shopatron is a band-aid that tips the playing field too far in the suppliers’ and large retailers’ favor, at the detriment of the rest of the dealers.

Ultimately, one of two things will happen: Either the industry will adopt systems and processes for sharing real-time supply-and-demand data, ensuring more efficient supply chains — or there will be less opportunity for the smaller dealerships that make up the majority of the market.