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Calculating Return

By Mel Duvall  |  Posted 05-15-2002 Print

Calculating Return

The results have been impressive. Since 1998, Mitsubishi has reduced its port stock from 45,000 units to none, saving $100 million a year. Cars still come into port and are stored for a short period of time, but Mitsubishi no longer owns any of the vehicles coming in; the dealers do. Meanwhile, cars spend an average of 60 days on dealers lots, down from 166—a significant improvement considering that each car costs Mitsubishi $6 per day in inventory holding costs, the amount a car costs to sit on the lot. Meanwhile, warranty costs have also been reduced, since the longer a vehicle sits on a lot, the more likely it is to pick up nicks and scratches.

The result: Mitsubishi's cost of incentives to dealers—special pricing and no-cost extras thrown into vehicles to generate sales—has been reduced from $2,600 per vehicle in 1998 to $1,700, saving another $290 million a year. Most of that has been redirected into advertising and brand awareness campaigns. O'Neill says Mitsubishi purchased the equivalent of about one week of network television advertising in 1997, and today it purchases 36 weeks. Yet perhaps the most telling figure is that Mitsubishi managed to rev its sales up 69 percent in just three years, from a bit more than 190,000 vehicles in 1998 to more than 320,000 in 2001.

Automotive analyst Dennis DesRosiers, president of DesRosiers Automotive Consultants Inc. of Ontario, Canada, credits moving responsibility for forecasting in- to the hands of dealers as one part of the remarkable turnaround story at Mitsubishi. But he also believes that coming out with the right products at the right time was just as important. In fact, DesRosiers cautions that this kind of "microforecasting" tends to work well in an up cycle, but not as well on the way down. "You've got to do bottom-up as well as top-down forecasting," warns DesRosiers, "or else you're going to get caught when the market swings."

O'Neill disagrees with DesRosiers' assessment. He maintains that Mitsubishi always had a great product. The real difference was in getting the right vehicle to the right place, and in redirecting dollars spent previously on incentives toward marketing. And O'Neill isn't as concerned about "microforecasting," saying that the company's demand planning tool already has the macroeconomic forecasts plugged in, so the dealers are getting the "macro" picture. And he still believes the dealers know their market best. In the first 60 days of this year, he notes, North American auto sales for all manufacturers were down 5 percent from a year earlier, but Mitsubishi America's sales are up 26 percent. "Our dealers chose to ignore some of those macro forecasts—and it's a good thing," he says.

Back on the dealer lot, Graeber says Mitsubishi had better not consider returning to the old methods of forecasting. Now that he has control over his own forecasts, he's not giving it up. "It's about accountability. No one should know my market better than me," says Graeber. "In my opinion, we're a much more customer-driven company than we were in the past."


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