Automotive Supply Chain: Stocked Inventory vs. Working Capital

Welcome to Part 1 of Driving on the Bumpy Road of Automotive Supply Chain. In this series, Slimstock Canada will help you resolve the most common pain points in the automotive aftermarket supply chain and provide you with in-depth coverage on how it is drastically changing.

Our series will focus on Jack, a supply chain analyst at Universal Exports, a Canadian Automotive Aftermarket Distributor. Jack has more than 15 years of experience as a supply chain professional in the distribution industry. The last few years have been challenging yet inspiring due to widespread economic and regulatory changes, both foreign and domestic.

Stocked Inventory vs. Working Capital  

Like most supply chain analysts, Jack’s primary focus is to free-up working capital, but that job is not so simple in the automotive industry. In recent years, the industry has seen significant changes caused by invariable demand patterns. These changes have come in response to demographic shifts from immigration and new environmental regulations that have driven frequent changes in technology.

For Jack to overcome these challenges, he can rely on state-of-the-art supply chain tools to assist his decision making. However, for him to truly excel in his role, he cannot rely solely on automated tools and standard statistical methods.

Multiple Sites for Parts Sold in Multiples 

A common challenge for Jack is how to distribute stock from the central warehouse to Universal Exports’ 30 branches spread across Canada. While this is a common enough supply chain problem, the automotive industry is unique in that many of the parts are often - but not always - sold in multiples, e.g. spark plugs or lug nuts.

Sometimes the end-user only needs to buy one, but other times they will replace all spark plugs if one of them fails. Since cars have 4, 6, 8 or even 12 cylinders, Jack needs to know how many sparks plugs each branch should keep in stock when they sell an average of three at a time.

Jack’s sales team is complaining to him that they are losing sales in some branches because they are missing links to foresee a "max vehicle sale." For example, there are specific types of spark plugs that are for cars with 6 or 8 cylinders. But if Jack keeps three on the shelf to accommodate his average sale, he will never be able to meet the needs of end-users who want to replace all of their spark plugs at once.

On the other side of the office, Jack’s finance department is telling him that too much deadstock is piling up in some branches. To avoid tying up too much capital or having the parts devalue as they sit on the shelf, he should be cautious with the amount he sends out.

Good data for good decisions 

To make the best decision, Jack decides to crosscheck car databases with vehicle sales in the geographic areas surrounding Universal Exports’ branch locations. By doing this, Jack was able to determine the average number of cylinders for cars per region?He can use this data to see what it would mean to increase inventory at branches accordingly and if they want to accommodate for the max vehicle sale. Using lost sales statistics, Jack comes up with an analysis showing the investment versus the potential increase in revenue.

Armed with the data Jack has provided them, it will now be up to the company’s decision-makers to come up with a plan of action. As a supply chain professional, Jack was able to help Universal Exports make an informed decision, but the situation is still a little more complicated than it seems.

More on that in Part 2 of this series, where Jack delves into another important factor of the automotive supply chain - Product Lifecycle.

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