General Motors and Ford are two giants of American auto industry that ruled the fortune 500 list for years. Auto industry is one of the biggest industries in America but off late all the players are struggling to maintain the margins, burdened with lucrative employee benefits- a legacy of sunny days and increasing competition from the Japanese and Korean competitors (Mann, 2006).
With the increasing fuel prices due to geo-political scenario, the once stalwarts of automobile industries are leaking red. The situation has been aggravated due to the lack of creative thinking on the part of companies too; Japanese and Koreans beat the American companies by making cheaper cars but American companies never able to find out how to reduce the overall cost.
The overall cost of car includes cost of manufacturing of car and distribution of car. None of the major car companies tried to be innovative in distribution so there is significant opportunity for the American car companies to reduce the distribution cost and increase their margins on sales.
Traditional Method of Cars Distribution
In the car industry the distribution is done through big dealers which are assigned by the car companies in lieu of their financial capabilities. The whole business model is based on franchise model, where the dealer takes a huge cut from the sale of the product. The advertisement and marketing is done by the company (Office for the Study of Automotive Transportation, 2004). Often there is more than one dealer in the city and these dealers in their endeavor to increase sales often undercut each other on price.
Dealership based model requires huge investment both on part of company and dealer so the company should try to bring an end to the self competing distribution model and try to built one which can directly relate and appeal to the customer.
New Proposed Distribution Model
While purchasing a car customers look for technological features – power, engine capacity, mileage per gallon, interior space and aesthetic features like design and color of the car.
When launching a new model, what the company can do is along with the advertising campaign through mass media it can assign a number of cars on city road, the cars will feature numbers where customers can call and they will have a demonstration of car at their home. Simultaneously the customers can go to the website and ask for similar service.
Advantages of the model
One it will arouse curiosity among the customers secondly they will able to see how the cars looks on road.
The customers can able to have test ride near their home and can easily rate the car on parking needs and other drivability factors. Once satisfied, there will higher tendency to have a positive response than the one at dealer place.
It will cut the dealer cost and boost margins, secondly it will also keep the inventory cost low so incase of failure of a model the company can safely manage the production process. Faster churning means new innovative colors and designs like in computer industry or fashion industry.
Drawbacks to the proposed model
The company has to schedule the time as the customer needs, even though the cost of demonstration cars won’t be more than that of in present model where cars have to be kept for display in various outlets across the city.
Mann, Boris. (2006, May 30). Japanese and American Automobile Markets Trends – An Insight Why American Companies Losing. EzineArticles. Retrieved September 29, 2006, from http://ezinearticles.com/?Japanese-and-American-Automobile-Markets-Trends—An-Insight-Why-American-Companies-Losing&id=209344
Office for the Study of Automotive Transportation, Univ. of Michigan (2004), 21st Century Supply Chain: Changing Roles, Responsibilities, and Relationships in the Automotive Industry
Roland Berger Strategy Consultants (2004), Odyssey of the Auto Industry: Suppliers Changing Manufacturing Footprint, SAE World Congress, Detroit, March 2004
U.S. Department of Commerce (March 30, 2005).U.S. Automotive Industry Employment Trends. Retrieved September 29, 2006, from http://www.ita.doc.gov/td/auto/domestic/staffreports/Jobloss.pdf.