The current issue and full text archive of this journal is available at

www.emeraldinsight.com/0960-0035.htm

The impact
The impact of decentralised of decentralised
control on firm-level inventory control
Evidence from the automotive industry
435
Sander de Leeuw
VU University Amsterdam, Amsterdam, The Netherlands Received October 2009
Matthias Holweg Revised December 2010
Accepted December 2010
Judge Business School, University of Cambridge, Cambridge, UK, and
Geoff Williams
International Car Distribution Programme, Solihull, UK

Abstract
Purpose – The purpose of this paper is to investigate the effect of decentralised control on finished
goods inventory levels in a distribution system, and to identify the factors that determine the overall
inventory level.
Design/methodology/approach – The authors’ study is based on a mixed method approach using
both a survey and semi-structured interviews to assess inventory management practices and firm
performance.
Findings – It was found that the common assumptions that distribution outlets or dealers are
homogenous and that their behaviour is uniform in response to central control, such as the
manufacturer’s strategy, do not hold in practice. In fact, the authors show that under conditions of
decentralised control, the inventories held at outlet level vary greatly around the aggregate inventory at
overall manufacturer level and in this sense bear little resemblance to it. Amongst other conclusions,
these findings provide a possible explanation for previous studies’ inconclusive evidence on inventory
reduction.
Research limitations/implications – The authors’ research is based on evidence from the
automotive industry in the USA; future research may include a wider industry analysis and
geographical scope.
Practical implications – The paper identifies how incentives and decision-making structures at the
outlet level need to be considered in order to derive decisions that are optimal at the supply chain level.
Originality/value – The paper extends the current literature on the determinants of inventory levels
by using dealer-level data, as opposed to manufacturer or firm-level data in previous studies, thereby
identifying possible causes for the previously inconclusive evidence on inventory levels in distribution
systems.
Keywords United States of America, Automotive industry, Inventory, Distribution, Stocking policy,
Order fulfilment, Supply chain management, Decentralised control
Paper type Research paper

The authors would like to thank Professor Marty Anderson at Babson College for his International Journal of Physical
Distribution & Logistics Management
contributions to this study, Professor Bertrand at Eindhoven University for his valuable Vol. 41 No. 5, 2011
comments on earlier versions of this paper and the anonymous reviewers for their constructive pp. 435-456
q Emerald Group Publishing Limited
remarks. We also gratefully acknowledge the support of the International Car Distribution 0960-0035
Programme (ICDP) and the MIT International Motor Vehicle Program (IMVP). DOI 10.1108/09600031111138817
IJPDLM 1. Introduction
41,5 The control of inventory is a central issue in operations management (OM), and
accordingly has received a considerable amount of attention in the literature. One of the
drivers for this attention is that inventory holding comprises a significant cost in the
supply chain. Inventory management theory is concerned with defining minimal
inventory levels given certain exogenous variables such as supply and delivery
436 lead-times, supply and demand uncertainty, batch sizes and product variety (Rumyantsev
and Netessine, 2007). However, these theories often do not fully reflect business reality.
Dubelaar et al. (2001), for example, found that inventory in fashion supply chains is not
related to demand uncertainty, a key component of inventory management theory.
The complexities of supply chains encountered in practice, caused by aspects such as
competitive behaviour, localised decision making, incentives or business cycles, are
largely ignored in most traditional models. Furthermore, most inventory-related studies
focus on manufacturing and procurement related processes upstream of the original
equipment manufacturer (OEM), while little attention has been paid to the management of
finished goods from assembly down to the customer (Cachon and Olivares, 2010).
This study is focused on empirically assessing determinants of inventory and is set in
the automotive industry. This industry was referred to as “the industry of industries” by
Drucker (1946) more than half a century ago. The prevalent mass production thinking,
introduced by Henry Ford at the start of last century, changed the face of the industry and
still shapes it today. Despite the improvements made through the proliferation of the
just-in-time (JIT) or lean production paradigm (Monden, 1983; Schonberger, 1982;
Womack et al., 1990), the vehicle distribution and dealer sales sourcing strategies have
hardly changed in the automotive industry. The majority of vehicles across global regions
are still made to forecast rather than end customer orders, and subsequently sold from
dealer inventory (Holweg and Pil, 2004). Dealer inventories in the automotive industry
typically range between 20 days and around 100 days, dependent on the country (Holweg
and Miemczyk, 2002). At the higher levels of stock, ageing risks and the necessity for large
discounts to avoid obsolescence are vary significant given the fact that product variety is
considerable (product variety may vary anywhere between a few hundred to tens of
millions of different vehicle specifications for one type of car (Kiff, 1997)).
Academically, much of the attention in the automotive industry research has been
devoted to manufacturing performance, in particular labor productivity in the assembly
plant (MacDuffie et al., 1996; Womack et al., 1990), and to the link between vehicle
manufacturer and its component suppliers (Helper, 1991; Helper and Sako, 1999; Liker
and Wu, 2000; Ramcharran, 2001; Sako, 1992). Despite the efficiency of the
manufacturing operation, however, overall vehicle supply systems shows poor
performance in responding to customer needs (Holweg and Pil, 2004), and increasingly
rely on incentives and rebates to sell their products. Such “make-to-stock” policy aims at
keeping the capacity utilization at the vehicle assembly plant stable and high
(Raturi et al., 1990). In a capital intensive industry, this approach makes manufacturers
less vulnerable to swings in demand in the marketplace. Yet, given the current
overcapacity and the increasing levels of customization of the product (Pil and Holweg,
2004), such policy comes at the obvious penalty of large inventories in the marketplace,
as illustrated below in the case of the USA (Figure 1). The average stock level in the USA
is 63 days forward sale, a figure that has hardly changed since the days of Henry Ford
(Lacey, 1986), regardless of the improvements that have been made on the factory
200 The impact
180 of decentralised
160
control
140 Chrsyler

120 Ford 437

GM
100
Honda
80
Nissan
60
Toyota

40 VW

Average
20

0 Figure 1.
Jan 96
Mar 96
May 96
Jul 96
Sep 96
Nov 96
Jan 97
Mar 97
May 97
Jul 97
Sep 97
Nov 97
Jan 98
Mar 98
May 98
Jul 98
Sep 98
Nov 98
Jan 99
Mar 99
May 99
Jul 99
Sep 99
Nov 99
Jan 00
Mar 00
May 00
Jul 00
Sep 00
Nov 00
Jan 01
Mar 01
May 01
Jul 01
Sep 01
Nov 01
Jan 02
Mar 02
May 02
Jul 02
Sep 02
Nov 02
Jan 03
Mar 03
May 03
Jul 03
Sep 03
Nov 03
Jan 04
Mar 04
May 04
Jul 04
Sep 04
Nov 04
Feb 05
Apr 05
Jun 05
Aug 05
Oct 05
Dec 05
Nov 07
Jul 08
Vehicle stock levels
1996-2008
Source: Wards

and supply side. On average, over the period of 1996-2003, 3,332,950 units were held at
any point in time in the US market, which (assuming an average sales price of $20,000)
equates to $66.7 billion of capital tied up at any point in time.
Despite the rising prominence of JIT manufacturing and logistics concepts in academia
and industry from the 1990s onwards, several empirical studies have been unable to identify
any significant decrease in finished goods inventory levels in many different industries,
while work in progress inventory and raw materials stocks have consistently decreased
over time (Chen et al., 2005; Hendricks and Singhal, 2008; Rajagopalan and Malhotra, 2001).
In fact, Chen et al. (2005) report that finished goods inventory (measured in number of days
sales in inventory) has even seen an increase between 1981 and 2000 in several industries,
amongst others the automotive industry in the USA. Only two industries (pharmaceuticals
and electronics) reportedly experienced a decline in finished goods inventory.
Most research on inventory management is focused on specific – often hypothetical –
situations. There is very little empirical verification of the relationships between factors
that influence inventory levels (Dubelaar et al., 2001). We take this evidence as our
starting point, and propose that the factors causing a lack of decrease in finished goods
inventory levels may go beyond traditional inventory determinants. We use evidence
from the automotive industry to support this. Few academic studies, with the
exceptions of Kiff (1997), Blumenfeld et al. (1999) and Karabakal et al. (2000) have
directly analysed the drivers behind finished goods inventory levels in industries that
use dealer-based retail and distribution systems. In these settings, the assumption of a
central inventory policy may not hold, as decision making is often decentralised to the
local dealer level, where they are (financially) responsible for ordering, maintaining and
selling the stock on their premises. Decision making in such decentralised distribution
systems is thus bound to be suboptimal, as local dealers are suffering from “bounded
rationality” (Simon, 1960). Such decentralised systems may rely on transhipments
between local outlets to balance inventory (Westwood, 1999) for an example from
IJPDLM the fashion industry. These dealers are furthermore bound to optimise their local
41,5 operations, rather than create a global optimum for the supply chain, much in the same
way as vividly illustrated in the famous MIT Beer Game (Sterman, 1989a, b).
In this paper, we add this local optimisation factor to the existing literature through
investigating to what extent control of inventory that has been devolved to the dealer
level is driving inventory levels and can therefore explain the lack of a decrease in
438 finished goods inventory over the past years. Inventory drivers in dealer-based retail
and distribution systems are analysed using actual empirical data from the automotive
industry. We have obtained quantitative data through structured interviews and
field surveys of distribution outlets: in total, we obtained data from interviewing
95 automobile dealers. Furthermore, distribution management staff at 12 national sales
organisations from 12 different vehicle manufacturers have been interviewed to discuss
their perceptions on drivers of inventory levels for the dealer.
The paper is organised as follows. First, we review literature on determinants of
inventory levels. We then outline the industrial context of our empirical analysis and
research approach. Consequently, the results of our empirical analysis are discussed
and conclusions and theoretical contributions are provided in Section 5.

2. Literature review
The way inventory is portrayed in the OM literature shows a great deal of variation.
At the most extreme end, the literature on lean production depicts inventory as muda
(waste) (Womack and Jones, 1996). Here, efforts are oriented towards minimising
inventory in supply chains, partly because it is often viewed as an indicator of process
capability (Lieberman and Demeester, 1999). Not only Forrester (1961) but also Galbraith
(1973) showed that inventory does not need to have such a negative connotation: it is a
buffer against uncertainty, which – if used wisely – can be advantageous.
Inventory theory discriminates between different types of inventory and acknowledges
that it serves several purposes. Figure 2 shows an overview of the inventory determinants
we focus on in our research. Each will be explained in further detail below.

Lead-time
Seasonality
Product margin Local
+ considerations
Target service +
level +
Finished goods +
Uncertainty + inventory level Speculations
–
+ +

Batch size
+ Company size
Volume Demand
–
discounts variability
Product variety +
Figure 2.
Inventory level
Notes: A “ + ” means a positive relation; “ – ” a negative relation; both in the direction of
determinants
the arrow
First, any textbook on inventory management identifies the influence of supply lead The impact
times on inventory targets; for example, Silver et al. (1998). This follows Little’s simple of decentralised
law which in some ways is almost a tautology, however it does describe an important
driver of inventory in production systems with a set lead-time (Little, 1961). control
Second, inventory theory also stipulates that stock levels are related to batch sizes.
The larger the production batch size, the longer the interval between two production
batches and therefore the more inventory is required to cover demand during the 439
interval between two production batches. Higher production flexibility can decrease
production switching times and thus facilitates decreased batch sizes with a resultant
decrease in stock levels (Silver et al., 1998). Batch sizes are also affected by product
variety. More product variety requires more production switching, hence longer times
between production of a given product resulting in the need for higher inventory
(Cachon and Olivares, 2010). Volume discounts also impact batch sizes: higher volume
discounts typically encourage customers to buy in larger quantities and thus increased
inventory is required (Lee et al., 1997). These first two factors determine the “cycle stock”.
The third well-known factor relates to the “buffer” or “safety” stock component of
inventory, which focuses on covering uncertainty. Davis (1993) argues that there are
three types of uncertainty – supply uncertainty, internal process uncertainty and
demand uncertainty, of which demand uncertainty has the most influence. Zipkin (2000)
and Silver et al. (1998) show that it is necessary to buffer against demand uncertainty if a
certain level of customer service is to be achieved. Similarly, Silver et al. (1998) show
that supply uncertainties lead to the need for extra inventory against unreliable
replenishment timing.
Closely related to demand uncertainty is seasonality. Greater seasonality is
expected to lead to higher inventory levels (Cachon and Olivares, 2010). When it is
costly to change production in synchronisation with demand, seasonality in demand
leads to a gradual build-up of inventory during the low selling season followed by a
rapid decrease in inventory during the peak selling season.
The next factor that effects the level of inventory relates to the target service levels for
customer demand (Cachon and Olivares, 2010). For example, more inventory is required
if customers require instantaneous gratification, compared to a situation where
customers who are willing to wait (Nahmias and Smith, 1994). Target service levels
depend on circumstances. Customers buying high-margin products are more sensitive to
stock-outs (Rumyantsev and Netessine, 2007).
The sixth factor to consider is that inventory levels have been found to relate to the
size of the company. Eppen (1979) has shown that by combining inventory from
different locations into one pool from which all demand is satisfied, inventory levels can
be lower and give the same customer service. Bigger companies are better able to pool
inventory.
Seventh, and the last of the traditionally accepted factors, the variety of products
supplied influences inventory levels. More product variety leads to more variable demand
for each variety (van Ryzin and Mahajan, 1999) and the need for more changeovers in
production (de Groote, 1994). Both higher variability in demand and the need for more
changeovers (equalling less productive time) will necessitate more inventory.
Chen et al. (2005) and Rajagopalan and Malhotra (2001) argue that there are other than
traditional factors that influence the level of inventory, such as the fear of losing sales,
the strategy of make to stock production or speculative considerations. Previous studies
IJPDLM (Sterman, 1989a, b) have illustrated how human decision making in the supply chain can
41,5 be suboptimal. Independent decision-making in supply chains may lead to speculation
or to gaming, leading to the introduction of dynamics in a supply chain that are not
related to end customer demand variations per se. Simon (1960) showed that limited
information across the entire system equally leads to suboptimal decision making
(“bounded rationality”). Lieberman and Demeester (1999) conclude in their plant survey
440 that inventory levels are not only dependent on traditionally modelled aspects such
as lead times and other product and process characteristics, but also softer aspects such
as the workforce effort and management style. We will summarise these under the
heading of “managerial considerations”.
Despite considerable efforts in inventory reduction, which showed success in
reducing overall raw material and work in progress inventory in the USA, finished
goods inventory has not decreased overall statistically. In fact, finished goods inventory
levels have increased in the automotive industry (measured in terms of number of days
sales) (Chen et al., 2005). Furthermore, there is no consistent picture across industries,
which implies that there are industry-specific factors influencing inventory levels as
well. The evidence as to what determines these inventory levels is mixed. Several
authors (Cachon and Olivares, 2010; Gaur et al., 2005; Lai, 2005; Rumyantsev and
Netessine, 2007) point towards a strong relationship between inventory levels and
determinants such as gross margins, demand uncertainty and lead-times. Chen et al.
(2005), on the contrary, argue other aspects such as macro-economic conditions influence
inventory levels. Rajagopalan and Malhotra (2001) stipulate five causes as to why
finished goods inventories may not have decreased to the extent work-in-progress and
raw materials stock has. The five causes that they stipulate can be summarised in the
following sentences. The Production function has more control over component/raw
material inventory than over finished goods inventory, where the marketing function
has significant influence while typically having little incentive to reduce inventories.
Finished goods are used as a buffer against demand uncertainties and firms may not be
willing to reduce such stock for fear of losing sales. Firms may aim for higher service
levels by increased focus on make-to-stock production. Globalisation has seen a general
increase in imports over greater distances involving less frequent shipments, resulting
in higher finished goods inventories. Lastly, inventory may have been pushed upstream
from the final manufacturer, which increases finished goods inventory at suppliers.
Hendricks and Singhal (2008, p. 4) also argue that traditional inventory determinants
may not explain inventory levels satisfactory and state that “[. . .] it is quite possible that
inventory turnover may be the proxy for strategic choices firms make with respect to
how they choose to meet the needs of the market”.
In this article, we will explore the impact of decentralised decision-making on the
inventory in distribution systems. We base our investigations on the US automotive
industry, as this industry has been a rich setting for previous studies (Blumenfeld et al.,
1999; Cachon and Olivares, 2010; MacDuffie et al., 1996). We investigate to what extent
traditional determinants still hold true in this industry as well as to what extent and how
a decentralised responsibility for inventory management may mitigate these
determinants. Contrary to earlier studies where inventory has been investigated using
secondary industry-level data (Cachon and Olivares, 2010; Gaur et al., 2005; Rumyantsev
and Netessine, 2007), empirical survey data at the level of individual dealers (outlets) to
support our findings has been utilized.
3. Method The impact
3.1 Industry context of decentralised
New vehicle automotive distribution systems, also referred to as “new vehicle sales
supply systems”, can best be defined as open systems with the goal of supplying new control
vehicles in response to customer demand. The main input is customer demand (in the
form of orders), and the main output is the physical vehicle delivered to the customer.
The term “sales supply system” has been used in the literature (Williams, 1999), 441
although “supply and stocking systems” has been used synonymously (Kiff, 1997),
as well as the terminology “order-to-delivery” (OTD) process.
The sales supply system usually commences with an order being generated
at the dealer, either for stock or for a customer. The process then flows from order
entry at the dealer, through order processing steps at the national sales company or
directly at the vehicle manufacturer (i.e. scheduling and sequencing for production),
through manufacturing and outbound logistics (vehicle distribution) back to the dealer
and customer. Such a process is commonly referred to as the order fulfilment process
(Shapiro et al., 1992).
The common perception is that there are two basic ways an order can be fulfilled in
the motor industry – the vehicle is either built-to-forecast against a dealer order and
the customer buys it from stock, or the customer orders it from the factory via a dealer
and it is built-to-order. In reality, this view proves to be too simplistic, as there are in
fact many ways of fulfilling an order for a new vehicle, including locate-to-order,
amend-to-order, and hybrid build-to-order systems (Holweg and Pil, 2001).

3.2 Methodology and research approach

We followed a methodology similar to Kiff (1997) to analyse the US supply and stocking
systems. In-depth interviews were held with 95 distribution outlets of dealers and the
staff of 12 national sales companies (i.e. the companies that represent a vehicle brand or
the OEM in the USA – which could be an independent importer or an organisation
operated by the manufacturer itself). Discussion topics for these interviews are
summarised in Appendix 1. We used the dealer interviews to collect quantitative data
using a questionnaire. Answers provided by dealers were based on actual dealer
performance information such as stock levels (in several cases stock reports have been
provided by the respondents to verify this information), though the requested
information was not always readily available. Dealers therefore had to provide an
estimate sometimes. Survey questionnaire items are provided in Appendix 2. All dealer
questionnaires were completed at the end of the interviews. Applying different
perspectives to a problem is a form of triangulation that has been used to improve the
validity of our findings (Flynn et al., 1990). In particular, the combination of a qualitative
study using the background data collected and a quantitative approach using
descriptive statistics based on the survey should be expected to render high validity.
In this study, the extent to which factors that determine inventory according to
traditional inventory theory also apply to automotive post-assembly distribution
inventory levels are investigated and which other factors also influence inventory are
explored. Contrary to previous studies, we base our investigations at the level of an
individual dealer distribution outlet, not at the manufacturer level. Results from studies
in company level inventory levels may not always apply to individual retailers. This
has several ramifications. The literature has shown that product variety is a key
IJPDLM driver of inventory. At dealer outlet level, however, the possible varieties of product
41,5 (considering both model range and the specification combinations by model) exceeds the
average annual sales per outlet by several orders of magnitude (Pil and Holweg, 2004).
For example, the average car dealership in the USA sold 753 units in 2003, respectively
(Wade, 2005), while individual volume models such as the VW Golf or Ford Focus can be
configured into 199,813,504 and 366,901,933 different combinations, respectively (Pil and
442 Holweg, 2004). The average sales of a dealership is far smaller than the number of
permutations of options, colours and features of a vehicle that can be sold. This is also
the case for example with small dealers of white good appliances in Italy, as described by
Perona et al. (2001). Even for a vehicle with a limited variety forecasting on an individual
stock keeping unit level in a dealership is virtually impossible. However, as we aimed at
obtaining information from a diversity of brands and manufacturers our sample
composition and size did not allow for analysing variety and uncertainty. Both demand
uncertainty and product variety have therefore not been incorporated in our research.

3.3 Dataset
During the first months of the research project, several means of data collection with
dealers were piloted and their validity discussed with a selected group of dealers. These
included a mail survey, a telephone survey and direct appointments for structured
interviews. In the light of poor response rates using other data collection methods, it was
found that personal interviews with the dealers were the most viable way of obtaining
data about dealer practices. This method also allowed for obtaining background
information from dealers, such as their perceptions, as well as additional data, such as
inventory reports and order bank overviews.
Interviews were not pre-scheduled, but done by visiting the dealer premises without
prior notification during low shop traffic hours and asking for an interview with the
manager. Using this method, it was possible to either interview the new vehicle supply
manager immediately (or a similar person in charge of new vehicle supply and stocking
at the dealership) or to agree an interview time in the near future. In total, 275 dealers of
all brands represented in the US market received a request for an interview, of which
95 agreed to participate (giving a response rate of 35 per cent). The dealers were selected
across five major regions in the USA – out of a franchised dealership population of c.
22,000 in the USA (Wards, 2002). To avoid local biases in dealer practices (e.g. dealers in
coastal regions may be close to a major port or distribution facility and have
dramatically reduced lead times (Karabakal et al., 2000), and to provide geographical
spread, the interviews were scheduled in different areas throughout the country. Within
one area, the interviews were spread over different brands as much as possible to avoid
brand related biases. For dealerships that consisted of multiple franchises, we selected
the franchise with the smallest representation in our sample. Table I shows the
geographical spread of survey respondents.

3.4 Study limitations

As with any empirical research, our study has limitations. First and foremost, not all
dealers were able to draw upon actual performance data when responding to our survey,
as many key performance indicators were not recorded. Hence we decided to use partial
returns where the remaining data could be verified. For that reason, there is a difference
in the number of data points available between the determinants investigated.
We did not find any structural lack of data such as one complete region or brand that The impact
typically did not fill out all information. Furthermore, we have only covered five of decentralised
different regions in the USA, which was a necessary simplification of a complex market.
We only analysed major markets, small and remote areas were not included in our control
research (although in US rural markets having a large inventory is a key for sales
(Johnson, 2009). The national sales companies indicated during our interviews that the
dealers in the areas not visited showed relatively similar characteristics to the areas 443
visited. In terms of lead-times, we do not believe that this impacts on our results
extensively as we have included a mix of dealers across the country.
The focus of the study is on the automotive network for passenger vehicles from
factory to dealer in the USA. Conclusions cannot be extended to other industries or the
automotive industry in other countries. Furthermore, albeit was not feasible to capture a
true customer perspective on customer service aspects such as desired order-to-delivery
lead-time or flexibility in selection of specification, e.g. colour or option schemes. Instead,
we relied on the dealers’ opinions to provide these data.

4. Empirical findings and discussion

4.1 Quantitative analysis – summary statistics
Table II shows the summary statistics for the data collected. One data point equals data
collected from one distribution outlet (which we will refer to as “dealer”). This table
shows that, on average, dealers carry 66 days of inventory, which is in line with the
overall industry average. This number varied between 24 and 233 days. The data also
show that dealers source their sales primarily from their own stock. The average is in
line with the manufacturer level inventory though the spread at dealer level is much
larger than at the manufacturer level. On average, 89 per cent of all vehicles sold

Region Total number of dealers interviewed European brands US brands Japanese brands

Boston 27 8 13 6
New York 14 4 5 5
Los Angeles 20 3 9 8
Cincinnati 16 4 6 6
Atlanta 18 5 7 6
Table I.
Note: n ¼ 95 interviews Sample size per region

n Minimum Maximum Mean SD

Days of inventory (outlet) 70 23.87 233.43 66.3129 33.99744

Days of inventory (firm) 72 23 89 65.59 19.874
Sales from dealer stock (incl. transfer) 91 40.00 100.00 88.6813 12.28990
Sales via customer order 91 0.00 40.00 4.9451 8.23996
OTD lead-time 73 10.00 120.00 59.2329 28.73322
Frequency of ordering 84 1.00 30.00 3.2500 5.40387 Table II.
Impatient customers, wait seven days or less 92 0.00 100.00 70.7554 30.98435 Summary of descriptive
Valid n (listwise) 38 statistics
IJPDLM are sourced from own dealer stock. The variability in this number is relatively low.
41,5 Several dealers sourced as much as 99 per cent of total sales from their own inventory.
Sourcing patterns by type of brand are shown in Figure 3. Sales through customer orders
at the factory represent only 5 per cent of total sales. Sales sourced through a central
distribution centre and the in-transit pipeline make up the remaining 6 per cent – this
again showing a large degree of variability.
444 Order-to-delivery lead-times varied between less than two weeks and more than three
months, dependent on the location of the factory. Brands with factories located in the USA
quoted the shortest order-to-delivery times. On average, dealers ordered cars weekly from
the factory or importer. Table II shows that dealers perceive customers to be unwilling to
wait. On average, dealers indicated that 70 per cent of the customers are not willing to wait
longer than one week. This figure differs by type of brand though not as much as one
would expect (Figure 4). According to dealers, customers are anxious to get their new cars
independent of the brand considered, with customers from European and US speciality
brands willing to wait slightly longer. While we did not ask for the difference in
willingness to wait for a new model of a car versus a model that had been selling for some
years; one may expect that customers are more willing to wait for a new model.

4.2 Quantitative analysis – correlation analysis

Table III summarises the correlations between the variables investigated in our survey.
The correlations are analysed using a significance level of 0.01 and 0.05 (two-tailed).
We use same-year public firm-level inventory data published by Wards (1996-2008)

100
4 8 4 11 10
11 10 16
80 13
30

60
% of sales

40 83 79 77
72
54
20

0
Japanese US specialty Japanese US volume European
specialty brands volume brands specialty
brands brands brands

Dealer stock Transfer Distr. center In transit Build-to-order

Figure 3. Notes: Specialty brands are those that are considered “premium”, such as BMW
Sources of US car sales (European), Lexus (Japanese) and Cadillac (US); the others are “volume”, eg. Chevrolet
to customers (US) or Toyota (Japanese); all European brands were classified as “specialty” in the USA
Source: Dealer interviews USA
 100
1 1 The impact
5
7 8 5 3 6 of decentralised
5
8
11
11 13 control
18
Mean % of customers willing to wait

80 10
15 10
18
13 445
60
18

40
73 71
62 61
48
20

0
US specialty US volume European Japanese Japanese
brands brands specialty specialty volume brands
brands brands
0-3 days 3-7 days 7-14 days
Figure 4.
Notes: Specialty brands are those that are considered “premium”, such as BMW (European), Dealer opinions on US
Lexus (Japanese) and Cadillac (US); the others are “volume”, eg.Chevrolet (US) or Toyota customer willingness to
(Japanese); all European brands were classified as “specialty” in the USA wait for a new car
Source: Dealer interviews USA

to review correlations between firm-level inventory and factors influencing individual

dealer inventory levels. The term firm-level inventory is here used to refer to the overall
post-factory inventory of one brand across brand products/models. This is contrasted
with dealer or distribution outlet inventory, which refers to the overall inventory level
of one brand in a distribution outlet (across products/models).
Our correlation analysis shows the following significant correlations. First, the more
impatient customers are perceived to be, the more dealers actually sell from their own
stock and the more stock dealers therefore keep. It follows that fewer customers are
satisfied from build to order at the factory, as expected according to traditional
inventory models.
Furthermore, the sales objective of the dealer is negatively correlated with the sales
via customer orders. During our interviews, dealers indicated that in situations where
higher sales targets are set, there is more pressure on the outlet to turn over their own
stock, and hence to sell from stock to customers at the expense of sales via customer
orders at the factory. Such a two-way relationship between the level of inventory and
sales has been recognized by several authors in the past (Dubelaar et al., 2001). Not only
does more sales require more inventory, more inventory may also induce more sales.
Related to this is the fact that the number of days of inventory at the firm level is
negatively correlated with the outlet sales objective set by the dealers. This may be
due to a time-delay between inventory build-up at the firm level and setting dealer
 41,5

446

Table III.

coefficients
IJPDLM

Pearson correlation
Days of Sales Impatient Patient
inventory Days of objective Frequency Frequency Sales from Sales via customers (wait customer
(outlet inventory dealer of of vehicle dealer stock customer seven days or (.14 days
level) (firm level) (outlet) ordering delivery (incl. transfer) order less) wait)

Days of inventory 1
(outlet level) n 70
Days of inventory 0.130 1
(firm level) Sig. 0.344
n 55 74
Sales objective 20.153 20.250 * 1
dealer (outlet Sig. 0.206 0.048
level) n 70 63 80
Frequency of 0.065 0.088 20.076 1
ordering Sig. 0.605 0.478 0.521
n 65 67 73 84
Frequency of vehicle 0.010 20.052 0.400 * * 0.236 1
delivery Sig. 0.944 0.718 0.003 0.067
n 49 50 54 61 63
Sales from dealer 0.105 20.060 0.191 2 0.106 0.047 1
stock (incl. Sig. 0.386 0.609 0.090 0.337 0.715
transfer) n 70 74 80 84 63 95
Sales via customer 20.022 0.149 20.244 * 2 0.004 2 0.103 20.312 * * 1
order Sig. 0.859 0.206 0.029 0.973 0.422 0.002
n 70 74 80 84 63 95 95
Impatient customers 0.253 * 0.017 0.183 0.127 0.040 0.519 * * 20.274 * * 1
(wait seven days or Sig. 0.035 0.882 0.103 0.249 0.758 0.000 0.007
less) n 70 74 80 84 63 95 95 95
Patient customer 0.003 20.031 20.149 2 0.042 0.142 20.097 0.002 20.165 1
(.14 days wait) Sig. 0.983 0.818 0.239 0.730 0.331 0.404 0.986 0.155
n 57 58 64 69 49 76 76 76 76
Note: Correlation is significance at: *0.05 and * *0.01 levels (two-tailed)
sales objectives. It in fact shows one of the shortcomings of turn-and-earn allocation: The impact
allocation of vehicles based on past sales performance only may lead to a considerable of decentralised
delay in clearing out inventory.
We furthermore found that the sales objective is positively correlated with the control
frequency of vehicle delivery to the dealership (i.e. the frequency of vehicle supply from
the manufacturer), which is as expected. Higher turnover at the dealer level implies more
frequent deliveries as the maximum number of vehicles that can be delivered to a dealer 447
in one drop is physically constrained by the size of the delivery trucks.
As one can also see in the scatter-plot (Figure 5), there is virtually no statistical
connection between the days of inventory at the firm level and that at the dealer level.
One would expect a certain degree of variability between these two figures as certain
factors (dealer size, location, sales promotions, delays in stock adjustments due to
turn-and-earn allocation that links future allocations of vehicles to current sales) will
induce a degree of short-term variability. Dealers are normally not able to receive
significantly more or less vehicles than they are currently selling because of
turn-and-earn allocation systems (Cachon and Lariviere, 1999). However, as factories are
focused on stable production rates and produce a significant percentage of their capacity
with stock orders (Holweg and Pil, 2004), an imbalance between supply and demand of
vehicles is very likely. Our interviews revealed that in cases of oversupply,
manufacturers actively try to pursue dealers to take more vehicles than their allotted
quantity by promising them more vehicles that are in high demand if they also take
vehicles that are less popular. Some dealers appeared to be more willing to take this risk
than others dependent on their individual inventory strategies, leading to differences in
inventory profiles at the dealer level, even within one franchise.
The ramification of the lack of correlation between firm- and dealer-level inventory
shown in Figure 5 is that not just traditional inventory determinants but particularly

250.00

200.00
Days of inventory (outlet)

150.00
R Sq Linear = 0.017

100.00

50.00

0.00
Figure 5.
Scatter-plot: outlet-level
versus firm-level
20 30 40 50 60 70 80 90
inventory
Days of inventory (firm)
IJPDLM strategic considerations may be influencing inventory levels. We believe this confirms
41,5 Hendricks and Singhal (2008) who suggest that inventory levels may well be a proxy of
strategic choices that a company makes in order to meet market needs. Not only the
variability between firms and industries as noted by Chen et al. (2005) but also the variability
at the dealer level is of importance in justifying inventory determinants. The resulting
question arising from the above is that, since inventory cannot be explained by assuming a
448 central decision point, what drives inventory decisions at dealer level? We addressed this
question in our interviews, the findings of which are reported in the following sections.

4.3 Qualitative analysis

During the interviews, dealers indicated that the emphasis on sales from dealer stock is
driven by local (dealer) considerations. First, dealers commonly have the opinion that
customers do not want to wait and therefore they stock up, which reflects in our
correlation data. Dealers also indicate they attempt to “seize the deal” by selling a car
from their own inventory while the customer is still on their premises. Many dealers
indicated they are afraid that customers might “change their minds and go somewhere
else” if they do not sell a car that is physically on the lot. Third, when inventory levels are
considerable, dealers feel pressured to sell cars from their own inventory to prevent
stock ageing and to maintain a reasonable level of stock turn. Dealers feel this (financial)
pressure to sell from stock in order to avoid costs such as inventory maintenance
and discounts on over-aged stock. During our interview round, we have observed that
discounts of 15 per cent of the consumer sales price for over-aged stock vehicles are not
an exception. Fourth, dealers indicated that they are afraid to get stuck with odd
specifications of vehicles that customers have ordered at the factory but cancelled
afterwards. The resulting conclusion is that it is in the dealers’ interest to sell from stock
to “seize the deal” but also to “keep the inventory moving”, often with discounts
involved. As one dealer said, “our business is to fit a customer to a car”.
Furthermore, the inventory strategies differ considerably between dealers, even within
the same brand as Figure 3 shows. As a result, there is no such thing as a “typical dealer”
of any given brand. One dealer indicated he was holding close to seven months inventory
because he always wanted to be able to deliver from stock. Another dealer from the same
brand only held an average of 1.5 months of inventory. This dealer also predominantly
sold from stock but also sold vehicles from other sources. Similarly, one dealer of a
franchise sourced 99 per cent of his sales from his own inventory and 1 per cent through
swaps of vehicles with other dealers and obviously did not place customer orders at the
factory. Another dealer of the same brand sourced only 40 per cent from his own lot and
even relied for 25 per cent of his sales on customer orders sourced from the factory. It seems
to be the explicit strategy of several dealers to stock up significantly resulting in inventory
levels significantly higher than the industry average. Almost 20 per cent of the dealers of
our sample held average inventory levels of more than 80 days and 10 per cent held more
than 100 days stock. These dealers indicated that having a wide choice readily available
for customers was considered a key competitive advantage. This is exemplified by the
following dealer quote from one of the interviews: “if the customer comes in, we try to sell
him a car from our lot before he changes his mind”.
The result of this stock-driven strategy is that customers often do not get the vehicle
specifications they originally wanted. Our survey data show that dealers indicate that,
on average, 40 per cent of the customers sacrifice their preferred choice on one or more
aspects of vehicle specification. We believe that this figure is an underestimation of the The impact
percentage of customers sacrificing on ideal specifications to meet the dealer desire to of decentralised
sell from what is in their own stock. Customer research in the UK, a market with similar
sales sourcing characteristics in the early 1990s as the USA, showed that 75 per cent of control
the customers at that time accepted different vehicle specifications than they originally
desired (Kiff, 1997). Dealers indicated in our interviews that customers are least willing
to sacrifice on engine and body choice and are most willing to sacrifice on accessories 449
and vehicle colour. Our interviews also indicate that as a result of not being able to
satisfy customers specification requirements, lost sales at the level of individual outlets
are considerable in this industry. This is not uncommon in comparable industries such
as white goods (Perona et al., 2001).
Given the enormous amount of potential vehicle specifications, dealers obviously
have difficulties determining which cars with which specifications to put in their
inventory. Some dealers use inventory velocity as a measure to determine whether the
right specifications are in stock. As one dealer quoted during the interviews “if a car has
been on my lot only a short time before it is sold to a customer, I immediately order a
similar car as it indicates that this is a popular specification”. The level of customer
flexibility in accepting vehicles with different specifications than they originally desired
cannot be assessed based on our data. However, the stock-driven sales strategy
definitely drives a need for customer flexibility. The result of the current system is that a
significant proportion of customers do not get what they really want.
Mangal and Chandna (2009) show that lateral transhipments between retailers can be
advantageous in multi-retailer supply chains in order to solve stock imbalances. It is
questionable whether the use of transhipments provides an appropriate way to lower
inventory levels in the automotive industry. Transhipments can typically be justified
economically if the value density (i.e. value per m3) of a product is high (de Leeuw et al.,
1999). However, our interviews revealed that dealers are wary of using transhipments.
First, dependent on the brand, dealers may not be eligible for incentives if they source a
vehicle from another dealer instead of from the factory. Second, the effort and associated
costs involved in shipping a vehicle from another dealer prevents shipping over large
distances. Third, dealers are concerned with the increased probability of vehicle
damage. Average costs quoted by the dealers to obtain a vehicle from another dealer
were $100, with typical transhipment distances being less than 100 miles. Dealers
representing European brands tranship vehicles over the largest distances in the USA.
We found that stock allocation quantities from manufacturers to dealers are rather
the result of a negotiation process than based on performance measures. Automobile
companies in the USA use a form of a “turn-and-earn” system to allocate vehicles to
dealers, which in its simplest form means that a dealer can earn an allocation for a
vehicle in the next period by selling one in this period (Cachon and Lariviere, 1999).
However, dealers indicated during our interviews that allocation quantities are often
the result of a negotiation process where in order to receive larger quantities of vehicles
in high demand, dealers also had to take more vehicles that did not sell well. It is
known that OEMs have tried to use their power by restricting allocation of vehicles in
high demand (particularly the new models) to certain US dealers (Harris, 1997) but this
interference has been ruled as illegal (Forehand and Forehand, 2002).
In general, dealers perceived the OEMs to be of little help in inventory management.
Dealers for example indicated that forecast data provided by OEMs are not reliable,
IJPDLM which is logical since OEMs only have dealer sales data by definition, and this does not
41,5 equal real consumer demand at detailed specification level. Alternative strategies such
as built-to-order may improve information quality for the OEMs and reduce lost sales
(Holweg and Pil, 2004) but a transfer to another strategy requires a significant amount
of commitment and time to implement. Furthermore, although they are relatively small
compared to manufacturers, automotive dealers have a strong voice in the inventory
450 policies of manufacturers (the example of restricting allocation of vehicles to dealers
described in the previous section). Therefore, if dealers are not convinced of new ways
of working, manufacturers will have a very difficult time implementing new supply
chain wide inventory policies.

5. Conclusion and future research

In this study, we have expanded on the existing literature by considering the impact of
decentralised inventory control on finished goods inventory levels in the automotive
supply chain. We build on the studies by Cachon and Olivares (2010), Rumyantsev and
Netessine (2007), Hendricks and Singhal (2008), and Rajagopalan and Malhotra (2001),
who all identified different factors that determine the finished goods inventory levels in
the supply chains they studied. Common to these studies are the assumptions that
distribution outlets or dealers are homogenous and that their behaviour is uniform in
response to central control (i.e. the manufacturer’s strategy), which in turn allows for
the inventory in the distribution system to be evaluated at firm level. Our study shows
that these assumptions do not hold in the practice of the automotive industry. In fact
we show that there is vast variation in the inventory held at outlet level and in this
sense it bears little resemblance with the aggregate inventory at firm level under
conditions of decentralised control. We expect that these findings hold in other
industries characterised by a dispersed network of dealerships with devolved control.
We extend previous studies by showing that there is not just variability in stock
levels across industries (as did Chen et al. (2005) and Hendricks and Singhal (2008)),
across firms (as shown by Cachon and Olivares (2010) and Rajagopalan and Malhotra
(2001)), but also across distribution outlets. Homogeneity of stock levels in decentralised
systems can quite simply not be assumed in several industries. It is very likely that there
are considerable differences between local outlets in a supply chain (dealers, retailers) in
their modus operandi and these will have a significant impact on finished goods
inventory levels.
The underlying root cause for this variability is the fact that dealers will act as
independent enterprises, aiming to maximise their own profit. By nature, these decisions
at outlet level will lead to suboptimal decisions at supply chain level, when considered
from a firm level perspective. However, any independent dealer will make informed
decisions based on their subjective commercial interest – in other words, what might
appear as suboptimal decision-making from the OEM’s point of view, might well be
optimal for the dealer in terms of ensuring profitability.
Our findings need to be put in the perspective of the characteristics of the automotive
industry, which most importantly features a highly asymmetrical balance of power
(Benton and Maloni, 2005). The structure of the industry enables manufacturers to
exert a high degree of control over their franchised network (Tongue and Whiteman,
2003), in contrast to, for example, the food industry or general merchandise where
large retail companies such as Wal Mart control the distribution channel and not
the manufacturers (Kumar, 1996). One therefore would expect a relatively unified picture The impact
across outlets in retailer-dominated situations. Our research however shows that in the of decentralised
manufacturer dominated automotive industry there is a large variability in inventory
management strategies among automotive dealers. This finding provides evidence for control
the preliminary observations from the study by Cachon and Lariviere (1999), who during
their research on turn-and-earn allocation systems noted differences in automotive
dealer inventory management practices. This has important ramifications: first and 451
foremost, any study investigating the determinants of inventory levels in distribution
systems under conditions of decentralised control must not only consider the scope of
decision making devolved to the retail level, but also judge the degree of “optimality”
against the impact on profitability at both firm and retail level. This finding extends the
work of Holweg and Pil (2004), who showed that optimising productivity of the factory
can result in sub-optimality of the overall supply chain by putting forward misaligned
incentives. This means that the factory uses its power to produce at a constant rate to
some extent independent of the demand and encourages dealers to take resultant stock
for which the dealer is financially responsible.
In summary, our conclusions are twofold: first, inventory performance must be
judged at the level at which decisions are made. If decision making rests within the
dealer or outlet level in the supply chain, then analysing overall supply chain decisions
should incorporate local decision making, as this decision-making behaviour is driven
by a combination of soft and hard factors, and not necessarily identical for every dealer
in the system. This conclusion stands in stark contrast to most operations research
models for integrated production-distribution inventory systems, where generally all
dealers are considered to be homogenous, thus justifying the use of firm-level data as an
outcome measure. The managerial implication of this is that decision making at the
dealer level must be explicitly incorporated in supply chain design. It is essential to
cooperate with dealers to change the supply chain.
Second, in order to explain the level of inventory in a distribution system, one needs to
understand the incentive structure that drives its operation. Naturally, the manufacturer
will have a very different incentive structure from its retailers, which leads to local
optimisation and underperformance at supply chain level. Dealer incentives are
typically not part of inventory management theory but do influence inventory levels
considerably. A turn-and-earn allocation system where allocation is solely based on past
sales performance may be slow to adapt to changing circumstances. More sophisticated
allocation mechanisms that promote build-to-order, decrease lost sales and reduce
inventory in dealerships are required. Any discussion of inventory performance, or even
“optimality”, thus needs to be set in the context of the incentives that determine the
behaviour of the decision-making actors in the supply chain. The implication of this is
that if a manufacturing firm desires to lower supply chain wide inventory levels it is very
difficult to achieve without proper incentives. One way to deal with this for
manufacturers is to slowly alter the supply chain and introduce changes at the moment
of launching new products.
Future theoretical research may be focused on devising new allocation mechanisms
that reduce inventory and lost sales. Empirical research may be focused on how
to introduce alternative inventory management policies in a devolved supply chain and
on comparing inventory policies in a variety of devolved supply chains.
IJPDLM References
41,5 Benton, W.C. and Maloni, M. (2005), “The influence of power driven buyer/seller
relationships on supply chain satisfaction”, Journal of Operations Management, Vol. 23
No. 1, pp. 1-22.
Blumenfeld, D.E., Daganzo, C.F., Frick, M.C. and Gonsalvez, D.J. (1999), “Impact of
manufacturing response time on retailer inventory”, International Journal of Operations
452 & Production Management, Vol. 19 No. 8, pp. 797-811.
Cachon, G.P. and Lariviere, M.A. (1999), “Capacity allocation using past sales: when to
turn-and-earn”, Management Science, Vol. 45 No. 5, pp. 685-703.
Cachon, G.P. and Olivares, M. (2010), “Drivers of finished-goods inventory in the US automobile
industry”, Management Science, Vol. 56 No. 1, pp. 202-16.
Chen, H., Frank, M.Z. and Wu, O.Q. (2005), “What actually happened to the inventories of
American companies between 1981 and 2000?”, Management Science, Vol. 51 No. 7,
pp. 1015-31.
Davis, T. (1993), “Effective supply chain management”, Sloan Management Review, Vol. 34 No. 4,
pp. 35-46.
de Groote, X. (1994), “Flexibility and marketing/manufacturing coordination”, International
Journal of Production Economics, Vol. 36 No. 2, pp. 153-67.
de Leeuw, S., van Goor, A.R. and Ploos van Amstel, R. (1999), “The selection of distribution control
techniques”, International Journal of Logistics Management, Vol. 10 No. 1, pp. 97-112.
Drucker, P. (1946), The Concept of the Corporation, John Day, New York, NY.
Dubelaar, C., Chow, G. and Larson, P.D. (2001), “Relationships between inventory, sales and
service in a retail chain store operation”, Management, Vol. 31 No. 2, pp. 96-108.
Eppen, G.D. (1979), “Effects of centralization on expected costs in a multi-location newsboy
problem”, Management Science, Vol. 25 No. 5, pp. 498-501.
Flynn, B.B., Sakakibara, S., Schroeder, R.G., Bates, K.A. and Flynn, E.J. (1990), “Empirical
research methods in operations management”, Journal of Operations Management, Vol. 9
No. 2, pp. 250-84.
Forehand, W.E. and Forehand, J.W. (2002), “Motor vehicle dealers and motor vehicle
manufacturers: Florida reacts to pressures in the marketplace”, Florida State University
Law Review, Vol. 29, p. 1057.
Forrester, J.W. (1961), Industrial Dynamics, MIT Press, Cambridge, MA.
Galbraith, J. (1973), Designing Complex Organizations, Addison-Wesley, Reading, MA.
Gaur, V., Fisher, M.L. and Raman, A. (2005), “An econometric analysis of inventory turnover
performance in retail services”, Management Science, Vol. 51 No. 2, pp. 181-94.
Harris, D.L.-M. (1997), “Unveils new standards for dealerships”, Auto. News, Vol. 3, p. 1.
Helper, S.R. (1991), “How much has really changed between US automakers and their suppliers?”,
Sloan Management Review, Vol. 32 No. 4, pp. 15-29.
Helper, S.R. and Sako, M. (1999), “Supplier relations and performance in Europe, Japan and the US: the
effect of the voice/exit choice”, in Lung, Y., Chanaron, J.J., Fujimoto, T. and Raff, D.M.G. (Eds),
Coping with Variety: Product Variety and Productive Organisations in the World Automotive
Industry, Ashgate, Aldershot.
Hendricks, K.B. and Singhal, V.R. (2008), “Demand-supply mismatch and stock market reaction:
evidence from excess inventory announcements”, working paper, Georgia Institute of
Technology, Atlanta, GA.
Holweg, M. and Miemczyk, J. (2002), “Logistics in the three-day car age: assessing the The impact
responsiveness of vehicle distribution logistics in the UK”, International Journal of
Physical Distribution & Logistics Management, Vol. 32 No. 10, pp. 829-50. of decentralised
Holweg, M. and Pil, F.K. (2001), “Successful build-to-order strategies start with the customer”, control
MIT Sloan Management Review, Vol. 43 No. 1, pp. 74-83.
Holweg, M. and Pil, F.K. (2004), The Second Century: Reconnecting Customer and Value Chain
through Build-to-Order, Vol. xi, MIT Press, Cambridge, MA, p. 238. 453
Johnson, R. (2009), “Wood: a hillside full of trucks”, Auto. News, 9 November, available at: www.
autonews.com/article/20091109/RETAIL/311099707 (accessed 9 September 2010).
Karabakal, N., Gunal, A. and Ritchie, W. (2000), “Supply chain analysis at Volkswagen of
America”, Interfaces, Vol. 30 No. 4, pp. 46-55.
Kiff, J.S. (1997), “Supply and stocking systems in the UK car market”, International Journal of
Physical Distribution & Logistics Management, Vol. 27 Nos 3/4, pp. 226-43.
Kumar, N. (1996), “The power of trust in manufacturer-retailer relationships”, Harvard Business
Review, Vol. 74, pp. 92-110.
Lacey, R. (1986), Ford – The Men and the Machine, Little Brown, Boston, MA.
Lai, R. (2005), “Inventory signals”, working paper, Harvard NOM, Cambridge, MA.
Lee, H.L., Padmanabhan, V. and Whang, S. (1997), “Information distortion in a supply chain:
the bullwhip effect”, Management Science, Vol. 43 No. 4, pp. 456-558.
Lieberman, M.B. and Demeester, L. (1999), “Inventory reduction and productivity growth: linkages
in the Japanese automotive industry”, Management Science, Vol. 45 No. 4, pp. 466-85.
Liker, J. and Wu, Y.-C. (2000), “Japanese automakers, US suppliers and supply-chain superiority”,
Sloan Management Review, Vol. 42 No. 1, pp. 81-93.
Little, J.D.C. (1961), “A proof of the queuing formula L¼W”, Operations Research, Vol. 9 No. 3,
pp. 383-7.
MacDuffie, J.P., Sethuraman, K. and Fisher, M.L. (1996), “Product variety and manufacturing
performance: evidence from the international automotive assembly plant study”,
Management Science, Vol. 42 No. 3, pp. 350-69.
Mangal, D. and Chandna, P. (2009), “Inventory control in supply chain through lateral shipments –
a case study in Indian industry”, International Journal of Engineering, Vol. 3 No. 5,
pp. 443-57.
Monden, Y. (1983), The Toyota Production System, Productivity Press, Portland, OR.
Nahmias, S. and Smith, S.A. (1994), “Optimizing inventory levels in a two echelon retailer system
with partial lost sales”, Management Science, Vol. 40 No. 5, pp. 582-96.
Perona, M., Cigolini, R., Adani, M., Biondi, R., Guzzetti, S., Jenna, R., Chessa, M. and Agellara, S. (2001),
“The integrated management of logistic chains in the white goods industry. A field research
in Italy”, International Journal of Production Economics, Vol. 69 No. 2, pp. 227-38.
Pil, F.K. and Holweg, M. (2004), “Linking product variety to order fulfilment strategies”,
Interfaces, Vol. 34 No. 5, pp. 394-403.
Rajagopalan, S. and Malhotra, A. (2001), “Have US manufacturing inventories really decreased?”,
Manufacturing & Service Operations Management, Vol. 3 No. 1, pp. 14-24.
Ramcharran, H. (2001), “Interfirm linkages and profitability in the automotive industry:
the implications for supply chain management”, Journal of Supply Chain Management,
Vol. 37 No. 1, pp. 11-17.
Raturi, A.S., Meredith, J., McCutheon, D. and Camm, J. (1990), “Coping with the build-to-forecast
environment”, Journal of Operations Management, Vol. 9 No. 2, pp. 230-49.
IJPDLM Rumyantsev, S. and Netessine, S. (2007), “What can be learned from classical inventory models?
A cross-industry exploratory investigation”, Manufacturing & Service Operations
41,5 Management, Vol. 9 No. 4, pp. 409-29.
Sako, M. (1992), Price, Quality and Trust: Inter-firm Relations in Britain and Japan, Cambridge
University Press, Cambridge.
Schonberger, R.J. (1982), Japanese Manufacturing Techniques, The Free Press, New York, NY.
454 Shapiro, B.P., Rangan, V.K. and Sviokla, J.J. (1992), “Staple yourself to an order”, Harvard
Business Review, Vol. 70 No. 4, pp. 113-23.
Silver, E.A., Pyke, D.F. and Peterson, R. (1998), Inventory Management and Production Planning
and Scheduling, 3rd ed., Wiley, New York, NY.
Simon, H.A. (1960), “Decision making and organizational design”, in Pugh, D.S. (Ed.),
Organization Theory, Pelican Books, Harmondsworth.
Sterman, J.D. (1989a), “Misperceptions of feedback in dynamic decision making”, Organizational
Behaviour and Human Decision Processes, Vol. 43 No. 3, pp. 301-35.
Sterman, J.D. (1989b), “Modeling managerial behavior: misperceptions of feedback in a dynamic
decision making experiment”, Management Science, Vol. 35 No. 3, pp. 321-39.
Tongue, A. and Whiteman, J. (2003), Understanding 1400/02: New Roles in the New Regime?,
International Car Distribution Programme, Solihull.
van Ryzin, G. and Mahajan, S. (1999), “On the relationship between inventory costs and variety
benefits in retail assortments”, Management Science, Vol. 45 No. 11, pp. 1496-509.
Wade, P. (2005), “The future of car dealers”, HWBI Management Briefing, Vol. 1 No. 5, p. 6.
Wards (1996-2008), Ward’s Automotive Yearbook, Wards Communications, Southfield, MI.
Wards (2002), Market Data Book, Wards Communications, Southfield, MI.
Westwood, J.B. (1999), “Retail inventory movement: a case study in rationalisation”,
International Journal of Physical Distribution & Logistics Management, Vol. 29 Nos 7/8,
pp. 444-52.
Williams, G. (1999), “European new vehicle supply – the long road to customer pull systems”,
ICDP Journal, Vol. 1 No. 1, pp. 13-21.
Womack, J.P. and Jones, D.T. (1996), Lean Thinking, Simon & Schuster, London.
Womack, J.P., Jones, D.T. and Roos, D. (1990), The Machine that Changed the World, Rawson
Associates, New York, NY.
Zipkin, P.H. (2000), Foundations of Inventory Management, McGraw-Hill, Boston, MA.

Appendix 1. Interview questions

Sales process
(1) How do you forecast your sales?

Stock data
(2) What are the main locations of your finished goods stock and distribution centers?
(3) Who is the owner of the finished goods stock at your premises?
(4) How do vehicle transfers between dealers take place?

Customer preferences
(5) To what extent are customers flexible?
(6) How do you ascertain whether customers are satisfied?
Order-to-delivery process The impact
(7) Describe the order procedure from customer requesting a vehicle to actual delivery and of decentralised
payment to the manufacturer?
control
(8) What order amendment possibilities exist and which ones do you use?
(9) What type of information is exchanged between manufacturer and dealer; how and how
often?
455
(10) Which information systems do you use to manage inventory and supply?
(11) How do you search for a vehicle that a customer requires?

Distribution to dealership
(12) How do you know where a car is in the pipeline to a dealership?
(13) Who gets the holdback (sales bonus) when transferring a vehicle to another dealership
and from another dealership?

Financials
(14) What type of factory support do you get for inventory costs and what are conditions?
(15) What do manufacturer discounts and rebates depend on?

Appendix 2. Survey questionnaire

Sales process
(1) Sales objective total for dealer and for best selling model.
(2) Number of vehicles sold year to date.
(3) Percentage of match of OEM set sales objective compared to dealer set sales objective.

Stock data
(4) Manufacturer proposed stock level (units & days of sale).
(5) Typical stock level (units and days of sale).
(6) Percentage of stock #3 months old; 3-6 months old; 6-9 months old; 9-12 months old;
# age; 12 months.
(7) Typical number of cars on order at any time.

Customer preferences
(8) Percentage of customers willing to wait 0-3 days; 3-7 days; 7-14 days; 14-30 days; . 30
days (dealer view).
(9) Percentage of customers willing to buy another specification of engine, colour, options
and accessories, trim (dealer view).
(10) Typical discounts required for customers to accept alternative specification of engine,
colour, options and accessories, trim (dealer view).
(11) Percentage of customers buying a vehicle according to specifications (dealer view).

Order-to-delivery process
(12) Frequency of ordering at the factory/importer.
(13) Typical order-to-delivery lead-times for orders placed at the factory.
(14) Typical order amendment lead-times for amendments to engine, options, colour.
IJPDLM (15) Percentage of of total vehicle sales sourced from own inventory, dealer transfers,
distribution center pipeline swap, swap of manufacturing slot, order on factory.
41,5 (16) Percentage of on-time delivery of vehicles to customers against originally specified
timing.

Distribution to dealership
456 (17) Percentage of damage to vehicles delivered from manufacturer.
(18) Typical transport distance and cost of transferring a vehicle from another dealership.
(19) Typical damage repair costs per incident.

Financials
(20) Length of interest-free period for vehicles in stock.
(21) Typical factory Percentage of discount on excess inventory.

About the authors

Sander de Leeuw is an Assistant Professor at VU University Amsterdam specializing in Supply
Chain Management, a field of business in which he has over 20 years of teaching, research and
consulting experience. Prior to joining VU University, he has been employed as a Management
Consultant at amongst others KPMG and he held positions at Eindhoven University of
Technology, Babson College and at MIT’s Center for Technology, Policy and Industrial
Development. Sander de Leeuw has an MSc and a PhD in Industrial Engineering/Management
Science from Eindhoven University in The Netherlands. Sander de Leeuw is the corresponding
author and can be contacted at: sleeuw@feweb.vu.nl
Matthias Holweg is a Reader in Operations Management and the Director of the Centre for
Process Excellence and Innovation at the Judge Business School, University of Cambridge. He is
a principal investigator on several research projects, including at MIT’s IMVP, where his
research focuses on the dynamics of competition and patterns of evolution of the global
automotive industry. He has spoken and published widely on managing supply chains in global
manufacturing industries, with a particular focus on the viability and implementation of
customer-responsive strategies. Prior to joining the faculty at Cambridge, Matthias Holweg held
positions at MIT’s Center for Technology, Policy and Industrial Development, and at the Lean
Enterprise Research Centre at Cardiff Business School. Originally trained as an industrial
engineer in Germany, he holds a Master’s degree in Operations Management from the University
of Buckingham, and a PhD in Logistics and Operations Management from Cardiff University.
Geoff Williams is a graduate in Mathematics from Sheffield University, has over 40 years
experience within the British motor industry, with ten years in charge of vehicle supply and
distribution world-wide for Jaguar Cars including responsibility for programming, order control,
computer information systems and physical distribution. Since becoming an independent
consultant in 1991, he has played a major role in the International Car Distribution Programme
(ICDP) supply studies, managed the 3DayCar research programme involving Bath University,
Cardiff University, and ICDP, and has led supply system development projects for individual car
makers across brands world wide using computer simulation modelling.

To purchase reprints of this article please e-mail: reprints@emeraldinsight.com

Or visit our web site for further details: www.emeraldinsight.com/reprints
Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.