Friday, February 13, 2009

Why Just-In-Time Won't Work For Detroit

The concept of "just-in-time" manufacturing, which minimizes warehousing as a cost-savings and efficiency measure, has been with industry for some time now. JIT as it is known to the economists, began with Ford Motors in the 1920s and was rediscovered after World War II, becoming industry standard within the last 20 years.

But JIT won't work for the Big Three automakers - indeed for any automaker selling cars in the US - and here's why.
Americans can buy virtually anything over the Internet these days -- sex, booze, houses -- everything, that is, but a new car. If you want to buy a new Ford Fusion, you have to go down to your local dealership and haggle with the car salesmen, an unpleasant and daunting task. The process usually subjects consumers to hours in the dealership hotbox and can add hundreds, if not thousands, of dollars to the price of the car. Wouldn't it be nice if you could cut out the middleman and just order your Prius straight from Toyota?

But you can't. And there's one reason why: the car-dealer lobby, which has worked hard to ensure that this will never happen. Since the late 1990s, car dealers have used their considerable political clout to pass or better enforce state franchise laws that in many cases make it a criminal offense for an auto manufacturer to sell a new car to anyone but a state-licensed car dealer. The laws governing who can sell new cars are among the most anti-competitive of any domestic industry. By creating local monopolies for dealerships and prohibiting online sales for new cars, they constitute a major restraint on interstate commerce; in 2001, the Consumer Federation of America estimated [pdf] that the laws added at least $1,500 to the price of every new car.

These parochial state laws also make the distribution system for new cars incredibly inefficient and expensive, one factor in the financial problems facing the Big Three in Detroit. Online sales would help companies like GM and Chrysler align production to sales better by allowing more people to buy their cars built-to-order from the factory, rather than having Detroit send out truckloads of vehicles to sit around on dealer lots for months in the hopes that a rebate offer will finally entice someone to buy them.

Attempts to repeal the laws that require this, or to make exceptions, have been soundly thrashed by the dealers' lobby. Even the Big Three - who have seen the benefit of online ordering and JIT production - have been sent home by their own dealership industry.

JIT for Internet purchases could revolutionise the auto industry just as it has apparel, computers and other manufacturing sectors. But the local dealership won't let them: it'd rather hang on to its monopoly status and hefty commission/fee schedule. Which means that, rather than adopting a build-to-order model for cars, Detroit is forced to produce masses of vehicles that then sit at distribution centers or dealers' lots until the dealers can coax someone into buying. This isn't good for consumers, and it isn't good for the Big Three which have enough troubles. Yet somehow this archaic business model has been allowed to persist.

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