Lean inventory management sees Mahindra retail stock at 5-year low

by Shahkar Abidi 09 Nov 2019

Tough times often call for tough decisions to stay strong. That's what seems to be happening with Mahindra & Mahindra's (M&M) retail marketing in the domestic market. Benefiting from improved sales demand during the festive month of October, compared to the difficult 10-odd months before it, the UVs to CVs and EVs manufacturer has reported that its retail inventory levels are currently at a five-year low. Practicing lean inventory management (see separate panel below) has evidently helped.

Judicious product-push planning, gearing up for BS VI and targeting specific growth markets in a time of tepid sales has helped achieve current levels of lean inventory. However, anticipating new sales demand in November and December due to a delay in farm harvesting and the ongoing marriage season in India, the company is likely to push some inventory in rural belts to meet the demand, top company officials have said

Announcing the company's results for the quarter ended September 30,  2019 (Q2) yesterday, managing director Dr Pawan Goenka said M&M's retail inventory went below the "ideal" level. "Therefore, we have some room to gain inventory" he remarked, emphasizing that after December, the company will try to match the billing (wholesales) with retail (when vehicles are sold to the end consumer). According to retailer lobby body FADA, an inventory of around 3 weeks is desired for the passenger vehicle sector.

Compared to September sales numbers, M&M  sold 4,127 more PVs in October (September 2019: 14,333), registering growth of 28.7 percent. Similarly, SUV sales increased by 3,927 units in October 2019 as compared to September's 13,858 units, up 28.3 percent. Veejay Ram Nakra, chief of sales and marketing, automotive division, M&M had said, “The festive month of October 2019 was excellent for Mahindra, with retail volume exceeding wholesale by approximately 40 percent. This robust retail performance was contributed by both passenger and commercial vehicles. Further, our billing numbers are in line with what we had planned for the month, since the objective was to significantly correct our channel inventory. We hope to see the positive consumer sentiment continue going forward.”

Autocar Professional had reported on November 4, how festival-led demand in October  led to a spike in sales for some PV and two-wheeler OEMs, Royal Enfield benefited substantially to the extent that its inventory level is down to about three weeks. In fact, the situation has resulted in a stock-out situation in many key markets in West and North India for the bikemaker, which is not ideal from an opportunity lost market dynamic.

India Auto Inc and the dealer fraternity has for some time now contending with high inventory levels, which began a year ago with the 2018 festive season. The lack of financial liquidity, increase in vehicle costs arising out of regulatory upgradation, low economic sentiment, and increase in insurance costs, among others, led to the prolonged slowdown demand for new vehicles.  The comparatively increased month-on-month sales in October, due to festive season-led demand, provided an opportunity for OEMs and dealers to correct the same, before the industry transits to the BS VI era in April 2020. 

“That means everything that went wrong last Diwali regarding inventory has been corrected now,” pointed out Dr Goenka. He, however, stressed that October retail sales need to be seen in light of two factors. It is not very often that Navratra and Diwali fall in the same month and also spill over to November, thereby spreading sales into two months. "Unusually high discounts" offered by most OEMs also provided much momentum to sales; this has now been stopped in November.

Dr  Goenka said it is too early to comment whether the improved sales numbers in October constitute green shoots of market revival. Addressing the ongoing debate of wholesale and retail sales numbers, he said that though retail numbers are a better indicator of the real-world market performance,  it’s a  “zero sum game” as billing has to equal retail within a period of 3-6 months. The reason India Auto Inc prefers wholesale is merely due to the regulatory mandate which requires revenues to be calculated on billing done to the retailer. Further, retail numbers are not well defined and therefore can be counted only when vehicles get sold and registered. Also, not all the States in India have thus far been covered in the vehicle registration data of the Ministry of Transport.

BS VI production to start in January, concerns about BS VI fuel remain
Like all automakers in the country, M&M is actively engaged in the upgrade to BS VI. Dr Goenka said the impact of BS VI transition will decide how the industry fares in the fourth quarter of FY2020 (January-March 2020). He expects all OEMs, including M&M, to start rolling out BS VI vehicles from January.

Pre-buying of BS VI vehicles is expected to pick up pace closer to the BS VI deadline, which means around February and early March when OEMs start announcing the revised vehicle prices for BS VI-compliant vehicles. However, the industry is not including heavy commercial vehicles (HCVs) for the pre-buying due to the underlying slowness in goods movement because of the ongoing economic slowdown.

As regards availability of BS VI fuel, Dr Goenka said the uncertainty over timely availability remains as  oil marketing companies (OMC)s are still unwilling to give any commitment of supply prior to the April 1, 2020 deadline. It takes about 3-6 month to remove the impurities arising out of changing the BS VI fuel in the ecosystem.

How lean inventory management helps
Lean inventory management is a skill that most well-managed companies practice. While maintaining inventory, as compared to a stock-out situation and inability to match supply to demand, is vital for running any business, holding on to inventory and high inventory levels becomes an expensive proposition if goods are not shifted quickly. Holding inventory (as dealers in India have over the past year or so) can cost a vehicle manufacturer around 20 to 30 percent more than the specific unit itself! In a slowed-down economy (like India is at present) as well as a competitive market, adopting the lean inventory management mantra makes for sound business sense.

Lean inventory management is all about eliminating waste in terms of costs, time and effort. Doing more with less is, to some extent, a black art when it comes to arriving at the right balance of inventory but the combination of experienced automobile dealers (who usually know the pulse of the consumer) and right-thinking OEMs can achieve this. The immediate benefits from maintaining a lean inventory are reduced costs, enhanced stock turnover and customer satisfaction and, importantly, improved cash flow -- for both OEMs and their authorised dealers. What's not  to like?

Also read: M&M MVML Q2FY2020 net profit down 24% at Rs 1,355 crore

Mahindra open to partnership with Ashok Leyland, or others, for e-mobility