Allocation and production when demand is hot

Although most of the news in the U.S. auto industry is bad, Honda is selling more of its small car – Fits and Civics – than it can make.  So this creates two problems – (1) how do you allocate vehicles when dealers are scrambling for more and (2) how can you make more of the hot selling vehicles?

Honda uses turn-and-earn allocation – if a dealer sells a vehicle, they earn the right to another one. Seems fair but more importantly, it makes sure that dealers don’t charge too much or else risk slowing their sales, thereby jeopardizing future allocations (our conjecture, not in the article).  In other words, its a legal way to discpline dealership pricing and sales effort.

But Honda still wants more of those Fits and Civics, so it is making plans to move truck capacity around and free up capacity for its smaller vehicles. Toyota and the other makes are doing the same thing.  The winner from all of this will be the firm that has the most flexible production – who can turn a truck assembly line into a small vehicle assembly line the quickest and at the lowest cost?  Flexibility is like insurance – its seems a waste when you don’t need it and critical when you do!

Automotive News, June 17, 2008, Honda dealers scramble amid stampede to small cars


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