Chrysler Group had a tough first quarter this year. In its earnings announcement, the company said that profits had fallen 65 percent year over year. Why? Production couldn’t keep pace with sales.
It might sound like a case of mismanagement to anyone with an MBA, and there is a point in that. Obviously there’s either something wrong in production or supply chain if you can’t keep up with orders. And yet, sometimes meeting demand is exactly the wrong thing to do for long-term company success. A combination of the two is what went wrong at Chrysler.
The car manufacturer reported that “[a]s anticipated, the quarter was negatively affected by the reduced vehicle shipments that resulted from key product launches, namely the 2013 Ram Heavy Duty trucks and the 2014 Jeep Grand Cherokee, as well as preparation for the second-quarter production launch of the all-new 2014 Jeep Cherokee. These actions are expected to position the Company for a strong performance in the second half of 2013.”
As AP put it:
Chrysler freshened up the Jeep Grand Cherokee large SUV and its Ram heavy-duty truck for the new model year, and is replacing the Liberty midsize SUV with the all-new Jeep Cherokee. But the plants that make those vehicles were slow to crank out the new models.
Any company has to come out with new products if it is to keep the attention of customers and prevent rivals from developing killer competitors and walking away with market share. One problem with new model announcements is that sales of now older versions will feel the impact. Many consumers will simply wait for the latest and greatest and put off purchasing the existing product. The common solution is to drop prices and attract particularly price-sensitive buyers who might not have purchased at the higher price anyway. Managers have to learn to ride product lifecycles and recognize the marketing, pricing, and production implications.
But what apparently happened with Chrysler is that even as new models were coming out, factories were not ready to produce in the volume that was necessary.
As the Wall Street Journal reported:
While retooling factories is a recurring part of new vehicle introductions, production losses on some of the company’s highest-margin vehicles took a toll on earnings, contributing to a “not so glorious” quarter, Chief Executive Sergio Marchionne said during a conference call on Monday. “It wasn’t painless,” he added. “It should have not caused the disruption that it did, but it has. We’ve learned and we’re moving on from here.”
Whether that will be good enough is yet to be seen. Chrysler reaffirmed its annual earnings projections, but hitting them will mean virtually no mistakes in the rest of the fiscal year, including the rollout of the 2014 Jeep Cherokee SUV.
Manufacturing and supply chain issues are critical to the success of a company and impossible to completely separate from marketing and sales. Chrysler is hardly the only company that has come up against such problems. Apple, for example, has had issues with both the iPhone and iPad because of problems building enough supply.
It’s a good reason to remember that a business organization depending heavily on silos has inherent problems. Only when marketing and sales can work in tandem with manufacturing and logistics can a company match what it thinks it can sell with what it thinks it can make.