For many years now, most automakers have built a host of vehicles, shipped them to dealers, and sold them in that manner, though some buyers choose to go through the process of ordering a vehicle to their own specification. However, the semiconductor chip shortage has shaken up that old business model, to the point that Ford CEO Jim Farley now says that the automaker will shift to more of a build to order approach.
“We are really committed to going to an order-based system and keeping inventories at 50 to 60 days’ supply,” Farley said during Ford’s Q2 2021 earnings call with investors. “I know we are wasting money on incentives.”
Historically, vehicles that wind up languishing on dealer lots often require heavy incentives to sell, particularly near the end of a model year. The chip shortage, however, has forced automakers including Ford to slash production, leading to record-low inventory on dealer lots.
But this crisis has also forced Ford to focus on producing its higher-margin products, which boosted revenue by nearly $5,000 per vehicle in Q2 and added $1.5 billion to the automaker’s operating profit. Additionally, average transaction prices increased by approximately $6,400 in June, year-over-year, at $47,800 per vehicle.
Ford recently admitted that its inventory will never return to its pre-COVID-19 highs and that the pandemic had taught it how to turn inventory faster. Shifting to a build to order approach while also increasing inventory turns will undoubtedly continue to have a positive impact on the automaker’s profit, particularly when the chip shortage is over.
Farley recently stated that the chip supply was beginning to improve, and reiterated that on Ford’s earnings call as well, saying that he’s “seeing signs of improvement in the flow of chips now in the third quarter, but the situation remains fluid.”