Ducati’s North American operations show improvement

Ducati’s North American operations have improved considerably over the last 12 month, especially in terms of cutting non-current inventory, improving warranty claim processing and generating dealer traffic.
Michael Lock, Ducati’s chief executive officer for North American operations, said in an interview with Powersports Business that strides have been made in addressing major problems, but he noted that there is still lots of work to be done.
“The last year has been a real roller coaster,” said Lock. “We inherited a dreadful situation, and we spent the first six months doing almost nothing but fire fighting, responding to problems.”
Lock, who took his present post last March, faced a situation in chaos at that time. The company had just relocated its North American headquarters from New Jersey to its present location in Cupertino, Calif., it had begun outsourcing its motorcycle warehousing and distribution to UPS Worldwide Freight Service in New Jersey, it had begun outsourcing its parts and accessories warehousing to Excel in Columbus, Ohio, and it was launching a dealer online computer system.
Unit sales through March 2003 were only about half the number they were for the same period in 2002, the lowest mark since 1999, and the dealer network was in turmoil.
“In truth,” he says now, “the chaos of the business was running us. Everyday, we came in and found that even though we took one step forward, we took one step backward somewhere else.”
For the year of 2003, Ducati’s North American sales were off 17%, the worst performance in any of its markets. Worldwide, Ducati’s 2003 sales were off 3%.
Today, the situation has turned around, says Lock. North American sales through February were up 76% over the same period last year and March will be even better, he says. And last year, he notes, sales for the July through December period were up 3%, a sharp reversal from the first half of the year when they plummeted 40%.
Non-current inventory
When Lock toured the country last summer talking with dealers, he got the same comments, time after time. “We had to tackle the inventory problem,” he says. “We heard it from everyone; we had too much and it was too old.”
One significant part of the inventory problem was that the non-currents were held primarily by dealers. Ducati itself didn’t hold much of the old inventory.
What Lock found, too, was that dealers had taken matters into their own hands. Since the aged bikes in inventory weren’t price competitive, dealers were undercutting each other to get rid of the old product.
“We knew we had to end the wars among dealers and stop the confusion among consumers,” he says. “You could call five dealers and get four different prices on the same bike.”
Lock’s team identified actual street prices for the non-currents, then compared those prices to MSRP. “We knew we had to adjust things so the MSRP would meet the street price without devaluating the brand.”
The answer was a fairly simple, two-step process: Adjust retail prices and generate traffic through financial promotions. “You have to follow the tried and true route,” he says. “If you want to stimulate retail without devaluating the brand, you use finance promotions.”
Since the dealers held so much of the inventory, they had to be price-protected regarding the new promotions. Lock had to credit dealers with the difference between the new price and the old retail price.
“That was a big deal,” says Lock. “That was the first signal that we were with the dealers. We told them, if there is pain and suffering, we’re going to share it with them.”
So, last May, non-current prices were chopped 15% to 20%.
The second step was stimulating sales by giving the consumer something; that meant great financing deals.
Unfortunately, Ducati has had only mixed success through the years with financing promotions, and last year there was plenty of competition on that playing field.
The new program had to have two characteristics: It had to sell and it had to be something that Ducati could administer; not an easy task, given the competition and the chaos within the system. Ducati went with a zero percent financing for 24 months promotion that ran from Oct. 1 through Feb. 29. It worked, and sales jumped for the period.
Total network inventory held by Ducati and by its dealers is down about 25% compared to the same time last year. And the age of the inventory has dropped by about four months, or a reduction of about 30%.
Interestingly, Ducati found that most customers who participated in the financing program did not take the zero rate, opting instead for a higher rate and a longer term. That gave them a lower monthly payment.
The new program now being presented will offer a 3.99% rate available for 48 months or 60 months, and promotional materials will emphasize the monthly payment, rather than the interest rate.
“We’re quite well on target now,” says Lock in discussing the inventory situation, “but the trick is not to get into it again.”
Lock candidly says that OEMs often like to concentrate on the supply side of the economic equation, which allows them to plan production more easily.
“Our new philosophy is to emphasize the demand side,” he says. “We’ve given dealers a way to reduce inventory, and now we are concentrating on driving showroom traffic.”
For example, he says, the company plans its build based upon dealer orders, rather than having the factory plan the build and then telling dealers how much they must order.
It’s not a new approach, other OEMs do it, but it’s new for Ducati, which tailored its 2004 build using that approach. Now, it’s actually sold out of some models, a position it’s never been in.
“When you can say to a dealer in March that he’ll have to wait for an ’05 model,” says Lock, “he might jump up and down and yell. But once he thinks about it, he knows it’s best for everybody.”
Parts inventory
If Ducati’s bike inventory was a problem, parts stocking was even worse. “Parts stocking was a nightmare,” says Lock. In North America, Ducati’s first time fill rate (the percentage of an order that gets filled when a dealer orders) was down around 40% when Lock took over. That compared to about 93% for Ducati worldwide.
Lock’s target was to hit 90% by the end of 2003, and the fill rate today is about 93%.
“We still have some supply issues, as do other OEMs,” says Lock, “but we don’t have a systemic problem like we did then.”
Computer problems
One problem that affected Lock’s entire operation was the online system connecting North American dealers with the Ducati factory in Bologna, Italy. The new system, used successfully in Europe, didn’t work here. The worst performing segment involved warranty claims, making it almost impossible for dealers to administer.
Even though the Arco system worked well in Europe, Ducati didn’t realize that here the software had to interact with a locally run Oracle system. That added an important additional step to the digital communications process.
“We were getting software conflicts here that never showed up in Europe,” laments Lock. “We had tremendous, tremendous problems with data corruption and data not being transferred correctly.” The problem was compounded when it was discovered that only five years of historical data had been saved. “We needed history back 10 years,” says Lock. “If you know there are problems, you have to continue to operate a ‘good will’ warranty system. That just wasn’t available when we went live.”
The computer problems have been solved for the most part, he says.
Ducati’s dealer base here seems solid, despite the company’s problems. At the start of 2003, there were 176 dealers, and by the end of the year there were 174, with only about a dozen changes. psb