March 30, 2023

Not All Inventory Efficiency Index Scores Are Created Equal

Cloud Theory
Cloud Theory
SUVs in a row

Learn why Hyundai's Efficiency Index score of 127 is better than Honda's score of 154


A year is a really long time in the automotive industry these days, and the last two years have been exponentially more complex. What used to be a relatively stable and predictable marketplace has been disrupted by a series of shocks to the system – COVID, COVID recovery, chip shortages and supply chain issues, production stoppages, gas price spikes, and interest rate woes. Not all OEMs have weathered the storm in the same way, in the same timeframe, or in the same segments.

The Cloud Theory Inventory Efficiency Index score (patent pending) provides a previously unavailable market-specific view of supply and demand across all makes and models and spanning all geographies in real time, but it can also be used to understand longer term dynamics and how OEMs are weathering those macro-events over time. The small SUV marketplace offers a case in point and demonstrates that not all Inventory Efficiency Index scores are created equal.

The Cloud Theory Inventory Efficiency Index measures the balance between a model’s supply and demand within its relative market. A score above 100 means that a model is selling quickly relative to its supply while a score below 100 indicates that supply exceeds demand. A score of 100 means that a model is getting its fair share of sales–in other words, selling at a rate that meets market demand. This metric enables key decision makers to confidently distribute marketing and incentive dollars as well as reallocate inventory to places it will sell most efficiently.


Small SUV Dynamics

In Q1 2021, the automotive industry was navigating its way through the first year of the COVID-19 pandemic. Inventory levels were starting to decline, but the full extent of the chip shortages and general supply chain issues had not yet been fully realized. In the small SUV segment, the Honda CR-V had an average inventory level of more than 60,000 vehicles at that point but plummeted to just under 8,000 by Q4 (down 87%) and has yet to recover more than a year later. In that two-year period, CR-V’s Inventory Efficiency Index score skyrocketed from 94.5 to 154.2 (+59.7 points) because Honda is selling those short-supplied vehicles faster than they can produce them. Its inventory share and market share both declined significantly (double digits on both), but the latter fell at a lesser clip than the former, resulting in the efficiency gain.

Hyundai Tucson has also seen a rapid rise in its Inventory Efficiency Index score over that same time frame – from 81.5 to 127.1 (+45.6), but did so in a very different manner. Its average inventory went from just under 16,000 in Q1 2021 to just short of 15,000 two years later. That model maintained its inventory share but gained almost 4 points of market share in the process.

The recommended actions to take, therefore, need to consider not just the efficiency score itself, but the situational and competitive context represented by that score. Honda, for example, should be very cautious to support marketing budget allocations to a model in their lineup that is in very short supply and high demand, and should contemplate shifting marketing or incentive resources to other models until that equation is in better balance. Hyundai, on the other hand, should consider striking while the iron is hot, and continue to support a model that is doing well and has opportunities to do even better.

Similar scores with very different actions, proving that not all Inventory Efficiency Scores are created equal.

Seeking the Latest Report? Discover Our Newest Resource Below:

Topics Discussed