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By Marty Lariviere

My family is a Honda (NYSE:HMC) family. We have had at least one Honda in our driveway for the past dozen years. Over that time, Honda has seen its US market share rise pretty steadily. Even when the overall car market crumbled, Honda managed to be less affected than the average firm and thus saw its overall share climb.

That is, until this year. As the graph shows, Honda has recently fallen off the pace. Yes, its sales are up this year but its gains are much more modest than the gains of GM (NYSE:GM), Ford (NYSE:F), and even Hyundai (OTC:HYMLF). So why has Honda stumbled?

Automotive News has a recent article that proposes several answers ("The threat to Honda’s mojo," December 6) even as it quotes Honda execs claiming that they don’t worry about share:

At Honda, “no one talks about share,” Mendel said in a recent interview. “Chasing share gets you into bad habits. We set a business plan to sell a certain number of cars. We don’t set the plan based on an assumed share. We plan to grow 2 or 3 percent in volume in good times, and bad times. And there are times we’ll give share back.”

Of course, Honda doesn’t care about share. Just like I’ve never heard a business school dean say he or she is concerned about BusinessWeek rankings.

In any event, the reasons given for Honda’s slow down are numerous. The Civic and CR-V are long in the tooth but have redesigns coming. Honda was slow to ramp up production until they were convinced that an increase in demand for trucks (that’s pronounced Pilots and Odysseys at Honda) was real. The company has never been as aggressive as other firms with promotions. They have always been better at products than marketing. And so on.

One explanation, however, caught my attention: Honda has been hampered by its allocations mechanism:

Dealers say they could hit sales targets if Honda would fix its inventory and allocation system. The system, called MOVE (for market-oriented vehicle environment) was rolled out in 2001. Honda has promised an update in 12 to 18 months.

Oregon dealer Theis, a 25-year Honda veteran, said increasingly complicated model proliferation has taxed the current MOVE system. It’s about more than just days’ supply on a dealer’s lot going toward turn-and-earn; it determines what vehicles can be ordered at a particular time.

Large and small dealers agree that Honda’s inventory, allocation and manufacturing systems are not properly aligned, requiring a combination of mathematics and luck to get the right cars in stock.

The new Odyssey is an example of what frustrates dealers. With pricey options such as rear-seat video, power tailgate and leather seats, the new van has many more trim levels and features. Dealers believe they are better judges of local tastes than are factory reps.

“Right now we can choose within certain build constraints each month, but that can still be reconfigured by the factory,” said Theis. “Dealers say if they could get the cars they want, and get more local control, they could grow.”

I find allocation schemes really fascinating. How firms dole out limited capacity can have a real impact on the incentives retailers face. Turn-and-earn (which doles out more available inventory to those who are selling fact) can give a strong incentive to really move the metal. The interesting thing here is that the dealers can’t work the system the way the want. That is, the allocation system doesn’t properly allow them to respond to incentives because they can’t get the configurations they want.

There’s another intriguing question here. Do local retailers really know better? That is, does a dealer who only sees his or her local market necessarily understand what customers want better than Honda which gets sales data from around the country? I am not suggesting that Honda may be right to deviate from dealer requests as they current do. From the article, it seems everyone agrees that this system is broken. What I am suggesting that there may be less local variation than dealers currently believe. For example, Honda makes a CR-V without all-wheel drive. However, I doubt any Honda dealer in Chicago bothers ordering those. But that also has to be true for Honda dealers in Minnesota and New York. Honda is currently revising its allocation system in order to “provide dealers with an intuitive, more localized and market-focused way of managing their inventories.” That may well be a significant improvement over the current system but may not be a cure all.

Disclosure: No position