IndyCar fans and journalists appear to be hopeful that Tony Cotman will solve many of the problems that imperil the IndyCar Series. Regrettably, the evidence suggests otherwise.
Like Brian Barnhart, Cotman is apparently determined to dictate the IndyCar supply chain from above. Supporting evidence is provided by Marshall Pruett at SpeedTV.com.
Supply Chain Economics
The practice of dictating the supply chain is one that has to go. Tony George did this initially to ensure that the IRL would have sufficient supply in 1997. It was a short-term solution that somehow became a long-term policy. Cotman then adopted it when he oversaw development of the DP01 for ChampCar. So it would seem that the decision-makers at the IRL now share a bias in favor of micromanaging the supply chain. This is a huge mistake, in my view.
An efficient supply chain must develop organically. Vendors must compete to maximize quality and minimize cost. Teams must be allowed to manage their own product life cycles and spend what they determine they can afford.
When a single vendor is chosen and a maximum price is dictated, that price becomes the effective minimum price because there is no market competition. Costs are artificially increased and an unnatural barrier to prospective new entrants is created. This practice also increases the amount of compensation that the league must provide to teams in order to ensure that enough of them show up to race.
Dictating the supply chain is costing the IRL millions each year, in my view. The decision that Barnhart and Cotman are about the make will certainly cost the IMS more than Ron Green ever did. It is interesting that a sole-source supply chain likely makes technical enforcement much easier than it would be if teams were to choose from multiple options offered by an unlimited number of vendors. Perhaps this is coincidence.
A Better Way
Barnhart and Cotman should be in the business of telling the teams what they may not do. Technical rules are best when they are composed of constraints that evolve in correlation with technologies and economies. Right now IRL management is picking economic winners and losers. This creates gross inefficiencies throughout the IndyCar economic universe.
Recall the USSR. It didn't work there, either.
For example, an economist would not be surprised to learn that the 2010 Honda engine lease is ridiculously overpriced. After all, without Honda, there would be no supply of IndyCar engines. The IRL has therefore surrendered all of its bargaining power to Honda.
In addition, the lease price that is incurred by the teams includes the St. Pete Tax, the Toronto Tax, and the Mid-Ohio Tax. Therefore, the teams and the IRL, via IndyCar TEAM, are sponsoring those three races. That the money is laundered (legally) through Honda does not change the ultimate direction of the cash flows.
Thus, we can conclude that much of the cost of IRL engines in 2010 will have absolutely zero to do with engines. Such is the cost of incompetent management.
Microeconomics 101
Establishing a middle ground between open competition and managed competition is undoubtedly difficult. But I would argue that IndyCar's core economic problems are far more elementary and not at all exclusive to the business of racing. Unfortunately, it seems that the IRL lacks managers who understand basic microeconomics well enough to devise a cost-effective solution.
The lack of sufficiently sophisticated strategic managers is costing good and loyal people their jobs at the World's Greatest Race Course.
The Indianapolis Motor Speedway Board of Directors can and must do better.
Roggespierre
I'd like to imagine that whatever future concept they have, it involves the interest of multiple chassis manufacturers. Certainly from the perspective of being a sanctioning body alone, they would be in the position of at least picking out what the maximum length of the wheelbase should be. But I'm probably waaaaaay too hopeful.
ReplyDeleteRoggespierre said…
ReplyDelete"Dictating the supply chain is costing the IRL millions each year, in my view."
I'd agree to an extent. Where I'd part ways is the cost or savings involved when you're trying to run at the pointy end of the stick.
I think there's a parallel scenario in the SCCA in regards to the 'spec' versus 'formula' issue. Classes like Spec Racer Ford and [spec] Formula E on the sole source supplier (SCCA Enterprises) side, along with Formula Ford and Formula Atlantic on the open supply chain side, provide a real world model to work from. Maybe when we get a little deeper into this, we can look at the liabilities and benefits associated with either approach.
-John
$25 million on the table...
ReplyDeleteRocketman53:
ReplyDeletePlease tell us how $25 million on the table....
is going to help fix the supply chain if the same rules and equipment still apply.
GM wrote:
ReplyDelete"Please tell us how $25 million on the table.... is going to help fix the supply chain if the same rules and equipment still apply."
If the same rules apply, putting up $25 mil is stupid becasue it would have no purpose. But, the $25 mil-on-the-table idea is to return to the original principles of the Sweepstakes to revitalize the genre before it flies up its own rear end and disappears.
I agree if the same rules and equipment apply then putting up $25 mil is pointless. But first you have to have a change in the rules to allow the 500 to return to it's orginal principles. And be honest with yourself, do you really see that happening anytime soon? I don't, unless a MAJOR miracle occurs.
ReplyDeleteGuys,
ReplyDeleteDemand change from those who possess the power to make it happen! Do it constructively - explain why change is necessary.
That is what we're trying to accomplish here.
1. Demonstrate that change is necessary
2. Explain why it's necessary
3. Propose realistic solutions
If I were to conduct a self-assessment, then I would say that I've covered #1 very well and #2 fairly well. I have only just begun to address #3, and that's where the rubber hits the road.
So, onward we go, "As if".
Next, we will thoroughly examine the IndyCar supply chain. Then, guided by our Five Core Benefits to Customers, we shall begin to address the specifics.
Yes, that means writing competition rules.
Best Regards,
Roggespierre
John,
ReplyDeleteThe benchmarks you suggest are worthy of discussion.
However, I think that it is important to remember that SCCA and IRL are completely different businesses.
SCCA racing does not require an audience. If the IRL were similar, than it would have many more options to choose from.
This, I believe, has been the core IndyCar marketing problem for more than 30 years. The need to appeal to a mass audience is a significant CONSTRAINT that includes multiple permutations. The IRL can't just do what it wants because it makes sense to insiders at the former Indy-TV offices.
That is why I say that the IRL has no concept of what Marketing entails. It begins with Product and ends with Promotion.
As I mentioned above, we are about to change the way that technical rules are written. Specifically, we are going to do it with guidance from Five Core Benefits to Customers. We are going to develop a product for the express purpose of attracting an audience.
This will be a groundbreaking exercise, even if it is "As If".
It's good to hear from you again.
Best,
Roggespierre
And be honest with yourself, do you really see that happening anytime soon?
ReplyDeleteLet's be honest; even if we're able to come up with a variety of interesting suggestions, what are the chances that we'll see them implemented in a timely manner? Now that such a reality check is out of the way, maybe we can proceed with the mental exercise. After all, we're playing on a blank slate. No one is paying us. We shouldn't be forcing ourselves to stay away from radical suggestions only because it seems unlikely that the IRL would listen to anything much beyond staying the course.
Well said, VB.
ReplyDeleteThis will be a groundbreaking exercise, even if it is "As If"
That sounds exciting! And if it's the truth of what's going to go down here, I have a hard time believing that the exercise will go unnoticed.
May I ask a question? Does anyone here have any kind of background in Manufacturing? The IRL doesn't. That is part of the problem. Building 1 item cost more that building 10. Building a 100 costs less than ten. Plain and simple, you have the blind leading the blind. Until you get people that understand supply chain economics, you are just urinating the wind and hoping it doesn't blow back in your face. I stand by my orginal statement....I can build a 750HP overhead cam engine for less that $50,000.00 US. I dare anyone to tell me it can't be done. Same for the chassis. After 35 plus years of making other peoples products faster, I dare them to prove me wrong. Keep the manufacturers in a supply chain capacity and not as competitors and let the small shops back in and watch what can be done.
ReplyDeleteOldwrench,
ReplyDeleteWelcome back, my good man!
We're just about to get into your area of expertise. You're already talking the language.
One thing...
Economies of scale are great If the costs savings are subject to bargaining between buyers and suppliers. Honda Performance Development is getting fantastic scale from its current IRL engine deal. The problem is that ALL of the cost savings accrue to HPD!
Add competitors - including the small ones - and just watch that Honda lease price come down!
Best,
Roggespierre
Exactly!!! If the supply chain opens up, then that ugly word comes in COMPETITION! The best example is the price of a HD or Plasma TV. Where have the prices been going since their introduction???? Down, down and down! Same for computers, Blackberrys and the rest of what the world buys. Is not a Indy Car Team a buyer, and a company like mine a seller? When the IRL figures out that without me or others like me they won't have a business for long if Honda and others go bye bye! It is not wise to put all of one's eggs in one basket. I address this to those in charge at the IRL.
ReplyDeleteGM wrote:
ReplyDeleteFirst you have to have a change in the rules to allow the 500 to return to it's orginal principles. And be honest with yourself, do you really see that happening anytime soon? I don't, unless a MAJOR miracle occurs.
Frankly, if we're being honest with ourselves, none of this, except perhaps for the "500", is viable ...barring a MAJOR miracle, including a cash infusion, a flash of sanity, and a spark of public interest in an apparently declining market.
Please, carry on...
Old Wrench has it 100% right!
ReplyDeleteSet the rules, and get out of the way. Why do we need one engine, or two, one chassis? We don't!
We need a formula that allows for anyone to produce a race car to fit the formula.
Innovation, competition, not only between teams and drivers, but between engines and chassis all within a budget will bring interest, and from interest---fans and sponsors.
osca
Guys,
ReplyDeleteWe should ask ourselves the following question.
WHY is IRL Management apparently determined to muck up the supply chain, adding unnecessary millions to the cost of participation, cost that the IRL/IMS must underwrite via IndyCar TEAM in order to ensure that enough cars show up to fulfill the promoters' agreements?
Here is one hypothesis: Fear.
Fear of what? Fear of losing 1) supply and 2) supposed "sponsorship". These fears are, in my opinion, based not on economic reality, but rather on perception. Barnhart and Cotman fear that they would look bad before the IMS Board if they were to lose Honda's series level sponsorship.
The reality is that the IMS Board should force IRL Management to do just that. Honda is not a series sponsor. Sponsors invest in the enterprise. Honda is extracting revenue from the enterprise. It is therefore the antithesis of a sponsor. That is redirects subsidies paid by teams and the IRL to promoters at Mid-Ohio, Toronto, and St. Pete does not change the nature of Honda's participation. That Honda forces the league to ruin its schedule with the race at Motegi is even more reason to either renegotiate or say goodbye.
Does anyone really believe that the Indy 500 teams won't be able to source engines without HPD? Would Ilmor, Cosworth, Judd, Speedway, Katech, McLaren, Menard, PowerTrain and a host of other engine builders not be interested in competing at Indy?
The supply issue is a short-term problem due to development and lead time. Otherwise, it is a red herring. The "sponsorship" would not be missed - it would save the IRL/IMS cash money.
Honda and Toyota are demonstrating that they now view auto racing as a profit center rather than a promotional platform. Toyota's Cup participation is the notable exception to the rule.
If manufacturers are in the racing game to make money, then we should ask ourselves whether or not we should welcome their participation.
My initial instinct is to let them go.
Best Regards,
Roggespierre
I welcome their particapation as long as the rules permit others and myself to join in. They don't!!! If anything, they fear competition!!! It has more to due with the old saying about building a better mouse trap. It doesn't come from them, it comes from creative people that look for better ways of doing things when they don't have the financial resources. Ask Bill Gates and Steve Jobs that question. Both started out of garages and changed the world!!! Corporations are about control, not about creative thinking. They want to control a market and limit participation by escalating costs to the point where only a few can play and by determining the rules so if you do play they still can win or make money.I am a true capitalist; and believe that open markets are the true test of a persons or a companies true value. The IRL doesn't. Same for our goverment. The strong survive and the weak fail. It is why we are in the mess we are in on both levels. So, open up the rules and lets see who has what !!!
ReplyDeleteRoggespierre:
ReplyDeleteIMS has shown they don't know how to manage the race car supply chain, however I disagree that it can't be managed from above. In fact, mandating the supply chain is what makes the great companies great.
The people doing the negotiating have never driven cost out of anything on a serious level, so it should not be surprising that they are not doing it now. IMS needs to get cost accountants working on the real COSTS of what they do and decide in advance how much profit they are willing to allow people to make when they participate. That is what Coca-Cola does. That is what Dell, Motorola and HP do. These companies don't let suppliers dictate what they charge.
IMS is in the old-world "get three competing bids" way of thinking. Smart companies don't do business that way. Smart businesses understand what they are going to pay in advance.
Where is this more evident in the Honda engine program. As I have told you before.... Indycar teams could buy a brand-new, 600+ HP Corvette Z06, yank the engine out of it, put it in an Indycar, throw the rest of the car in the trash, run it for four races, and DO IT ALL OVER AGAIN.... for the cost of a Honda 600+ HP lease.
>>oldwrench said...
ReplyDeleteIt is why we are in the mess we are in on both levels. So, open up the rules and lets see who has what !!!<<
Opening up the rules won't solve anything, and will just make it more expensive and less safe.
Poor kids play soccer and rich kids play golf. Why? Soccer has a lower cost of entry and simple equipment that lets talent shine. Talent shines in golf too, but you need cash to get there.
Indy racing needs to be like soccer. They need to use simple, inexpensive equipment to let talent shine.
The model I would like to follow is the "Main Event" at the World Series of Poker model. While not exactly applicable... I want to see Indy racing in general and the Indy 500 in particular become the something like that... where racers from around the world can compete on the biggest stage. I suggest the best way to do that is to drive cost out of the equipment (by making it simple, but still making it fast and safe) and sell it to anyone who wants in.
Donald wrote:
ReplyDelete"Opening up the rules won't solve anything, and will just make it more expensive and less safe."
Yeah, that open rules concept never worked before. Let's stick with de facto spec racing and its illusory open competition, where the big money wins week after week by wringing out that final percentage, the edge the others cannot afford to seek, let alone find, in their "common" equipment. That'll send the turnstiles (and remotes) clicking.
I wonder how the costs today compare with those golden, immediate pre-IRL years, when open rules were in force, and escalating costs "forced" TG to found the cost-contained IRL. I'd almost bet, adjusted for inflation, today's inferior product is more expensive, either gross or net.
There must be some reason all those sportsmen owners of bygone days are skipping out on all this fun.
The failure of the rules is simply one thing.....lack of conviction. Most present and past IRL chassis meet or can meet the present safety and competition rules. It simply is that the IRL wants these cars to go away. Would it be a pity if a no name team in an upgraded 6-12 year old car with some new wrinkle would basically drop kick Penske, Ganassi and AGR with technological ingenuity? I think that might put some butts in the seats and a few new teams in the feild. I agree with Rocketman53.....increase the prize money along with a revised rules package and lets see what happens. I am going with full fields and sellout crowds!
ReplyDeleteRocketman53 said...
ReplyDelete"I wonder how the costs today compare with those golden, immediate pre-IRL years, when open rules were in force, and escalating costs "forced" TG to found the cost-contained IRL. I'd almost bet, adjusted for inflation, today's inferior product is more expensive, either gross or net."
Mid-90's CART: $7-$13 million to run a full season. So in today's dollars around $10-$18 million.
-John
Guys,
ReplyDeleteIt's pointless to compare anything with CART in the pre-IRL years, in my opinion. Those teams were so highly levered by arbitraged supply chains that there was virtually zero correlation between their costs and their value.
The original IRL engine model wasn't perfect by any means, but it wasn't bad. Yes, you had to run an Olds or an Infiniti, but teams were free to build their own motors or outsource the work to whomever they chose. A nascent cottage industry sprouted - Speedway Engine Development, Katech, Comptech, Roush, NAC, Rocketsports, Menard, Ed Pink, Tom Hooker.
I thought that the competition was more diverse and more interesting than that of the factory-controlled CART manufacturers Mercedes, Toyota, Ford and Honda.
The IRL blew its economic model to smithereens when it granted concessions to convince Honda and Toyota to jump the fence. In the GM/Infiniti model, the supply chain portion of the program was separate from the series sponsorship deal. That has never been the case with Honda and Toyota. Thus, we have the Motegi Tax, St. Pete Tax, Mid-Ohio Tax and Toronto Tax inflating the price of the engine lease.
Sponsorship and the supply chain must be decoupled. I am not sure that anyone at the IRL understands the economics of the cash flows.
Best Regards,
Roggespierre
Donald,
ReplyDelete"IMS is in the old-world "get three competing bids way of thinking."
You give the IMS more credit than it deserves, IMO. The "three competing bids" model would be an improvement.
The IMS is all about personal relationships. Regardless of whether it's the buy-side or the sell-side, personal selling is everything. Those who are not members of the family work diligently to establish personal relationships so that they can not be easily replaced.
Managing construction and service contracts accounts for a good portion of my job. I don't even ask the names of the subcontractors; managing the subs is the job of the GC or primary service provider. My job is to ensure that design specs are met, the Scope of Work is satisfied, and that the GC gets paid on time. Beyond that, I simply don't care.
IndyCar teams are the IRL's General Contractors, if you will. The IRL should at a level that is similar to the one that I describe. Think of the Technical Rules as parallel to a Scope of Work.
From the IRL's perspective, engine builders and manufacturers are subcontractors. The league tells the GCs (teams) what they must do and what they may not do with regards to safety and competition. Then the GCs negotiate with the subs to acquire the necessary materials and labor. Thus, a market is established. The IRL has no business participating in that market.
Best Regards,
Roggespierre
The problem comes when you compare the racing business with regular business. You GC model works fine in the real world, but in the racing world... the goal is to GO FAST and WIN... making money is secondary.
ReplyDeleteIf IMS acted the part of the grown-up and made it THEIR business to drive cost out, they would be saving the team owners from themselves. This is clearly needed.
What is NOT needed... is any talk about getting back to the "good old days" of CART or even USAC. We need to look forward and I am glad you are turning back those who want to re-hash "the split". It was broke then, it is broke now... let's get about the fixing.
Donald,
ReplyDeleteGoing fast and winning are indeed important. I don't disagree. But I would suggest that making money is also VERY important to everyone. Chip Ganassi and Roger Penske make money racing. Eric Bachelart makes money racing. Who doesn't? Maybe Dennis Reinbold, but I wouldn't bet on it.
Those who don't make money get out. The current system has forced many to follow that tack. The series can't drive cost out because its sales and operating agents are fully incentivized to muck up the supply chain with purported "B2B" deals. The commissions are swell, I've been told, and the additional job security can really come in handy in times like these.
Right now, the teams do not control their own product lifecycles. There is no flexibility with regards to engine mileage, for example. Small teams are not permitted to stretch it out. Instead, they just quit showing up.
That must change. It will only change if teams are allowed to spend to their own budgets. Will the competition suffer?
The CART and USAC days might have been good, but they existed in a vacuum that was largely devoid of market competition. Those circumstances - and therefore those business models - are no longer based on economic reality.
Regrettably, the IMS seems not to understand that passing the asset to the next generation will require that the organization become legitimately competitive. Cutting costs will NOT be good enough.
Best Regards,
Roggespierre
Donald said…
ReplyDelete"The problem comes when you compare the racing business with regular business. You GC model works fine in the real world, but in the racing world... the goal is to GO FAST and WIN... making money is secondary."
I agree. You open the rules up and the next day someone will be on the phone to Lola and Cosworth, not their accountant or the local speed shop. It's pretty hard to innovate your way around two-car wind tunnels, shakers, dynos, unobtanium and all the engineers that come along.
I don't like it, but the technology genie is out of the bottle and we can't put him back in, so we're just going to have to deal with it. And to me, dealing with it will be more along the lines of DQing Penske for showing up with mirrors detrimental to the sport of IndyCar racing, than giving him more options.
-John
John,
ReplyDeleteThat's why you have technical rules. Your solution for Penske's mirrors is not only viable, but also necessary. Of course that rule would have to be enforced with all manufacturers.
Thus, the competitive advantage is eliminated. The suppliers to the teams are left to compete on price. That brings costs down.
Technical rules are a combination of mandates and constraints. They must be adaptable but not arbitrary. The MLB reached its zenith when the commissioner had power to rule "in the best interest of baseball." IndyCar Racing should be no difference.
How would an IndyCar Commissioner determine that which is in the Best Interest of IndyCar? He or she would look to the Core Benefits to Customers for guidance.
Do tricked-out mirrors augment customers'
1. Aggrandizement?
2. Thrill?
3. Intrigue?
4. Affirmation?
5. Community?
If, in the Commissioner's judgment, the answers are no, no, no, no and no, then the mirrors are disallowed because they are not in the Best Interest of IndyCar.
Teams that develop technologies are welcome to consult with the league and seek guidance along the way. If I were commissioner and Tim Cindric presented his mirror idea to me, then I would be glad to tell him to save his time and money because I have no intention of approving such a device.
The fact that teams want to go fast and win is not unusual. Racing is not an exception. Every business wants to maximize value. Every business must compete.
You can use all of the wind tunnels, shakers, dynos and engineers that you want. But that does not mean that you will be allowed to use all of that information.
If teams don't like it, then they are free to race elsewhere. Good luck with that - other series have rules, too, and many have teams that have even more money. Penske and Ganassi lose to them about 33 of 36 weeks per season in NASCAR Cup.
Best,
Roggespierre