Thursday, November 12, 2009

IndyCar Supply Chain Follies

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

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.


Wednesday, November 11, 2009

IndyCar: Heads still Rolling at IMS

A good person and employee has been deemed expendable by the Indianapolis Motor Speedway Corporation.
According to Curt Cavin of the Indianapolis Star, IMS Director of Public Relations Ron Green was one of several staffers who lost their jobs Tuesday.

In a previous life, I worked directly with Ron Green on many occasions. He was always professional and accommodating. Like me, Green was then a true believer in the Indianapolis Motor Speedway in its past, present and future permutations.

His ouster leaves me sad and angry. Ron Green did his job well. The same can not be said of those who make strategic business decisions at the IMS and IRL offices.

I remind you that this is an organization that has demonstrated zero understanding of the differences between media relations and promotions, corporate sales and product marketing, supply chain management and product development.

Fred Nation, Green's former supervisor at the IMS, issued a statement in which he predictably blamed the economy for the latest round of layoffs.

I consider Fred a friend. In this case, he is wrong. Green and the others lost their jobs because they happen to have worked for a company that is very poorly managed. They are paying the price for decisions that were made by others.

Barring significant and unanticipated upgrades in management talent at the IMS and IRL, Green and his cohorts will certainly not be the last to go.

Green's dismissal reminds us of the reality that has befallen IndyCar racing. Masquerading an intellectual property licensing agreement as Title Sponsorship does not change that reality.


Core Benefit: Community

Our final proposed Core Benefit to Customers is that of Community. In many ways, it is derived from the Core Benefits that have already been discussed: Aggrandizement, Intrigue, Thrill, and Affirmation.

There are many types of communities. They can be either formal or informal. All are based on something that is shared: location, socioeconomic status, occupation, security, faith, race, ethnicity, language, age. Often, sub-communities emerge from within larger communities.

For those who are interested, I will suggest reading the following staples of MBA level analysis of what academics have called "collective action" and "spontaneous sociability".

Mancur Olson: "The Logic of Collective Action"

Robert Putnam: "Bowling Alone: The Collapse and Revival of American Community"

IndyCar Community

It would seem that the IndyCar Community, writ large, should be a spontaneous and voluntary association that is based on the shared interests of those who choose to participate. There is no default membership requirement such as race, ethnicity, and socioeconomic status.

Therefore, people join the IndyCar Community for its own sake. This can be both good and bad for the marketers who make product development decisions.

That's us, by the way.