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Turning the business around involved more than segmenting and pulling out of retail. It also meant maximizing every strength we had in order to boost our profit margins. In re-examining the direct model, we realized that inventory management was not just a core strength; it could be and incredible opportunity for us, and one that had not yet been discovered by any of competitors.

In Version 1.0 of the direct model, we eliminated the reseller, thereby eliminating the mark-up and the cost of maintaining a store. In Version 1.1, we went one step further to reduce inventory inefficiencies. Traditionally, a long chain of partners was involved in getting a product to the customer. Let’s say you have a factory building a PC we’ll call model #4000. The system is then sent to the distributor, which sends it to the warehouse, which sends it to the dealer, who eventually pushes it on to the consumer by advertising, "I’ve got model #4000. Come and buy it." If the consumer says, "But I want model #8000," the dealer replies, "Sorry, I only have model #4000." Meanwhile, the factory keeps building model #4000s and pushing the inventory into the channel.

The result is a glut of model #4000s that nobody wants. Inevitably, someone ends up with too much inventory, and you see big price corrections. The retailer can’t sell it at the suggested retail price, so the manufacturer loses money on price protection (a practice common in our industry of compensating dealers for reductions in suggested selling price). Companies with long, multi-step distribution systems will often fill their distribution channels with products in an attempt to clear out older technologies or meet their financial targets. This dangerous and inefficient practice is called "channel stuffing". Worst of all, the customer ends up paying for it by purchasing systems that are already out of date.

Because we were building directly to fill our customers’ orders, we didn’t have finished goods inventory devaluing on a daily basis. Because we aligned our suppliers to deliver components as we used them, we were able to minimize raw material inventory. Reductions in component costs could be passed on tour customers quickly, which made them happier and improved our competitive advantage. It also allowed us to deliver the latest technology to our customers faster than our competitors.

The direct model turns conventional manufacturing inside out. Conventional manufacturing dictates that you should always have a stockpile of raw materials, because if you run out, your plant can’t keep going. But if you don’t know what you need to build because of dramatic changes in demand, you run the risk of ending up with terrific amount of excess and obsolete inventory. That is not the goal. The concept behind the direct model has nothing to do with stockpiling and everything to do with information. The quality of your information is inversely proportional to the amount of assets required, in this case excess inventory. With less information about customer needs, you need massive amounts of inventory. So, if you have great information – that is, you know exactly what people want and how much – you need that much less inventory. Less inventory, of course, corresponds to less inventory depreciation. In the computer industry, component prices are always falling as suppliers introduce faster chips, bigger disk drives, and modems with ever-greater bandwidth. Let’s say that Dell has six days of inventory. Compare that to an indirect competitor who has twenty-five days of inventory with another thirty in their distribution channel. That’s a difference of forty-nine days, and in forty-nine days, the cost of materials will decline about 6 percent.

Then there’s the threat of getting stuck with obsolete inventory if you’re caught in a transition to a next generation product, as we were with those memory chips in 1989. As the product approaches the end of its life, the manufacturer has to worry about whether it has too much in the channel and whether a competitor will dump products, destroying profit margins for everyone. This is a perpetual problem in the computer industry, but with the direct model, we have virtually eliminated it. We know when our customers are ready to move on technologically, and we can get out of the market before its most precarious time. We don’t have to subsidize our losses by charging higher prices for other products.

And ultimately, our customer wins. Optimal inventory management really starts with the design process. You want to design the product so that the entire product supply chain, as well as the manufacturing process, is oriented not just for speed but for what we call velocity. Speed means being fast in the first place. Velocity means squeezing time out of every step in the process.

Inventory velocity has become a passion for us. To achieve maximum velocity, you have to design your products in a way that covers the largest part of the market with the fewest number of parts. For example, you don’t need nine different Disk drives when you can serve 98 percent of the market with only four. We also learned to take into account the variability of low-cost and high-cost components. Systems were reconfigured to allow for a greater variety of low-cost parts and a limited variety of expensive parts. The goal was to decrease the number of components to manage, which increased the velocity, which decreased the risk of inventory depreciation, which increased the overall health of our business system.

We were also able to reduce inventory well below the levels anyone thought possible by constantly challenging and surprising ourselves with the results. We had our internal skeptics when we first started pushing for ever-lower levels of inventory. I remember the head of our procurement group telling me that this was like "flying low to the ground 300 knots." He was worried that we wouldn’t see the trees.

In 1993, we had 2.9billioninsalesand220 million in inventory. Four years later, we posted $12.3 billion in sales ad had inventory of 33 million. We’re now down to six days of inventory and we’re starting to measure it in hours instead of days. Once you reduce your inventory while maintaining your growth rate, a significant amount of risk comes from the transition from one generation of product to the next. Without traditional stockpiles of inventory, it is critical to precisely time the discontinuance of the older product line with the ramp-up in customer demand for the newer one. Since we were introducing new products all the time, it became imperative to avoid the huge drag effect from mistakes made during transitions.

Difficult Reading Comprehension Question - 36


Common Information Question: 2/3

Mark the FALSE statement from the following:


The company mentioned in the passage could attain efficiency on raw material inventory management because they were procuring components only in line with their timely requirement.


Generally the more the amount of quality information about the consumer needs and the market a firm possess, the less is its inventory requirement.


In order to serve the market more efficiently, the firm mentioned here reconfigured their computers with increased proportion of low-cost parts and a fewer types of high-priced parts.


The conventional manufacturing system always ensured that no competitor can lower prices to reduce profit margins for everybody.

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Difficult Reading Comprehension Question - 37


Common Information Question: 3/3

Find out the FALSE Statement:


Having less amount of inventory is better in the computer industry as with time better quality components with enhanced capacity reach the market with lower price.


Before improving the inventory management system under the direct model, the firm first removed the reseller from its marketing model, which contributed in its cost-cutting attempt.


The companies with long distribution network incorporate information – gathering process within their systems which enable them to market products with latest available technologies.


The efficient inventory management allowed the firm to enhance productivity as well as the flexibility to enter or exit a market.

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Common Information

Indian car rental market may be segmented under four broad categories. First, the most popular segment is of a fuel conscious and mileage hungry consumer who prefers a chauffeur driven car. To extract maximum benefit from hired car, consumer representing

(5) mileage per liter of fuel that he has paid for. Consumer of this segment is very price sensitive and wants maximum value for money even if he may rent by unorganized players. Branded players are lagging behind to true this segment because

(10) Indian marker, organized car rental industry is crawling for the last couple of years to position itself as a most sought after option to meet segment requirements. Hertz India is also practicing the same. To position itself perfectly in the mind of the targeted segment, it has gone for multiple strategic routes to win over different segments. The major external influencing factors for the consumer in this segment may

(15) be the firm’s marketing efforts to establish itself as a service provider with value for money. Due to their association with renewed airlines and hotels, Hertz, to a lot many people means faith. This may help her to create an impression in the mind of this segment that they will definitively be cheated and get their value, even if it means spending a little extra. Further, it is trying to educate this segment about

(20) benefits of self-driven car as a medium of hassle-free journey by projecting a premium value for money image and with a fleet nix of compact and luxury cars (such as Ikon, Accent and Esteem).Second, a sizable amount of people are there who usually use their own compact or three box mid-size car but prefer to enjoy the riding thrill of SUV (sports? Utility Vehicles)

(25) like Ford Endeavor/Honda CRV/GM Chevrolet or a Luxury car like a Mercedes/Camry for a shorter time span. Upcoming new generations urban executive of large corporate in India with a high disposable income and proactive to enjoy all new things in life and to make it more adventurous and eventful represent this segment. To them renting a self-drive car and driving off to a palace of their choice in a

(30) Mercedes /SUV gives them an experience off to a place of their choice in a holiday. Under this same self-drive segment, another type of consumers are frequent international travellers (including foreign tourists) who prefer their privacy and independence and wish to choose their own routes/ car model at the time of exploring destination. They love their freedom & space in life wherever they

(35) travel without any barrier like being driven by a chauffeur. Equipped with their internationally accepted credit cards, an international driving permit or license, they prefer advance car rental booking by logging on the car rental company’s website and thereafter just picking up the keys of their booked car once they enter a new country/city. They are adventurous, driving enthusiast, belonging to the upper middle

(40) class, have brand loyalty about their car rental agency. In this self-driven segment, Hertz India is trying to position itself as a contemporary service provider by offering both economy cars and SUV’s (Scorpio and Tata Safari). To win over occasional self-drivers of SUV type cars and frequent travellers. Hertz uses slogans like "Break free" or "Drive the World’s #1" regularly in travel magazines to portrait the quality of its cars,

(45) and the range it offers. Third segment consists of instructional consumers, mainly hotels in big cities and air service providers. Institutional consumers prefer quality and service assurance to offer maximum possible service to their customers. In India, all big car rental agencies have contract with start hotels to offer rental service to them. In this segment, Hertz has

(50) prominent clienteles like Taj Group of Hotels, Marriott and Jet Airways. Further, they have contract with hotels like Shangrila in Delhi, and Renaissance and JW Marriott in Mumbai to provide all car rental requirements of them. Their other clients are Carlson Wagonlit, BTI Sita, Thomas Cook and online travel sites like Make my trip, India times and Travelguru. According to their deal with Jet Airways, it allows Jet

(55) Privilege members to earn ‘miles’ every time they use Hertz car rental service. For every Rs. 1000/- spent on Hertz rentals, a Jet privilege member earns 100 JP Miles and special discounts are given to platinum, gold and silver card holders.

In recent past ‘fleet management’ is coming up as a possible fourth target segment for car rental companies in India. Word wide cars are not purchased but only leased and

(60) this trend is getting its root in Indian market also. It means the management of a fleet of vehicles, using certain tools, to improve operational efficiency and effectiveness. To win over consumers of this segment, services should be professional and a fleet management company should address all the issues a company might deal awith pertaining to managing its fleet. In India, Lease plan Fleet Management

(65) India (LPFM), the wholly-owned subsidiary of Leas plan Corporation, Netherlands is pioneer in this focusing more on car rentals than on fleet management. Though it provides chauffeur-driven cars to many companies like IBM, Sony, KPMG, Compaq, there is a huge scope in this segment for future growth. This segment demands

(70) Customized service in terms of vehicle acquisition, fuel management, vehicle financing and maintenance, resale of the cars at the end of the contract period etc.

Difficult Reading Comprehension Question - 38


Common Information Question: 1/6

The primary purpose of this passage is to:


Illustrate how Hertz could plan for the Indian market and maximize profits


Illustrate buying behaviour of unorganized sectors offering car rental services


Illustrate segment opportunities for a new entrant in car rental business


Illustrate consumer awareness and views about options available in car-rental business in India.

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Difficult Reading Comprehension Question - 39


Common Information Question: 2/6

‘Self-Drive’ concept may be a lucrative option to a manager to true Indian consumers because:


Collectivist culture motivates Indian consumers to opt for self-drive


Indian roads encourage consumers to experience joy of long drive


Indians may enjoy driving comfort of SUV as they don’t have capacity to own it


A sizeable number of Indian consumers aspire to enjoy new things in life

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Difficult Reading Comprehension Question - 40


Common Information Question: 3/6

As a business manager of a car-rental company, you may popularize ‘self-drive’ concept to international travellers because:


They know Indian roads and want to explore new places by their own


They dislike concept of chauffeur as Indian chauffeurs are not every professional


Individualistic culture discourages them to travel in group


They can easily book their cars through website of car rental agencies

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