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Model structural overhang vs. bleed-off (fix net-benefit triviality) #2

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130 changes: 99 additions & 31 deletions METHODOLOGY.md
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Expand Up @@ -22,22 +22,35 @@ the narrative is coherent, not pulled from Hyundai's actuals.

## 3. Core formulas

The central correction over a naive DSI model: **above-target stock is not automatically a
liquidation candidate.** Stock that will sell through within a patience window at current
demand should simply have its replenishment paused — it *bleeds off* at no clearance cost.
Only the residual still sitting after the window is a **structural overhang** worth a
clearance haircut. This is what stops the model from recommending you discount demand you
already have.

```
dailySales = avgMonthlySales × (1 + demandShift) / 30
DSI = stock / dailySales # days of inventory on hand
targetStock = targetDSI[category] × dailySales
excessUnits = max(0, stock − targetStock)
excessCapital = excessUnits × unitCost
carryingOnExcess= excessCapital × carryingRate # annual $ bled on the excess
liquidationLoss = excessCapital × liquidationDiscount # one-time clearance haircut
recaptured = excessCapital × (1 − liquidationDiscount)
netFirstYear = carryingOnExcess − liquidationLoss
excessUnits = max(0, stock − targetStock) # gross above target
windowUnits = dailySales × 30 × clearWindowMonths # what sells within the patience window
bleedUnits = min(excessUnits, windowUnits) # clears organically — no action
overhangUnits = max(0, excessUnits − bleedUnits) # structural overhang — the actionable base
overhangCapital = overhangUnits × unitCost
monthsToClear = excessUnits / (dailySales × 30) # organic sell-through of the excess

carryOnOverhang = overhangCapital × carryingRate # annual $ bled on the overhang
liquidationLoss = overhangCapital × liquidationDiscount # one-time clearance haircut
recaptured = overhangCapital × (1 − liquidationDiscount)
netBenefit = carryOnOverhang − liquidationLoss
portfolioDSI = Σ stock / Σ dailySales # volume-weighted, not a simple average
```

**Status rule (segment-specific, not one universal cutoff):**

- `At Risk` — `DSI > targetDSI` (over-stocked relative to the segment's velocity)
- `Overhang` — `overhangUnits > 0` (above target *and* won't clear within the window → clearance candidate)
- `Bleeding Off` — above target but `overhangUnits = 0` (self-resolves once replenishment pauses → no clearance)
- `Stockout Risk` — `DSI < 0.5 × targetDSI` (too lean; turning away serviceable demand)
- `Healthy` — otherwise

Expand All @@ -53,45 +66,63 @@ segments do not. A uniform threshold would contradict the thesis.
| SUV | 60 | Mainstream mid-velocity |
| Volume | 45 | High turnover; lean target protects ROIC |

## 5. Decision rule
## 5. Decision rule (two steps)

1. **Pause, don't dump.** For every above-target pool, first stop replenishment and let it
bleed off. Anything that clears within `clearWindowMonths` never warrants a clearance
haircut — liquidating demand you already have is value-destructive.
2. **Clear the overhang on net benefit.** For the structural overhang that remains, act
**only when `netBenefit > 0`** — the annual carrying cost avoided exceeds the one-time
clearance loss. Because the overhang sits *beyond* the window by construction, annual
carry is the right horizon to weigh against the one-time haircut.

For each above-target pool, act **only when `netFirstYear > 0`** — i.e. the annual
carrying cost avoided exceeds the one-time clearance loss. Recaptured capital is then
redeployed against `Stockout Risk` pools first (relieving lost-sale demand), with the
remainder funding strategic EV / growth priorities. This resolves the
redirect-vs-liquidate distinction: transfer where a constrained pool can absorb units,
clear only where none can.
Recaptured capital is then redeployed against `Stockout Risk` pools first (relieving
lost-sale demand), with the remainder funding strategic EV / growth priorities. This is why
the model clears the IONIQ 5 (soft demand → a months-long overhang) but *not* the Tucson
(above target, yet sells through in days). It also resolves the redirect-vs-liquidate
distinction: transfer where a constrained pool can absorb units, clear only where none can.

## 6. Scenario parameters (defaults & ranges)

| Parameter | Default | Range | Source logic |
|---|---|---|---|
| `carryingRate` | 18%/yr | 8–28% | Floorplan interest (~8%) + depreciation (~7%) + storage/insurance (~3%) |
| `liquidationDiscount` | 6% | 2–15% | Wholesale/auction haircut to clear excess units |
| `liquidationDiscount` | 6% | 2–15% | Wholesale/auction haircut to clear excess units (see §12 for the channel ladder) |
| `clearWindowMonths` | 2 mo | 1–6 mo | Patience window: above-target stock that sells through within it bleeds off rather than being cleared |
| `demandShift` | 0% | −20% to +20% | Demand stress test |

## 7. Baseline results (default assumptions)

| Metric | Value |
|---|---|
| Capital deployed | $2.87B |
| Capital above target | $412M (14% of deployed) |
| Annualized carrying cost on excess | $74M/yr |
| Capital recaptured (net of discount) | $387M |
| One-time clearance loss | $25M |
| First-year net benefit | $49M |
| Capital deployed | $2.80B |
| Capital above target (gross) | $603M (22% of deployed) |
| Structural overhang (actionable) | $320M (11% of deployed) |
| Annualized carrying cost on overhang | $58M/yr |
| Capital recaptured (net of discount) | $301M |
| One-time clearance loss | $19M |
| Net benefit | $38M |
| Stockout-risk funding gap | $216M (fully covered by recaptured capital) |
| Portfolio DSI (volume-weighted) | 50 days |
| Portfolio DSI (volume-weighted) | 52 days |
| Overhang pools / bleeding-off pools | 3 / 1 |

Note the gap between **$603M above target** and the **$320M actually cleared**: ~$283M of
above-target stock bleeds off on its own once replenishment pauses, and is never liquidated.

## 8. Sensitivity (illustrative)

- **Carrying rate is the swing factor.** At 8% the annual bleed falls to ~$33M and several
pools no longer clear the net-benefit hurdle; at 28% it rises past ~$115M and clearance is
obviously worth it. This is why the rate assumption must be owned by Finance, not assumed.
- **Clearance discount** mostly affects *how much* is recaptured, not *whether* to act,
until it approaches the carrying rate.
- **Demand shift** moves pools across thresholds — a −10% shock pushes additional volume/SUV
pools above target; +10% relieves them. The status logic recomputes live.
- **The bleed-off window decides how much is even actionable.** This is the parameter that
encodes "don't liquidate demand you still have." At a 1-month window more above-target stock
counts as overhang; widen it toward 6 months and most pools are judged self-resolving, so the
overhang — and the recommended clearance — shrinks toward zero. At the 2-month default, $320M
of the $603M above-target is overhang.
- **Carrying rate** scales the annual bleed on the overhang (≈$26M at 8%, ≈$90M at 28% on the
baseline overhang) and, with the discount, sets whether clearing clears the net-benefit hurdle.
It must be owned by Finance, not assumed.
- **Clearance discount** mostly affects *how much* is recaptured, not *whether* to act, until it
approaches the carrying rate.
- **Demand shift** moves pools across thresholds and resizes the overhang — a −10% shock lengthens
sell-through (more overhang); +10% lets more stock bleed off. The status logic recomputes live.

## 9. Known limitations (and the honest next steps)

Expand All @@ -100,8 +131,9 @@ clear only where none can.
- **Contribution margin not modeled**, so redeployment upside is stated as the funded demand gap,
not an incremental-profit figure. *Next step: per-segment margin to value recaptured capital.*
- **Steady-state demand** — no seasonality, model-year transitions, or incentive elasticity.
- **Single-period view** — `netFirstYear` mixes a recurring annual saving with a one-time loss;
a full NPV would discount multi-year carrying savings. *Next step: multi-period NPV.*
- **Single-period view** — `netBenefit` weighs one year of carry on the overhang against a one-time
loss. The bleed-off window removes the cruder "annual-vs-one-time always clears" bias, but a true
model would integrate carry over each pool's expected hold path. *Next step: multi-period NPV.*
- Figures are illustrative and not Hyundai actuals.

## 10. Retail & DMS layer
Expand Down Expand Up @@ -147,3 +179,39 @@ from the OEM layer, now visible as floorplan cost.
yet modeled (would quantify the *margin* cost of aging, not just floorplan); dealer-trade
logistics cost is assumed negligible; and a live DMS integration (vs. illustrative aging
vectors) is the obvious productionization step.

## 11. Whose capital is it — OEM vs. dealer floorplan

A deliberate simplification worth stating plainly: the OEM layer values the **entire** national
pipeline at OEM wholesale cost and frames clearing it as recovering OEM capital. In reality,
once a unit is wholesaled to a franchised dealer it sits on the **dealer's floorplan**, not the
OEM's balance sheet — which is exactly what the Retail & DMS layer (§10) measures. The two
layers describe the same metal from two balance sheets:

| Stage | Who owns it | Where the carry lands |
|---|---|---|
| In production / in-transit / port / unallocated | **OEM** | OEM working capital |
| Allocated & wholesaled to a dealer (on the lot) | **Dealer** | Dealer floorplan interest (Retail layer) |

The OEM's *direct* capital-at-risk is therefore the un-wholesaled slice plus its exposure to
incentives and residual support; the on-lot overhang is borne by dealers and influenced by the
OEM through **allocation and incentive policy**, not by repossessing units. Figures are stated on
a single OEM-wholesale-cost basis for clarity, with the dealer view reconciled in §10. *Next step:
split the pipeline into OEM-owned vs. dealer-floorplanned and carry each at its own rate.*

## 12. How the overhang actually clears (the "6%" unpacked)

`liquidationDiscount` is a single blended haircut; in practice clearance runs down a ladder of
channels, each with a different cost and side effect — there is no single anonymous buyer:

| Channel | Buyer | Typical haircut | Side effect |
|---|---|---|---|
| Retail incentive | Ordinary retail customer | ~2–8% (subvented APR/lease, cash) | Pulls demand forward; brand-equity drag on luxury |
| Fleet / commercial | Rental & commercial fleets | ~8–15% | Floods the used market later → **depresses residuals** |
| Dealer trade / wholesale | Other dealers | ~10–20% | Logistics cost; limited absorbing capacity |
| Auction / remarketing | Dealers & exporters | ~15–30% | Last resort for 90+ day units (see §10 curtailment) |

The default 6% corresponds to a **modest retail-incentive bump** — the cheapest rung. The model
does not yet price the residual-value contamination from the fleet/auction rungs, which would feed
back into a higher effective EV carrying rate. *Next step: a channel-mix input that blends the
haircut and routes the residual hit back into `carryingRate`.*
33 changes: 20 additions & 13 deletions README.md
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Expand Up @@ -18,23 +18,27 @@ one place while demand goes unserved in another.
## The approach

Measure each model's **Days Sales of Inventory (DSI)** against a **segment-specific target**,
then apply a **net-benefit decision rule**: clear above-target inventory *only when the annual
carrying cost avoided exceeds the one-time clearance loss*, and redeploy the recaptured capital
to relieve stockout-risk segments first.
separate stock that will **bleed off on its own** (just pause replenishment) from a genuine
**structural overhang**, then clear only that overhang *when the annual carrying cost avoided
exceeds the one-time clearance loss* — redeploying the recaptured capital to relieve
stockout-risk segments first. The point of the bleed-off step: never discount demand you
already have.

## Key results (illustrative baseline)

| Metric | Value |
|---|---|
| Capital deployed | **$2.87B** |
| Capital above segment target | **$412M** (14%) |
| Annualized carrying cost bled | **$74M/yr** |
| Capital recaptured | **$387M** |
| First-year net benefit | **$49M** |
| Capital deployed | **$2.80B** |
| Capital above segment target (gross) | **$603M** (22%) |
| Structural overhang (won't bleed off) | **$320M** (11%) |
| Annualized carrying cost on overhang | **$58M/yr** |
| Capital recaptured | **$301M** |
| Net benefit | **$38M** |
| Demand-constrained gap funded | **$216M**, fully covered |

The recaptured capital more than covers the volume shortfall — the EV-glut and slow-luxury pools
fund the lean volume line, with ~$171M left for strategic priorities. Full derivation in
Most above-target stock isn't cleared — it *bleeds off* once replenishment pauses; only the **$320M
structural overhang** (EV-glut + slow-luxury) is liquidated. The recaptured capital more than covers
the volume shortfall, with **~$85M** left for strategic priorities. Full derivation in
[METHODOLOGY.md](./METHODOLOGY.md).

## How it's structured
Expand All @@ -43,9 +47,10 @@ The app is organized as four role-targeted views:

1. **Strategy Brief** — answer-first recommendation with quantified impact, then a
Situation / Complication / Resolution case. *(Consulting framing.)*
2. **Decision Dashboard** — segment-targeted DSI table, corrected and accurately-labeled KPIs,
a ranked net-benefit recommendation engine, and **live scenario sliders** (carrying rate,
clearance discount, demand shift) so every figure can be stress-tested. *(Planning / analytics.)*
2. **Decision Dashboard** — segment-targeted DSI table that separates a **structural overhang**
from above-target stock that simply **bleeds off**, accurately-labeled KPIs, a ranked
net-benefit recommendation engine, and **live scenario sliders** (carrying rate, clearance
discount, bleed-off window, demand shift) so every figure can be stress-tested. *(Planning / analytics.)*
3. **Execution Plan** — phased rollout, RACI decision rights, governance KPIs, and a
risk/mitigation register. *(Program management.)*
4. **Retail & DMS** — drills the OEM thesis down to the dealer P&L: DMS-sourced aging buckets,
Expand All @@ -62,6 +67,8 @@ This was deliberately built to survive a probing interview:
and a volume-weighted "Portfolio DSI," not a count ratio mislabeled as a financial return.
- **The headline tradeoff is actually computed** — carrying cost avoided vs. clearance loss, per
pool, with an explicit act/hold rule — not asserted in prose.
- **Above-target ≠ liquidate** — the model strips out inventory that sells through on its own and
only clears the structural overhang, so it never recommends discounting demand you already have.
- **Targets are segment-specific**, consistent with the core thesis.
- **Assumptions are owned and sourced**, with sensitivity and limitations documented openly.

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