Wednesday, December 3, 2008

Carefully Moving Into Troubled Water – Part I

Fifteen North American Heavy Equipment (HE) and Auto service-parts OEMs recently completed our 100-question business pulse survey. Pretty interesting. This blog will only touch on a fraction of the interesting stuff – we will be mining the survey for wisdom over the next several weeks. For the most part, everybody’s steering very carefully into this recession. Our Market Watch sales reports show that most of the auto sector is getting hit hard by the recession, and that HE had a pretty bad October (but, a fairly splendid 3rd Quarter). The media has kept us abreast of the primary reactions to this on salaried labor – the domestics have led the pack in doling out packages. But, what about all our other costs? We find three things at work: (1) IT budgets for 2009 are being slashed (as is headcount, capital expenditures, and benefits), (2) everybody is being careful with business processes that impact key customer satisfaction metrics (85% of the OEMs surveyed either increased or held tight on targeted fill, with 67% of HE increasing fill), and (3) many OEMs feel that they are doing the right things on key revenue growth pressure points … but are they?

Reductions to IT spending are interesting. This was once a sacred cow at most firms, but OEMs have recently discovered that these sort of investments can be delayed. Everybody is cutting, but by differing amounts. Eleven percent of the OEMs are only cutting their IT spend by 5 to 10%, whereas 22% are cutting more than half. Recession-weary HE companies are generally doing much better in 3Q sales than the auto sector, yet most are slashing IT costs by more than 50%. IT has proven to be the biggest area of controllable cost that is going under the magnifying glass.

Based on 16 years of NASPC participation, we have all learned the lesson on taking care of tomorrow’s customers. While a few are looking at reducing inventory that could negatively impact customer facing fill rates, most are holding steady. 86% of the industry has decided that ship-direct is not the answer for how to save money. Only 29% have reduced dealers on DDS and a mere 7% have reduced DDS delivery frequencies to remote dealers (long term effect on those dealers to be determined). In a normal recession, 3PLs typically would be seen as a quick solution for reducing costs: 57% of the industry ranges from neutral to very dissatisfied with their current 3PL (nobody was “very satisfied”). 33% are looking to decrease their reliance on third party logistics providers (vs. 8% looking to increase their reliance). The key for a 3PL to do well in this environment is to focus on the “Big-3”: (1) materially reduce top-of-mind supply chain costs, (2) make end-customers more satisfied, and (3) be a seamless partner with their OEM clients. This is impossibly simple. Overall, we do not see evidence of the OEMs degrading their supply chains – the best “tell” of this is that most of the industry has not reduced supervisor-to-hourly ratios.

Growth is curious (we will cover this in more detail next week). Sixty one percent of the OEMs have seen modest to significant unit sales reductions – both HE and Auto have winners and losers in unit sales growth. Auto has been harder hit by the recession. Yet, only 20% have a second line of parts. More than 50% of HE has a second line. Hmm. The key to selling more in a recession is to increase market share in the areas you are weakest. For Auto, this means service retention; for everybody this means selling more accessories and implements. Service retention for Auto is fairly miserable and only 40% say they have an executive in charge of this. HE typically has much better service retention; however, only 33% have an executive in charge of this area. Overall, when you look at the details, Auto says they are doing all the right things, but getting the wrong results. Conversely, for HE, they are getting the right results, but are not claiming to follow the game plan. Or, maybe Auto thinks they are doing most of the right stuff and, for whatever reason, it just ain’t so. Ditto for accessories.

The moral of the story is that the industry is protecting its most precious assets in this recession – the end customers. Cost cutting has been rational and non-life threatening, at least so far. Growth? Well, most OEMs think they have this one cracked …and, that the unit losses are due to something else.

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