Monday, March 30, 2009

Recession Busters and Low Hanging Fruit

I am re-falling in love with a term I used to hate (but, before that, loved.) Low hanging Fruit. The visuality of this is simply wonderful – imagine yourself as a business unit head and you wander through your cost center halls; you reach out and pluck easy ideas that save you tons of money, or make you tons more revenue. I fell out of love with this term years ago when I discovered that nothing was really that easy. In fact, I started to associate the term with naivety.

A major focus this year at NASPC is “Recession Busters” - beyond the normal awful stuff we have to do to survive in bad times, what are companies doing to grow revenue, cut costs, and improve cash flow? There’s lots going on – CNH is on the move with more arrows in their quiver than ever before. Subaru, Ford, and many others are doing some pretty smart stuff. Our perception of low hanging fruit has changed as a consequence of talking to a dozen or so companies in the past few weeks. It’s not that it’s easy to reach out and grab that apple, rather it’s that we now know how to do it and have dashed barriers that we did not question before.

A few years back Volkswagen surged to best-in-class in terms of productivity – took them a year or so to do. (I’m not saying it was easy, but the pace of change certainly was breathtaking.) That gave us some cause for pause. We look around, and see that Volkswagen is wrestling their way to service-parts leadership in a lot more areas than just warehouse productivity. Doing what they did didn’t fit with my disrespect of that term, low hanging fruit. But, that’s not a bad way of describing how they approach excellence – they do simple things very smartly. Mopar will shock and awe us this year at the NASPC – another example of a company turning on the dime, reaching for, and grabbing that low hanging fruit … with a fair amount of sweat on their brow.

Let me give you a vivid example of this emerging “low hanging fruit” concept. It is really quite logical, but not quite real … yet. Let’s go into some uncharted water for a few minutes. We will talk more about this at the conference.

First, let’s leave for this uncharted water from a familiar port. We’ve proven over the years that there is a remarkable similarity between CE/Ag/HT end customers and automobile customers. CE/Ag/HT customers want “up-time” in their equipment choices, and for decades this has been the holy grail for the segment leaders here. Up-time is synonymous with “reliability” – Toyota and Honda discovered this in the early 1980’s. Lesson: carefully study those CE/Ag/HT guys.

How do customers get information on choices they make? Cars? Easy; they watch TV. Excavators …well, this not so easy. We rarely see excavator commercials on TV or during the Superbowl. What about service and parts, not cars (and not accessories)? Where do customers get their information? Like excavators, the same place we get our news –dealers and the internet. We have lots of proof, but we really don’t need it. Customers go to the internet for education on things that are important to them. More than just go to the internet for information, they first go to OEM websites with surprising frequency.

OK, take it as a fact: customers go to your websites to learn about service and parts.

Next, regardless what segment you are in, what’s important to customers of service and parts? We’ve really nailed this one over the past several years: (1) trust, (2) value, (3) cost, and (4) convenience. That’s pretty much it. Next, what’s important to the OEMs? (5) High service retention. Finally, what’s important to connecting these five things together? (6)Ease and (7) Innovation. It has to be easy for customers to get relevant information … or they will rely on other information sources and common opinions from their cousin Goober.

Recently we evaluated 27 OEM websites according to these criteria – each criterion was weighted differently. Each of the first 5 criteria was scored by us as being either high/medium/low/no. We defined “high” as having “proof” in the website, whereas medium scores were given to OEMs who made specific criteria an area of significant focus. You could even get “low score” points for merely mentioning the criteria. We gave extra points for great innovation and deducted points for making it difficult to find the parts website. Deere and AGCO’s websites provided relevant benchmarks for the measurement criteria and allowed us to gauge our judgment. Now remember, we mentioned that this is uncharted territory, so nobody should feel bad about having a short bar. Automotive OEM websites seem to be generally developed and controlled by proverbial box-checkers. These box-checkers don’t think much about the ownership experience and stuff like that. They want to show product and have things rotate 180 degrees so you can see the headlights one second and taillights the next. Selling parts and the ownership experience falls through the cracks ... at car companies. (By the way, there are lots of best and worst practices in these 27 web sites. Some OEMs have examples of both. Chevrolet and other OEMs aspire for a younger, hipper, owner base. These sorts don’t know or care that General Motors owns Chevrolet. If you go to the Chevrolet web site there is no mention of service and parts. Instead, you are encouraged to sign up for a Yahoo account and then go to a Yahoo hosted - not Chevrolet hosted - owner website. Err, ah, what about my wonderful Gmail account? Nah, pass, why have both? Now, if you do stumble onto the GM website, you can find a link to service and parts, and get a best-in-class proof of why Genuine sheet metal provides a better value. Then you are faced with Clint Eastwood’s “Holy Trinity” Dilemma from Million Dollar Baby … OK, who’s Chevrolet? Now, what about GM Parts? Got it. Now tell me about the Holy Ghost “Goodwrench?”).

Not at CE/Ag/HT. We were not surprised by the cluster of higher scores for these segments. This, indeed, is low hanging fruit of the choicest variety. Customers have a predisposition for talking smack about car dealers in terms of trust, value, cost, and convenience. They use evidence from cousin Goober and Aunt Ethel. Why not? Why not change all that and provide an education for customers where they tend to go to become educated? Change is low-dollar and high value-added. We just need to rewire some thinking – maybe get our ad agencies to provide the right copy on trust, value, cost, and convenience? When you are in uncharted territory, you always need to look at the leader and pack positions. For instance, at the Battle of Trafalgar, you wanted to watch Lord Admiral Nelson’s boat. In this, we look at Deere and the CE/Ag/HT pack positions, and at Mazda and VW. These guys are like Nelson.

More to come in a few weeks as we all sail into some uncharted water and think about what makes some fruit low hanging.

Please let us know your thoughts on our blog CarlisleBlogFeedback.com

Tuesday, March 24, 2009

Alternate Perspectives on Supply Chain Costs or .. What Do You Get When You Cross Eli Whitney with Frankenstein?”-Michael Sachs & Brian Crounse


Most people know of Eli Whitney as the man who invented the cotton gin – the big invention of the industrial revolution. Another, more important legacy of Eli Whitney was the popularization of interchangeable parts (something we all know and love about the service-parts business).

Times like these have us all thinking about how to save money, particularly within our supply chains. This week, we’re headed for the lab where we’re going to use Eli Whitney’s interchangeable parts to build a couple of supply chain Frankenstein monsters. We will do this by swapping like-kind parts, but they are going to come from different OEMs. So, what we end up with is a supply chain that takes the best (or average) of the OEMs and pieces them together into one supply chain monster.

To keep things simple, let’s use four fairly large parts of the service-parts supply chain: 1) outbound transportation, 2) fixed facility costs, 3) variable warehouse costs, and 4) inventory carrying costs. We’re going to ignore inbound transportation due to the huge impact imports have on their cost differences. So think of our monsters in terms of the flow of goods to the customer once initially landed at one of our warehouses.

Let’s start by building our Heavy Equipment monster – our “HE Frankenstein.” The range of overall supply chain costs (expressed as cost as a % of sales) across the industry exceeds a 2-to-1 ratio, high-to-low (even after lopping off the lowest cost OEM). Some of this variability is due to company-specific opportunities and constraints, but a lot of the variation is driven by performance. So, what if we take some of the better parts from various OEMs and build an HE Frankenstein?

For each part (outbound transport, fixed and variable warehousing, and inventory carrying), we’re going to compare cost as a % of sales. This neutralizes the impact of volume on costs. We’ll then look throughout the industry segment for the part we’d like to use for building HE Frankenstein. Once we’ve selected a part, we’ll figure out the cost of sales differential (relative to the rest of the industry) and apply that number to actual costs. This will enable us to monetize the savings for the industry.

Outbound transportation is one of the highest cost elements of our monster. Looking once again at costs as a % of sales, we find that for outbound, the high cost OEM is nearly 3 times higher than the (comparable) low cost OEM.

Outbound transportation is an area where there is a lot of commonality. All of the OEMs have dealers and distributors across the country. All of the OEMs generally offer similar service levels, with stock orders delivered in 2-5 days and emergency orders delivered within 24 hours. The big differences between companies lie in network density (dealers and depots) and shipment policies (e.g., referral chains, will-call availability, etc.). There is also a mixture of two-tier and single tier networks, with most OEMs somewhere in the middle. What’s interesting is that these differences in structure don’t explain much of the difference in costs. In fact, significant contributors to the difference include mode choices and freight rates. Freight rate benchmarking has often demonstrated that rates are very inconsistent, even when viewed by mode on a specific origin-destination pairing.

If everyone were to perform at the best-in-class (BIC) level for outbound transportation, OEMs could save a total of more than $115 million annually (or an average of nearly $15 million for each non-BIC company). But that’s pretty ambitious. Let’s also look at moving to median-level performance all companies that have higher-than-median costs. The result is a savings of nearly $60 million annually across the industry (or an average of $12 million for each company above the median line).

Fixed facility costs are mostly a function of how many facilities we have, where they’re located, whether they’re owned or leased, and, if owned, how long they’ve been depreciating.

Variable Warehouse costs are driven by two primary components – labor cost per hour and productivity. For this analysis, we correct for labor cost per hour, by giving everyone the median wage of the industry. This way, wage differences are neutralized and will not interfere with the cost savings analysis.

The following table summarizes the effect of interchanging four good parts for the four not-so-good ones. You’ll also see that we don’t even need the best parts to save hundreds of millions of dollars. In fact, we just need to use average (median, really) parts. *Best-In-Class is based on using the data for the 2nd or 3rd-best performer; some top performers operate under unique circumstances.


So, if everyone were to use best-in-class parts, the industry could save $375 million. While that may seem unrealistic, one would be hard pressed to argue against a goal of mid-pack performance. But by using mid-pack parts to build HE Frankenstein, the industry could save well over $200 million.

Before talking about some of the things you might do to achieve mid-pack performance, let’s do the same rebuilding of the auto monster – “Auto-Frankenstein.” As with HE, we’ve lopped off the lowest cost provider before quantifying best-in-class.
*Best-In-Class is based on using the data for the 2nd or 3rd-best performer

If Auto Frankenstein were to perform at the best-in-class level, OEMs could save a total of $1.3 billion annually. Drawing a line at the median and calculating the potential savings for the OEMs above the line results in $535 million in annual savings. That’s over a half-billion dollars just to get to mid-pack!

Now before you email or call us with your concerns regarding lack of part interchangeability or the interconnectedness of parts (e.g. adding warehouses increases fixed and variable costs while reducing transportation costs), I will admit that we have not built the perfect supply chain monsters. Besides, we’re talking about Frankenstein – not exactly the most elegant (or manageable) specimen. But the fact remains that no one OEM is best at everything. Even after correcting for the reasons why any one company is “different” we’re going to find that the opportunities are huge.

So, what can OEMs do to build their own Frankenstein monsters? There are two approaches here. One approach assumes that you can’t re-build all of the supply chain parts yourself. In these cases, you would be better off working with other OEMs to build the part that is interchangeable with both organizations. This is happening today. Some OEMs are collaborating with other OEMs on outbound transportation. By combining routes, route densities increase and, therefore, delivery costs go down. With sales going down, inventory will be going down proportionally. This means warehouses will have empty space. Are their collaboration opportunities that would enable better utilization of fixed facilities?

The other approach is to build your own monster parts. Audit freight bills not just for accuracy, but also to find savings (they’re in there). Benchmark your freight rates – based on our recent analysis, there is a surprising lack of correlation between volume and rates on a number of high volume lanes. Rethink some mode choices (and associated order response times). Increase warehouse productivity by up to 50% (for those of you that attend our conferences, you’re aware of at least two OEMs that have done this). Stop ordering so many parts with high likelihood of obsolescence. And for those of you that collect dealer inventories (and if you don’t, you should), why do you continue to order additional inventory on some parts when you have more than a lifetime supply in the field?

In these economic times, we can not afford to play it safe. Ferret out every practice in your supply chain that is done simply because “it is the way we have always done it.” It can be hard to change, to admit that others may have a better idea. Today, however, it is the way to survive.

"Man," I cried, "how ignorant art thou in thy pride of wisdom!" – Dr. Frankenstein

Please let us know your thoughts on our blog CarlisleBlogFeedback.com

Wednesday, March 18, 2009

Everything You Wanted to Know About ”Revenue Management” Technology ..But Were Afraid to Ask - Sanjay Seth

Last week we talked about the need to unlearn what we think we “know” about pricing, and to focus efforts on simple creativity to start ringing the bell with revenue management. Let’s focus on these no-brainer simple solutions to revenue management.

Can You Handle the Truth? Or, Are You Lost In Detail and In Denial, With No Enabling Processes and Tools.

When it comes to revenue management, most companies face several hurdles. To start with, most are lost in detail. A typical OEM has thousands of part numbers, millions of transactional dealer data and deep folklores about pricing. Add to that volumes of ad-hoc market research, which typically collects dust. Let’s not forget about supersessions, which at most organizations is a pricing black hole. Beyond that there are sacred cows - part numbers considered “untouchable” without any rhyme or reason. These are all symptoms of either nonexistent or non-explicit pricing strategies and enabling processes.

Organizations also fall into the trap of instituting data-intensive approaches to service revenue management (such as elasticity, transactional analysis, etc.), only to realize that these approaches work in other industries but present problems in service-parts.

Then there is the belief that all pricing problems will be solved once new software is implemented.

The list goes on. You get the point.

Let’s face it. Parts pricing is often called upon to fill revenue or profit gaps, reflecting a visceral sense that there is money on the table that can be added to the bottom line. However, most pricing processes are not designed to handle these issues. There is little visibility as to where the opportunities may lie among an amorphous population of 200,000+ parts, and there are no tools to quickly execute more targeted strategies for realizing those opportunities.

Good Segmentation Is the Foundation

Segmentation is the backbone of service-parts revenue management. Segmentation is all about organization, in that it groups parts into logical pricing buckets. Think of it like Stephen Covey would – “The Seven Habits of Highly Effective Pricing.” Unless you are the “Rainman,” it is daunting to figure out how to set parts prices for 100,000+ part numbers. This is beyond comprehension (hence, the “Voodoo” we talked about last week). However, we can comprehend, organize, and execute revenue management for various groupings of parts; for example, the fast-moving high-wear parts. To start your approach to effective segmentation, you must begin by unlearning everything having to do with how you segment today. If you don’t do this, you will start nodding your head and believing, “Hmm, well, we do it that way, too … just a little differently.”

Segmentation also allows OEMs to overcome the inherent bias towards under pricing competitive parts. Let me elaborate…Cognitively, we think of competitive parts as a single homogenous part group and tend to price these parts similarly and aggressively using the lowest common pricing premium, if any. However, in realty even within competitive parts, the degree of competition varies depending upon the product lines (e.g. hypercompetitive, competitive mechanical parts, tires, glass, etc.). As such, we should price discriminate even within competitive parts, harvest wherever possible, and not leave money on the table.

A good segmentation plan enables you to focus your limited human capital on the parts that matter. Let me explain…For a typical OEM, 80% of the revenue comes from 20% of the parts (fast movers). You should spend 90% of your manual resources on these high-volume, competitive parts. Conversely, you should let technology manage the slower moving, less competitive parts that make up the remaining 20% of revenue.

The key to effective segmentation is defining a set of simple business rules that are derived from existing data. Here are some do-it-yourself tips:
  • Start with three broad categories – Competitive or Market-Driven, Internal Objective-Driven, and Less Competitive. Further divide these based on your specific needs. For instance, hyper-competitive, competitive-mechanical, collision, tires, etc.
  • Identify quantitative filters to drive segmentation. Consider existing part hierarchy, part age/lifecycle, part velocity, level of competition, among others. Add wholesale/retail focus if you want to be fancy.
  • Put high warranty parts in their own segment. This is a must do internal segment. Others to consider are- recall/campaign parts and parts on specific contracts.
  • For competitive segments, use empirical information and heuristics. Focus on fast-moving parts in product lines, since the aftermarket goes after the fast movers as well, rather than the tail end of the sales.
  • Since a part can only belong to one segment, establish priorities for assigning segments. For instance, the high-safety segment will take precedence over the less competitive segment, meaning that even if a part is less competitive, if it is a high-safety part it will be belong to the safety segment.
  • Establish lifecycle triggers that pricing algorithms can execute (and people can review for exceptions) to migrate parts from segment to segment. One such trigger could be volume. Additional triggers to consider are competitive matching, market share changes, etc. This is a must (though it may be not in the beginning if you are just getting started). Otherwise you will be stuck with static, Stone-Age segments.
By the way, all the data you will need to get started is your part master with detailed part information, 12 months of part sales history, and off-the-shelf tools – but more on this later.

Market Data Is Your Achilles Heel, But There Is Light at the End of This Tunnel

In my mind, we make gathering competitive data more complex then it needs to be. Start with your top volume movers and work your way down – you will be surprised how few there really are. Then identify an internal resource (maybe an intern) to coordinate research on these parts (that person should have some people-smarts to get to the competitive intelligence you need).
  • For mechanical parts, send the list to your regional offices and the field force (if you have a really smart graduate, he/she will build a web page that the field force can logon to and punch in what they find). Walk the streets, work the phone, and watch the web. Then, repeat monthly or as directed. Focus on two specific price points; the jobber net and retail price. For jobber net, don’t forget the undocumented discounts, which typically range from 10 to 20%. Also, don’t be overwhelmed with multiple color street sheets (blue, green, etc.). Nobody uses them anymore.
  • If you like technology, invest in an online web scraper. They are cheap and get you published retail prices for a large basket of parts quickly. These are typically good for maintenance-type parts. But beware of retail price, they generally don’t mean anything, unless you are in Europe where retail prices are the key.
  • You can even add a quick and dirty web page or portal for field staff and dealers to input competitive prices with some rewards for those who send good data.
  • If you want to get really fancy, hire a price research bureau. This tends to lend credibility, but generates a lot of data that you don’t have time to digest or use.
  • For collision parts, buy estimating system data – period. There is nothing better out there.
Each Segment Requires a Specific Pricing Strategy and Pricing Method For each segment, define a specific positioning and an explicit formula. I also recommend documenting these strategies using a standard template.

High Warranty Parts – Be careful here and handle them separately. Don’t lower prices, otherwise you may get sued. Self-evidently, treat recall parts like warranty parts.

Competitive Parts – Price competitively (i.e. within the ballpark of the competition), but at a premium. Competitive collision pricing is somewhat different and more complex – you are the market leader, insurance companies are the customer, and there are a few very strong competitors (LKQ, LKQ, and LKQ), all of which make this a little more tricky. You do want to invest some time to formulate a strategy that protects this cash cow.

Less-Competitive Parts – There is not really a market in the classical sense for these parts, so there is really no “good” price. For these parts, use a simple margin and cost relationship: cheap part (in terms of acquisition cost) – higher margin, expensive part – lower margin (you set the cost brackets and assign the margins). You can add sophistication by having separate curves for specific part categories. Scared? Well, if you’d like to make sure you are not completely off base, then look at your key comparable OEMs – but a sufficiently large dataset of comparable parts may be difficult and very expensive o come by. And ultimately, who cares? This stuff is never going to make it into the cost of ownership comparisons anyway. If it does, then your segmentation is not right, as these parts should belong to a cost of ownership segment. Hey, it’s a recession – why waste your money on data that is irrelevant and proves nothing?

Collision Parts Need Different Treatment

More than any portfolio, collision cannot be managed by “averages.” Aftermarket competitors cherry pick the parts on which they will compete. Therefore, we need to manage the collision business at a part-number level.

This requires part-number-level market intelligence from collision estimate data provided by companies such CCC or Mitchell.

Using the detailed part-number information OEMs can identify where opportunities exist for improved margin and/or market share, not to mention better segmentation.

Proper Tools Are a Must In Order to React Quickly and Flexibly to “Contribution Requests”

Start with offline tools before investing in heavy-duty IT. To that end, hire someone who loves Excel and Access and knows some programming (maybe a smart college intern). Have him/her assemble the key inputs, using whatever you can easily get:
  • Parts Master – description, product line info, part creation date, and whatever else is readily available
  • Part Supersessions – old part, new part, supersession code
  • Sales – split by warranty/non-warranty, $ and pieces
  • Cost history – whatever is available
  • Dealer Net history – whatever is available
  • Retail price – whatever is available
  • Application data – which models, model years does a part fit on
    • One OEM built a CD (a simple CD!) that they called the “Universe” with all that stuff on it, published every month by someone in IT using Excel and Access.
Then, have him/her build a scrappy Access database that downloads and integrates all these inputs. The database will maintain segmentation rules, identify supersession chains, run Paretos, and spit out segment codes for each part. Add some reporting capabilities, such as volume and price, either on a part number or product-line level – nothing fancy. You can also store pricing methods and formulae in the Excel or Access database to generate price lists. Also, we don’t need fancy elasticity-type analytics, because there is very little elasticity in service-parts. If it isn’t broke, don’t fix it! The key outputs you are after include volume changes, margin compression due to cost changes, new parts coming on file, etc. Whatever millions you have saved from not building a big IT system, invest into competitive research. Take my word…the Access database will get you going in weeks if not days.

Let me say it one more time…you don’t need technology to get going. If you believe in the crawl, walk, run approach, then you need technology only to run after you have figured out how to crawl and walk using simple offline tools.

In case you want to really invest in technology, I recommend the following functionality in the software system, keeping in mind that very few vendors have demonstrated the experience to deliver this:
  • Data Interface and Management: Integrate and manage various internal and external data sets, including creation of pseudo data from the existing information.
  • Market Research Data: Ability to import and process market research data by part number, including display and use of competitive analytics and various pricing activities.
  • Supersessions: Ability to identify supersession chains from the part data and make it available for various pricing functions.
  • Segmentation: Ability to create and manage revenue management segments over the lifecycle of the part. Segments are the core of market intelligent pricing and revenue management.
  • Pricing Methods: Ability to create, manage, and apply mathematical or logical expressions, formulae, parameters and constraints for determining the precise price of the part.
  • Analytics, Simulation, and Price Generation: Functionality to simulate pricing scenarios, generate price lists, and conduct ad-hoc pricing analysis.
  • Margin Visibility: Functionality to show various margin components at part number level.
  • User Roles and Security: Functionality needed to define, configure, and execute user access to various features of the system based on roles & responsibilities.
  • Alerts and Workflow: Ability to create and manage pricing alerts and workflows, including automatic and batch events and approvals.
  • Reporting and Monitoring: Onscreen and offline pricing/revenue reports (standardized and customized) with hyperlinks to detailed screens/dashboard. Also includes ability to create/deploy standardized and customized reporting and monitoring dashboards.
  • Global Application and Scalability: Functionality needed to deploy and use the system globally, across multiple markets.
Let the truth be told. Today, most OEM processes are focused on reactive price administration. What we need is to shift the focus of our precious resources toward proactive price determination using segment specific pricing strategies, enabled by simple-to-use technology. This will make us strong and profitable as we come out of this recession. Call me at 248-767-2620 if you have any questions.

Tuesday, March 10, 2009

Recessionary Pricing - Do Do That Voodoo That You Do So Well! or, …Hey, Forget the Voodoo and Get Cracking With a Little More Psychology and Science?

Cole Porter had it right on this one. We started our revenue management “brain surgery” practice in 1993. We call it “brain surgery” because most OEMs walk around with a pricing headache, but fear going to the doctor to get it fixed. Or, worse yet, they think that in a world of headaches, they are pretty well off compared to everybody else. It is not uncommon for top OEM executives to have family members going to dealers for simple maintenance and coming back complaining about high parts costs. They prove it with anecdotal evidence that can find its way to the board room. High prices are characterized as a cancer. So, it is not uncommon for the “institution” to believe that parts prices are dangerously too high … without any understanding of the attached value chain. And it is all too common for the pricers to think they really do have everything under control; that those executives simply do not understand, … so they must carefully continue do what they already know they need to do (whatever that is, nobody knows). They do that “pricing voodoo.” In the struggle between misguided opinion and voodoo science nothing changes. NY Times Op Ed columnist Gail Collins might characterize this as a classic Mexican standoff in a time of colossal opportunity. (Maureen Dowd would simply attribute it to W. and Cheney.)

Two war stories: Years ago we did some breakthrough work in parts revenue management that was supervised by a very suspicious EVP of North American vehicle sales and marketing. He positively knew that service-parts were already overpriced and always mentioned his favorite local dealer – “the ringer” – as the paragon of virtue and benchmark of aftersales support. We talked to about a hundred dealers and included the ringer in the mix. We documented how each of these hundred or so dealers set their list prices. The ringer was the most aggressive dealer in the mix in terms of matrix pricing (i.e., matrix pricing is a dealer retail price setting method that sets prices at a multiple of dealer acquisition costs and almost always results in prices that are higher than OEM suggested list.) Jaws dropped and we proceeded to re-write a price book that rang the bell for over $100MM in margin improvement … without any (call it “zero”) flak. The next year, after the pricing adjustments had been implemented, dealer satisfaction with pricing improved. So did CSI. On another assignment, this one vehicle pricing, we interviewed a slew of dealer salespeople and, using fresh deal jackets, documented the “choreography” behind hundreds of very recent deals. One salesman was especially proud of selling a tricked-out full size pickup to a compact-car price shopper. We interviewed the new pick-up truck owner later that evening and found he was as pleased as punch with the deal he got. Lesson? Pricing is more about complex integrated processes than prices. Hence, the term “revenue management.”

In our preparation for this year’s conference on “recession-buster ideas” we’ve heard a lot about pricing as a tool for more rapid coping with the recession. We are not hearing of it as being used as a pick axe to break into the money vault. Rather, we are hearing about using pricing to solve the value-chain solvency riddle. How can you price in a way that helps customer satisfaction, is good for dealers, and is good for the distributor? Let’s make this perfectly clear. How do you price so that customers do not use it as an excuse for tarring dealers as the high-cost spread, while dealers make more money and the OEM makes more money?

Plot, Plop, Fizz - 3 Keys to Unlock Recessionary Relief

Impossibly quick and simple. All you need to do is (1) UnLearn a bunch of stuff that might be metastasized through your organization, (2) ask a lot of “Why Nots” that challenge a lot of baseline operating knowledge and policy, and (3) very quickly roll out sim-tech solutions to realign prices, starting with the no-brainers and moving to brainers.

UnLearning. The first trick is to UnLearn some everyday walking knowledge. One of our cardinal laws of consulting is to UnLearn. It is in our “Handbook for the Recently Hired” training manual. Let me explain. We all know that you drive on the right side of the road – we learn this through observation and drivers education. Driving on the right side of the road soon becomes an automatic response – we do not have to think about it. Now, go to Japan and you have to UnLearn a lot about driving. Nothing is automatic about driving on the left side of the road, and you have to think about each and every step to avoid catastrophe. It’s the same with revenue management. Rather than rely on automatic responses, let’s think about some things that float closest to the surface.
  • We know that dealer repair order “optics” is the culprit in causing dealers to be erroneously seen as “higher cost” than IRFs – and the problem is more with labor rates and shop supplies than with parts prices.
  • We know that smart dealers with the most aggressive matrix pricing strategies, coupled with superb service and customer handling, have higher customer satisfaction than rank-and-file dealers who simply use suggested list prices. Approximately 50% - 60% of dealers use matrix pricing.
  • We know that the OEMs have less than half their parts market share because a lot of maintenance and repair work is done by IRFs who buy their parts from non-dealer sources.
  • We know that most of these IRFs double-net the non-fastest-moving parts on their ROs and they are aware that they make more money with higher priced parts. We know that they know customers think they are cheaper than dealers and they do this with lower labor rates, not parts costs.
  • We know that IRFs buy most of their parts from WDs and jobbers because of convenience, fast delivery times, and counter-person relationships. Not pricing. We know that they really do not do much price shopping once they have selected their preferred suppliers.
  • We know that a typical jobber can carry about 20,000 parts that services all OEMs – including air fresheners, tools & supplies, agriculture, lawn & garden, light construction, and truck. We know that the breadth of parts in stock for any one particular OEM’s model is fairly narrow and focused on fast moving maintenance parts. We know that if the part is not in stock, it cannot be delivered in the timeframe that the IRF prefers.
  • We know that Wal-Mart carries some parts that are priced very low and are highly visible reference points – mostly batteries, filters, and fluids. We know that smart-ass journalists who pick on OEM parts prices are lazy and do much of their research at mass merchandisers.
  • We know that price is always part of a value proposition: price, product, place, promotion. We know that there is a difference between price and value. A price is a digit. Value expresses the relationship of what you get for what you pay.
  • We know that we are price leaders on some parts, and that the aftermarket will follow us (price decreases here only lead to lower profits for all).
  • We know suggested list pricing is still quite unsophisticated across OEMs and the aftermarket.
  • We know that the “baseline” premium that customers are willing to pay for OE “genuine” is about 10%-20% and has not changed over the decades.
  • We know that, outside CE/Ag and fleet -
    • few people are do-it-yourselfers and that this is not a make-or-break segment for the OEMs
    • LKQ/Keystone has a fairly limited short-list of competitive crash parts for each OEM, the extent of which is proportional to the model-specific fleet size, and,
    • Powertrain is a lost segment where dealer sales are more situational than cost competitive – what’s left is fairly price insensitive.

What do we have to unlearn? The car-guys have to unlearn common knowledge that most parts are “competitive.” Actually, in the grand scheme of things, few really are competitive because OEMs generally do not effectively compete outside the dealer channel just on price, absent certain segment-relevant service quality sales components. Everybody needs to UnLearn that we must have pricing parity with all of our “competitive” parts, because unless you have a great wholesale strategy working out there, most of these parts (and parts prices) are simply ignored by the non-dealer market. We have to UnLearn core pricing laws that encourage us to competitively price for markets we do not really operate in (e.g., car-guys DIY, mechanical wholesale, accessories, and Powertrain) and that are completely different than the one we dominate in (this is the equivalent of selling boats in the Sahara). We must UnLearn that doing a “competitive benchmarking assessment” is a big deal involving lots of time – it is scalable and can be done with a 3rd party or, when cash is tight, in-house. Most of it (the 80% that causes most of the pain) can be done inside a couple of hours inside your local Wal-Mart, hunting on the internet, and talking to friendly bump-shops.

Here’s an interesting way of looking at pricing. Let’s take an OEM who does $250MM in parts sales as an example. Let’s assume that 5% of the total sales value is in the “comfort zone” of competitive pricing – e.g., looking out at the incredibly foggy terrain of pricing, we think we are plus/minus $12.5MM of being where we should be. We could hire one person to spend all their time on the internet, talking to dealers and bump-shops, searching the web, and auditing the shelves of Wal-Mart. This would cost us $100K a year for a scrappy new hire. Based on C&C’s 15 years in the pricing” brain surgery OR”, that $100K investment is likely to get you to $262.5MM in sales with more comfort than you have at $250MM in sales. That’s a pretty good investment, even if you need 10 more people (or the equivalent $ with a third party) rather than just one scrappy BA. We need to UnLearn how we think about a “revenue management” organization, headcount, and operating costs.

Why Nots. We publish a price book and have a walk from dealer net to suggested list. We have discounts and incentives. We have programs. First off, we need to UnLearn that these are all independent events. They need to be connected. Actually, they can be integrated and connected to replace the voodoo with psychology and science. Why Not do this? Let me explain. OEMs like flat mark-ups from dealer net to suggested list – a 40% dealer margin is standard. So, the “suggested” dealer margin on an oil filter that competes with Wal-Mart is the same as an arcane electronic ignition part. Change this and risk the wrath of vitriolic calls from powerful (and influential) dealer council members. So, we might lose this “lever” and are forever sub-optimized. We have to unlearn this. Why not squeeze the suggested list on the few highly competitive parts and use a wholesale compensation program to economically drive wholesale penetration? Or, why not simply eliminate suggested list on these parts altogether? We need to UnLearn the fact that wholesale compensation programs can be gamed by dealers – innovative use of today’s technology can help prevent the most egregious offenses, and entrepreneurial third parties can audit compliance much the same way freight bills are audited.
  • Why not challenge the premise of achieving dollar-wise competitiveness in the most highly competitive crash parts pricing? Why not programmatically guarantee specific crash parts for the life of the ownership and even cover subsequent collisions? VIN matching and fine print can protect you from abuse.
  • Why not take the pressure off Powertrain pricing, because it is pretty much a lost cause for most OEMs. Instead, plan for the rather huge and sweeping changes that are about to come from Obama’s more aggressive green house gas emission standards – this will impact about half your volumes, across all sectors.
  • Instead of focusing resources on a hopeless battle with companies like Jasper, start developing brilliant core management and remanufacturing strategies for the new crop of Powertrain components.
  • Why not change some select parts prices and track them over time? Why not do consistent price experiments – starting today - to learn about the market?
  • Why not do sell-out lifecycle pricing more elegantly? Rather than trying to use complicated adjustments to retail prices over vehicle lifetime, use a program to give customers of older vehicles a discount.
  • Why not segment your customers clearly before you take action? You have retail end-customers, insurance, fleets, dealers, independent workshops. Don’t treat all of these the same.
  • Why not publish a suggested list price to the trade (different from the retail list price)?
  • Why not focus on the top 5 parts in each product line?
  • Why not play the same game as Aftermarket distributors? Actively use suggested list to steer your dealer margin and channel strategies: e.g. artificially provide high dealer margin on some commodities and work backwards with sell-out promotions to maintain cost-of-ownership and price perception. Discounts off list for wholesale customers will look better and dealers will have some flexibility to give discounts to price sensitive customers.
  • Why not have a simple discount matrix where the OEM can quickly adjust pricing and margin strategies according to market dynamics? This would not disorganize retail pricing and is everything but transparent for Aftermarket competitors.
  • Why not keep things simple AND effective? What about two margin levels by product line where this makes sense. A parts manager can cope with that complexity: “I know I do 40% margin on my oil filters, and I also know I get 50% on these 2 or 3 very fast moving filters.” (They already know by heart these key part numbers.)
  • Why not have a real peek at what we spend on promotional activities? We all know that year-over-year campaigns do not work that well. Dealers stop buying 2 months before and 2 months after the campaign. Why continue? We know that certain campaign types always trigger great results. Why not focus on these to generate profit and yield higher loyalty?
  • Why not make our pricing value proposition clearer? Dealers are often overwhelmed by the different components. They primarily look at basic pricing and don’t get the total picture: campaigns, bonus programs and other allowances. That’s pretty bad when it’s time to compare prices with Aftermarket. Simplification is key in pricing communication!
SimTech. This is short for simple technology. Once you make it through UnLearning stuff that is no longer true, understanding your revenue management levers, and employing some no-brainer creativity, you need to start ringing the bell. To start the process, you don’t need hyper-expensive software that is value-priced. In fact, you really do not want to start there. There is an old farm saying, you don’t learn to drive in a Rolls Royce – you start out on a tractor. Or, a 1973 Chrysler Cordoba with Corinthian Leather seats. Sanjay Seth will talk next week about accessible do-it-yourself pricing technology and segmentation.

Wednesday, March 4, 2009

The Future of OEM-Dealer Business Model for Wholesaling Mechanical Parts to Independent

Over the last several weeks we have focused on ways OEMs and their dealers can improve their service business, service retention, as well as customer satisfaction and loyalty – even in the face of a weakening economy and declining consumer confidence. Let’s talk about the “dark side” – the driving factors behind why OEMs and dealers will struggle to sell significantly more parts until they have figured out how to penetrate the largest untapped growth market in the aftersales parts industry: the market for wholesale mechanical and maintenance parts. The answer is quite simple and one I think we already know: OEMs need a game-changing approach for wholesaling parts to independent repair facilities.

Let’s start with some facts. Based on the latest AIAA data, the market for mechanical and maintenance parts outside the dealer service shop is estimated to be over $60 billion (at wholesale prices), which is HUGE. OEMs and dealers maintain only a fractional share of this market – maybe 10%, but probably much less. This means if dealers could grow their already miniscule wholesale mechanical part sales by 25% (2.5 points of share) this would be worth an incremental $1.5 billion in part sales.

The problem, however, is that many dealers are simply neither equipped nor engaged in a way to support the requirements of independent repair facility business owners – but more on this later.

Why do we sit idle while the IAM continues to grow stronger (and the numbers don’t lie)? Part sales for many OEMs are in steady decline, or have been stagnant at best, while the Big 3 auto parts companies (O-Reilly, AutoZone, and Advance Auto) have racked up their greatest revenue and earnings performance years. The stock prices for 2 of these 3 companies hit 52 week highs recently, even as stocks in general (and auto stocks in particular) were tanking. Wall Street rewarded these companies because their businesses provide a countercyclical sales safety net and for their strategies of improving distribution, increasing store count in key areas and closing poor performing locations, providing higher levels of customer service, improving inventory levels, and others. Their stock price increases have been staggering, exceeding 50% since the November 2008 market low. These increases have pushed the market caps for some of these companies beyond those of some of the OEMs that build the vehicles that consume their parts. The fact is that their business models really aren’t that complex. These aftermarket companies are simply experiencing part sales growth based on the huge number of vehicles sold over the last 5-7 years, as these vehicles enter their prime parts consumption years.

The Big 3 auto parts companies have capitalized on this growth opportunity by consistently providing their repair shop customers with three basic fundamental services: 1) have the part when the repair shop needs it, 2) get the part to the shop within 1 hour, and 3) help the shop’s technicians when they have problems repairing vehicles. These three simple things increase shop productivity and profits, while generating high customer satisfaction – something any customer who buys tens of thousands of dollars in parts from you every year would expect.

The fundamental dilemma for OEMs is how to meet the installer needs using their existing dealer channel. Although there are dealers who have been successful at wholesaling parts, an average dealer lacks the capabilities and mindset to support the independent repair shops and grow the business. This creates a classic Catch-22. These dealers don’t sell much to IRFs because the IRFs simply cannot rely on the dealer to support their business. The reason these dealers cannot support the IRFs business is because, on average, they sell only $25k-$30k of mechanical parts each month to IRFs, which doesn’t generate enough revenue or profit necessary to support the levels of service required by IRFs – support being trucks, drivers, full-time support staff, sales people, etc. But the reason dealers don’t have the profits is that they don’t provide the service levels – you get the point.

A typical installer encounter with the dealer goes something like this, “Hello this is Joe over at ABC auto and I need to order some parts”, “ah, ok can you hold….. (5 minutes later), you want to order some parts?” “Yes I would” Joe replies calmly because he’s gone through this same routine over and over again with dealers. As Joe rattles off his list of parts the dealer tells him what he can and can’t fill (dealers can typically fill only a portion of what Joe wants “today” because the dealer doesn’t stock the right parts for older vehicles). Then the dealer tells Joe he can get Joe the other parts to him “sometime today.” And for this level of service the IRF gets to pay a premium price? The sad thing is that these are the high quality parts with which Joe wants to service his customers’ vehicles. So, do we honestly wonder why we can’t capture more part sales? God forbid Joe calls back and needs technical advice! No successful businessman would rely on a partner who places the success of his business in jeopardy.

In an effort to help dealers overcome their weaknesses and increase wholesale part sales many successful OEMs are implementing targeted programs which motivate dealers with financial support and non-financial support. Financial support includes such things as incentives on parts sales growth. Non-financial support includes expert training and advice on how to operate a mechanical parts business in their dealership, as well as targeted marketing. For select OEMs, these programs have been instrumental in changing dealer behavior and growing the business.

But the efficacy of these programs is really dependent on sustained dealer engagement in the wholesale channel. To be successful, dealers have to think and behave like parts retailers, providing high service levels and developing relationship with installers. At the same time, OEMs and dealers need field sales support to continuously monitor and promote dealer engagement in wholesale. All this requires investment in labor, capital, and, most importantly, focus and commitment.

By the way, programs that solely focus on giving wholesale comp, with no strings attached, operate on the wrong criteria. The issue that IRFs have – despite what your dealers have been telling you – is not with the price, but with the service levels! Wholesale comp does nothing to address that, unless dealers are required to invest in providing higher levels of service to grow their business. So, most wholesale comp-only systems do not address the antiquated dealers’ low-service business model that has eroded installer satisfaction and trust in doing business with them.

The fact is that many OEM dealers are not engaged in going after the wholesale mechanical business because it requires commitment and investment. Only the committed dealers can survive this. Some OEMs have taken the right approach and successfully focused their efforts on helping these engaged dealers. But to really catapult and grow the business beyond current levels (i.e. change the game), OEMs need to address dealer capability gaps as a broader group.

Interestingly enough, all OEMs and dealers face very similar challenges in the wholesale channel. As such, can OEMs leverage their economies of scale and collectively fill these capability gaps? We think they can and more so in today’s economic environment.

The Time Is Right to Capitalize on the Mechanical Wholesale Opportunity; but OEMs Must Collaborate to Compete. It boils down to these four things:

  1. Realize that fragmentation is costly and inefficient and that fragmented industries must often consolidate to compete. Is there any reason why we should have different brand dealers maintaining redundant asset (e.g., trucks, drivers, support staff, sales people, accounting staff, etc.) servicing the same IRF customers?

  2. When in Rome…you simply need to copy the core strategies of successful aftermarket companies. AutoZone, Advance Auto, NAPA, O-Reilly, and others rely on having local warehouses (part stores) that stock the fastest moving 30k or so part numbers to provide high order fill and deliver these parts to IRFs within an hour. They use IT systems to integrate their respective companies with IRFs to make locating and ordering parts easy.

  3. Share “experts” to support customer service and provide repair advice. OEMs need to act like aftermarket companies and realize that customer relationships and real-time service builds loyalty. They need to provide IRFs the expert advice of the most veteran parts counter person. Give IRF technicians instantaneous access to a centralized part and vehicle repair information portal that would answer their questions in a proficient and professional manner – a common OEM support center.

  4. Build relationships one at a time through one-on-one sales support with IRFs. OEMs need to have field sales representation, just like the aftermarket. This sales force builds relationships by calling on installers, on behalf of every OEM dealer, and assisting them with improving their businesses.

With these basic elements of collaboration (warehousing, logistics, support staff, tech support, IT integration, and sales support) OEMs and dealers can greatly enhance their ability to penetrate their biggest potential market for growth. Collaboration will allow OEMs and their dealers to provide substantially higher levels of service – the basic element of every effective mechanical wholesale business model – at lower costs. This is the future of OEM wholesale mechanical parts programs.