Wednesday, June 24, 2009

Why Big Dealers Will Win – David Sergeant and Tom Parish

Regardless of what industry segment you are in, you are probably watching the dealer transformations of Chrysler and GM and wondering if big really is better, or if small and fragmented is the winning strategy. You need to think with your brain on this one, not your heart. We are pretty sure that Chrysler and GM are headed down the right path and leveraging the biggest transformational advantages provided to them by their bankruptcies. So, when the market representation choice comes to your doorstep, hopefully outside of bankruptcy court, what do you do? Or, as Clint would say, “Do you feel lucky?”

From the perspective of the general public, one of the most visible results of the Chrysler and GM bankruptcies has been the impact on their dealers. Dealerships are closing literally by the thousands. Those dealerships have strong ties to the local communities through the people they employ, the organizations they sponsor, etc. So they, appropriately, get a lot of sympathy as another victim in the restructuring of Chrysler and GM. Many in the general public question why GM and Chrysler want to close all these dealers right now –“won’t having more dealers help you sell more vehicles?” is a reasonable question. And in the short term they may be right. But ultimately, having a smaller, healthier dealer body is the right direction.

So why reduce dealership counts now?
One, because they can – bankruptcy gives the Chrysler and GM a short window to do this without the protracted and expensive legal battles that pulling a franchise agreement typically presents.

Two, because it is the right thing to do in the long run to get their distribution network more in line with their main competitors and with modern retailing. The move under bankruptcy by GM and Chrysler to dramatically reduce their retail dealer networks will start to remove a significant competitive advantage enjoyed by Toyota and other Asian companies.
The American retail consumer market has evolved immensely over the last 40 years. The U.S. has gone from a country with small local diners, local car dealers, and downtown retail shopping…..to a fast food nation with large malls, big box retailers and mega dealers. Starting in the 70’s almost every retail business has specialized, franchised or been absorbed by chains. One of the last bastions has been the “Big 3” group of local car dealers, holdouts in a fast changing retail auto market.

Since the 70’s GM, Ford and Chrysler have reduced their dealership ranks significantly, primarily focusing on cutting out small volume retail dealers. At the same time Toyota and Honda, having the luxury of a “clean sheet,” chose to focus on growing large dealers with big territories, while the Big 3 struggled with far too many dealers in metro areas, competing with each other rather than the emerging Asian competition.

So what’s the advantage of a lean retail dealer network with fewer larger dealers?


On the new vehicle sales side, larger dealers mean higher volumes/dealer with higher grosses – as a result of reduced marketing costs and not being discounted to death by three or four same-make franchises - all fighting for the same customers.

Larger, higher volume dealers also should mean that vehicle inventory turns faster. Faster turns saves money on inventory, and may also allow for increased breadth – you can stock more variety if overall you have less inventory. This improves the choices available for customers.

On the quality front there are several potential benefits. That reduced inventory and faster turns means fewer days on the lot, which means less chance for dings and dents. So the customer gets a better vehicle when they buy. It also means quality “fixes” or product changes introduced at the factory take less time to reach the customer since there are fewer inventory vehicles that have to be cleared out first. At the same time, fixing a problem with existing vehicle inventory is a lot less costly when you only have 30 days of inventory rather than 80 or 100 days.

Wal-Mart has used these same principles as one of the key drivers of their success. Wal-Mart’s vaunted performance in sales efficiency ($/square foot) and inventory management provides the same type of strong foundation for their business that dealerships with high vehicles sold per outlet and (historically) low days of inventory provide for Toyota and Honda.

Another advantage to a lean retail network has to include quality control within the dealer prep and service departments. It is significantly easier to install and maintain service standards at 1500 large profitable Toyota dealers compared to the resources and time required to train and control 6000 smaller GM retailers (or the remaining Chrysler outlets), many of which are slowly going out of business.

What about the parts side? If you have to ship parts to four dealers to cover a given geographic area, while your competitor only ships to one, you’ll have higher costs. If the competitor has one large dealer they’ll have higher volumes on slower moving parts which generates less variability, greater breadth and far fewer parts returns. The greater breadth means faster repair order fill and happier customers.

Another big advantage is that service bays are maximized while the parts inventory generates greater profits on higher turns, which in turn generates higher fixed ops coverage for the individual dealer.

To summarize: Big Dealers equals:
  • High Volume / High Profit Franchises
  • High Inventory Turns
  • Great Inventory Breadth (consumer choice)
  • Quick Reaction to Market Changes
  • High Quality Service Through Standardization
  • High Parts and Service Profits
  • Faster Feedback to the Factory On Defects
  • Fewer Vehicle Problems Due to Shorter Time On the Lot.
Will GM and Chrysler’s bigger dealers be more competitive? Will they compete less with themselves and more with other companies? Will GM and Chrysler achieve cost savings by no longer having to process and ship three vehicle or parts orders to Toyota’s one?

Probably yes to all those questions.

And just how many dealers do mass volume companies like GM and Chrysler really need. Well, if Toyota’s 1500 dealer network works superbly for them, Chrysler probably doesn’t need much more than that number.

GM’s a bit different due to its Buick/GMC channel, but around 2000 to 2500 should be more than enough. In other words the ‘Big 3’ may need to consolidate far more dealers than currently have been announced.

The streamlining of GM’s and Chrysler’s networks does not mean that there’s no role for some smaller rural dealers. They are in a category by themselves. They don’t really hinder the corporation and may offer some strategic geographic advantage.

Additionally, some of the closing metro retail points could also be utilized for local service by surviving franchises if they want to keep the aftermarket at bay.
Regardless, it’s in the metro areas and suburbs that more than 80% of the new car volume is sold and that’s where the game will be won.

The Detroit 3 have been making tremendous gains in matching the product quality and execution of the Asian makes. Now the restructuring provided by bankruptcy will go a long way toward reducing structural costs and making Detroit more cost competitive. The next big hurdle will be to make the Detroit 3’s dealer networks lean and profitable enough to allow them to match their competitors’ strengths and truly move into the modern world of retailing.

Wednesday, June 17, 2009

Digging Deeper Into Lean at Volkswagen Group of America – Interview With Jack McEowen – Part II The Story

Well, VW didn’t follow the path of a name-branded Lean approach. Jack had Lean experience with 5 different companies and was very familiar with how it works, and more importantly, what slows it down. Jack describes Lean as being a top-down initiative, but with bottoms-up implementation.
“Of all the things I have observed and learned … it has been that Lean must be supported and clearly articulated from the top, but must come from the bottom up. It has been through this learning process that some traditional methods have been discarded, such as trying to teach everyone to think in terminology or to develop small Lean teams to show everyone how it is done. We were fortunate to have several things happen within a short time-frame. First, Eric Johnston set a vision and propelled that vision to reality by clear and consistent communication and unwavering support of the people he put in charge of reaching the vision. He always called it the "Super Bowl". This vision was a replacement of our existing warehouses with modern and clean facilities, replacement of our legacy systems with SAP, and a renewal of our organization to meet the needs of the new vision. Some of the organizational work included bringing in people with Lean experiences. The first would be Tony Gomes. Tony worked out on the shop floor and focused the passion and competiveness of our people to excel. At the same time, Eric Johnston supported the development of key users - people trained very heavily in the new SAP system and the methodologies to specify system changes and testing.”
Two-Phased Attack of Lean

Lean at VW, unlike other OEMs, was seen from the start as more of an enterprise effort – affecting both warehousing and inventory management. So, it was not just confined to the shop floor, where we typically find Lean. This has huge benefits, since Lean was never stuck to the warehouse floor it could find other paths to improved enterprise productivity, such as in energy management.
“Finally, the push from Eric to get better fast created two teams - one to attack inventory problems and the other to attack warehouse productivity. Eric knew both had to happen for everything to work per the communicated vision. At this point in time, we took a different approach. Specific experts were asked to modify processes and systems to meet Lean goals. So the few imparted their Lean knowledge to the many. We spent a great deal of time during and after the process changes teaching people the value of the changes and established specific metrics for the processes to show the improvements. These included LHY1, LHY5, and Supply Chain Costs as a percent of Revenue, among many others. And we heavily involved the key users in the modifications and testing.”
Continuous Improvement

Name branded continuous improvement efforts sometimes get in the way of getting any improvement done. Continuous Improvement (CI) simply means making things better. Contrast this with Six Sigma:
A business management toolset, initially implemented by Motorola, that seeks to improve the quality of process outputs to a 99.9997% efficiency level by identifying and removing the causes of defects (errors) and variation in business processes. It uses a set of quality management methods like DMAIC and DMADV, including statistical methods, and creates a special infrastructure of people within the organization Executive Leaders, Champions, Master Black Belts, Black Belts, and Green Belts who are trained experts in Six Sigma methods. Each Six Sigma project carried out within an organization follows a defined sequence of steps and has quantified financial targets - cost reductions or profit increases. (DPC: Six Sigma intimidates the hell out of me; I like Continuous Improvement because I understand it and do not need years of training).
Jack described VW’s journey to continuous improvement to me.
“As we were finishing these changes, we shifted gears. We joked that the major changes were easy for someone in corporate to identify. Now came the hard part. We had to develop the ability to continuously improve our processes. We developed principles for the warehouse that included engagement and accountability, benchmarking, and rewards and recognition. It was drafted with a lot of participation from managers and backed by metrics all the way down to the individual. Then we initiated Continuous Improvement teams that took people from all parts of the warehouse, from warehouse associates through general managers, to work on a team on a specific topic looking for a specific productivity improvement in a specific period of time.
CI is easy compared to Six Sigma, and better yet, it’s the same thing, but with a lot less formality, rules, steps, nouns, verbs, training, time and cost. Rather than plan and debate about doing CI, VW just did it.
“We use simple teams and simple communications. You are not judged by the quality of your PowerPoint - rather by the scope and impact of your change. To use a sports cliché, we'll take a bunch of bunt singles any day. This evolves naturally into individuals and ad hoc teams adjusting processes proactively to meet stakeholder requirements. Supply Chain and systems are very similar. The real difficulty is finding things that bridge across all areas to develop teamwork and a deep understanding of the business drivers. Additionally, we talk about the teams and the changes openly and share across the traditional boundary of warehouse and corporate.”
Changing Boundaries

Continuous Improvement and brainstorming is a lot of fun when there are no boundaries – when the sky is the limit and ROIs are irrelevant. Imposing limits gets us closer to reality – this is all about process/machine modification vs. replacement. Practical ideas surfaced at VW and were shared across the enterprise.
“This was a significant change as the general managers became facilitators, something that was familiar from past culture, but from an unbounded brainstorming perspective. This time the teams had boundaries and constraints. This allowed us to focus and quickly make changes. We then began to share the various teams' progress with all warehouse managers monthly so everyone knew what was being worked on and why. As a simple example, we knew almost half of our man-hours were for outbound processing, so that was the first place we looked. The team superstar was not the most senior or the most recognized person on the team. People listened to his ideas, tested the new process and we introduced the change for the entire network with terrific results.”
Lean in the Extended Enterprise

After this year’s conference I talked with Jack about Lean. To Jack, Lean has no boundaries … in fact, he can’t understand why others see these boundaries anymore.
“I must admit I was a little disappointed in the level of participation (at the conference) on that topic (Lean). I found it hard to believe that more people did not want to discuss items like a 47% reduction in KWH used, a 90% reduction in cost per line for power equipment….”
We talked about Lean efforts that focused on energy reduction. This was spearheaded by a corporate Lean staffer. Jack described the utility bill as just being another time-phased metrics report. This was a perfect candidate for Continuous Improvement, and, metrics improvements support a Green workplace and cost savings. The big message here is that Lean is boundaryless and is not confined to expected places in the supply chain.
“A similar approach was done within the headquarters with a grass roots effort supported by management to clean up inefficient processes. The outcome of both of these teams was a level of engagement and empowerment that I have only seen one other time in my career. Our people are committed to doing things well and to solving issues for our stakeholders. This culminated in a succinct strategy that was rolled out to the team early last year. At the foundation of our strategy, you will find our commitment to our people and to their development. Now we are trying to grow the capabilities of our team to sustain our performance. This will be the most challenging part of the journey. It will require the greatest effort and greatest focus to weave these Lean experiences and capabilities into the everyday fabric of our culture.”
Bottom Line on Lean at VWGoA
  1. You need it to be a top-down “or else” initiative by the VP of Parts. The VP need not be a Lean guru. In fact, s/he doesn’t even need to be trained in Lean. The VP simply needs to be committed.
  2. You need the Lean feedstock of someone who has done it before, who can answer questions, who can make decisions. Lean zealots can be good, but they can bring a lot of baggage regarding process precision – exactly the way to do Lean based on prior life experience with other work cultures. More important than Lean zealots are flexible Lean managers – folks who have experience with Lean principles, but are flexible regarding Lean implementation.
  3. You need to embrace appropriate enterprise metrics and use them to set standards for improvement. You need individual accountability of metrics. You need to communicate across the enterprise – goals, targets, and ideas for improvement. This was fundamental to the success at VW and more recently Mopar. It is important that these metrics not be private and personal – they need to be visible and indisputable.
  4. You need to improve with Continuous Improvement processes. These processes can reflect common sense continuous improvement, and need not reflect somebody else’s sense of process complexity and bureaucracy. You don’t need to hold up starting because you need a year’s worth of costly start-up activities – think generic continuous improvement vs. name-brand text book approaches.
  5. You need to embrace the entire enterprise with Lean by focusing on any opportunity to improve metrics with process simplicity and Continuous Improvement.

Tuesday, June 9, 2009

Digging Deeper Into Lean at Volkswagen Group of America – Interview With Jack McEowen – Part I Background

The absolute number one high priest of service parts Lean is someone Jack and I know fairly well – Tony Gomes. Tony came from the Toyota shop floor workforce and invented service-parts Lean at the Toyota San Ramon warehouse in the late 1980s. Tony lives and breaths Lean – after Toyota he went to Chopper Transportation, worked for us, worked at VW, and now is at Honda. Tony is a bottoms-up Lean kind of guy who often scolded me with terms like “Fear Free!” When I think of all the high priests of Lean sitting on Mount Olympus, I see Tony sitting right there in the middle. But, there are a few other priests of Lean. Don Johnson at Ford implemented Lean across the most innovative parts supply chain ever designed – he packaged all this into the Daily Parts Advantage. It took him a tad more than a year to transition from old to new, and his team did it with stellar success. Anu Goel, Joe Kory, Helmut Nittman, Kent O’Hara, and the fabulous John Sullivan were key members of this dream team. Charlie Hyndman came out of manufacturing and with his team spread the implementation of new “Template” warehouses with Lean methods over a bunch of years. It is interesting to study the High Priests of Lean, but many of us tend to give up before we really start emulating them. There are simply too many manufactured excuses:
  • Toyota has a very different culture than anybody else, certainly different from us.
  • We simply don’t have the time or patience for a bottoms-up approach to Lean.
  • Don’t underestimate the costs of all that change – we simply don’t have the budget.
  • Ford and GM’s scale is way beyond us – not comparable.
  • They developed very specialized versions of Lean that were meant for UAW shops.
  • We are OK as we are now – my guess is that there’s not really much difference in our productivity compared to their average.
  • I don’t trust the metrics – this is apples and oranges.
  • We are different.
  • Based on my metrics, we are already best-in-class.
  • Yeah, well, we are already doing all that stuff and we are Lean right now.
To counter all these excuses, the VW (shorthand for Volkswagen Group of America) Lean team also sits on Mount Olympus with the other Priests of Lean. VW has improved facing warehouse productivity by 120% since the 2003 NASPC Data book. This is a remarkable accomplishment in so short a period of time. The multi-colored chart tells a great story. The shaded area represents the 5 quintiles of warehouses that we have tracked for about 17 years. Of the 200 or so parts warehouses that we kept tabs on, we divided them into 5 equally sized groups; with approximately 40 parts warehouses in each color band. As you can see, the ceilings of each band have risen over time. The top quintile – Q1 – is characterized by steadily higher levels of productivity. In other words, the target for “best” is moving each year.

The colored lines represent VW’s North American parts warehouses; the dotted black line (barely visible) is the average productivity of all VW’s NA PDCs. Starting in 2004, VW initiated a march from its comfortable home in the bottom quintiles to 2007, when it reported all warehouses in the top quintile. In 2006 it missed by a nose in having all 7 facilities in the top quintile. VW’s ride to best-in-class has been rapid, steady, sustainable, and, most importantly, capable of emulation. How did they do it? I talked with Jack McEowen to find out.

Of all the Lean operations we have closely examined at NASPC, VW’s is the most relevant and interesting. First off, we all saw it unfolding year-by-year at the conference – the march to best-in-class could not be ignored. VWGoA is not GM, Ford, or Mopar – not massive in scope with specialized labor requirements. It was not a Toyota company, yet it had reached a level of productivity comparable to Toyota. It did not spend fat wads of cash to become lean. It did not immerse itself in years of cultural training and outfit its folks in dojo attire to simply start its Lean journey. Jack described VW’s journey in roughly 4 steps/phases:
  • The Vice President of Service-Parts became committed to business system evolution and standardization based on a massive global SAP implementation effort. He was also quite savvy and paid attention to where VW was vs. others in terms of productivity metrics. The challenge to his team was to evolve, or be evolved by others. The numbers, in comparison to others in the industry, told a convincing story that change was a comin’.
  • The big-bang improvements came from implementing standardized business processes and systems. The excuse for this was SAP – but, ultimately it was just an excuse. GM’s excuses were their “Template Warehouses”, Ford’s excuse was DPA – bottom line is that mostly it is an “excuse” that matters, not what the excuse is. Others have standardized business processes based on other momentum generating events. Standardizing on better, but still sub-optimal methods and processes gave VW huge gains in productivity. Implementing these under a commitment to a metrics-driven Lean culture leads you on the journey to excellence and improvement. The Big bang within a metrics-driven Lean culture that focused on individual accountability of results got VW within reach of the First Quintile.
  • Enterprise improvement came from a simple adoption of Continuous Improvement (CI) processes. Jack had worked with Lean at 5 previous employers. Jack’s focus was on inventory and Troy Smith’s focus was on warehousing. Jack described Continuous Improvement at VW. “It came down to a matter of finding a way of making the changes we needed to make. I was familiar with 6-Sigma, Kaizen, Cycle Takt time … , but we needed to find an easier way to get there without spending a year of up-front time in training and non-productive work. I could not translate the number of black belts we might have in a facility into LHY productivity improvements.” So, they went simple, fast, and inexpensive. This step got them into the First Quintile and is keeping them there.
  • Sustainability is VW’s challenge for the future. As would be expected, VW’s CI efforts have sliced and diced work processes and made them fairly VW-unique. This limits their ability to quickly cope with growth – external hires cannot come aboard and immediately start contributing. They need to be trained and indoctrinated into the new VW Lean Culture.
Part II of this blog will go into more detail of our interview.

Wednesday, June 3, 2009

GM Bankruptcy – How Will it Change the Service-Parts Industry?

The New York Times, Wall Street Journal, Bloomberg, Chrysler/GM Restructuring Plans, and Aunt Millie have all printed their opinions on what happens when one or more of the domestics files for bankruptcy. David Brooks of the NYT was particularly depressing this week. The most interesting bit of trivia came from my online news scan last week – someone was concerned that we just might not have enough qualified bankruptcy lawyers to handle the GM Chapter 11 filing and related journey through the courts.

Our May 6th blog, “Chrysler Bankruptcy and What It Means for Us” detailed some of the systemic impacts on service-parts and identified some prescriptive measures. That was an inventory of the dark side of this journey. What about the bright side? There is a high probability that Chrysler and GM will emerge from bankruptcy as new, lean, mean, fighting machines. They will be fundamentally different. Just thinking of these differences in service-parts, what does the Crystal Ball see and what does it mean for the competitive fabric of service-parts everywhere?

First, let’s surface the five most obvious pockets of change that come from these bankruptcies:
  1. Their labor contracts will emerge as fundamentally different, in terms of work rules, fixed cost commitments, benefit loads, and pay scales.
  2. Dealer counts will be reduced drastically – the big cuts are in smaller, more rural, dualed, defunct, underperforming, and less profitable dealerships.
  3. Dealer networks will be re-planned to accommodate fewer dealers, less sparse geography, non-“underperforming” rural and urban dealers, and more rational customer requirements.
  4. All contracts will be reviewed and either nuked, re-worked, or transitioned to the surviving company.
  5. Salaried headcounts will be drastically reduced with all the nice-to-haves being eliminated or drastically cut.
How Will GM and Chrysler’s Labor Relationship Impact Us?

We are at the beginning of a new era in labor management. Contract entitlements are a thing of the past – worse yet, they represent invisible mines that can sink a company. Looking sideways at the UAW National Agreement, it more closely resembled an unabridged version of Tolstoy's War and Peace. Wading through the details of the agreement often led to more war than peace. And now, labor is a casualty of war. What does all this mean for us?
  • Other UAW shops will want the same deal as GM and Chrysler, and they will have the strongest case in decades for contract and work rule reform.
  • There will be less tolerance for OEMs to adopt a benign acceptance to organizing efforts. Labor unions served their purpose a century ago to protect workers from a broad swath of brutal labor practices. Unions now represent an obstacle to future company survival. So, what happens if a facility organizes? OEMs will move it as part of an overall risk avoidance strategy.
  • Non-union service-parts OEMs will have less pressure to provide wages, benefits and job protection that is near-parity with UAW OEMs. The UAW is mortally injured and the likelihood of organizing another OEM in the US is greatly diminished.
  • We have been tracking industry cost of sales (COS) data for years and have not seen what we’d like to see in total COS tracking with productivity improvements. How do we get these two metrics to track in the same path? We need labor to embrace Lean faster and more profoundly. GM is a textbook case of Lean supply chain implementation; they need a new labor agreement to book all the productivity savings. Many others in the industry, who have not moved the needle with costs, need to get faster to “Lean 2.0”, which is a re-launch and a re-think of Lean. VW is the role model here (we are targeting next week’s blog to be focused on Lean at VWGoA.) Mopar is another good role model.
  • One way to harvest high levels of labor productivity is to reduce or eliminate spikes in demand and/or use labor-on-demand (LOD). Labor on demand could utilize people who do not want to work 40 hours a week, and/or 52 weeks a year. The key here is to get acceptance of this practice by your existing labor force, and to get a stable, trained LOD workforce. This is not as difficult as it may seem.
How Will Dealer Consolidation Change Life for Everybody?

Chrysler and GM will cull out small, weak, and franchise-defunct dealers. A whole lot of them (60%) will survive and 40% will be managed to extinction by the bankruptcy courts. NADA and state dealer organizations really forced these bankruptcies (as opposed to an out-of-court restructuring), because they lobbied state legislatures for “dealer day in court laws”, thus creating a legal toxic waste pool that could only be managed by the bankruptcy courts. We will only hear from the surviving dealers – those on the DOA list will fade away quite quickly within the court’s hospice for the terminally ill. What is most certain is that GM and Chrysler’s surviving dealer body will be much stronger than the predecessor organizations. Some dealers will be asked to remove competing franchises from their GM showrooms. Others might be asked to upgrade their stores, and still others will be told they do not need to make any changes.
From the June 1 Automotive News: “The 1,124 dealerships who received termination notices in mid-May will have their phase-out procedures explained. GM expects to put ‘significant’ demands on surviving dealers. ‘We expect them to perform well on customer satisfaction scores and sales, have their facilities up to speed and not have any non-GM brands in their showrooms,’ LaNeve said. Initially, GM will not make specific demands to improve the property, he said. ‘We’re not right away demanding new facilities,’ LaNeve said. ‘We’re not using this as a threat in this kind of market to get dealers to… spend money they can’t afford to spend.’”
A result of the recent culling of the dealer herd is the near extinction of the “hobbyist dealer” – the ones who just loved being a dealer or were a dealer because they were a dealer’s kid. The survivors are “business people” dealer operators. Money – not love – is the motivator. This means maximizing net profits. The “old school” dealer worried about competing with their own service department. The “business person” dealer wonders how to maximize stockholder ROI: (1) Can I make money being a mini-PDC for the independent installers in town? (2) Can I make money operating a satellite service center downtown, or on the way out of town, where the other dealer was shut down? (3) Can I make money ordering parts smarter by aligning with RIM? All this is good – parts is the money-maker and a more willing dealer body could be advantageous. This will change the competitive mix; maybe profoundly.
  • Emerging from bankruptcy, GM and Chrysler will have stronger share of minds with their dealer bodies, so dualed franchises will have to reckon with this. Higher share of mind will enable increased effectiveness with service retention programs – and broadly speaking, this is where much of the action should be focused.
  • Many OEMs will have dealers that use to be dualed, but if they still exist, are/will-be standalone (or have 1-2 less brands in separate showrooms). These dealers will be on the edge, but may also be willing to think outside the box - use such dealers as willing partners in new service growth pilots.
  • We suspect that RIM-gaming will be dealt with, RIM frustration will greatly diminish, and compliance will improve significantly. GM and Chrysler’s RIM programs will ultimately fly as they were originally intended and the extended enterprises will be knit closer together. So, for everybody, it might be time to focus on RIM, or a more effective implementation of RIM.
  • The name of the game is Performance Terms – GM and Chrysler are forerunners here and should have a much easier time with dealer acceptance and compliance. Any dealer resistance will be plowed under during the next six months, so it is a good time to closely examine your T&Cs.
  • We expect to see rational no-brainer turf changes that old and tired dealer organizations have resisted for decades. Defunct dealer geographies have customers in them – retail and wholesale. This is a risk for the OE and an opportunity for remaining dealers. So, expect to see more OE-directed efforts in serving wholesale accounts (IRFs and body shops) and end-customers with remote service and/or parts for the full compliment of warranty and customer-pay work. Dealers won’t be cut out, they will be dealt in – by this I mean that it will not take the usual lifetime to sort through turf wars. Chrysler’s emergence through bankruptcy will probably be too fast to accommodate this with court protection, but GM will have time to do this right.
  • Expect GM and Chrysler to have high dealer cooperation and commitment to new service and parts initiatives. Surviving dealers will be the best and brightest and thankful to remain in the good graces of the OEM. A second bankruptcy is not without precedence. So there is no immunity from the disease of old, bad habits.
How Will Supply Chains Be Re-Planned?

This one is a no-brainer. Parts warehouses are located where dealer demand is, and are stocked with parts that dealer customers want to stock, and tend to order. Well, dealers are getting weeded out on a massive scale, and inventory is seen as a huge consumer of cash flow. Besides closing Jacksonville and Columbus parts warehouses, GMSPO will also close its Boston facility.
General Motors will close a Boston warehousing and parts distribution center as it works to re-emerge from bankruptcy this year. According to a filing from the company, the parts center will be one of 13 GM facilities to be shut down in the restructuring plan. Three other facilities will be placed in "standby mode". The Boston warehouse will be closed by December 31. “As GM strengthens its aftersales business, we’re aggressively pursuing strategies that allow us to continue fast parts delivery to our dealers and distributors, and improve our warehouse capacity utilization,” said Kevin W. Williams, GMNA Vice President and General Manager, Service and Parts Operations, in a press release.
  • Stronger dependence on RIM strategies by stronger dealers will favor sparser, more specialized warehouses and break-bulk facilities. We have known this for years, but haven’t had the opportunity or imperative to do much about it. So, the tide is turning back to sparser parts networks, enabled by RIM and enterprise-wide supply chain management. Also, the full RIM integration will make 5 days/week, next-day ORT unnecessary. Small adjustments to dealer breadth and depth and sophisticated D2D will allow a 2-day ORT on stock orders delivered perhaps 2 to 4 times a week.
  • DDS will be re-thought as we all look at less expensive, but still dependable, modal alternatives for supplying dealers various order components. This is another RIM enablement. However, it was another bone of contention with dealers. Now cost is king and we all know how important fulfillment is.
  • Slow moving parts will be further segmented and are just wonderful candidates for outsourcing: (1) “classic” parts sold to Vintage Parts-like operations, (2) very slow moving parts regionally consolidated and perhaps outsourced to a 3PL, (3) just-plain-slow moving parts with consolidated large-scale, but predictable flows remaining in-house, but with very Lean operations.
  • It’s time to think about pre-planning or at least intelligent time-shifting of repairs, relaxing the need for expensive same-day/next-day delivery. What’s the lowest cost way to provide convenient (not always the quickest) service to our customers?
How Will Contract Renewal Impact the Industry?

Once into bankruptcy all existing contracts are up for grabs. They can be nuked, re-negotiated, or renewed under the surviving company. Besides labor contracts and dealer franchise agreements, it is easy to overlook what this can mean. All contracts have action items associated with them. Detroit’s killer purchasing buyers have already wrung much of the fat out of the traditional supplier body – we’ve already discussed potential risk impacts of this. Trimming the fat from traditional parts and service suppliers was like taking candy from a baby. However, there is a whole category of suppliers who escaped these nips and tucks: software providers. Chrysler and especially GM will emerge as fundamentally different enterprises – smaller, less global, and leaner.
  • The cost of software is nearly impossible to benchmark – much of it is value-priced based on the size, scope, and affordability of the target customer. It has little to do with actual development costs. Further complicating software pricing are new release costs and installation costs. For recent nice-to-have software, it will be time to tear up some contracts and rebid in our brave new world; a world that is less focused on global integration, huge scale, and bells and whistles that will be rarely used. Given the lifespan of typical IT, this might not be all that short-sighted as we move into 8 years, at least, of less industrial globalization.
  • It might be time to take a re-look at those hyper-expensive SAP ERP backbones and add-on systems. Tear up the contracts and bring in Oracle or somebody else (if they have not already been bought or controlled by SAP/Oracle.) The scope of requirements of the emerging companies, by definition, must be smaller than the predecessor organizations. So, it might be time to rethink old ways of inflicting IT implementation pain and do some nipping and tucking here.
How Will Salaried Headcounts Evolve?

Service Parts headquarter organizations (here I am just focusing on parts) will evolve, through necessity, to more precisely focus on the essentials of operating the business of service-parts in the new economy and new world. For quite awhile, there will be no acceptable justification for staff increases. So, the trick will be to adjust the mix of what you’ve already got. Ultimately, there are 4 essentials to the parts business: (1) part pediatrics - birthing parts and part-numbers and making sure they make it through the formative years – Service Engineering, (2) managing high order fulfillment at the lowest possible cost – Supply Chain, (3) getting dealers to buy parts and sell them – Sales & Portfolio management, and (4) revenue and yield management.
  • Service Engineering is a big staff consumer, with the work consumption appetite being proportional to the overall process efficiency. This is an area ripe for Lean Thinking in the way and manner that VW practices Lean. At VW, the utility bill has become a metrics scorecard. Scores are to be continuously improved. At VW, Lean can mean turning off your computer terminal to improve your utility bill score. Lean service engineering is like what CNH does to reduce parts proliferation. So, the next battleground for Service Engineering is Lean.
  • Supply Chain is a big cost generator with some fundamentally changed requirements. It needs more staff to get the job of change done. I suspect that this will be an area benefitting from staff re-mixing.
  • Sales and Portfolio Management has been crippled by sales force consolidation in recent years. Parts marketing is a skill that needs to be integrated and practiced by portfolio management. The trends here are overwhelming and will not be overcome. So, we are looking at fewer, but more concentrated staff.
    • The car-guys need to hold on to Collision market share, because it is so critically important to them. This is the brain trust.
    • Everybody needs to focus on maintenance and repair (M&R) parts.
    • Powertrain is hopeless and should be outsourced.
    • Accessories, as with GM, should be sent back to the whole goods division for product development; supply chain management should stick with service-parts.
    • In reality the “Sales” is all about channel management. The rub here in the industry has always been with the sheer number of people needed in the field to contact and work with dealers. So, we have seen a lot of consolidation and cuts here. The objective in parts field management is fairly simple – to sell more parts with prods and programs. Like the IAM, the OEMs will wake up and figure it is best to segregate program management from program implementation. Developed programs should be outsourced to third parties who get paid to perform. This crunches OE sales staff down to portfolio managers and a tight cadre of internal mega-program managers. Further, it will help wholesale strategies fly – if a program does not pencil, nobody will bid on it.
    • Service retention as the result of the total aftersales customer experience is a good candidate for this develop-program-and-farm-it-out model. Third parties can get performance pay for program management and execution. So, there is really no excuse for back burnering this.
    • Installer Management i.e. managing installers is a transcendent portfolio that integrates collision (bump shops), M&R (independent installers), and the traditional field organization (dealer installers.) OEMs have never viewed installers as their true customers (unlike vehicle owners). We need to begin looking at installers at the same level as vehicle owners, because at the end of the day installers are also servicing the OEM’s vehicles and that the quality of repair at the installer will impact vehicle brand perception as well. While there is a certain logic to this, the concept crisscrosses traditional organizational boundaries – kudos, and big-bucks, to the OEM who figures out how to do this.
  • Few OEMs have figured out how to manage revenue expertly – the industry is getting better at this, but has a long way to go. Typically we call this “pricing” and task Finance with it; the art has evolved somewhat from flat margin management, but many are still at the Sputnik stage of development. It is time for Revenue Management to break away from the pack at many companies and get the resources and attention deserved by the best ROI in this industry.
  • Not on the list? Reduce to a limited staff function, consolidate it with other corporate staff groups (Finance, Purchasing, IT, etc.), nuke it, or outsource it.