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:
- Their labor contracts will emerge as fundamentally different, in terms of work rules, fixed cost commitments, benefit loads, and pay scales.
- Dealer counts will be reduced drastically – the big cuts are in smaller, more rural, dualed, defunct, underperforming, and less profitable dealerships.
- Dealer networks will be re-planned to accommodate fewer dealers, less sparse geography, non-“underperforming” rural and urban dealers, and more rational customer requirements.
- All contracts will be reviewed and either nuked, re-worked, or transitioned to the surviving company.
- Salaried headcounts will be drastically reduced with all the nice-to-haves being eliminated or drastically cut.
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.
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.
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?
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.
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.