Thursday, July 30, 2009

The Future of New Vehicle Warranties - David Sergeant

Over the last 20 years, vehicle quality has improved significantly – vehicles last much longer and warranty costs have declined dramatically. Yet, the volume manufacturers have stayed with the traditional 36-month new vehicle warranties.


Partly to save money.

Partly, because new vehicle owners have traditionally traded in their vehicles by the fourth year, as the warranties expired (or sooner if under lease). As such, leaving the 36-month warranty in place encourages a similar behavior by that segment despite the much higher quality of today’s vehicles.

Perhaps it is time for the mainstream OEMs to revisit the basic warranty and consider what the customer really wants.

Back in the 80s, OEMs offered new vehicle warranties of 12 months, with multiple options for paid, extended warranties. This remained unchanged for decades.

Times changed. In the early 90s all the OEMs moved to 36-month warranties, plus the optional extended warranties. And that’s pretty much where the mass volume manufacturers sit today, with a few interesting exceptions (i.e. a few 50,000 mile bumper-to-bumper warranties, 100,000 mile 5+ year powertrain warranties, 10-year powertrain warranties, etc.).

Perhaps the only real recent innovation has been vehicle warranties that include prepaid maintenance, which is the province of companies like VW and BMW (with BMW’s being much more comprehensive).

Vehicles of the late 80s were quite different from today’s efficient, safe, high-quality marvels. Defects have dropped significantly for all OEMs and so have warranty costs. The rising quality, change in mix and higher cost of vehicles has led to longer contracts (up to 84 months) for a segment of new vehicle purchasers. This type of extended contract doesn’t match up well with the 36-month warranty, which has led to a proliferation of OEM extended warranties that can be purchased and some abuse by private companies.

Beyond all that, what did the original longer 36-month warranty do for the industry and the car owner? It basically forced the OEMs to reduce defects on a regular basis for the 36-month warranty period, which of course meant a huge improvement in quality.

Hyundai entered the US market in 1986, and came out of the starting blocks like a sprinter. In 1986 they sold more than 200,000 units and set the benchmark for all new market entrants. Unfortunately, their reputation for product quality was not so sprinty. But, this is a brilliant company. It appears that they learned the lessons from the domestics about the corrosive nature of tarnished quality on brand reputations. Taking a page from Chrysler’s early 80s strategy, they introduced a limited 10-year powertrain warranty. The results have been breathtaking. Hyundai has leapt to the top of the pack, winning significant quality awards … they could have been bankrupted.

Back to our original point – perhaps the mainstream OEMs need to revisit the basic warranty and consider what the customer really wants. Are VW and BMW customers extremely pleased with a warranty that includes maintenance? What are the advantages of such a warranty?

Some benefits that come to mind are maintaining close customer contact, blocking out the aftermarket, ensuring higher quality vehicle maintenance, simplifying repair of non-safety defects within a normally scheduled (and prepaid) visit, and basically maintaining tighter control over the entire customer ownership experience.

Weighing the advantages of including maintenance in the basic 36-month warranty versus the powerful marketing message of 10-year non-transferable limited powertrain warranties, I’d have to consider the trouble-free maintenance-included warranty to be a viable alternative.

That doesn’t mean that a longer 50 or 60-month warranty isn’t overdue. It just might be that basic warranties, which include maintenance for some period of time, may also have strong appeal. It would be very interesting to test consumer preference of a 10-year powertrain warranty versus the 50-month BMW all-inclusive warranty with maintenance.

So, OEMs appear to have three options for warranty coverage:
  1. They can stay where they are, accrue the benefits of increased quality to the bottom line, and risk losing service retention, which can lead to a loss of repurchase loyalty.
  2. They can extend the duration of the warranty period. This can help maintain customer loyalty until the ownership cycle is complete, but won’t do much for those who buy new vehicles frequently.
  3. They can expand the content of the warranty with features such as free maintenance. This strategy can lead to the richest OEM-dealer-customer relationship, as the customer will return to the dealers for reasons other than “my car don’t work.” The risk here is that parts and service are currently a significant profit center for both the dealer and OEM.
Conclusion: depending on customer mix and OEM costs, different warranties may make sense for different OEMs. But, on balance as OEM costs go down due to quality and the importance of service retention goes up, longer and more innovative warranties just make sense.

Wednesday, July 22, 2009

Roger Penske’s Saturn Do-Over

If we described motor vehicles like an oenophile describes wine at a tasting, it would be a lot more interesting than how we do it today. How would we describe Saturn at a car tasting? “… hints of green pastures beckoning the smell of home … a whiff of pride of workmanship; pride of creation … no aftertaste, but it recalls the fenced horse paddocks of Spring Hill, Tennessee … its not about the car, its about what the car means, to its owners and to its creators.” Pretty cool. Penske bought an experience, not a car company.

Roger Penske purchased the distribution rights for Smart a few years back, and recently bought Saturn from GM. Everybody has heard of Roger Penske – he is into just about everything automotive. He is high powered, full of energy, has extreme attention to detail, is old school, respects every penny, a brilliant strategist sometimes going against what everybody else is doing (and does so successfully), an opportunist, and he buys and sells with good timing. Typically, he hits the ball out of the ballpark.

But, he is playing in a pretty rocky ballpark. Penske will become an independent distributor of Saturn; because he has only a few years of production commitment from GM, he will be unlike any other independent distributor ever created. After a few years he will have to find another design and production source, or, he will have to do all this on his own. Who has travelled down that path before? Very few.
  • Penske – he already owns 25% interest in Hino Motor Sales USA – a small and successful medium duty truck distributor; Toyota acquired a majority ownership of Hino’s parent company in 2003.
  • Southeast Toyota and Gulf States Toyota are the poster children for success – but, after all, they are distributing Toyota products.
  • Ernie Boch’s Subaru of New England is still independent and very successful. They distribute the snow belt vehicle in the snow belt.
  • Other OEMs have used independent distributors in their past, but not been quite so successful. Mitsubishi and Mazda.
What seems to separate the cream from the milk here are two things: (1) incredible product, and (2) incredible spirit of entrepreneurial innovation. Saturn, Smart, and maybe more acquisitions present a unique opportunity that we are all here to observe: a “do-over.” Specifically, what will Roger do?

I don’t know, but the question is quite interesting.

If we all had a “do-over” opportunity in service-parts, what would we do? Thinking about do-overs, it makes sense to create three “bucket lists” – one bucket for stuff that already works better than anything else, a second bucket of things that can’t change, and another bucket for the stuff dreams are made of. But, let’s be practical and learn the lesson from Volkswagen Group of America (VWGoA) about “bounded” brainstorming. Let’s make sure the do-overs have positive ROIs with paybacks of less than one year. This will ground us to reality.

What’s In the Good Bucket?

The customer and how the customer is treated is front and center in the good bucket.

There was a lot that was right with Saturn.

On the sales side they are best known for really getting the customer service thing right – driven by large dedicated market areas that made their “one-price” approach work.

On the service-parts side the most notable innovation was Saturn’s Retailer Inventory Management (RIM) system, which set the standard for all RIM systems that we see now (but the distinction of first RIM system goes to VW in the 1970s). Saturn’s system was simple and engineered for a new entrant. Most brilliant was its technique for preparing a suggested parts order for dealers. Saturn dealers reviewed the order rules on a weekly basis and focused their energy on rules, not order lines. So, their energy was used constructively, and minimally.

On the distribution side, Saturn treated all their employees well and with a high degree of respect. Early on there were no “we-they” management-labor teams. They were pace-setters in warehousing ergonomics and clever ideas to ensure right-part/right-quantity quality. They were also able to leverage RIM to efficiently service all U.S. Saturn dealers out of a single warehouse. The logic was irrefutable: if Saturn controlled all dealer parts re-ordering, they also controlled order response times (ORTs). This made sense for servicing dealer service lane business.

Lots of good ideas here; but Saturn is no longer a new entrant.

What’s In the Can’t Change Bucket?

Very little. Perhaps the most obvious example of things that can’t change is the UAW workforce in the warehouse. Saturn learned that you could have the best UAW workforce imaginable, … in good times. Bad times were a different story. They could have written a business book in labor management called “Bad to Good; Calling it Great, But, Really, Pretty Much the Same.” Probably wouldn’t have sold well.

Maybe the UAW workforce, and their associated + $55 an hour wage and benefit cost, should not be taken as a given.

What’s In the “Do-Over” Bucket?

Penske will be distributing an existing product with incredible brand appeal. However, because he is lacking direct control of the “product” side, he needs to leverage what the core of the Saturn brand stands for. The product is almost (but, not quite – I will get to this) secondary at Saturn – or at least it was for years before Saturn lost some of their customer treatment magic. At its peak, the customer experience was at the heart of Saturn’s brand passion and they did it with at best mediocre product. This is good, because Penske will have less control of the product and more control of the ownership experience. Here are my top do-overs – in this week’s blog we will address only the top four.
  1. Saturn must do-over its aftersales ownership experience and attain best in class service and vehicle repurchase loyalty.
  2. Saturn must evolve and do-over its lifetime telematics “connection” with its customers.
  3. Saturn must do-over how it measures and manages customer satisfaction with dealer services.
  4. Saturn must do-over the dealer franchise agreement that bundles exclusivity in sales, service, and parts – this exclusivity acts against putting the customer front and center in your mission statement (and, I’m not a big fan of formal mission statements).
  5. Saturn must do-over its selling and F&I process – more harm than good comes from starting with one-price selling and evolving to sales methods that generate enough profit to keep the retailer doors open.
  6. Saturn must be lean and generate independent-distributor-like profits from its efficiencies.
  7. Saturn must be a money machine and not a cash collector – it must be best in class in revenue management.
  8. Saturn must be accountable to making money and accomplishing its mission – this is all about metrics, measurement, and execution.

The First Do-Over Should Be Doing Something About Repurchase Loyalty and the Linkages to the Service Experience

Penske has a way of re-thinking the obvious and doing business better, in obvious ways we never dreamed possible. Customers come in and buy a car or truck, spend an hour or so and typically walk away feeling pretty good about what they purchased, but not how they purchased. OK, I can live with that. Then, customers spend the next 5 years forming opinions about their dealer and OEM by interfacing with service personnel. The statistics are irrefutable – if they are very satisfied with their service experience, they will have a higher likelihood to repurchase the same brand of vehicle/whole-good. If they are not very satisfied, they have a higher tendency to try a close-by independent repair facility (IRF). If they are less than totally satisfied with the first IRF, they go to another one that is close by. So, it’s not that the IRFs are better, they are “more.”

Penske’s do-over here should be to launch with a customer retention strategy that is very “Penske.” It should focus on (1) trust/value/cost/convenience, (2) constantly moving repair satisfaction at dealers from good to great, (3) encompassing programs and DMS technology to bear on instant detection of customer dissatisfaction – and fixing it before it festers, and (4) focusing the dealer repair order (RO) on total price without known line-item dissatisfiers associated with labor rates and labor hours.

All this sounds compelling, but Saturn found that its customer experience could not sell cars all on its own. Since Saturn had about the highest ownership satisfaction with sales and service in the industry (based on many industry reports); why didn’t their very high service satisfaction lead to higher loyalty retention? Three icebergs sunk the ship. Saturn’s product walk from entry-level to up-scale didn’t work. Worse yet, its one-price no-haggle selling was not sustainable in a world dominated by rebates and incentives. And the third iceberg was the Saturn culture that was inflexible; it was tied to a great ownership experience, no-haggle selling, and cult-cars. None of these were even reasonably sustainable with independent dealers, operating in a tough competitive environment, having a limited appetite for investment. So, Penske, who is not reputed to be very feely-touchy, must first think about “culture” before he does anything.

The Second Major Do-Over Should Be a Comprehensive Telematics Strategy.

People are becoming increasingly “connected” – to their families, to their computers, to their phones, and to their vehicles/equipment. Beyond simply being connected, people want to leverage their connections to become more efficient. The best examples of these sort of connections are Komatsu’s Komtrax telematics system and GM’s OnStar. At this moment, no system is perfect. So there’s a lot of room for improvement and a lot of room to do more. The chart to the right represents a dream-team of telematics capabilities for a do-over. Saturn already has OnStar installed, which is best-in-class. Penske needs to negotiate OnStar coverage that tracks with the dream-team of requirements and capabilities. Making sure the entire package is cost neutral should be easy.

Third Do-Over Is Also “So Penske” … Change the Satisfaction Surveys!

You can’t manage what you do not measure, and gamed satisfaction surveys mostly measure how good dealers are at out-foxing satisfaction scores and factory incentive plans (and factory disincentive plans). Start with what you really want to measure. Does the customer intend to return to the dealer for service? Why or why not? Does the customer recommend the dealer for service? Why or why not? If we want to influence loyalty, shouldn’t we be investigating loyalty rather than satisfaction? Correct for dealer gaming. This is simple. The survey (or surveyor) should state that the survey results will remain private and not be shared with the dealer. The first question on the survey should ask if anybody at the dealership mentioned how important the survey was to them. If more than 20% of the surveys for a dealer come back with the first question checked “yes”, then drop all CSI support to the dealer in question. We call this a truth quarantine – if you want the truth about what John Q. Customer thinks, you need to quarantine him from the dealer. Reconsider whether your considerable investments in splashy concocted CSI surveys are worth it. They are very expensive and support a phony foundation. This is completely logical. If Toyota can consistently be mid-pack in CSI performance and still be the richest car company in the market, with enviable service retention rates, then it calls into question the validity of the big name-brand surveys.

Fourth Do-Over Is to Re-think Sales, Service, Parts Exclusivity

Let me explain. Saturn is all about the customer and putting the customer front and center. Part of the problem with Saturn was that the processes and behaviors of Saturn’s creators (and I include retailers in this) were not sustainable in an evolutionary marketplace. One price selling. Exclusive stores with exclusive architecture. Friendly treatment. At its essence, Saturn is about how its product is thought of (cult-like), how it is sold (family style), and how it is serviced (with care and competence.) It is not about giving retailers exclusive rights to buy and distribute service-parts. Saturn owners are geographically dispersed, while its few retailers are primarily in the larger metropolitan areas. If Saturn retailers cannot service all its owners due to geographic reasons, or because of failures in retailer service retention efforts, it should not reward its retailers with service-parts exclusivity. Penske should retain the ability to distribute genuine Saturn parts to whoever needs them in the servicing of Saturn customers. Or, establish service and parts only Saturn stores in rural areas to provide customers the convenience of local access to genuine parts and service. This would lead to more satisfied customers and higher profits for Penske.

Given Penske’s history, you have to believe he will bring creativity and innovation to the effort of re-making Saturn. We wish him well.

Thursday, July 16, 2009

Happy Re-Birthdays Detroit, and Thanks for the Presents

And, congratulations to the proud parents – the Obamas. You did good.

It was common knowledge that the GM and Chrysler bankruptcies would unleash destructive forces that would propel the US industrial complex (along with everybody else) into a depression and destroy the foundation of the entire motor vehicle industry. This was even outlined in the recovery plans submitted to Congress. Well, all that certainly didn’t happen. What we found out was that we were not as smart as we thought. Rather than debate the nuances of these rebirths now, we need to dig deep for lessons and signals for the future.

For the past 15 years I have had the opportunity to speak with UAW groups about the state of the industry, typically around contract negotiations time. Basically, I’d been telling them how bad things were, and that it was not inconceivable that one or more of the domestics could become bankrupt. It was usually towards the end of my presentations that the “bankruptcy” words rolled out of my mouth. The reactions from the participants differed over time. Early UAW leaders labeled me as a deviant, not to be believed, based on humorous anecdotes I’d use about parenting my teenagers. Starting two contracts ago the UAW groups started to pay attention. During the last round of negotiations, they were finally scared. Still, nobody really believed that bankruptcy could ever really happen. Everybody knew that bankruptcy would result in an industry-wide cataclysm. And, because of this, everybody knew that it would not happen.

But it did. Lightning struck twice. And, remarkably, there was no cataclysm. The speed and efficiencies of the Chrysler and GM bankruptcy proceedings were awe-inspiring, and defied the expectations of even the most naive optimists. Delphi was the benchmark and it set up the expectation that going through bankruptcy court would be a very long journey. But we learned a few simple tricks from the Obama task force; they talked about separating Chrysler and GM into good and bad companies, with the good parts emerging from bankruptcy fast. The bad parts would stay under the protection of the courts for years. That’s what happened. This must mean that Delphi is all bad parts. Maybe that’s why GM spun it off in the first place.

This birthday celebration has meaning beyond the simple re-birth of two industry pillars. Here’s an initial set of take-aways.
  1. The supplier community is healthier than we all suspected. I wrote about this in a recent blog on Bo Andersson. There have been remarkably few unexpected supplier bankruptcies. This recession and the bankruptcies have been like a Geithner “stress test” on motor vehicle suppliers. Most suppliers have, so far, weathered the storm and been able to adapt to a market that contracted by about 35%. The $5Bn bailout helped, but we need to put this in context. In this instance $5Bn helped save an industry; in the case of AIG, $5Bn was just pocket change. So, we do not need to worry so much about our supply base.
  2. We need to be extremely careful about our dealer-ization strategies. Both GM and Chrysler studied this one to death and determined that more dealers do not necessarily mean more sales or more profits. So, we should be extremely careful about adding new dealer points. Toyota’s restricted big-dealer distribution network has been spectacularly effective. We need to start thinking about fragmenting the typical dealer/distributor and looking for separate distribution strategies for whole goods, used, accessories, service, parts, wholesale, and, perhaps, information. The need to service a car or piece of equipment does not always mean needing another full-service dealer rooftop.
  3. There is a way to deal with the UAW. For decades the UAW and “management” were in a Mexican Standoff. The US government pulled the trigger first and left a pretty significant head wound. The UAW will now negotiate, because the “or else” has happened and, now, it is about the survival of their members, not the strike target. Deere, Cat, Ford and others will now be the ones to demand pattern agreements, and will get them. For non-UAW shops, the threat of a successful UAW organizing move is fairly non-existent. We will find that the UAW lost a lot of credibility in the eyes of labor – and not because it emerged as a loser in the bankruptcies, but, because they share the blame in bringing Chrysler and GM into the bankruptcies.
  4. Maybe customers are more resilient than we thought. The theory was that if GM and Chrysler went into bankruptcy, their customers would flee to other brands and the volume losses would be catastrophic. Well, that did not happen – we have not seen anybody dropping off the cliff in market share due to the bankruptcies. In fact, the only real change in market share at Chrysler and GM is from lower fleet sales due to temporarily reduced production and the decline in fleet demand within the industry. June was disappointing, but so were the circumstances inside GM and Chrysler – besides this, GM’s June was relatively better than the Japanese Big-3. A lot has changed in the past week or so. So, retail customers are the kind of fickle people we’ve seen for a couple of decades, not the kind of fickle people who stay away during bankruptcy proceedings. They certainly responded to the big messages that were drilled into them decades ago about quality and fuel economy – pre-recession market share numbers bear this out. But, buying a car or a truck from a financially troubled company has not proven to be a show stopper.
  5. Maybe it’s OK when someone says, “I’m from the government and I’m here to help you.” And, maybe it makes sense to question conventional, common-knowledge auto know-how. There’s no denying it that the Obama Task Force, working with Chrysler and GM management teams, did a spectacular job of cleaning up decades of waste, debt, and management exasperation. Hey, they got Lutz back from retirement, and this is a guy that does not suffer fools gladly. With lots of outside executives and government employees deeply looking into the auto industry, some of the old automotive modus operandi may have been blasted away – or at least heavily questioned. This vaporization of “common knowledge” might be a fast-acting virus and spread. So, expect a lot of questioning about overoptimistic business plans, overcapacity, high fixed-cost break-even, manufacturing plant inflexibility – even the entire business model. Past excuses to change were “we’ve always done it this way… if we do this or that we’d go bankrupt”… well, try again now.
  6. The universe of carmakers is not contracting. Policy wonks and researchers have been telling us that in the future only 5 large carmakers will have the scale to survive; this is nonsense. Nobody wants a major carmaker to go bankrupt. Rather, we may get more companies with the Chinese entering. Economies in manufacturing become less important (more and more manufacturing is at suppliers anyway) while technological cleverness wins (Apple is beating Microsoft with a lot less resource investment).
  7. The government is putting its money where its mouth is. For years the government said consumers need to buy greener cars (i.e. pay more money for smaller, uglier cars). Now it is getting smart. The set-up of the “cash-for-clunkers” program actually makes a lot of sense and will work in achieving a greener car park.
  8. The cheap dollar is good for the moment. A cheap dollar makes it interesting to manufacture cars locally in the US, and more expensive to buy foreign imported cars. For the moment this will be a real tailwind for the newborn companies.
  9. A move away from pure focus on stock market performance will help the rebuilding process. With the government (and the UAW) holding large ownership positions in companies, this will be the opportunity to focus on medium / long term value and investments. This is a move away from the ultra-high attention to Wall-Street shareholders. (After all, Wall Street got us into this mess, didn’t it?)
  10. The Independent Aftermarket will have techs who prefer Genuine parts. GM and Chrysler have or will close about 2,000 stores with about 10 techs per store. This means about 20,000 techs trained by the OEMs will be moving to Goodyear Gemini, AAMCO and the like (OE dealers are not hiring) and these techs are used to installing genuine parts. This is an opportunity to wholesale parts to the independents.
  11. Enormous profits are waiting in the wings for US automakers. GM, Chrysler and soon Toyota have rationalized assembly plant capacity. Further, salaried and hourly staff levels have been reduced across the industry. For the first time in decades capacity has been reduced to long term demand levels for the US market. Once industry volumes get back to 14M to 15M SAAR, OEMs will make good money. Remember that this rather lackluster SAAR does not appear so unreachable when you consider the volumes needed to replace depleted dealer inventories and fleet sales. At 16M SAAR the US auto industry will print money. Cars and Trucks will be sold without discounting and subventing leases, because production will actually be limited at meeting demand.

Wednesday, July 8, 2009

Common Knowledge: Its Not Who You Know, It’s Who Really Knows

A lot of what we do is a function of common knowledge. Stuff we simply know a lot about. We know why parts sales are down simply because we walk the halls and collect information 24/7 and listen. We know why we can’t sell M&R wholesale because we talk to dealers; we even visit them. We take them out to lunch, and really understand how it works back there. Undercarriage? Power Generation? Accessories? Powertrain? Collision? Same answer; been there done that.

In fact, we take huge pride in understanding our customer requirements. A badge of pride is how much time we spend with our customers. We rattle off dealer names and tell great stories we’ve been told. We accumulate a lot of common knowledge, and pick up a fair amount of confidence and swagger in the process. We use this to make decisions at lightning speed. Because we know it cold, and because others don’t. It’s common knowledge.

I thought it would be interesting to challenge “common knowledge” and use real data instead of competing opinions and anecdotal wisdom. The easiest way to do this was to ask our survey team to take a recent survey and break down the industry responses by who filled out the survey. These surveys have gigantic sample sizes, so nothing was lost in the process.

Our annual Accessory Survey was completed in April, 2009. The chart with the red and green bars is pretty interesting. It contrasts “average” industry sales manager vs. parts manager satisfaction with accessory pre-installation programs. There’s quite a difference here. Parts managers are pretty specific in their dissatisfaction; sales managers are pretty happy. This is just one slice from the April Accessory survey. The parts manager’s cut on things differs from the sales manager’s in a broad range of areas. The person who sells accessories to end customers is the sales manager; usually not the parts manager. I wonder why the sales managers rate the “pre-installation of accessories” so high? Maybe because it involves less work than dealing with their parts department (postpone “spot delivery”, order the part, schedule installation, arrange loaner car, etc.) … and maybe the higher commissionable gross on the tricked out car will put a little something extra in their pocket. By the way, the person we tend to listen to and accumulate “common knowledge” from is the parts manager.

Maybe common knowledge shouldn’t be so common. Further, maybe the way we learn things should be challenged as well.

The major underlying message of the recent Lean at Volkswagen blogs was all about learning. Several years ago, using data and metrics, Eric Johnson learned that Volkswagen’s productivity was lagging. The evidence was indisputable. He created a burning platform for change, made people accountable, and leveraged metrics to measure progress. Eric was not steeped in warehousing and supply chain common knowledge; he decided to learn it from scratch. Not based on folklore and other people’s stories, but based on fresh facts. Volkswagen moved from supply chain back-of-the-pack to best-in-class. Volkswagen busted the myth of common knowledge.

OK, so, (1) dealer parts managers probably are not the best source of common knowledge in how to sell accessories, and (2) you don’t need a lot of supply chain common knowledge to get started on the path to best-in-class. Maybe there are more than 2 common knowledge myths in service parts?
  1. It is common knowledge that dealers cannot wholesale M&R parts to independent repair facilities. They don’t have the training, counter sales staff, field organization, delivery infrastructure, attractive-enough prices, and reputations. Parts managers know these limitations hands down – they know that the real “wholesale market” is for collision and D2D. So, spending time here is probably a waste of time. Hell, its common knowledge. I wonder; how are some OEMs busting the myth and getting double-digit gains in M&R wholesale?
  2. Everyone knows that price increases have a negative impact on satisfaction and sales volumes. Economists teach courses on pricing elasticity. In an economy like this, who would dare mess with pricing? Sales and marketing staffs know their customers cold and know when too much is too much. The risks are too great, so don’t bother. I wonder; if pricing elasticities are “real”, they’d be most real for the IAM. So how did the IAM raise prices so much in the last few years and still look so good to Wall Street?
  3. Most people will tell you that reman is for later in the product lifecycle, when market share is at risk and a lower priced part is all that will sell. Therefore, you shouldn’t offer reman too early in the lifecycle, because it will simply cannibalize sales of higher margin parts. Just listen to your engineering, purchasing, and sales staffs to learn this. I wonder; if this is true, then why are the HE segments so much more aggressive in reman when they have much more loyal customers for brand new genuine parts?
  4. Local Distribution Centers (LDCs) work in Europe; in fact they are growing in numbers. Nevertheless, American supply chain experts know that LDCs won’t work in the US, because of our unique geography. Just listen to your US supply chain peer group; the fact that no one has started one up here is reason enough not to consider the idea. I wonder; if we look at European vs. US service retention percentages, old-country Europe wins hands-down … could this have anything to do with different service location and parts distribution strategies?
  5. Sales and Marketing folks all know that service reminders have mediocre response rates and that you can’t increase the efficiency/effectiveness of service reminders except by including increasingly generous offers. Because of the heavy reliance on third parties to run service reminder programs, it’s too difficult to get the right data to drill down to find out what’s really effective and what’s not. Even though the spend in this area is generally very large, any improvements simply won’t justify the effort. I wonder; are all the service marketing firms out there just plain incompetent? Or, do some do it differently?
  6. It is common knowledge that you need a specific parts field organization for each whole goods brand. Daimler Truck supports both Freightliner and Western Star with the same field organization. Volvo and Mack have and continue to support both brands from the same field organization. Isuzu parts field supports Isuzu, Chevy and GMC dealers. But, these are all truck OEMs and they are very different. I wonder; are they really that different?
  7. It is common knowledge that dealer sales departments do not want to sell accessories. Of course when the Lojack rep offers to slide a few bucks to the sales or F&I manager for referring customers, but doing no other work, suddenly Lojack is listed on the addendum sticker on every vehicle in stock. I wonder if dealers using “genuine” OEM parts purchased through their parts department think that the negligible commission is eclipsed by the herculean hassle factor.
  8. It is common knowledge that field reps help dealers grow the business. I wonder; our field today is not what it was “back in the day” when “we” were in the field. What is left of the field seems to be undertrained and understaffed to the point of being barely competent to complete their checklists … much less to be business consultants who can help dealers grow business.
  9. It is common knowledge that there is a trade-off between inventory turns and fill rates. I wonder; NASPC industry trends show that a lot of companies are increasing both turns and fill rates.
  10. It is common knowledge that improving warehouse quality has a drag on productivity. I wonder; NASPC attention to the numbers seems to disprove this myth, too.
  11. It is common knowledge that to grow parts sales you need to re-loyalize owners that defected to the aftermarket rather than simply retaining current customers. I wonder; the costs to recapture seem awfully steep versus the costs to fix specific problems that give customers an excuse to exit.

Wednesday, July 1, 2009

Bo Andersson, Purchasing and The Death of All Those Salesmen

Reader comments attached to Automotive News’ announcement of the departure of GM’s purchasing Czar, Bo Andersson, were of three camps: (I) folks at GM who worked with him and respected him, (II) folks who worked with him and were not fans, and (III) everybody else who was very unhappy with what Bo did in the supply arena. Most were in the third camp. Reading Camps II & III’s comments would lead you to believe that “Purchasing” was at the nub of the problem confronting this industry, and that Bo was incompetent. Neither is true; I will get back to this.

I use a fairly extensive review panel for each week’s blog – firm as well as industry insiders and outsiders. This one really stirred up the pot. I love my reviewers, but in the case of this blog, I found many of them too irrational – thinking with their hearts, not their brains. I see Bo Andersson as a man who was at the pivot point of massive change in this industry. Nobody in that position can emerge perfect and God-like. He took the purchasing baton from GM’s cult leader Lopez and the boorish Harold Kutner (not in this order) and ushered in a new world. Lopez and Kutner were both massively flawed – neither was capable of creating sustainable change. Bo was different. Forever gone now are the good old days of supplier relationships. Most supplier salesmen are now dead – figuratively or just plain dead and not replaced. Man, in my heart, I really loved those good old days … and I’ve got to tell you from the start:I, personally, really hate the depersonalization of relationships with our clients. But what does my brain tell me? Let’s take a journey together and talk about the current state of purchasing in this industry, mix in a little market research, examine some facts of today and then make judgment on what kind of man Bo Andersson was.

So, What’s The Current State Of Purchasing In The Auto Industry? The First Stage of Development Was To Make a Sow’s Purse From Gucci’s Ear

It all started about twenty years ago with José Ignacio Lopez’ discovery that supplier relationships were costing GM a lot of money. How did he fix this? Using a vintage typewriter, he pecked out his famous Warriors Diet and switched wrists for his watches to constantly remind him that something was different. Lopez created a Voodoo purchasing cult where insider relationships overshadowed, call it made obsolete, supplier relationships. It worked. But, it was hokey, and ultimately, the Voodoo side of it was not sustainable. Consultants stole the best of Lopez’ pre-1993 ideas (without the Voodoo) and went on the road. Many, if not most, OEMs have adopted these more aggressive pre-’93 purchasing tactics that strip out all personal relationships in the “buy.”

Most of those supplier salespersons from the 1980s and early 90s are now, figuratively, dead – simply because they are irrelevant. The “Needers” from the OEM may still have extensive relationships with suppliers, but once there is a requirement for a “buy”, the entire process is turned over to purchasing. The new purchasing process starts with professional purchasing agents (“buyers”) at the bottom of the pyramid with no authority to make the deal. They are Dickensian creations who simply ask for “more”, but without the “please.” Relationships are not allowed at this level; but, who cares anyway, they are now irrelevant. Requirements are defined, potential suppliers are identified, and bids are solicited with a fairly inflexible process, completely controlled by the junior purchasing agent. All the while, the process remains in the firm control of the junior buyer. Some OEMs have even outsourced these buyers to India, which further dis-intermediates any possible “negotiation” at this level. This part of the purchasing process is all about “give and take” – the supplier gives, and the buyer takes.

Bid winners are separated from bid losers and the information is culled from all the proposals and Purchasing’s supplier database to negotiate cost reductions with the winners, and to be better prepared for the next similar bidding process. It is very similar to making olive oil – first, second, and third pressings. The market has transformed from “virgin” olive oil to third pressings. Typically, there are at least two rounds of final negotiations. The first round is managed by the buyer or the buyer’s manager. The next round might even be managed by the true client – who is earnestly trying to close the deal, but purchasing is telling them that they need something more. The winner emerges through this gauntlet with a one-dimensional contract. The OE can terminate at will, the proposal is chopped up into discrete chunks, and they demand financial information … it’s all there in a thick contract that the supplier is desperate to sign. The supplier has few rights … if they think they do, then they can walk. Few do.

Systems Dynamics explains much of post-Lopez evolution – there were some sub-optimal unintended consequences of all this change. The four most important unintended consequences were: (1) the need to bring more and more suppliers into the bid process – neatly handled by global purchasing, (2) the inability of suppliers to improve product and service quality, improve responsiveness, manage their own financial sustainability, and deliver lower prices – neatly handled by building supplier development groups, (3) more supplier bankruptcies than intended – neatly handled by revised terms and conditions and outside firms like AlixPartners, and (4) the need to recognize that all suppliers were not “commodity” suppliers. Let me explain this last point. More evolved purchasing organizations work with more evolved suppliers. Suppliers must make a choice: Do they remain as commodity suppliers, or do they evolve into strategic suppliers? Most can’t evolve; hey, most haven’t even the slightest idea of how to evolve. Strategic suppliers are the new “partners”. Well, not really partners … but certainly better that being lumped in with the commodity supplier group.

That’s it. Same thing as a Moroccan Bazaar, but on a much more massive and systematic scale … and with infinitely more savvy buyers.

Some Market Research

In the mid-90s, at the beginning of this purchasing transformation, when I was much younger and much more naive, I was bamboozled by a brilliant client into moderating eight focus groups of supplier salespersons. The client’s name was “blind,” and the objective was to listen to about 100 different supplier voices to gauge if these newly emerging “aggressive” purchasing tactics were sustainable. I love stuff like this, so I agreed.

Mid-way through my first group of eight, I became educated. The suppliers were furious with these newfound tactics. They became uncontrollably angry. They shouted at me and they vented to the mirror in the back of the room – they used profanities. They told me the new process stripped them of their dignity and sense of respect. Beyond dehumanizing, the tactics were demeaning. They were no longer important, and this kicking down of the evolutionary ladder was part of the process to subjugate the salesperson’s place in the order of this industry. They brought up examples of professional “partner” relationships they had with the Japanese transplants. They boasted that they were in control – they were easing out of the most demeaning relationships and improving their business mix with the transplants. They said:
  • Build quality would suffer as suppliers exited or would “give em what they are asking for.”
  • Suppliers would increasingly become bankrupt and chaos would rule.
  • Costs would increase as quality plunged and sources of supply dried up.
  • Production economics would become un-Toyota-like from increasing supplier disruptions.
Each session was identical. It was so troubling that I did not sleep for 4 nights in a row. The next week, I was tasked with writing my “opinion” as to whether these new demeaning purchasing tactics were sustainable. During that week, I received anonymous phone calls from focus group participants threatening legal action if I did not destroy the audio and video tapes from the sessions. They had second thoughts about what they said.

So, what was my opinion? Fifteen years ago, I said the new processes were ugly, but sustainable. I still feel that way. For the few truly evolved OEMs, they really are no longer ugly. Life his simply changed for the supply base. All those old salesmen are now dead.

15 Years Later – What Do We See?

Insiders to the unfolding evolution of purchasing saw a lot of ugliness in the transformation. The quest for a global supply base surfaced a lot of “eligible” suppliers who simply were not qualified – landed cost-wise and aftersales service-wise. But, I ask: How would you generally characterize the current state of Chinese, Korean, and Indian automotive suppliers? Pretty good, eh?

Purchasing’s squeeze of Delphi was counterbalanced by well publicized billions of dollars of flow-back to Delphi. But, should purchasing take the hit for a failed divestiture strategy?

And, what about all those wonderful Japanese supplier relationships? Hmmm. Indeed, many of these are civilized, gentlemanly, and have the smell of warm apple pie on a Thanksgiving morning. But, are they better and have they produced a better result? I see no evidence to support this.

Looking back at fifteen years of evolution, I see that the threats voiced during my focus group sessions simply did not materialize. Production costs have been significantly reduced, and product quality has improved. Even Power admits the quality gaps are shrinking. "No one is building junk anymore - those days are over," said David Sargeant, Vice President of Automotive Research at J.D. Power and author of the IQS study. "We're really talking about the difference between a really good car and a great car these days." Supply chains have been made much more efficient. Supplier disruptions have been better managed. Further, the Chrysler and GM bankruptcies have proven another point – given the severity of this recession, relatively few suppliers have been so damaged by these new purchasing processes that they have surprised us with Chapter 11 filings. OK, Barrack helped a little here with about $5Bn. But, supplier bankruptcies have become a steady-state way of life, and the world has not come to a crushing halt as predicted by many.

The Bottom Line on Bo Andersson

I never met Ignacio Lopez, but after reading sections from his Warriors Diet, I would never drink the Kool Aid offered by that man. I met Harold-the-Hun once and took a shower shortly after the meeting. I never met Bo; only spoke with him once on my cell. I am a supplier and generally hate this new era of de-personalized purchasing. So, I have no hidden agenda that makes me a natural fan. But, I have to admit Bo Andersson did a remarkable job. GM’s purchasing practices have evolved further than any in the fifteen years since Lopez left. Under Bo Andersson GM has indeed made a, well, call it “Rayon” purse from a sows ear. Many others are still in the sows ear stage of development. Bo is a professional and a gentleman. Bo’s cost cutting staved off GM’s bankruptcy for years … furthermore, GM’s purchasing practices are partially responsible for saving many other players in this industry. Bo Andersson is one of the few modern heroes of this industry.

Just looking at the data, I’d say we have seen an incredible evolution in the industry’s supply base – mostly for the good.