Wednesday, October 28, 2009

Finding a Home for Excess and Obsolete Inventory ?Matthew McCauley

Everybody is looking for ways to save money these days. Where can we find large savings opportunities? Look at your processes to manage and dispose of excess and obsolete (E&O) inventory.

E&O inventory represents a significant cost category for most OEMs. From the 2009 NASPC panel discussion on inventory management, we found that the average North American OEM expected to see no sales over the next two years from 3-10% of its inventory dollars.

A typical OEM will scrap about 3.5% of its inventory dollars on an annual basis, or about half of what it considers to be E&O. Automotive OEMs scrap about 5% of inventory dollars, while heavy equipment OEMs scrap only about 1.8%. Assuming North American OEMs are carrying about $6 billion in inventory at cost, this translates into a staggering $200 million in parts that the industry just throws away each year. To put this figure into context, the value of scrapped parts in North America exceeds the gross domestic product of several Caribbean countries! Assume a 15% carrying cost for non-scrapped E&O, and this cost rises an additional $25 million per year. By the way, about the same value is thrown away in Europe, too.

How can we go about harvesting this opportunity?

First, a quick disclaimer: To state the obvious, we need to forecast and order parts in such a way that does not create E&O, but this is a subject for another blog.

We found from our NASPC mini-benchmarking in March that OEMs are using a number of channels to dispose of E&O inventory: There are several key implications of this chart:
  1. There is no consistency across OEMs in the way they dispose of E&O.
  2. OEMs may be in different situations that limit the extent to which they can pursue a given disposition channel, which explains some of this inconsistency.
  3. Nonetheless, when we see inconsistency like this it suggests an under-served area of the supply chain where there is limited common knowledge about the right strategy.
  4. Some OEMs pursue certain disposition channels a lot. They must have some knowledge of what works and what doesn’t work.
We peeled the onion on these disposition channels, added some of our own, and ranked them by our general order of preference:
  • Return to Suppliers: Many OEMs have agreements where they can return parts to suppliers or parent companies. Where this is possible, it should be the first plan to dispose of E&O. The upside with this approach is OEMs face low risk of parts returning as grey market. The downside is most suppliers and parent OEMs have restrictive return T&Cs or only reimburse at a fraction of part cost when parts near their end of life.
  • Export Markets: Some OEMs can sell directly to overseas markets. Some OEMs cannot sell directly, but can sell to a large wholesaling dealer who has the capacity to sell to export markets. The risk in this channel is that some of these parts may return as grey market, so obsolete parts (as opposed to excess) would be a better target for the export market channel.
  • Third Party Wholesalers: Identify third parties who will purchase slow-moving or obsolete parts from OEMs under exclusive, long-term agreements. By selling to these companies, OEMs can benefit by taking a tax deduction by writing off inventory value that is generally accounted for in the scrap accrual account. This arrangement can save significant warehouse space for OEMs. Also, non-union labor costs at these third parties tend to be lower than OEM labor costs, which allows third parties to take on more inventory than an OEM could. The downside to these third parties is they may not accept inventory that is truly obsolete (less than 1 unit sold per year). For some OEMs, this is the majority of their E&O.
  • Charitable Contributions: Parts such as engines and transmissions can be donated, and OEMs can realize a charitable contribution tax deduction. Subaru is a standout in this area. They have a contract with Goodwill to disassemble and recycle scrapped parts. Approximately 70% of scrapped service parts material ends up being recycled or re-used. Disassemblers also receive job training, so this is a win-win for all parties involved.
  • Salvage Companies: While general scrap metal will only fetch a few cents per pound, some specialized scrap companies will pay significantly more for parts containing valuable components.
  • Advertising Direct to Customers: OEMs should not get into the business of selling direct do customers, because they do not have the capacity to advertise, process, and ship small lot orders from PDCs. OEMs can, however, advertise select E&O parts on customer enthusiast websites, which will drive customers to the dealer channel.
  • Promotions to Dealers: Pushing E&O parts to dealers, especially at this time, is a bad idea. Given dealers’ very limited cash flow and Parts Department inventory space, we want to encourage them to stock fast-moving, high margin parts. Even if E&O parts are high margin, they will not return the highest ROI for OEMs or dealers. If OEMs feel compelled to sell E&O to dealers, we have seen some OEMs prioritize small groups of high value E&O parts for quarterly dealer promotions. This process requires significant coordination between the supply chain folks and the parts sales and marketing folks. Discounts of greater than 50% are typically required to make these parts move, which should further discourage OEMs from pursuing this strategy.
  • Destroy: After exhausting all other options, it’s time to scrap remaining inventory that cannot be sold to limit carrying cost.
Bottom line: There is significant money tied up in E&O and yet the flow of inventory into the E&O bucket is seemingly never-ending. Think of the storage and handling capacity we could free up by doing a better job with this. We see a lot of ad-hoc approaches to disposing of E&O in the industry, but no defined strategy. There is much the industry still has to learn about controlling E&O and minimizing its impact on the environment and the bottom line.

Wednesday, October 21, 2009

To NAPA, No Way. But Bring On the Paranoia – David Carlisle

The front page article in this week’s Automotive News confirmed my nonchalance when hearing that some terminated dealers were setting up NAPA operations in their nuked stores. The article contained anecdotes on a few dealers who tried (unsuccessfully) to reinvent their former Chrysler locations as used car dealerships and service centers.

If you’ve ever been a farmer, you’ve been to a NAPA store – if, for nothing else, you’ve been there for hydraulic couplings. A defunct dealership has pretty much nothing in common with a NAPA store. The owner/operators are different (they understand parts and selling parts to DIY and IRFs), the real estate is different (NAPA stores don’t look like dealerships), the help is different (NAPA has professional counter-persons), the delivery service is different (delivery inside 45 minutes), the relationships are different (aim to be the top supplier to local IRFs and treat them so well that they come to pick up the parts they want), the overhead is different (no boats to float), and the purpose is different (mechanical parts wholesale vs. warranty service and used car sales). So, it’s like comparing the Space Shuttle to a school bus – you choose who is who.

I asked one of my partners what he thought of this.

About 2 or 3 months ago when the story first came out about closing Chrysler stores switching to NAPA, frankly I was worried. At the same time, my 2004 Chevy Malibu (about 105K miles) needed some work - an electrical problem where my gas gauge did not tell me if the gas tank was empty or full. So I went on the web and found the nearest NAPA Service store. I went during lunch without an appointment to live the experience. This is not the traditional NAPA DIY/Wholesale store with Ford Rangers out front to deliver parts to local installers. The NAPA brand that dealers were converting to is a service brand focused on the DIFM market. I recall reading about NAPA claims that there are hundreds of these. This store was on 12 mile road in Berkley, MI and a very convenient location. But, I had to park on a side street because there was no parking available at the store. The parking lot in front of the store was filled with ten to 15 year old cars. The signage was lousy. I drove past the store and had to turn around and come back. This was formerly an independent store. Based on my reading of plaques in the lobby, about 2 or 3 years ago they signed up with NAPA. The lobby was filthy. Dirty floor. Cobwebs in the corners with dead bugs. The coffee pot was unplugged with the cord wrapped around it. The display case/counter was filled with dust and knickknacks from 5 years ago. The counter person was the proprietor’s wife. She was in slippers. Nice lady. The proprietor was the head mechanic. Really nice guy. Friendly, dirty uniform, dirty everything. His son was also a mechanic. That was it. Three people. Within 20 minutes they had my car in the bay for diagnosis without an appointment. This was good. When the proprietor finished diagnosing my car he called me into the garage to review his findings. The place was filthy – poorly lit and filled with junk between the service bays. One bay had his late model Chevy that he uses in Woodward Dream Cruise. He diagnosed my car, but did not have the right part on hand and told me I could come back in a week and he would fix it. He did not charge me for the diagnosis. I never returned to this NAPA service center because, although the proprietor was a nice guy, I couldn’t bear to sit in the lobby again. It was like being stuck in purgatory. Based on my personal experience, NAPA service centers are effectively local mechanics that buy NAPA parts and sell service to lower income people that want their 7 to 10 year old car fixed inexpensively. They will put up with a lousy experience to get their car back on the road cheaply. It was silly, on many dimensions, for NAPA to think this brand made sense for former dealers.
If NAPA wants to extend its reach, on the cheap, into the bombed-out sparse dealer territories, it would make more sense to retrofit other smaller and less expensive bankrupted rural real estate. The cause of all this ruckus was a rather public display of the second stage of grief: (1-denial, 2-anger, 3-bargaining, 4- depression, 5-acceptance). This week we read about the 5th stage in this cycle.

From the start I thought that the whole NAPA thing was stupid, but I really liked the thought impetus – let’s call it paranoia – that it represented.

A few years back we worked with an OEM on the paranoia we all had about mega public dealer groups. Our client was paranoid that big box retailers/publicly held Giga-Dealer groups might shift emphasis from the manufacturer brand to the retailer brand. In a biblical sense, we thought there might be a whole lot of rain coming, and asked ourselves if we should build an ark. We concluded that the risk/cost/reward of inaction was infinitely higher than assuming the worst case. Looking back in time, again in a biblical sense, we only got some intermittent showers. But, the paranoia generated huge improvements in areas including e-business, parts & service field organization, customer treatment & customer retention behavior, establishing a “Continuous Process Improvement” culture at dealerships, dealer agreements, and more. It was a Renaissance without the preceding Dark Age. We built the ark. They didn’t have to use it until October, 2008. It worked.
The most interesting part of this ridiculous NAPA story was the “hook” it had for many in the industry. The “hook” was all about retrenchment, partners turned competitors, weak underbellies, and walking away from the dealer parts and service businesses in select geographies for select customers. The hook was about something that the industry understands and sometimes feels helpless about. The hook was about customer retention.

Let’s embrace the possibility of the NAPA threat and think about building some boats. Hmmmm … If this NAPA possibility was real, then:
  • We have to think about how we service all of our customers, not just the ones located in urban areas near good stores. We might conclude that we should do something about commonsense-designed “genuine” remote service outlets for both warranty and customer pay service work. Or we may conclude that convenience means more than a short drive – like getting your car fixed correctly, on time – and continue to improve in those areas.
  • We have to think about how we stack up against the IAM in the mechanical wholesale space. We might conclude that we need to make profound changes to how we go to market outside the dealer service lanes.
  • We have to think about our back of store vulnerabilities and what the real threats are from companies like NAPA, O’Reilly, and AutoZone. We might conclude that we need to nurture a group of “can-do” dealers to step-up to the plate and compete for all segments of the service business that aren’t today’s low-hanging fruit.
Bottom line: Let’s try to grow up to a point where we don’t need disasters to rouse us from our complacency. We need to figure out how to understand that something we’ve got is broken without the bile of fear as our kick in the pants.

Tuesday, October 13, 2009

Six Big Issues For 2010

We see six big issues that will shape 2010 and beyond for the industry:
  1. Big supply chain improvements by seven companies across all sectors.
  2. Huge improvements in e-marketing and the fundamentals of service retention.
  3. Dealer count and densities changed markedly for some OEMs.
  4. We are on the cusp of major legal and regulatory changes that will impact fuel economy, drivetrains, and mix.
  5. Many have been successful in erasing the borders for dealer stock order deliveries.
  6. Organizations are much leaner now and have different expertise mixes.
We will be focusing a lot of attention in these areas from now through the April 2010 NASPC in Indy. All these areas impact costs and the capability to change.
  1. When you drill down into the numbers, you will find that several companies made significant improvements to key 2009 supply chain metrics. The 2010 NASPC metrics will be processed by March, 2010, and we expect to see additional movements. What’s happening? Many OEMs have been cleansing their inventories, with a special focus on the slowest moving and obsolete. Others have outsourced their parts operations. Still others have shrugged off years of complacency and made unexpectedly rapid improvements. The big questions have to do with the processes behind the metric improvements, and the adaptability of these changes to other enterprises. Supply chain improvements go right to the bottom line, fairly quickly in most cases. We need to know more.
  2. The most rapid changes we’ve seen in this industry are in e-marketing. We focused a few blogs on this and saw incredible improvements. I heard back from other OEMs (non-auto) telling me that more improvements were well on the way. The thrusts of these improvements are in (a) consumer education, (b) customer information integration, (c) closer linkage of e-need (e.g., I type “Ford service” into the search engine) with dealer fulfillment, and (d) seamless e-merchandising of related customer needs (e.g., extended warranties and service contracts, pre-paid maintenance, accessories, DIY parts ordering, dealer service scheduling, etc.). These are all fairly visible e-processes, but what about the numbers? What’s happened with sales per 5-year UIO? Service retention? Dealer $/RO? Dealer hours per RO? Service contract penetration rates? For new? For not-so-new? Accessory market shares? What impacts do we see on younger owners? How do all the puzzle pieces fit together – Twitter, cell phones, cell-phone navigation, Facebook, Telematics? The change has been monumental, but we need to know more.
  3. The past year has seen huge reductions to dealer counts across most sectors – Motown bankruptcies and CE recessionary sales meltdowns. In most cases the defunct dealers were small volume stores, where whole goods and parts sales reductions were small compared to dealer count reductions. It is easy to construct a story that assures us that this was not all that significant. I wonder. What about parts returns from these defunct dealers? What about D2D wholesale sales? Who is servicing stranded customers? What did the OEMs do to tighten up their supply chains in response to less dense dealer networks? Did we lose meaningful market share? Were there any meaningful transfers of the defunct dealers’ parts business to other dealers or the IAM? This was a monumental experiment for dozens of “theories” about our businesses. What results do we write in our lab book? We need to know more.
  4. The market is ripe for regulation. Even in a rebounding economy and with relatively low fuel prices, folks are not driving large or far. SUV and pick-up sales are still strangled, and there’s even talk of moving heavy trucks to natural gas or propane. Electric car companies are being launched and supported by the Obama administration. Saturday Night Live did a great job of making fun of the Obama theme of “Change”, intimating that there ain’t been much. But, that wasn’t quite true. He’s made change in areas where he had to (turning the knobs to fight the recession, engineering streamlined bankruptcies for Chrysler and GM, firing CEOs, cash for clunkers). The Administration has also followed up on some campaign themes (and taken advantage of weakened opponents) by setting a course for CAFE and introducing cap and trade legislation. How will these regulations, and the new drivetrain technologies they encourage, change our lives? What happens with maintenance contracts and service behaviors of hybrid and electric vehicle owners? Are they really serious about natural gas for heavy trucks? How would that impact our businesses? We need to know more.
  5. Some OEMs now ship dealer stock orders from US warehouses to Canadian dealers. In the old days it was common knowledge that this was not a big bell ringer in supply chain savings. Further nailing down the lid of the coffin was the expectation of significant border delays. For those who did it, was it worth it? How did they get around all the obstacles? What were dealer reactions? Fill rates? End customer impacts? We need to know more.
  6. The recession took a huge bite out of service-parts headcounts. How did it impact the mix of staff? What was the role of outsourcing? What about bundled service providers? Supervisor ratios? What happened to enterprise efficiency? We need to know more.
Bottom line: we have seen a huge amount of change lately; we simply need to understand what it was, how we dealt with it, what worked, and what did not. We don’t need to waste our time with revisionist history. We need the truth.

See you in Indy.

Wednesday, October 7, 2009

From Chainsaws to Implements and Accessories: Maybe There Is Something We Can Learn From Selling Chainsaws?

Buyers want to know what something costs before they buy it. I think this is understandable and reasonable.

One problem with selling implements and accessories, and this spans across all sectors, is that you generally don’t find out the cost until you are in the whole goods buying process – sitting down with a salesperson and buying a car, truck, or tractor.

One of the drivers of this problem is that our “common knowledge” may be “common”, but is often not knowledge. We assume you have to show the client the real thing in action – not just a picture – so we (and our dealers) focus on showroom displays. Further, dealers believe we should avoid all forms of one-price selling, so they try to bundle these costs into the whole goods and/or financing picture. Unfortunately, actual consumer research we have conducted shows that of all sales tools, customers find “installed price sheets” to be the single most helpful item! Hang that accessory on the wall, tell the customer what it costs to install it, and you’re that much closer to sale. Unless of course, you don’t even ask for the sale….which our NASPC research shows happens far more than anyone would imagine.

Note that the above charts are lifts from this year’s NASPC Crystal Ball. Mainstream is a label for mainsteam OEMs, Longest-in represents an OEM that has been in the market for a long time, and Last-in is for a very recent OEM.

It is very difficult for the OEM to get over this hurdle – they really can’t force their dealers to use a price sheet, to make available to customers a suggested retail price, or to market a fully installed price. To the extent that price is a critical part of the shopping process, it is reasonable for OEMs to expect that price be on the table. The problem is with the Robinson-Patman Act (Anti-Price Discrimination Act, 1936).

Stihl has an interesting approach on this issue that is elegant and simple. They understand how both chainsaws and underpants are shopped and bought – on the internet with sellers who merchandize their products and tell you what they will cost. So, rather than start an 18-month debate that they will lose with their dealers and distributors, they finesse it. Stihl has two dealer locators on their website. They use fancy graphics and larger typefaces for locating dealers with online pricing …or you can choose to simply view all local dealers, if you read the small type at the bottom of the locator.

Both Ford and Honda approach this same goal with more complexity and infrastructure. Basically, they accomplish the mission with e-stores that allow customers to pick, choose, and pretty-much buy on line. Installation is directed to cooperating dealers. When this approach works, it is better than Stihl’s. However, it might represent more brute force and intricacy (and cost) than what some OEMs might be willing to bear. Rather than an e-store, Stihl points shoppers to the closest dealers who subscribe to a shop, price, buy sales model. Then they let nature take its course.

Bottom line. Imagine an OEM website or set of web pages dedicated to farm implements or automotive accessories. We lure customers into these sites. They see that high capacity bucket or floor mat, rotate it 360 degrees and get excited. They want to know how much it costs. The web site provides a locator to local dealers who advertise prices on their website and you seamlessly make the transition to the closest dealer. Simple. Elegant. Cheap. Hey, it works for chainsaws.