Thursday, December 16, 2010

Looking Forward to 2011: OE Aftersales in Review and Preview - David Carlisle

We shut down next week, so this is our final blog for 2010. It has been an interesting year, where I can say that we made it in much better shape than we ever expected. Whole goods sales rebounded, and were matched by parts sales increases. In some cases, more than matched. I ask myself, what did I learn in 2010 and what do I expect to learn in 2011? These are two critical questions of introspection. I skimmed all of the 2010 blogs as if they were EKGs of what I was thinking about for the past 12 months.

The heartbreaks of 2010 included the closing of Saturn, for all the right reasons. But, I can’t help but feel a twinge of regret. Saturn was a re-think of the customer experience, and set the standards by which we judge much of our customer handling efforts. The lesson here is that good ideas really are not all that good unless they pencil.

My aspirational roller coaster thrills in 2010 came from Volkswagen. I love change. I thrive on change. I love unambiguous wins. VW’s approach to supply chain improvement has been breathtaking. They are taking the same winning headset into dominating parts sales and marketing. I’m not an underdog kind of guy – I like to see winners win. Luck is just fine, but it is uninteresting to me. I like to see a plan come together, and winners bring home the bacon. I love watching the Red Sox, Patriots, and VW. Two lessons here: you can’t manage what you don’t measure, and you can’t measure if you debate forever about what the best metrics really are.

A lot of relief in 2010 came in the form of rebounding parts sales in the US market. Canada is up, but not much over last year and this is mostly due to less of a dip in 2009. The basics of autos and heavy trucks remain the same; higher miles driven mean higher parts consumption. Next year should be even better with increasing car and truck sales. Construction and Ag rebounded too, but operating hours have a long way to go. Helping out in 2010 was seeing the “beer game” played out with these rebounding parts sales. Many of us have been through “beer game” training exercises, so we knew about the Bullwhip effect. Well, it happened to our industry this past year. I credit Cat’s Steve Wunning and Jim Owens for bringing this to my attention. It was quite obvious to Steve and Jim what was about to happen. But, it wasn’t all that obvious to everybody else. 2010 sales forecasts were hyper-conservative and assumed that recessionary market conditions would persist and depleted inventories would remain depleted. The lesson here is that some of the stuff we learned and never used is a lot better than the stuff we learned and is no longer valid. The fundamentals have not changed. We sell more parts when UIOs grow, hours of usage increase, and depleted inventories are replenished.

In 2010 we focused on wholesale. As we learned in our 2010 Recessionary Survey, nearly half of dealers focused on wholesale to drive growth. In the face of declining new vehicle sales and an aging vehicle population, OEMs looked to wholesale mechanical initiatives to increase sales to independent repair facilities. OEMs also shored up collision with price matching and certified body shop programs. These efforts paid dividends in the form of increased dealer satisfaction with wholesale support. The first lesson here is that market share and retention is a lot more than customer pay. The second lesson here is that tackling something that is difficult mostly needs more commitment, passion, and endurance for those who believe. If you want to run (and win at) sprints in high school, move to the middle of Wyoming and just run like the dickens. If you want to win the Boston marathon, well, you need to train and be committed. It is just that simple.

In 2010 we started to see the seeds of digital devastation sprouting. Our service customers are evolving to become “Digital Service Customers” (DSCs) – they represent about a third of our customer base. They use the internet for shopping and research. They feel most comfortable with peer review and input. They act on what they research and have remarkably high switching rates. They are less dealer-centric. They are young and more highly educated. They will displace our older more dealer-loyal service customers. They are the sort of folks who use Edmunds to research their vehicle choices. They are familiar. I remember 1985 when we were working with Hyundai on their US market launch. We were slipping under the radar of the domestics and the Japanese OEMs – no threat at all. GM was still focused only on Ford, and a distant Chrysler. Toyota, Honda, and Nissan were feeling pretty cozy with intergalactic JD Power CSI scores and Consumer Reports ratings. Nobody was terribly fearful of share shifts. That sort of stuff did not impact current year tactics, hopes, and aspirations. Today, in aftersales, it’s sort of like those good old days that the vehicle-side folks were enjoying. My, look what’s happened since 1985.

In 2010 we saw enhanced evolution of vehicle systems and Telematics. GM’s OnStar and Ford’s Sync are changing the way that consumers interact with their vehicles. With the proliferation of smartphones and other sophisticated mobile systems, I expect that more companies will make their onboard systems “talkative” with smartphones. This can be a major advantage in a variety of areas, including service retention – if your car can tell you it needs service, schedule a non-conflicting appointment based on your stored calendar information and set your reminders appropriately, why would you bother picking up the phone and calling an IRF? Telematics is big and becoming more plug-compatible. The lesson here is to pay attention to those Crystal Balls and get better prepared for the future. Ford, GM, BMW, Mercedes, and Komatsu all have a pretty good head start on this.

In 2010 we saw, thankfully, some reductions in junk car part sales from 2009. Evidence of this came from an OEM that conducted a market sizing and share exercise for their collision parts. They saw a clear reduction in the market share of junk car parts in 2010 compared to 2009. Several factors could have contributed to this; reductions in totaled vehicles to pull parts from … or the more optimistic belief that customers are using the rebounding economy to better repair their vehicles. Either way, our fear of an increase in the use of junk car parts long term looks to be dispelled for now. We still need to be careful here.

In 2010 some of those emerging markets exploded – you can’t really call them emerging markets when they’re now some of the world’s largest. It remains to be seen what level of growth is sustainable, but considering the unique challenges of ‘emerging’ markets and their customer tastes is more important than ever before. It’s not enough to design for Europe/Japan/North America and assume that the models (vehicles, networks, dealer relationships, etc.) will apply to emerging markets. There are unique challenges that must be addressed in each market; for rapidly growing markets, challenges are magnified and may be completely different from the issues that the industry typically handles. The Chinese are starting to move into developed markets… we need to watch for “interesting” service concepts like skipping a dealer network altogether and making agreements with national fast-fit chains for service.

In 2011 the HE segment got religion and continued on a “fat busters” program to increase sales and profits. Several heavy truck brands made very serious efforts to reevaluate every program and department … looking for ways to cut costs and not just do things because they always have. This wasn’t driven by financial hardship either – they’re having strong years for both whole goods and parts. A major focus is finding ways to use IT automation to free up headcount for repurposing. This segment is taking a course correction to follow the car-guys in many initiatives – taking advantage of the learning and investment the Auto sector has made along many different initiatives; for example, POS data. Several HT brands are ahead in using collision market intelligence. HT OEMs are continuing to push their focus on service retention and purchase loyalty. POS data gives this fight a new angle. The commoditization from all-makes parts makes this an enormous area of opportunity for OEMs to gain share from the aftermarket – and from each other. Second line and all-makes parts are gaining visibility at a bunch of HT brands. It would not surprise me to see OE Connection make some inroads in this segment. Lessons here? It’s all about listening with an ear to learn, not to defend. We still have some segments that are somewhat tone-deaf.

In 2010 we didn’t do enough in some areas. Most disappointing was the lack of effort in stressing the advantages of genuine parts, and dispelling the general public misconceptions that dealers are the high-cost spread. OEs have a lock on the distribution of parts that went into the building of the original vehicle, and, outside collision, they do pretty much nothing in merchandising this to their end customers. OK, mostly the car-guys are at fault here. CAT has historically been brilliant in merchandising the advantages of genuine. Our North American benchmark group has been seeing this for the past 15 years or so. Maybe we need to spend more time here.

What will 2011 bring? There are some things that I think will happen, and some things I hope will happen.
  • 2011 parts sales will show serious increases over 2010 for all segments. Most of the car-guys will see double-digit increases. Ag, CE, HT will see gains as well, but probably not at the same level as the auto segment. Motorcycle will get a breath of fresh air as consumer spending for delayed dreams increases, and the environment for accessory sales becomes more fertile. Harley will figure out how to reach into other segments – golf carts? Water sports? ATVs?

  • In 2011 Right to Repair legislation will continue to be an issue and will strive towards some conclusion. These bills (pending in NJ and MA) will force OEMs to provide their own proprietary tools and information to independent mechanics and other competitors, thus removing some of their advantage in the service bay. If the bills pass, it will make it even harder for dealers to retain service customers, and will accelerate the infection of low quality repairs performed in the independent aftermarket. It will be kind of like going to Mexico for your prescriptions … where, because of a lack of regulation, you don’t really need a doctor to write one out. Right to Repair smells like anarchy … hey, why not first roll it out to the airline industry? I’d like not to fly on a 737 that Joe’s Sunoco Repair works on.

  • In 2011 the OEMs are going to get even more serious about enforcing vehicle warranty terms that stipulate junk car parts from LKQ/Keystone not be considered as “genuine” and their use will void all warranties. This is just pure common sense – why should a vehicle owner who buys insurance want junk parts on a vehicle that is still in warranty? How can we be certain in this age of integrated engineering and safety systems that a junk car part from a car wreck still has all the quality of Genuine? Just who is responsible for checking all this out? It is time to get hyper-serious about this.

  • In 2011 I expect to present a banner to GM’s Vancouver PDC for either: (1) breaking the 100,000 LHY barrier, or (2) giving it a gallant try. I might have to settle for “Congratulations Vancouver – You Are Almost There – 100,000 is in sight!” I take this barrier-breaking as having the highest sort of personal interest.

  • In 2011 we hope accessories will continue to be a focus at the OEMs. Customers will continue to hammer the OEMs more and more on vehicle “invoice prices” they find on Edmunds, but accessories have maintained much of their suggested margins. Personalization is becoming more and more important to customers as a means of self expression, which the aftermarket has a strong hold on. Some areas the OEMs have more trouble competing in, like wheels, because of the aftermarket's lower quality standards and costs. However, other areas, like electronics, are high value items, and growing rapidly, that OEMs should control. Hey, you guys designed the vehicle, you should be able to create a better value proposition here than the aftermarket.

  • In 2011 digital media will be a strong focus for the OEMs; shouldn’t it be a strong focus for your dealerships too? Dealerships, like their OEMs, are creating an online presence on Facebook, Twitter, FourSquare, etc. Used correctly – not to simply blast Service Specials 24/7 – the dealership digital presence can be a powerful tool to increase our service retention. Smart dealerships are already using social media to answer service-related questions online directly with customers, who in turn will come to the dealership for service. You need to step it up here and assign your best talent in this area of the business.

  • In 2011 OEs are going to START to come to grips with the servicing, distribution, and lower customer pay sales of electric and hybrid vehicles. The use of electric and hybrid technology will have an adverse impact on parts sales. Although the percentage of vehicles sold with alternative powertrain technology over the next ten years will be low, it is forecast to grow quickly. The challenge is that most OEMs are providing long vehicle warranty coverage on the powertrain. Thus, parts sales will be warranty, not customer pay. Also, to some degree the use of diesel engine technology will have an adverse impact on parts sales. Again, although the percentage of vehicles sold with diesels over the next ten years will be low, it is forecast to grow quickly. Not just pickup trucks. The challenge is that diesels are highly reliable and will consume fewer parts than gas engines. So, technology will start to have a depressing impact on customer pay sales … we need to better understand this.

  • The engine business is going to get interesting in 2011. With Caterpillar’s exit from on-highway, Cummins is now the major player beyond proprietary engines. OEMs are pushing their proprietary engines as a way to reduce the percentage of their trucks built with all-makes. This will be a battle fought not just in the front of the store, but in the back of the store as maintenance and repair concerns are much more important to fleets than your average soccer mom. How Caterpillar’s share gets divvied up between Cummins and proprietary engines will have significant long-term impacts on part sales for OEMs and Cummins. For all of us, we need to stay tuned here, watch this evolution, and learn from it.

  • In 2011 someone will remember that structure follows strategy … and that our strategies have matured. Our 21st century strategies are all about low cost, high quality supply chains that subsume purchasing, interconnected digital information networks, service and parts retention strategies, sales and service operations excellence, revenue management, and support from finance and IT. Our structures are mostly relics from the last century.

  • In 2011 I hope we will collaborate more. We’ve planted the seeds for collaboration and now it’s time to harvest. We need to form a unified front against the AAIA. We need to communicate the value of genuine. We need a robust web-presence that provides sticky content, quality information, and unbiased reviews. We need to work together on the toughest supply chain issues. The longer we wait, the more difficult it will be to make up ground. We need to transcend benchmarking.

  • In 2011 the New York Times will figure out that Mr. Ed Niedermeyer’s opinions are quite idiotic and they will not use him – they will devote more space to sports coverage of their crumbling Yankee and Giants franchises, where at least it’s hard to get the facts too wrong. Mr. Ed’s wisdom on December 16 was that it is pretty much a crying shame that GM and Chrysler followed the market, rebounded from their bankruptcy miseries by selling more trucks, SUVs, and minivans. They cheated. They were supposed to just sell high-mpg cars and let those truck intenders go over to Ford, Toyota, Nissan, and Honda. Hmm. I thought it was pretty cool launching the Volt and Cruze, paying off billions of dollars in debt, having the largest IPO in history, and having balance sheets that are the envy of the industry. Oh well, what do I know.

To all of you, have a wonderful holiday season. Share it with the ones you love. Keep safe and happy. Return in January and let’s knock the ball out of the park in 2011.

Thursday, December 9, 2010

Why a Second Line of Parts Was a Bad Idea and Isn’t Now

Life was simple in the old days. If you bought a Toyota or a Chevy, you tended to stick with the brand and went back to the dealer for service. The industry was selling more cars and trucks than it ever dreamed possible, and the money to be made was at the front of the store – new, used, leasing, F&I, fleet. Dealers’ brothers-in-law worked in parts and service, and they all got together once a year at Thanksgiving. The mission of the dealer service department was to service what the front of the store sold, and make a lot of money off of warranty … unless you were a Toyota store. Matrix parts pricing and monster labor charges were de rigueur. You used genuine parts for everything – warranty repair and 150,000 mile fix-er-uppers.

Life was good in the old days.

Well, these are now the OK new days. The front of the store is break-even most years, and now “fixed operations” is expected to provide 85 - 100% retailer fixed cost coverage. The customers changed, and now they are not all that loyal to the brand. They shop and have a zillion little helpers on the internet that help them find the best products, the best deals, the best negotiating strategies, and the best satisfaction. This is all old news. Thank goodness for parts and service.

Not so fast.

Our service customers are also evolving. Younger customers are displacing dying off old customers, are less dealer-loyal for service, and are searching for all those internet helpers that helped them buy their car. Some of those helpers are here today. AutoMD is a good example. It “shifts the power to you.” Let’s say that I have a 2005 Camry and live in Acton, Massachusetts, and I want to replace my brake pads. It tells me that I can pay $65.69 for the pads if I put them in myself, or pay $86.25 if I go to a shop. The shop will charge me $92.22 for 1.3 hours of repair time with a “benchmark” labor rate of $71 per hour.

I can even buy the brake pads on-line and pay $63.74 (“saving $20.21”).

Or, I can ask it to find me a shop. It comes up with a list sorted how I like it. Here, I discover that there are some close-by shops that will do the repair for $25-$35 an hour, and I see that the closest Toyota dealer charges $95 an hour.
30% of all service customers use on-line research, so this is not just a short-term anomaly. We call this new generation of service customers “Digital Service Customers” – “DSCs” for short.

The fact is, our service customers are becoming zombies, just like our sales customers, who became zombies just like our purchasing organizations …. once they understood the power of data and negotiation. We are stuck with our dependence on the parts operations to cover fixed costs and generate profits – heavy equipment came to this realization well before the car-guys did. The facts all line up telling us that one-size-fits-all genuine parts branding strategies are not sustainable. I’m not going to talk about uncompetitive labor rates at dealers in this blog.
Timeout: OK, I lied. I can’t resist talking a little about those labor rates that give dealers a high-cost reputation. Just spend a few minutes on the internet and you can find thousands of price points for common maintenance and repair parts – like brake pads. The “evidence” to support dealer high-cost stereotypes is in extreme abundance. A DSC can shop the web and find brake pads for their vehicle at a fraction of the cost of the pads offered by their dealer. Now, they might be inferior pads, but the DSC will never know because the dealer parts counterperson rarely, if ever, sells the advantages of genuine. So, to the consumer, a $29 brake pad for a 100,000 mile Camry looks just as good as a $100 brake pad. To change this misconception requires training hundreds/thousands of unappreciated parts managers with skinny recessionary budgets using brain-dead dealer trainers. Not a horse I’d like to bet on. OK, let’s assume we can fix all that with some genius 2x2 matrices of rising cows and lazy ducks. Then, we’d have to tackle the problem of AutoMD’s list of $25 an hour labor alternatives vs. Bob Moran Toyota’s $95 an hour labor. We’d need to convince the DSC, with some clever web-stuff, that paying four times as much an hour for a wrench is a good deal. Sounds pretty tough, eh? Well I’m not all that concerned. Most fixed operations managers are smart, and labor costs are under their control. Ultimately, the smart ones will market-price their labor and use smart menu pricing. (The not-so-smart ones will continue to be good brothers-in-law and will show up on Thanksgiving … until things get worse in the front of the store.) The big problem will be in the stuff not under the control of the smart fixed operations managers – like the price of genuine parts in shrinking segments.

Next Time Out: OK, let’s take a bold leap and crystal ball this. It’s easy. Just forget everything you know, look at a very simple set of thirteen facts, and think like an entrepreneur. Here are the facts: (1) there are lots of IAM dollars going to buy right to repair legislation, (2) the internet tells you how much parts cost for lots of common maintenance and repairs, (3) AutoMD tells you how much labor costs, (4) AutoMD is only one third-party provider and others will surface and probably be a lot better than AutoMD, (5) there are thousands of dealers out there, (6) they service a lot of cars and trucks, (7) most OEMs only provide their dealers with genuine parts, (8) lots of these genuine parts are a lot more expensive than IAM parts, (9) historically, dealers have been very loyal to their OEMs, (10) younger Digital Service Customers are less dealer loyal and very dependent on the internet for research, (11) dealers will lose these customers to cheaper service providers that the internet tells them about, (12) these younger DSCs will grow as older customers die off, (13) dealers will become less loyal to OEMs. What does this all add up to? “DWDs” - Dealer Warehouse Distributors. Some smart chain like AutoZone will kiosk parts at dealers so dealers will not lose their service business as a consequence of web-enabled service shopping. That wasn’t so hard, was it?
The OEMs need to think out and roll out second lines of parts. Soon. This is no small feat. First off, the OEMs need to un-learn old, obsolete, and cluttered wisdom concerning why second lines don’t work: part number proliferation, cannibalization, parts quality, engineering costs and compliance, untested new global suppliers, eroded profits, small volumes, warranty terms & conditions complications – you know, things like these.

Let’s take a stab at this re-think.

#1: First find some comfort in knowing that other OEMs in Europe are moving in this direction. Several OEMs have second lines in Europe. In fact, there is an explosion of OEMs going in this direction. Block exemption is the catalyst. However, there are also lots of things to think about. A globally tested poor idea is taking a genuine part and putting it in a different box and selling it 20% cheaper as a second line. No wonder you see cannibalization; dealer’s aren’t stupid. And with the internet, consumers won’t stay stupid for very long either. Trying to do second-line and all-makes at the same time (these are different topics) will get you into trouble unless you are a heavy truck, agriculture, or construction equipment OEM. So, Auto-guys, just forget about all-makes (as was explained to me a decade ago by an old sage, “it all makes no sense”). Start by taking a look at what some companies in Europe have done – the collective wisdom here does not all lie between Oregon and Ohio.

#2: Segmentation should control the growth of parts proliferation. A market study will identify product lines/segments that have lower-than-expected market shares. Using a pareto analysis at a part number level will identify the smallest set of parts largely responsible for the lost segment shares. This handful of part numbers needs to be subjected to the 5-whys to understand what happened to all the volume. When the answer is largely “price” and the vehicle applications are for non-current models, then you should consider a second line. If the answer is largely “price” and the vehicle applications are current model – then, you need to re-price the main line and do not need a second-line part. Also, remember that “second line” really means second line – it is in addition to the genuine line. This more surgical approach provides a fair degree of inoculation against cannibalization. Don’t have the resources to do all this? Farm it out.

#3: Second lines are not “genuine.” This is important. Genuine parts represent a bundle of capabilities and caveats that cost a lot of money. For example, they can be used in vehicle warranty repair and they have more robust parts warranties. They have more “delicate” supply chains, they have higher fill rates, and they are built to exacting new-vehicle replacement standards. The product matches the promise. The product/promise relationship is also true for the stuff that AutoZone and LKQ sell. So, it is important not to overbuild, over promise, or overprice for non-genuine. These parts should be globally sourced and direct-shipped to dealers in order to control costs and provide for competitive margins.

#4: Second lines have different part numbers and terms and conditions. This is important. The benchmark here is tired, old, but still alive – NAPA. Parts warranty coverage should line up with NAPA for the class of part that the second line represents. This one is simple – just line the T&Cs up with the market icon and don’t think much more about it. Put a third party into business to audit retailer compliance by having them match up RO sales history with warranty claims: just like freight bill audits, they can work off a fraction of the savings. Saddle the third party with the responsibility to pay audited claims within the same time-frame window that NAPA does. Now, you don’t have to worry about retailer compliance or internal staff requirements.

#5: Farm out the engineering, too. That’s what aftermarket does. Find out how the IAM does all this to such an extent that they can merchandise their products as conforming to original equipment specifications. Then do what they do. Alternatively, consider using the engineering model used by OEMs who are growing their accessory business: push the product development and engineering to a separate skunk works legal entity to leverage entrepreneurial energy and fast time-to-market … while they contain legal exposure and mitigate risk.

#6: Train your retailers on how to un-learn stuff that no longer works and learn stuff that really does work in this web-influenced selling environment – how to compete in this new frontier. This includes qualifying the buyer, responding quickly, nailing down competitive quotes, managing a competitive internet presence, closing the deal, and following up upon completion. It isn’t about long hold times, off-the-cuff double-net pricing, switching to the service advisor for the labor cost, and sounding like a zombie.

#7: Think about the long term potential of a second line being an enabler to grow wholesale mechanical sales to IRFs … AFTER you get IRF fill, delivery and service nailed.

Bottom Line: Wipe away your excuses not to act and act like an entrepreneur.

Thursday, December 2, 2010

North American Auto Parts Sales Seem to Be in Solid Recovery

I planned to lead this week’s post with an awesome 3-D chart that compressed 12 charts’ worth of information into one. But as the author Henry David Thoreau was laid to rest just a stone’s throw from our Concord office, my staff persuaded me to simplify, simplify, simplify. Plus, I didn’t want to give Edward Tufte an aneurysm. I should mention that the information in the following charts is from Carlisle’s monthly Market Watch. Note that all the charts have the same y-axis scale. Let me summarize the high points:

The US parts market is recovering faster than the Canadian market … actually, it looks like Canada didn’t get hit quite so hard last year, so there was less room for a rebound. But, Canadian trends still seem a little… bleh.

Overall US parts and accessory sales are still gaining momentum. For some OEMs it will be in the double digits – growth in the same ballpark as year-over-year vehicles sales. Selling a lot of new cars and trucks does not automatically mean that you will sell a lot more maintenance and repair parts for your older vehicle parc. Certainly, accessory sales derive from vehicle sales, but this typically accounts for only 15% or so of the sales total. So, the overall parts sales growth is a result of more things going right with the economy and personal expenditure spending.

Accessory sales are leading the charge across the entire North American market and have been doing quite well in this recovering whole-goods (vehicle) sales market. Double digit accessory-greedy light truck sales growth is a major contributor here. Overall parts sales gains for the OEMs are generally more robust than the IAM, mostly due to spectacular accessory sales.

Collision is growing, as forecasted, based on a reversal of some fundamentals that took place last year (lower speeds to get higher mpg, delayed repair, pocketed insurance checks) and some recovery in miles travelled. This is a curious and controversial segment. LKQ’s organic growth in the third quarter was 8.2%, and there does not seem to be any “organic” momentum building through their current fiscal year. Yet, we do see some growth momentum at the OEMs. My guess is that some cash has freed up at retailers and they are building some inventory for the winter season – the “bullwhip” effect I talked about in previous blogs. This “recovery” contravenes some common industry thinking that postulates that retailers are sticking with their recessionary thinner inventories and relying more on the OEM’s hyper-fast order response times. Occam’s Razor tells us to select the competing hypothesis with the fewest new assumptions. Retailers building winter collision inventories in a recessionary recovery period certainly has zero new assumptions.
Timeout: The bullwhip effect is all about demand magnification throughout the supply chain, caused by a series of independent (and somewhat myopic) reactions of value-chain partners buying inventory in reaction to sales events. As we recover from last year’s recession, consumers will start to buy more … from severely depleted value-chain inventories. Delayed maintenance and repair will transition to upticks in dealer businesses, and independent installer business. Who gets what depends on who has what. The surviving retailers out there will have to compete for this uptick in demand and will want to replenish their inventories, both for what is selling and what they think might sell. Distributors will respond to this with orders on their suppliers. How will they react? They will react from the same nexus of fear … fear that they will lose sales and, worse yet, customer purchase loyalty. So, they, too, will have to replenish (probably over-replenish) for what is selling and what their wizards think will sell. And so on as we move along the supply chain. MIT and others have studied this to death. Bottom line is that a link chain of these sorts of reactions will rebuild inventories and enterprise sales … far beyond what actual demand might be. Just as we all were slaves to the Keynesian Paradox of Thrift in 2009, we will be slaves to 2010’s bullwhip. But the big questions are not only how loud the crack will be, but also, who will get cracked?

M&R sales gains are solid and seem to be more programmatically driven than reflective of a common wave of consumer fix-it-up behaviors.

Domestic powertrain is doing quite well (not much more room for disappointments here – so, from the bottom everything looks up). The Importers have not quite figured out how to sustain growth here- YTD numbers are good, but there’s a lot of month-to-month variability.

Tire sales are increasing. Yet, it seems that we’ve lost some momentum here in the market – Goodyear’s North American overall tire sales seem to be pretty strong.

Bottom Line: The service parts market is in recovery, the IAM has not launched a secret market share stealing weapon, and, due to 2009 cutbacks and capacity tightening, the OEMs are all under-realizing the potential of these market conditions. That is the unintended consequence of conservative forecasting. Hundreds of millions of dollars have been left on the table.

Thursday, November 18, 2010

Supply Chain Dynamics for Hybrids and Electrics

Our industry is capable of some pretty profound “do-overs.” The Chevy Volt and Nissan Leaf are two good examples. Gives me hope in those product guys and gals.

What about our supply chains? Why can’t we design and launch a “do-over” riding on the back of this incredible product innovation? Our industry is in the process of proliferating small volume eco-variants of motor vehicle technology that is very different than our mass-produced combustion engine fleet. The Volt will be a fairly low-volume product with one gas engine, one electric motor, and a humongous battery pack. It will have unique sheet metal and interior trim, with the preponderance of its powertrain components being unique and low volume as well. The Volt and Leaf are not the sort of vehicles that the aftermarket will gladly tool up for. The only parts competition will come from LKQ and their junk car recycling strategy.

These are low volume products with a fair amount of haz-mat, without significant aftermarket competition, targeted at highly educated and influential eco-minded consumers, who do not buy based on an ROI calculation.

So, are we just fine with flowing the service parts for these products through our traditional supply chains? Last week we discussed GM’s bold move of killing Mr. Goodwrench so that Caddy customers don’t get Chevy-ized service – tough move that makes sense. Why can’t we step up to the task of reinvention in our supply chains? Let’s think about it.
  1. First off, let’s think about the margin-math. We expect to see supply chain costs, as a percent of sales, that are reasonable. We mostly focus on the numerator – that’s the supply chain costs. Why not focus on the denominator? We have premium products where customers are making choices that go well beyond driving economics. They will pay more. More for the vehicle and more for the parts. So, if we want to focus on supply chain as a cost of sales, let the numerator drive the denominator … not the other way around.

    Timeout: The main concern with the denominator argument is that while cost of ownership may not matter much for the first round of buyers, it will matter (more) for the 2nd and 3rd waves of buyers, who are the buyers that really matter if these vehicles are to reach critical mass. The optics of high maintenance/repair costs may be more costly than any incremental revenue derived from pricing for the first wave of buyers.
    Timeout: Nah! The counterargument to the above argument is that the maintenance costs for EVs may be lower than conventional vehicles (e.g. no oil changes), so you may as well take back some of those savings with parts pricing. This may be more true of the Leaf than the Volt, which still has a conventional engine tucked in there … that only runs a fraction of the time. One caveat – initially, when the technology is immature, piece costs tend to be high. These high cost parts need to be reasonably priced or OEMs may get harpooned in the press, appropriately, by environmental groups.

  2. Next, we need to think of what’s the best solution for low volume parts. Easy. Single centralized warehouse located in Memphis or Indianapolis.
  3. Transportation? Air freight for all but Haz-mat.
  4. Haz-mat? Easy. Not my labor – outsourced solution.
  5. How do you run a small warehouse? Easy, make it bigger with shared/collaborative partners.

Bottom line: Looks like a great opportunity for working together as an industry, possibly with the assistance of a 3PL. The industry’s been looking for supply chain collaboration opportunities – this one is a no-brainer. It’s in all our best interests to find a low-cost way to get this new market segment off the ground. Talks should begin now, before inertia sets in and we fall back on our existing networks.

Wednesday, November 10, 2010

Death of Brand – Mr. Goodwrench, May He Rest In Peace - David Carlisle

GM announced the death of the Goodwrench brand this week as part of their overall brand clean-up strategy. My guess is that this was not an easy issue to decide on, nor did the balance of pros and cons clearly tip in favor of a yea or nay. Goodwrench, as a brand, did pretty well for about 40 years – huge brand recognition, and its brand affinity was spot on. If I had a multi-brand GM store, it was difficult to open one service bay door and specialize in 3-4 brands of service. Mr. Goodwrench branded the entire batch of GM support that went into extraordinary aftersales support for Chevy, Geo, Pontiac, Buick, Oldsmobile, Cadillac, and GMC truck. It was simple, elegant, and brilliant. Better yet, it worked and was effective. Mr. Goodwrench had huge brand recognition. He “branded” the concept of a trusting, competent, service experience, and he hung out at GM stores. He was feely-touchy that actually worked.

But, a lot changed in 40 years. If we go back a decade and think about brand simplification in a more traditional media environment, it was easy to poke some holes in Mr. Goodwrench. Just who was that guy? Was he a brand of genuine service parts? Was he the tech who worked on your GM car? Was he a Chevy guy? Or a Caddy gal? Did he represent uniform GM service standards? Hard to tell. But, he’s dead now.

Does this mean that all “service branding” is bad? No. I suspect that GM’s decision- making was more aligned with strengthening the basic vehicle brands than with the economic benefits of brand simplification. There’s lots here to think about.

The problem with Mr. Goodwrench was in overall vehicle brand management. Here’s the rub in a nutshell. I buy a Cadillac in 45 minutes; the dealer does not make much from this sale (he makes more from my trade-in); some years GM even loses money on the sale; I become a “service customer” for 4-5 years, spend hours upon hours at the dealership, and I move from the Cadillac brand to a “Goodwrench” brand, … just like my Chevy buddies. OK, I go to the Caddy dealer for the service, but, I get a Chevy-ized Goodwrench service. So, I’m in the market for my next car and I talk with my Lexus buddies. They get “Lexus” service for those 4-5 years. They tell stories about their dealer. It is hard to drink a martini and boast about my Chevy-ized Mr. Goodwrench Cadillac service to the Lexus crowd. It’s just too complicated. Goodbye Mr. Goodwrench.

That seems pretty compelling. Let’s do a 360. There are loads of service-parts brands that don’t have a marquee moniker attached: ACDelco (parts), Motorcraft (parts), Mopar (parts and “performance”), Mobis (parts). In the past few years, Ford launched a different sort of “service brand” called Quick Lane. If you go to the internet you have to be quite discerning to see the link to Ford. Ford’s Quick Lane competes against chains like Jiffy Lube and Firestone/Goodyear. A lot of the customers in this segment are aftermarket loyalist – they are a “lost generation” of dealer customers – once thought of as gone forever and way too expensive to bring back in. Ford’s approach was different than GM’s; they came to the table much later and under very different circumstances. Ford re-branded their offerings to a segment of the service and parts market that they were weak in. Actually, the more appropriate term is they “re-entered” the market. The logic of this is compelling – customers stray away from dealers to do simple maintenance at places where they think they can get a better deal in terms of both price and convenience. Younger, more internet-savvy, customers stray even more than our traditional older demographics. Dealers have age-old poor reputations for price and time-centric convenience. So, Ford has the Quick Lane brand for that sort of stuff. It is separate, but integrated at the same time – Quick Lanes are owned and operated by Ford dealers and they get all the around-the-wheel sales benefits.

Well, they get a little more than that. Since it is associated with a dealer, for these “strayed” customers they get higher vehicle repurchase intent as a side benefit of delivering competent “Quick Lane” service to customers.

The big difference between the Ford and GM strategies was in market segmentation – GM rebranded the entire service market with Mr. Goodwrench, whereas, decades later, Ford re-branded a segment of the market where they had not been competitive.

Bottom Line: Brilliant ideas have a half-life. They progress from brilliant to average, and on to mundane. Goodwrench seems to have experienced that lifecycle – it was a great idea that wasn’t very good any more and could not survive the internal gauntlet of critical brand review. So, it died.

But, I wonder.

I wonder if that gold-plated brand, that still has incredible equity, could have been repositioned much like what Ford is doing with Quick Lane???

Friday, November 5, 2010

Sales & Operations Planning – Miss & Hit

We have been asked on numerous occasions to write a blog on Sales and Operations Planning processes. Dragged our feet on that one for awhile. During the past year we were asked by two clients to participate in such sessions; we did so on a pro bono basis.

One session was disappointing. The expectation of the group was to develop new strategies during the meeting that could make a significant difference in the bottom and top lines. Everybody sitting around the table was pretty smart, so there was little chance that they had not figured out the right bunch of things to do. We spent most of our time frustrated, trying to figure out what had already been figured out. Frankly, I walked away from that session bruised and feeling quite stupid. After all those decades of being immersed in aftersales strategy, I felt as if I drowned at that meeting.

The second session made me feel better. Different OEM with a different mindset. Frankly, I was skeptical walking into the session. The big difference, which I could only discern on reflection, was the increased focus on communication and coordination. Rather than judge our success solely based on whether we walked away from the meeting with the “answer”, we took a more holistic approach to make sure we all understood each other and what we were working toward.

It is important to take a step back and think about the impact that significant strategic change can have on five business success drivers that we hold most dear: assets, structural cost, staff “headcount”, policy, and partner coordination. By just focusing on the top five staff groups in an aftersales organization we can see the impacts of “big” change in these five business success drivers. While business strategy setting is often spearheaded by sales and marketing, the ripples of internal impact are most heavily felt by IT and supply chain – notice the number of red dots in the graph.

It took IT decades to elbow their way to inclusion at strategy tables. They are now seen as key internal partners, because of their now familiar “incrementality” (“so, you really want to do this? well, it will cost X, I can’t start until Y, and it is Z on my list of priorities.”). The supply chain organization is often left out in the dark – not only does its “cost center” designation sometimes relegate it to an afterthought, but it also does not typically possess the clear dependencies of the IT organization nor the air-cover from an all-powerful CIO.

Let’s take a look at our current business environment. The dark days of 2009 are behind us, yet we are suspicious of our “recovery.” At worst, we question if it is a bubble that might burst and, at best, we think that sales growth might settle down to something much more modest. We all like what happened when we leaned-up last year: less inventory assets, lower structural cost, leaner staffing, and higher profits. Organizationally we still like to “peanut-butter” workforce staff allocations and cost reduction targets.

Our industry is pretty smart and has settled on a fairly tight set of key strategies. Many OEMs are convinced that some version of Saturn’s RIM (Retailer Inventory Management) makes the most sense for managing enormous enterprise inventory deployment … but they still struggle with how to accommodate/manage system and facing fill rates, sales and marketing push programs, broader retailer RIM parts coverage, uniform retailer acceptance, and total network supply chain optimization. All OEMs are embarking on aggressive digital strategies to increase market share and/or protect current turfs. These encompass owner centers, rewards programs, extended service plans, B2C, and B2B capabilities. Similarly, all OEMs are focusing on service retention to increase service, parts, and whole goods market share. Some OEMs maintain a “can’t get there from here” perspective, while others have a “can’t get there soon enough” attitude. Finally, finally, we see some movement on mechanical wholesale strategies, which really are critical parts of “retention” strategies. This year’s North American Parts Manager Survey will provide us all with plenty of food for thought in mechanical wholesale retailer perspectives. Accessories are taking off with increased vehicle sales and there’s lots of opportunity to grow faster, better, more-er, and cheaper here. And, the industry seems to be migrating more towards performance-based terms and conditions that act as enablers for the other five strategies. My guess is that this set of six strategies encompasses 90% of the “change” that is taking place at the 30 or so OEMs we closely follow.

So, when we map out the potential impacts of these more specific key strategies on the five business success drivers, we see that all of them have some impact; three have wholloping impacts. This reflects common sense that we now take for granted. Ford rolled out their integrated Daily Parts Advantage (DPA) strategy nearly a decade ago and we are, now, all used to highly integrated strategies. Yet, our strategy formulation processes largely remain non-integrated. We need to fix this.

Bottom Line of What I Learned From My Second Sales and Operations Planning Session:
  1. Involve all major parties that need to be integrated in your strategic rollouts.
  2. Let sales & marketing lead the charge in strategy formulation.
  3. Do not over-prepare or you will never meet.
  4. Do not meet with the expectation of developing new strategies. Rather, meet with the objectives to discuss pre-formulated strategies or to refine integration of these strategies.
  5. Let the conversation flow – do not bring out a stop watch.
  6. Do not be defensive – admit to past disappointments. The best strategies are the result of incremental improvements birthed from program disappointments.
  7. Don’t expect this to be a “one and done” meeting – your primary objective should be ongoing communication and alignment, not necessarily “joint decision making.” Like our RIM systems, if we and our dealers agree on parameters, it does not matter who “places” the order—either way we’ll achieve the same results.
  8. Leave your turf scars and attitudes at the door. Focus on implementing the right strategies at the lowest cost in the quickest timeframe.
  9. Don’t feel compelled to do somebody else’s job. Sales takes care of customers and is responsible for understanding their requirements. Marketing is all about share growth, awareness, and messaging in an increasingly digital world. Supply chain, service operations, and IT are independent enablers.
  10. Have some fun and talk a lot. Continue to do so.

Friday, October 29, 2010

Questions on Dealers’ Ability to Wholesale M&R Parts

We are just finishing the QC process on the latest North American Dealer Parts Manager Survey. This QC process takes a week or so and encompasses things like deleting survey records for parts managers who did not appropriately complete the survey (and other things like checking math for questions that sum to 100%).

I always ask for a quick peek. This week my quick peek was to look into what dealers had to say about mechanical wholesale. The responses surfaced a lot of questions and caused me to re-think some things. We need, our industry needs, answers to some questions.

This blog is all about pictures, so, if you can’t see the graphics, go to our homepage and click onto the blog.

What do you think?

Note: In the charts below each data point represents a unique OEM, with all OEMs organized into natural groups (“Types”). These groups are disguised to ensure anonymity is maintained.

Thursday, October 21, 2010

Together, We Are Smarter!

Thomas Neumann

“The learning of one man does not subtract from the learning of another, as if there were a limited quantity to be divided into exclusive holdings…That which one man gains by discovery is a gain of other men. And these multiple gains become invested capital…” (John Wesley Powell, 1886)

I recently happened to leaf through some NASPC materials from 2001: this was the first conference where we took a look beyond the warehouse to capture supply chain performance rather than “in-the-box performance.” It made me realize that what we take for granted today – this all-encompassing view of the aftersales business, the volumes of research, data, information and knowledge right at our fingertips – was not always there, and made me reflect how we are continuously evolving.

So, let’s take a short tour through Carlisle’s history, focusing on some key milestones of our benchmarking and research activities:
  • 1993: started NASPC (North American Service Parts Conference) as a venue to benchmark parts warehouse performance
  • 2001: expanded our view to encompass the entire supply chain
  • 2002: held first EAC (European Aftermarket Conference) as a sister conference to NASPC
  • 2002: conducted the first North American Automotive Parts Manager Satisfaction Survey to complement metrics with the “Voice of the Customer”
  • 2004: launched the North American Automotive Service Manager Satisfaction Survey
  • 2005: piloted South American Service Parts Conference
  • 2005: piloted first European Parts Manager Survey – for both Automotive and CE/ Ag OEMs
  • 2008: established NASOF (North American Service Operations Forum) to capture and compare key service metrics
  • 2011: expect to launch Carlisle first East Asian Parts Supply Chain Benchmarking
Now, this list – as long as it is - is by no means complete. Many of our clients participate in our mini-benchmarks, which are devoted to specific issues. We conduct end-customer surveys, for our conferences and at clients’ request, that are focused on the hot topics of today, such as service retention, telematics, reman, and the “Digital Customer”. Our Parts and Service Manager Surveys cover the heavy equipment industries in North America and Europe.

In sum, in less than 20 years, our view has expanded from US automotive warehouse productivity benchmarking to an aftersales perspective that covers different industries, functions, and geographies.

We are now observing some of our clients taking the next step, a step towards an aftersales business that is – if not managed – then at least measured on a global basis. In response to client requests, we are preparing for our first Asian Supply Chain benchmarking and are continuing our benchmarking efforts in South America, with the explicit goal to measure performance by a set of globally uniform standards and metrics.

As I’m writing this, we are also conducting a Parts Manager Satisfaction Survey in 15 countries on five continents – with further expansion being planned. Together with our North American survey, covering the US and Canada, this leaves Antarctica as the single continent we do not cover with our research products at the moment – although we do have snowmobile manufacturers among our clients, so I guess it’s only a question of time.

The web-based survey is built around the same template with the same questions in all 15 countries, from Paris to Pretoria and Sao Paulo to Sydney. This template, in turn, is very similar to the template we use in North America. What was surprising to me was that it fit like a glove everywhere, requiring only limited adaptation to simultaneously fit what are considered “emerging markets”, such as Russia, or mature markets, such as Western European markets.

This is a clear sign that the differences – at least as far as the core processes of the service parts business are concerned – between “emerging” and “mature” markets are rapidly disappearing. Dealers/distributors in emerging markets are starting to demand the same level of service and support as those in mature markets. Similarly, one can safely assume that the supply chain metrics that we’ve developed and tracked in North America and Europe over the past 20 years will also fit the benchmarking requirements in East Asia and South America very well.

So, “globalization” goes hand in hand with “homogenization.” While local and regional differences will remain, things are becoming more similar and more comparable around the globe. The mere fact that we were able to conduct a web-based survey around the globe is a clear example for this trend: people need to have internet access to participate – and they do have internet access, everywhere. Internet access was simply a given, not something that anyone thought about.

As a result, as things become more similar and more comparable, it makes sense to measure them with the same yardstick and common methodologies. Everywhere.

The potential benefits are huge:
  • Making a good idea pay off … globally: if you can achieve savings of $X M in the US through implementing one good idea, how much will it be on a global scale?
  • Creating new opportunities for learning: I’m convinced there are things one can learn from what is a happening in emerging markets, simply because they carry less historical baggage.
  • Fostering a spirit of improvement … and competition: no one wants to be “worst in class”, be it in comparison with industry peers or other entities within the same enterprise.
Last, but not least, (and possibly most importantly): Overcoming regional silos and forging a global organization. When it comes to benchmarking, we viscerally look to the outside and typically compare ourselves to our industry peers. Looking at our collaborative benchmarking conferences and the history of our industry’s improvements over the past 20 years, this has proven to be a pretty good idea. But with benchmarking on a global scale, we can now also compare ourselves looking to the “inside,” looking at the same metrics across countries and regions within our organizations. While our spoken languages are all different, common metrics can serve as the language and the basis on which everyone can communicate and exchange ideas. Everywhere.

We are genuinely looking forward to taking the next steps toward a global aftersales business together with our clients – if you are interested in any of our new global initiatives, please contact Sarah Outslay (East Asia and South America Supply Chain Benchmarking; or Thomas Neumann (Global Parts Manager Survey;

Friday, October 15, 2010

Future Shock – Our Evolving Digital Customers

Our digital customers exhibit the following behaviors:

  1. They are young and rely on the internet to research service choices.
  2. They are not as dealer-centric as middle aged and older customers.
  3. They’re cynical and are suspicious of perceived upselling.
  4. They are loyal only to the best, and their mothers.
  5. They will go online to tell friends, acquaintances and strangers about a bad experience.
  6. They drive older vehicles now, but will be buying and driving newer vehicles as they age.
  7. They don’t turn wrenches and, therefore, aren’t as knowledgeable about how their vehicle works and which parts and services are necessary.
And our digital customers are particular about information:
  1. They have higher standards for credible information.
  2. They associate credibility with transparency and independence.
  3. They associate credibility with quality, but will tolerate low quality if nothing better is available. This is especially true if they are first adopters.
  4. They are difficult to satisfy, but will flock to the best imperfect alternative that is available.
  5. They are connected to everybody else and like it that way.
  6. They migrate to newer and better ways of being connected.
Bottom Line: Our whole customer base will exhibit these behaviors within ten years.

Thursday, October 7, 2010

Why I Love Quicklane at My Dealer … And, Why You Should Love It, Too

The Digital Summit is next week in Cleveland. Our Digital Owner survey is in and we had around 9,000 survey submissions – we did most of our analysis on 3,000 participants who were Owner Center savvy and/or internet savvy. One thing we focused on was repurchase intent: vehicle and service repurchase intent. A key theory we’ve had for quite awhile has been that the first point of customer defection is routine oil and filter replacement. If a dealer cannot do this quickly, efficiently, and cheaply, then customers will stray. And, once they stray, well, they keep straying. This chart contrasts vehicle and service repurchase intent vs. quicklane service usage. Looks like our theory is true. This is just the tip of the iceberg.

Bottom line: Dealers need to be in the business of fast, efficient, and cost effective routine maintenance service. Heavy Truck is even moving beyond this and embracing these criteria for common repairs.

Friday, September 24, 2010

Digital Strategies Do Impact Customer Service Behaviors and Intentions

We just completed our Digital Impact Service Survey of 3,000 automotive service customers. We will be reviewing the survey results at the Digital Summit on October 14th and 15th. Here are a few nuggets to consider. Only about 25% of survey respondents use the internet to check the “ratings” of the service providers.

Whew! Not yet.

Of this 25%, 40% switch providers based on ratings, regardless of user age. It wasn’t just the young folks.

Hey, it’s only 25% of your digitally savvy customers that you’ve got to worry about.

Do you think this percentage will be increasing in the future?

That was a rhetorical question.

What do you do about this? The bottom chart tracks customer visits to the OEM owner center (OC) (by non-dealer customers) versus the likelihood to consider the dealer for service. It looks like effective “sticky” owner centers have a pretty profound impact on service repurchase intent. We suspected this.

Bottom Line: We will learn a lot more about the impact of the internet on our owners at the Digital Summit. See you there.

Friday, September 17, 2010

What You Don’t Know Really Can Hurt You – How Right to Repair Is Wrong For Our Customers

We need to think about this one a bit. AAIA’s premise is that customers should be able to choose who they go to for repair. Well, they do that today. But, more than the right to choose, the “Right to Repair” coalition thinks that the independents should have the right to cherry pick among billions of dollars of OEM investments and assets while not having to toe the line in terms of enterprise quality and systemic quality process management. This is remarkable and absurd – seems to be a mixture of communist joint property ownership and process anarchy. Rather than intellectualize how dangerous this is, let’s tell a story. What follows is a series of events (some are made-up composites, others are real composites) that paint a bleak picture of what can happen in the market today. Our OEMs are lock-jawed and narrowly focused on doing what is right for the customer, but not talking much about it. Our dealers are complacent and generally do not understand how to merchandise, market, and inform customers about their fixed operations. The independent aftermarket is an unregulated and largely unmanaged industry fully capable of profound and catastrophic failures. And, our customers range from misinformed to uninformed. Passing right to repair legislation does not even come a fractional step closer to fixing all this.

Customer, call him John Doe, goes to Joe’s Service shop down the street to get the brakes fixed on his kid’s car. It’s the third car in the fleet; old and the latest hand-me-down. Everybody knows that dealers are the last place you go because they are so expensive – so, Joe’s is a completely logical choice. Heck, John Doe’s kid, Mary, is paying for half the repair, so the repair’s got to be cheap. Called the dealer just to make sure they were priced out of the market – it took a few minutes on the phone, holding while listening to somebody else’s music, and, at the end of all this, the price seemed high. Besides, the dealer didn’t seem all that interested in the business. Dropped the car off at Joe’s. He said he might get to it this week, but he’d call when he could get to it and to talk about how much it would cost. Couldn’t hold him to his estimate – it’s a pretty old car and he didn’t know what he’d find. Seems like a nice guy who knows what he’s doing.

That’s what the customer hears and sees. Here’s what he didn’t see or hear.

The Dealer Service Advisor (SA) answers the phone and a customer wants a price for brakes on a pretty old car. It’s John Doe. The SA doesn’t know him, but he does know that the rotors are going to be shot and can’t be turned and still have any safety margin left. Almost immediately he knows from his on-line flat rate manual how long it’s going to take. His shop has a huge investment in tools, lift capacity, customer parking, diagnostic equipment, customer convenience services, staff, and technician training & certification – it’s all amortized in the labor rate. Actually, it’s the dealer General Manager who really knows all this; the SA takes it all for granted – he’s not been trained to sell what you get for that hour. So, he says nothing. But, he’s pretty smart – he won’t tell that customer on the phone what he’s going to charge per hour. He knows it’s high compared to the independent shops – maybe 15% high. The SA doesn’t know that at 15% all that stuff’s a bargain. The SA gets a lot of calls, so he’s learned to be as fast as possible – after all, he’s got all those folks showing up at the counter each day. So, he calls the parts department and gets prices for the brake parts. The parts department gets a lot of calls, too. They just look it up in their DMS and tell the SA the retail price of Genuine parts. They sell Genuine parts, because they know that they are the best. They fit better. They install quicker. They are higher quality. And, they are guaranteed – parts and labor guaranteed. The SA and parts manger know all this, but, it would take too long to tell that customer all this on the phone. So, it never gets mentioned. After a few minutes the SA takes Mr. Doe off hold and tells him the price of everything – all in one lump sum. The SA knows this is an exercise in futility – closing rates on phone quotes is dismal. So, he yawns when he gives the price. Mr. Doe says “thanks”, and the SA knows that this dog won’t hunt. Oh well.

Meanwhile back at the OEM, Service Operations work continues with data mining and problem resolutions to improve how vehicles are cared for and serviced by dealers. New diagnostic equipment is developed and new diagnostic solutions are programmed. New and improved parts engineering for existing parts results in parts supersessions – so, new parts, better parts, are released and managed throughout the supply chain. Technical Service Bulletins (TSBs) are developed that will help dealers’ service technicians with repairs – new ways to save repair time, improve quality, and increase safety. Some of these TSBs relate to those old superseded parts; others relate to the replacement parts. New tools are developed that do better jobs and save time for specific applications. Lots of time is invested in maintaining flat rate labor standards that reflect all this. A fairly large group of staff are focused on dealer technical training and certification. It is important to be technically competent when repairing a motor vehicle. Another staff group is at a call center and gives parts and service hotline repair advice – they give a lot more than advice; they solve unforeseen problems. Service Operations staff are also involved in managing warranty operations and disbursements; this is serious stuff because of parts and labor guarantees that the OEM stands behind. More than that, it provides a huge database of information on how well parts, systems, and processes are working … so, if they are not working well enough, they can be improved. It’s really a team effort. OEM purchasing tests parts and works with suppliers to make sure they are making what is specified … if they do not, they can be delisted and lose the business. OEM supply chain management makes sure the parts get from the suppliers to the dealers in pristine condition. They also collect returned parts and warranty parts for testing. All this costs a huge amount of money; Service Operations is a cost center. These costs are amortized in the cost of Genuine parts. But John Doe hasn’t got a clue all this is going on.

Joe’s Service gets his parts from Manny’s Auto Parts, gray market suppliers, and a dogs-breath of other places. Some of these guys give him bottles of Seagram’s at Christmas. Well, the ones who count do. The gray market suppliers get their parts from dealers all around the world … when dealers can’t return a part to the OEM (it might have been superseded or damaged) they can sell it to the bottom-feeders … who proudly display the OEM label and call it Genuine. Well, it’s not … it’s a junk part. Manny gets his parts from a whole bunch of other suppliers. They come in and buy everything in a brand’s line (like brake parts and rotors), junk it, or sell it to bottom-feeders in another country, and sell Manny their stuff. Manny doesn’t care. He’s in the business of selling parts and making money... and getting bottles of Seagram’s at Christmas from his suppliers. The stuff he buys can be sold under the price of the real Genuine part, because these manufacturers don’t have all the quality management costs that the OEMs have. If the stuff Manny buys doesn’t work, he sends it back and no questions are asked. Some of Manny’s suppliers get their stuff from third-world emerging markets. It’s reverse engineered and looks like the real thing. Some industry groups and third parties proclaim that reverse engineering can result in a better-than-Genuine part – Manny uses this line when he talks to his customers. The differences are subtle, the content might be degraded, and the overall quality is more a function of serendipity than rigorous QC. But, it’s cheap. Manny’s latest brake short-line is GoodEnuf Brakes. Manny stands behind it – hasn’t a clue of what he’s standing behind, but he does this nevertheless. The salesman is a nice guy and gives him bottles of Seagram’s.

GoodEnuf Brakes is a small company, but they strongly support their independent aftermarket trade association. Sends them good sized checks to help break the OEM stranglehold on a broad array of diagnostic and technical repair information – right to repair stuff. The trade association hires lobbyists to craft “friendly” legislation at the state and federal levels. The trade association also makes political contributions to friendly legislators. It takes a lot of money and patience to change the laws of the land and buy some good old American justice for their clients.

Jim Straightlace is the CEO of an OEM and he’s under a lot of pressure to cut costs. The media’s been ripping him apart for his lobbying costs. He finally caved and cut this line item. It’s just too difficult to explain it to the media, shareholders, institutional investors, and government watchdogs. Hell, his kids read the newspapers (on-line) and have been ribbing him every chance they get.

Joe at Joe’s Service is a nice guy and just trying to make a living. His niece wrote up some really nice reviews for him on the internet, so he’s 5-star rated at some websites. His shop is small and usually pretty dirty; there’s no waiting room and the customer parking lot also displays wrecks and used cars that Joe sells on the side. Joe was not very good at book learning; he got his degree at the U of Hard Knocks. He derides dealers and the big shops as being “big business.” He doesn’t have a budget for a lot more tools, the most modern state-of-the-art diagnostic equipment, technician training, fancy waiting rooms, coffee and doughnuts for customers, loaner cars, shuttle service, service advisors, and technical hotline support. He really doesn’t do all the work, either. He’s got a helper. Kid can’t read or write too well; doesn’t talk much either. That’s OK. No “big business” rules tell Joe who to hire or what to do. Kid does what he’s told and fixing brakes is a breeze. Kid can ask Old Joe if he gets into trouble. Joe generally understands what the kid is saying. Mr. Doe comes in and wants his little girl’s car brakes fixed. Joe said he might get to it this week, but, he’d call when he could get to it and to talk about how much it would cost. Said to Mr. Doe that he couldn’t hold him to his estimate – it’s a pretty old car and he didn’t know what he’d find. Throws the keys to the kid and tells him, sort of, what to do. Kid finally brings the car in puts it on a lift and removes the brakes and rotors. They’re shot. Kid doesn’t check the VIN; doesn’t see if there are any TSBs, supersessions, or recalls by calling a local dealer. Remember, talking is not his specialty. So, he calls Manny’s and barks out an order for the parts he needs. He simply ain’t got too many words. Manny sends over cheap brake parts he’s lucky enough to have in stock from his latest short-line emerging market supplier. GoodEnuf it says on the box. The installation instructions are comical in their brevity and lack of utility. No matter. The kid can’t read too good. The kid’s pretty good with a hammer, and will try anything to get all the parts in the package used in the job. Well, most of the parts, anyway. Besides, the brake parts don’t fit too well and it takes a lot longer to replace them than Joe thought. Joe calls Mr. Doe and tells him that there was a lot of rust and they had to be extra careful not to damage the wheel bearings during the job. That always works. That’s why it cost so much. Mr. Doe still thinks he got a bargain with Joe’s 15% lower hourly labor rate and using less expensive “high quality” aftermarket parts. After all, don’t they all meet or exceed the OEM spec?

Mr. Doe pick’s up the car and proudly gives it to his little girl, Mary. Just in time for prom night. Mary doesn’t drink. She gives the keys to her date that night. He drives. It rained and the roads are wet. Shortcut back home goes over winding roads. Approaching the curve a little fast. Apply the brakes.
… Well, as Dirty Harry would say, “Do you feel lucky?”

Bottom Line: Our industry would be nuts not to fight right to repair legislation. Joe’s is modeled on some local independent repair facilities (IRFs), so, his story is not an exaggeration. But, he’s certainly not representative of IRF “best” practices – he’s more like a nexus of bad practices. But, that’s not the point. There’s nothing out there stopping “Joe’s Service”, managing “Joe’s Service”, or making sure “Joe’s Service” does it right. Joe can’t lose his franchise if he screws up or underperforms. Right to Repair doesn’t help Joe’s Service do better work – it only gives him, and all the other IRFs, more credibility at somebody else’s capital expense … but with no more responsibility. It is a real bad idea.

Friday, September 10, 2010

What About Collision?

I hosted a Webinar for VW’s wholesaling dealers last month and talked about where the market is heading. VW is very creative with their leveraging of NASPC resources. Basically, TJ Dolliver and his folks said they’d help my brother find a convertible Bug if I did this for free. Outfoxed again – me, that is. After the Webinar, I told TJ I’d do the next one free of barter restrictions – maybe a t-shirt. The real creative bent on this Webinar wasn’t so much the negotiation, it was the application. We collect all this data for the industry. We feed it to you in April. We see that things are getting better. We know the root causes of what went wrong and the drivers of recovery. We understand what’s going on in the retail environment via tens of thousands of surveys each year. Yet, our retailers are still suffering from a recession hangover and are reticent to buy more inventory and hire more staff. These are the two big show-stoppers we all talked about in April.

Overall, it looks pretty good out there based on recent Market Watch results. The only fly in the ointment has been collision. LKQ/Keystone, the junk car-parts company, has been going gang-busters this year vs. last year. What’s going on? VW’s wholesaling retailers filled in some of the blanks for me. Retailer GMs are still shivering from last year’s melt-down and are being very conservative. They don’t see what we see, or they don’t really believe what the factory guys tell them. So, they have clamped down on investment in both inventory and staff. And, in the process, they are missing the market. The clips are from this week’s Detroit News. Last year, miles traveled stalled and accidents were way down – from fewer miles, lower speeds (to get higher recessionary mpg), jet-stream weather impacts (drier winter in the NE), and better vehicle safety features. Furthermore, last year folks pocketed their insurance claim checks as part of their cash conservation plans (there must have been dancing in the streets at some insurance companies due to low-ball estimation procedures). All this led to a real contraction in the collision market during 2009. 2010 is not 2009. Things have changed, and the market is coming back – recent government data shows we are out of the nose-dive in miles driven, there’s more pent-up celebrations, less cash conservation, more aging ugly dents that still need to be fixed … hence, more collision parts demand. Similar logic applies to all wholesale demand. And, while our retailer GMs maintain their grim recessionary reticence with cash and cadres of staff, junk car-parts companies like LKQ, and the independents, are having a ball.

Bottom Line: VW’s a pretty smart company. We need to use every tool possible to communicate and educate our retailers.

Thursday, September 2, 2010

Digital Devastation: How the OEMs and Dealers Are Being Disadvantaged By the Internet Hurt Locker

The big theme this year at the NASPC was “collaboration.” No area is riper for collaboration than the Digital frontier. The research for this blog stemmed from a recent family vehicle repair – it took me about 5 minutes. I would have done this for a more recent brake and rotor replacement on my Chevy Suburban, but RepairPal had no listing for my Chevy dealer (located about 2 miles away). The only Chevy dealer listed was 9 miles away, was un-reviewed, and had a 3-star rating. The un-rated independent shops all had over 4 stars. I find this to be disturbing. Hence “Digital Devastation.” All major players are showing up at the NASPC Digital Summit on October 15th. We will present a collaborative model for a digital presence that overcomes the digital “hurt locker” populated by planted social media postings, incompetent trade organization research postings, and “show me the money” third-party aggregators. My fear is that the OEMs will try to down the digital T-Rex with an ineffective flurry of pellets from a shotgun blast, rather than work together on a more effective rifle shot. So, be patient.

I had dinner with my daughter in NYC last month. She works for a large book publisher. She and her friends are very literary. So, during dessert Rebecca talks about one of her literary friends who recently quit her job working for a restaurant chain. Walked in and said, “I quit.” “Not so fast,” the story goes. The chain manager knew she could write like a wiz, so they negotiated a severance package that included 150 reviews of his places using, of course, different “voices” and idioms, so they’d be authentic. Rebecca was not talking about the crap one reads in social media, she was talking about interesting ways to make some money.

OK, it’s just a story. Hmm. Maybe not. I went to RepairPal and asked to find some shops close by that would service my Range Rover. The stars under the name of the service provider indicate how well regarded these stores are. I really loved these. Joe’s CITGO pegs the top chart with 5 stars and one review. There’s only one dealer on the page, Land Rover Metro West; it has no reviews and, curiously, 3.5 stars. All the others that have not been reviewed have 4.5 stars. Guess being a dealer gets you nicked by a point. Went to DealerRater and checked up on my Land Rover dealer – they gave it 4.9 out of 5. Hmmm.

Joe’s CITGO looked pretty nifty. So, I asked RepairPal for close-by service specialists for an old discontinued Chevy Geo. Joe nailed that one too. He’s 5-star rated on Land Rovers and Geos. His technician training costs must look like Harvard’s endowment. Hmm. That Joe!!!

Then I looked up the cost of front brakes and rotors, because we just had this done. RepairPal gave me back a range of prices (my cost was in the range) that visually indicated that the dealer was more expensive than the “independents.” Now, in my case, the independents – “Midas” – was more expensive than the dealer … they used “blizzard pricing” that includes a confusing array of parts, processes, options, and optics that confuses the crap out of you. The dealer just told me what he’d charge. The third-party web sites didn’t capture this very well. I thought the reason that Midas’s quote looked so good (sidewise & upside down) might be because of cheap labor rates. I looked up labor rates in Acton using AutoMD and found that the local Ford dealer was pretty much in-line with the independents. There were simply too many choices, so I looked elsewhere. Labor didn’t seem to be a big factor on that search.

I continued to think about that Midas brake job with blizzard pricing and wondered about the parts they used. I went to, where smart car buyers start, and researched “aftermarket parts.” They advised me to “shop around, make sure you’re dealing with a good mechanic and request high-quality aftermarket parts.” Great advice to most folks who don’t know how to top off their wiper fluid (let alone figure out if someone’s a “good mechanic”) and who don’t know the difference between cheap bacon fat and butter (which resembles the difference between aftermarket parts and Genuine).

These are just a few easy examples of the “Digital Devastation” mounted against car dealers and OEMs. I didn’t have to work hard at it to come up with these examples, and I wasn’t selective in the process to help build my case. The internet is the next consumer “service” battlefield, and there seems to be only one army out there. Social media and third-party sites are foot soldiers and mercenaries of the independent service and parts providers.

Bottom Line: We need to do something about this. We will talk about this at the Digital Summit on October 15th. Carlisle & Company accumulates an annual treasure trove of information that supports our belief that dealers are actually pretty good choices to make for getting your car or truck serviced. For the past 20 years we’ve kept this information “in the family.” I think it is time for it to come out of the closet. We need to develop a robust AAIA-like web presence that has:
  • Sticky Content: Customers only return to websites that provide robust information that has high quality broad-based utility and provides simple, tangible value. It has to be at the top of the list of places-to-shop. It needs to be the portal to OEM owner centers, vehicle shopping sites, service parts information, recall notices, user manuals, service intervals … and much more.
  • Quality Information: Customers want easy access to information to make better choices. Why not give them that information? Why not rate service providers on the stuff that really counts: technician education and skills? Conveniences like loaner cars and rentals? Waiting rooms? Why not publish costs of common repairs and maintenance that show dealer and independent costs? Why not do this using statistically fair ground rules?
  • Customized/Savable Search Criteria: Let digital customers choose how they rate alternatives – hey, Netflix customizes its ratings. This could be done with a simple survey that new customers take. Have them make choices that change how each service alternative is rated. For example, do they want Genuine Parts or aftermarket? (Do they know the difference?) Is labor cost the most important thing, or is total cost? Do they require any convenience things … like waiting rooms, loaner cars, or shuttle service? These could be used to build rating profiles like “El Cheapo” to ”Treat me like my Mother.”
  • Research: Post our research that shows that dealers really are not more expensive in many repairs. Why not translate all that information that we, and the OEMs, collect into bite-sized chunks for digital service shoppers? The facts are friendly.
  • Education: Educate consumers about the choices they have and the information that they use. Joe’s CITGO isn’t an expert at either Land Rovers or Geos. RepairPal simply assumes he is. Why not explain what you get for higher labor rates – things like training and certification. Why not explain the advantages of “Genuine” parts?
  • Customer Reviews: The honest facts should be friendly. If customers want to review service outlets, then we need to make sure that these reviews are not bogus. Dealers should not be dinged by one star just because they are dealers.
  • Lead Aggregation: Accumulate Google search term requests for parts and service (“Capture”) and connect these requests to appropriate dealers (“Connect”) and help close the lead.
  • What “Genuine” Really Is: In language that people can understand, eliminate the confusion between what “Genuine” parts are vs. the aftermarket. No, Edmunds has it all wrong – reverse engineered aftermarkets parts are not better and should not be requested. We talked a little about this last week with collision parts, and we will continue this journey in subsequent blogs.
  • Lobby Information Support: AAIA is very aggressive at fighting everything that the OEMs try to do to protect the sanctity of “Genuine” and the circumstances regarding warranty coverage. Most recently, the AAIA lodged a formal complaint with the FTC against Honda’s stipulation that Genuine parts be used to preserve its warranty covenants. Honda is fighting that battle pretty much alone – and it is a battle front and center to most OEMs looking at higher quality products with more comprehensive warranties.
  • Field Support: We have tens of thousands of dealers out there that could be much more effective with social media and showing up in the top–ten of any search. We need to support this web presence with SEO/SEM/SMO (Search Engine Optimization/Search Engine Management/Social Media Optimization) consultants that could advise, train, and shepherd dealers to make them more effective in doing war on the Digital Frontier.
Please email us back your thoughts on this – I think it is a pretty big issue. Also, I’d like to hear back from you about your thoughts and actions concerning the right-to-repair legislations that are cropping up in Massachusetts and elsewhere. Thanks, David