Wednesday, January 27, 2010

Dead Brand Society

Saturn is dead. Pontiac is dead, too. Saab was pretty much dead until Tuesday’s email alert from Automotive News; maybe Spyker will buy it. In 2009 we lost some iconic brands; two with incredible name recognition. How could this happen, especially to Saturn? They were still selling nearly 200,000 vehicles in 2008. That’s a lot of vehicles – in fact, it’s more than Kia sold in 2008, and Kia is seen as a very healthy brand. Saturn set the industry standard for customer treatment, coddling, and satisfaction. It invented RIM – retail inventory management for distributing service parts. Customers made the pilgrimage to Spring Hill Tennessee to eat barbecue at the plant. For most of its life Saturn did what guys like Thomas Friedman think is the right thing to do: focus on making economical small cars that America wants, and not help destroy the ecosystem and spirit of American can-do competitiveness by making those big fat gas–guzzling profit-rich trucks. Hey, Tom’s got a Pulitzer. Does he deserve it? Lets see.

How could Saturn die? Easy. It was a brilliant execution of what we now know was a stupid business model. Understanding Saturn’s demise explains the plague that hit all three dead brands.

There’s a bunch of ways to look at this. One way is to nod your head right to left, say something witty, and blame it on Detroit. Or, you could use your brain and congratulate the Big Dog (GM) for doing something really smart, and maybe a little late. They shoot horses, don’t they? I’m in the latter camp; sometimes you just have to cut bait. How does a dreamboat brand get to a point where you need to pull the life support plug? It’s all about the numbers. Let me explain.

I have about 25 years of hard-knocks schooling, including three learning “segments”, that got me to where I can now welcome SaturnPontiacMaybe-Saab to the Dead Brand Society. Let me summarize.

Learning Segment 1: Market Entry Planning. In 1984 I was on the Hyundai market entry team and wrote the aftersales plan. In 1990 I wrote the entire Kia market entry plan. Now, I can take no pride in their success – all I did was to help out and say that, hey, it made sense to come into the market. Once they hired-up, they threw out the plans and brought in remarkable talent like Hyundai’s Frank Ferrara. Frank was ex-Toyota and was a part of the ex-Toyota team that made Hyundai aftersales an NASPC leader company.

OK, all this is a long wind-up to understanding the key secret make-or-break market entry number. 15%. A new distributor in the 1980s and 1990s needed to buy and sell product, support it in the market, and make money with a 15% gross margin. Let’s put this into context. If the average whole goods product wholesales for $20,000 (a today number), then you have $3,000 per vehicle to play with. Warranty costs are passed on to the factory, as well as all/most of the technical support infrastructure. You have $3,000 to play with to pay your staff, pay your rent, and do all that stuff you need to do. Some more context. If you sold 100,000 units, you made $300MM. Even if you needed a ridiculous amount of “distribution” staff, say 1,000 people, you’d still have $200MM left over to pay for advertising, IT, and company jets. 20 years ago, if you had any reasonable amount of confidence in your sales numbers, “Coming to America” was a really great deal. The distributor money was so good that I even got a chance to work with Armand Hammer on a deal.

Back then 15% was plenty.

Back then.
By the way, typical distributor agreements stipulate sales volume commitments (banded) out at least 12 -24 months, saddle the manufacturer with standard warranty costs (e.g., warranties that are not disguised incentives), and strive to push extraordinary incentive costs upstream to the manufacturer. There is some give and take here. Most distribution agreements were crafted before we understood the ultimate evolution of rebates and incentives.
Learning Segment 2: Lee Iacocca and The Catcher as a Pitchman. Lee smoked cigars on TV and told America that if you could find a better car, buy it. And once he rolled out the rebates and incentives, they certainly did buy it. OK, it was Joe Garagiola as the pitchman in 1975’s Chrysler Carnival of Savings. Iacocca changed the industry with the minivan, American Idol CEO role model, and by transforming Garagiola’s incentives Carnival into what has become a nuclear dawn for the industry. Back then, incentives could tally up to $1,000 or more.
OK, so where am I. I make $3,000 a pop on each vehicle, I sell 100,000 of them, I have a ridiculous amount of staff, and now I’ve got to pay $1,000 a vehicle to compete with Lee. That sill leaves $100MM. I’m good. Well, er, as long as it only takes $1,000 a pop in rebates and incentives to sell 100,000 units.
Thousand bucks? That turned out to be a pretty stupid assumption.

Learning Segment 3: Whole Goods Revenue Management. I spent 3 years at an OE figuring out how to price cars and trucks. I learned that there were a lot of moving parts to this process. I also learned 4 important things:
  1. Historically it was hard to make money on small cars, because the Asians have great product in this segment, pour a lot of money into product refreshment, and have/had lower enterprise cost structures. They also have materially lower R&D costs.
  2. But, everybody knows that you have to be competitive in small car, because it is the first rung of the step-up ladder. You first buy used; first new is small and cheap; end up being buried in a Caddy.
  3. It costs more than a billion dollars just to develop a new transmission. Wow. And there are a whole lot more parts in a vehicle than a transmission.
  4. Just because a truck or Coup de Ville is a lot bigger than an Aveo does not mean that the R&D and production costs are proportionate to the retail price differences. You make your profits on the big stuff.
Bottom line, outside the simple tasks of “distribution”, it is hugely expensive just sustaining a presence in our highly competitive market. If your product line is broad enough and you have enough product in the high-margin sweet spot (large car and truck), you can make some good money. That explains why Toyota and Nissan built truck plants in the US.

Remember, nobody makes much of anything making small cars.

Fitting the puzzle pieces together. Well, it is all about four numbers. (1) fixed costs associated with production, (2) variable production costs, (3) distribution incentive costs, and (4) R&D return on investment expectations. Incentives started skyrocketing in the 1990s. At times, high-end brands like Saab spent more than $5,000 a unit to push the car. Mainstream brands went through cycles where they spent thousands of dollars per unit in a myriad of incentives – neatly tucked into some exploding piles. Like subvented lease car programs that completely missed the mark in estimating residual values. The Coming To America assumption of a thousand dollars a pop was blown out of the water.

Unfortunately, part of Saturn’s DNA was non-negotiable one-price selling. This pretty much prevented rebates – but did not prevent some forms of dealer incentives that eroded margins. Classic pricing elasticity went into effect and the net impact of competitive incentive spending made Saturns appear more expensive … so, sales volume fell. Saturn’s economic business case collapsed like a house of cards. The market really is efficient. The only way Saturn was going to get the volume necessary to make its business case pencil was to vastly lower its transaction prices … and that would not leave sufficient margin to make sense continuing the Saturn experiment. Furthermore, lowering MSRPs erodes residual values, so when you lower prices for this model year it translates into a 3-5 year cumulative effect … especially for lease cars. Checkmate. GM’s pretty smart. If something doesn’t work, try something else. They did that with Saab for 20 years and came to the conclusion that there was no “else” there. Same with Saturn and Pontiac.

Endgame. Saturn’s shrinking sales numbers increased the fixed cost apportioned to each sold unit, and there were not enough manufacturing economies to accommodate this. All this gouged distribution and manufacturing margins and made the R&D ROI look lousy. Voila, a dead brand. The same thing happened to Pontiac and Saab, with a somewhat different twist. Pontiac and Saab maintained competitive incentive spending, which propped up volumes somewhat (in 2008 Pontiac sold over 250,000 vehicles). But, the end result was the same. Bad R&D ROIs; dead, or almost dead, brands.

But, why couldn’t Roger Penske save Saturn? Let me make some guesses. Remember, he’s a pretty smart guy. The Saturn product development ROI was terrible for GM and they would be hard-pressed to provide product beyond a certain, fairly short, contract horizon. The numbers simply were not there. So, Roger went to Paris and looked for another manufacturer. Thus, he could join the group “Coming to America” and become a simple distributor … and live off his 15%. But, he could not broker a deal. My guess is that Roger was pretty tough on forcing warranty costs back to Paris (French cars do not have a Toyota-like quality reputation in the US), as well as being pretty tough on ensuring that a lion’s share of incentive costs be directed to the factory; this mitigated risk. The Saturn dealer network needed 150,000 vehicles a year to be healthy, and that’s a good portion of an annual assembly plant’s production. But, that’s a lot to sign up for. Signing up for the cost of product development was a lot, too. The numbers just did not work. He should have gone to India, Korea, or China. Dead brand.

Bottom Line. Saturn and Pontiac both had cancer and were destined to die in last year’s economic plague. It is important to understand why they died, and why it was inevitable. Otherwise, we will think about it, use our hearts to place the blame, and walk away with something that we will have to un-learn. We might have to unlearn any misplaced beliefs that Detroit was really dealt a full house with Saturn, Pontiac, and Saab … and they simply blew it. Saturn was a brilliant creation that will persist as a benchmark for the industry to chin up to. Including Toyota. The reality is that you can still Come to America and make a fortune, but, you can’t always Build In America and hope to win. Cost differentials are simply too big. That’s why Levis are not made here any more. That’s why global sourcing is big and here to stay. These brands died because their business models would not, in any way, pencil. The shame of it is that they did not die sooner. GM might have had billions of dollars, sooner, to invest in different products with better business models.

How many brands, strategies, beliefs, and legacies do we all have that need to be put out of their miseries because they no longer pencil? My guess is a lot.

Tuesday, January 19, 2010

Parts Sales Bullwhip In 2010

Through our collaborative forecast processes we’ve seen a certain amount of conservatism by the OEMs in forecasting parts sales for 2010. The recession’s paradox of thrift took a big chunk out of sales in 2009, but, now with recovery, what about a resounding rebound? Nobody’s looked very hard at the “bullwhip” effect on 2010 sales. This phenomenon, alone, could have as profound an impact as did the recession’s paradox of thrift. We’ve heard that the bullwhip effect could increase enterprise manufacturing sales by 65%, based on negligible increases in end-customer sales. It could lift sales, alienate customers, shift market shares, or most probably do all of this in the most unsatisfactory fashion for the OEMs.

What do brake rotors have in common with disposable diapers? Easy. The bullwhip effect – P&G surfaced this phenomenon in 1990 with supply chain problems seen in its diaper product lines. I was at Colgate-Palmolive as we tried to compete with P&G – they simply dominated in this space.

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?

Let’s walk through this.

Think about a typical customer. Recessionary market research shows that one immediate reaction to the horrific recession was to delay maintenance and repair, drive less, and conserve cash. Customers across all segments showed extreme buying conservation that was magnified by a depression-era attitude of thrift. Now, the interesting thing here is that we saw more survivors than we ever expected in our dealer and supplier groups. How did they survive? Well, they did the same thing John and Mary Doe did; they bought less and lived off, as best they could, depleted inventories. Backorders were not so good, but we all had bigger things to worry about. What about the guys in the middle of all this? The OEMs? In 2009 cash was king; inventory = cash flow. We all did the same things: cut back. All that was okay in 2009, because we had to survive and sales were in a free fall – if nobody is buying anything, then why do we need so much? What did we all hold on to? We kept our mission statements that said the customer was king and that we were all customer centric organizations. Pretty much paranoid about it. So, we worried about dips in loyalty – customer and dealer – but, it looked like we were all in the same sinking boat. So, we were okay.

Just read the papers and you can see that customers are crawling out of their conservation caves and starting to drive and buy more. So, these M&R delay cycles will be reduced and the absolute demand for M&R will increase. Heavy Truck will see the same thing. Ag, kinda. Construction is on a different periodicity with some different problems and non-problems. One thing’s for sure, customers will be out to buy more service in 2010 from retailers with depleted inventories. If parts delays result in service delays, customers will shop for alternatives. We all do this. And, we all know that once a customer strays, it is exceedingly difficult to get them back. Good dealers know this, too.

The OEMs must be asking themselves if they will hear those siren songs of a loud whip crack. There really are two issues: (1) how loud will the crack be?, and (2) will they feel it or will others benefit from it?

How loud will the crack be? One problem is with access to money – money to buy whole goods for sales lots and money to buy parts inventory. Money supply at the regional banks is still very tight and OEM financing is like getting water out of a dry well. The money supply will increase, but at a slower pace than we’d like to see. So, when customers return and ignite the service and parts bullwhip, dealers are less likely than ever to respond with orders that represent inventory expansion. Another “crack muffler” is how well, and effectively, the OEMs have integrated their supply chains. OEMs with few echelons of distribution will have less of a magnification of the link-chain reaction to sales events. Vendor-managed inventory (including ship-direct) and well-executed RIM strategies will also soften the whip crack for the parts they represent. OEMs with high backorder rates and sub-standard supplier responsiveness will find it difficult to improve in these metrics without contributing to the crack of the whip. Similarly, if your inventory management and forecasting systems are old and squeaky, and you’ve reduced staff support in this area, it is time to look for another job. Since this “magnification” represents OEMs buying more inventory, that’s probably not going to happen in 2010. So, certain, let’s call them “unsatisfactory,” levels of service are bound to persist throughout 2010.

So, who benefits from the whip crack? Darwinian evolution has left us with a pretty smart group of dealers. In the absence of improvement from the OEMs, they will simply increase their purchases from the independent aftermarket, because then they can “kan ban” production in their service department with parts deliveries every 45 minutes. This makes sense – the independent aftermarket’s supply chains generally emerged much healthier than the OEM’s after 2009’s market collapse. Think of the “whip crack” as resulting in a certain amount of parts sales from either magnified inventory replacement or market share shifts. The whip is certain to crack. Some OEMs will change and benefit. Others will suffer from lower dealer purchase loyalty and market share shifts.

Bottom Line

The bullwhip is just as inevitable as the thrift paradox. The big question is who wins and loses from the crack of the whip. You will know you have trouble if your backorders are at all-time highs – this means that your suppliers have cut back capacity and operating costs. If your supplier on-time performance is low, then you know that you are at the back of the food chain when the kitchen warms up. In fact, if there’s any truth to the science of the bullwhip effect, inevitable replenishment order magnifications will place significant order increases on first/second/third tier suppliers. This, coupled with tightened supplier capacity and diminished labor forces, means that things can only get worse. If RIM compliance is an issue or your RIM parts represent a narrow range this is a danger signal. Well-running ship-direct strategies are winners. Look at your average dealer inventories. If they made significant cutbacks, then they will be unprepared for the recovery. Now, I don’t want you to worry about them – they know how to survive. They will take care of their customers; if you don’t step up, it just won’t be by using the stuff OEMs sell them. They will apply Toyota Production principles, just like the OEMs do, and get it from suppliers who can get parts to them just in time for the service event.

If it all looks bad, what do you do? (1) Really focus on RIM performance and compliance, and (2) you will need to change your terms and conditions to be much more favorable than the aftermarket, especially payment terms. If you can’t do this, you should talk to your Fidelity rep and buy aftermarket stocks for your 401K.

Wednesday, January 13, 2010

58,976 – Transformational Objectives For 2010, Part 2

By Harry Hollenberg and Michael Sachs

You will recall that last week we started the discussion about transformational objectives. The key message was that it is more important to set an aggressive but plausible target than to endlessly debate which one is right or whether the one chosen is perfectly relevant. We set out to tackle target-setting for the entire service parts enterprise. To that end, we covered the following topics last week:
  • Supply Chain
  • Sales and Marketing
  • Service Engineering
This week, we will wrap up this topic by discussing the following topics:
  • Service
  • Revenue Management
Service – Service is the most secretive and introverted of the aftersales subcultures. It is probably the most important organization in a motor vehicle organization – simply because stuff breaks and customers want it fixed now. What are the transformational metrics here?
  • Owner service satisfaction impacts whole goods, parts, and service repurchase loyalty: best-in-class as measured in the North American Service Operations Forum (NASOF) for customer pay work is 83%. (Surveys vary among OEMs and there is no concerted effort to eliminate dealer “gaming” of the surveys. So, we have a long way to go in this area – but, in keeping with the spirit of Cat’s 58,976, we should not skip this one because it is flawed.)
  • Fixed-right-the-first time ratios have a direct impact on customer satisfaction and customer retention. Here, the metric is not FRFT, so lower is better: best in class at NASOF is 4.4% of vehicle visits .
  • Overall dealer service manager satisfaction is a pretty good surrogate for how well things are going with dealer service support: best-in-class overall NASPC service manager satisfaction is 97.6%.
  • The litmus test satisfaction survey response for service managers is technical support – this is critical in fixing it right the first time: The BIC for the NASPC service manager survey is 96.7% satisfaction with overall technical support.
We hear a lot about service capacity as being a key transformation factor. However, the numbers do not support this. Service technician capacity and efficiency certainly can be a choke point at the dealer and impact service satisfaction and repurchase loyalty. However, there is really no correlation between capacity and owner satisfaction. The company with the highest reported level of customer service satisfaction has “best-in-class” 300 new-to-7 year old UIOs per dealer service bay. If your number is less than this, you don’t have a service bay capacity issue.

Revenue Management (RM) – This area is too often overlooked. Each OEM needs to regularly price what could be over a half-million part numbers in a manner that optimizes its margins. What do “optimized” parts prices mean? It means that customers are OK with it, any possible volume losses are acceptable, and the margin improvement potential dwarfs anything else we could do. How do we know if we are any good at it? We tend to go to our pricers and ask them how good we are. They typically respond that they are doing everything they should be doing and can respond brilliantly to a long list of “are we?” questions.

The problem here is that gross margins are terrible metrics to use for setting transformational objectives – they are the result of a simple arithmetic calculation relating costs (might be too high or too low) to sales (might be too high or too low). Rather than results metrics, we need to focus here on process metrics – sort of like a Seventeen magazine 10-question quiz about the quality of boyfriends. Few have organized revenue management as a core competency. Here’s the 10-question quiz – best-in-class score is 10.
  1. Segmentation enables you to optimize revenue for like-acting parts. Do you use rules driven categorization of parts into competitive, internal, and less competitive segments (Possible metric: Split of competitive/less competitive parts/revenue)?
  2. Market Research enables you to check on how well your prices and margins match with relevant competition – the operative word here is “relevant.” Do you have a consistent process to collect market research data and use it in pricing decisions (Possible metric: % of parts with market research/competitive info)?
  3. Pricing Strategy should be developed for each separate segment with incredible precision to optimize margins. Do you use a defined pricing strategy to price parts in each segment (including dealer margins), driven by pertinent market data (Possible metrics: % parts above and below target/benchmark price; average price premium or discount relative to market benchmarks)?
  4. Revenue Management Organization that is highly capable, skilled, and well equipped is the only way to get all the work done – hotels and airlines have really focused a lot of investment here. Do you have defined roles and responsibilities for pricing (Possible metric: part numbers per pricing headcount)?
  5. Life Cycle Management is critical for optimizing margins, because it recognizes that parts transition from one RM segment to another over time. Do you move parts from one segment to another based on specific triggers, such as volume changes, age, etc.?
  6. Pricing Workflow Management is critical for effectively managing the sheer enormity of the RM process. Do you have alerts and approvals?
  7. Margin Management by Segment provides a cross-check of the outcomes of pricing strategy (#3). Do you have relatively higher margins on less competitive parts and lower margin on competitive parts?
  8. Promotions Management must be incorporated into revenue management and pricing, because of the impact this has on the bottom line. Do you have a rule book and process to structure and evaluate future promotions?
  9. Terms and Conditions Management also must be included as a part of revenue management because of its huge bottom line impact. Do you consider the costs and benefits of your terms and conditions in managing your revenue?
  10. Product Coverage Effectiveness allows you to climb on top of the mountain and assess the competitive landscape. Do you actively track market size and share by key product segments?
Bottom line. We’ve provided you with a set of metrics that you can use to set transformational objectives across the OEM aftersales business. Your job now is to identify those areas most in need of transformational change, set objectives, and strive to achieve them. Pick your metrics and objectives with care, but don’t spend weeks arguing over the details.

To help you get started, NASPC conference participants can email Brian Crounse ( and ask for our Transformational Objectives Scorecard. It is a spreadsheet with these (and last week’s) metrics, with BIC and worst-in-class (WIC) filled in. Key in your numbers and see how well you do. Non-participants are also welcome to call to learn more.

Wednesday, January 6, 2010

58,976 – Transformational Objectives For 2010

By Harry Hollenberg and Michael Sachs

About 15 years ago Steve Wunning1 set a simple transformational objective for Cat Logistics. It was 58,976. That number represented best–in-class motor vehicle service parts warehouse productivity circa 1995 (Method 1 for purists). 58,976 was a transformational rally cry that was imprinted on each team member’s brain. It was a symbol of the need to improve. It was a yardstick to measure that improvement. It worked.

58,976 is an interesting number when you consider that the highest Heavy Equipment (HE) LHY (Lines/Hourly/Year - Method 1) in the 2009 NASPC Data Book was only about 44,000. 58,976, which was used as the transformational benchmark at Cat Logistics, is a 15 year old automotive segment high-water point. 2009’s LHY has 15 years of improvement and refinement for HE. Caterpillar is an undeniably hyper-competent company that sets the standard for pretty much everybody in the motor vehicle aftersales parts business. Their philosophy is simple – owner satisfaction with service parts sells the next machine. So it is notable that an industry leader such as Cat chose such an aggressive transformational objective borrowed from a car company. The message here is that it is more important to set an aggressive but plausible target than to endlessly debate which one is right or whether the one chosen is perfectly relevant. Steve Wunning is a brilliant guy. No wonder he did well at Cat.

As the industry looks to 2010 and what it will bring, it should be thinking about transformation. Paul Krugman’s 1/4/2010 editorial in the NYT had to do with fear of repeating that 1937 “feeling” of a laid-back recovery – announcing that the depression/recession is over and letting the good times roll. Alternatively, we still need to work at it; to actively transform, without the debate of the exact target. Rather than setting a single warehousing transformational objective, it makes sense to tackle the entire service parts enterprise. Leveraging the breadth of our motor vehicle experience, I’ve asked our “metrics gurus” to take a whack at it.

- David

With the New Year upon us and a strong sense that the economy is improving, this week and next we’ll give you food for thought about improving the performance of your service and parts enterprise. The topics we will cover are as follows:
  • This week -
    • Supply Chain
    • Sales and Marketing
    • Service Engineering
  • Next week -
    • Service
    • Revenue Management
Supply Chain – after nearly 20 years of supply chain benchmarking, setting transformational objectives is a layup. Simply aim for well-established best-in-class (BIC) performance. Or, if you’re near that level, shoot to exceed it.
  • Dealer satisfaction with parts availability is a pretty good surrogate for how well dealer customers think you are doing: BIC overall NASPC parts manager satisfaction with parts availability is 98.1%.
  • Total supply chain network cost of sales, excluding ship-direct sales & costs: 6.2% for BIC HE and 9.1% for BIC auto and motorcycle. (Cost metrics are the only ones where we make a distinction between HE and Auto, simply because the cost per part and gross margins are impossibly different.)
  • Supplier on-time delivery performance impacts fill rates, inventory levels, and customer satisfaction: BIC is 95%.
  • System fill rates impact customer service, dealer purchase loyalty, and inventory levels: BIC is 99.0%.
  • Network inventory turnover (excluding ship-direct), which impacts fill rates and working capital: BIC is 6.6 turns per year.
  • Backorder queue levels have a significant impact on dealer and customer satisfaction and on purchase loyalty: BIC is 8.8% of a day’s business.
  • Warehouse efficiency represents a huge source of controllable cost: BIC is 44,999 LHY measured using Method 5 (not Method 1).
  • Warehouse quality impacts customer satisfaction and, ultimately, purchase loyalty: best-in-class is 110 total warehouse errors per million lines shipped.
  • Transportation impacts both cost and satisfaction. It can also be traded off against lower/higher warehousing costs and/or purchase costs. Good BIC transformational cost benchmarks are 2.6% of sales for HE and 5.8% for auto/motorcycle.

Parts Sales and Marketing is all about generating awareness and sustainably capturing sales. We have killer transformational metrics in Sales, but find ourselves lacking in Marketing. On the Sales side we have the following:
  • Service retention, the ultimate metric. This is all about retaining customers in the back of the store once they have bought in the front of the store. Service retention is the perfect transformational goal, because there are no downsides from over-achievement. The higher the retention, the more parts and service owners buy from OEM dealers. Buying more parts and service involves choosing – choosing the dealer from a rich list of alternatives means that the customer is satisfied. The metric that the industry is migrating towards is retained new to 7 year old VINs: best in class is 66% (non-luxury). The inability of HE to track VINs may either represent a problem or an opportunity.
  • Overall Satisfaction with OE’s help in improving your customer service retention – from the NASPC Service Manager Survey – is a good indicator of your dealer’s assessment of your support: BIC is 91.1%
  • The NASPC Parts Manger Survey tabulates other transformational Sales metrics:
    • Overall satisfaction with accessories :BIC is 91.2%
    • Overall satisfaction with Mechanical wholesale support :BIC is 85.1%
    • Overall satisfaction with Collision wholesale support :BIC is 87.8%

Marketing is already in the process of transformation from traditional hit-n-hope media and merchandising awareness to e-marketing, where you can pay for and measure anything you can dream up. Parts marketing funnels through the dealer; they see everything and are the co-recipients of success. In 2009 we saw OEMs slim down marketing and merchandising spend involving traditional air/print media, as well as racing endorsements and dealer spiffs. In 2010 we do not expect a rebound in these areas – most rebound marketing budget money will be repurposed to targeted internet marketing and merchandising.
  • Website capability is absolutely critical in conforming an awareness strategy to how people want to become aware. Although it is a work in progress, the best metric out there is the NASPC Website Review Score: BIC is a score of 115.
  • Dealer satisfaction with marketing support is a relevant metric simply because the dealer is the funnel for parts sales and first order recipient of any awareness strategy: BIC NASPC Parts Manager Marketing Support score is 83.4%.

Service Engineering is in charge of the birthing and technical care of each part. Lots of people are responsible for loads of costs. Few outside service engineering understand the totality of what they do – everybody simply knows that it is critical to being in the parts business. Ultimately it all comes down to proliferating parts. Paul Gurizzian covered this in a recent blog:
The effects of parts proliferation on inventory, operating costs, and service impact all supply chain partners (suppliers, distributors, and dealers); not just OEMs. By reducing part count-related complexity, suppliers have lower manufacturing costs. Both direct activities (e.g., number of machine set-ups) and indirect activities (e.g., material handling and bill of material maintenance) are reduced. With demand concentrated on fewer parts, both dealers and distributors need to hold less inventory to achieve a target fill. Alternatively, they can invest in the same inventory and achiever higher off-the-shelf fill. Also, beyond the obvious benefits to customers, there are second order effects from higher off-the-shelf fill, such as lower premium transportation costs resulting from fewer emergency orders placed by dealers on behalf of customers.

Three motor vehicle service-parts OEMs from both North America and Europe have independently estimated over the past several years that there is between a $7,000 and $10,000 savings associated with not creating each new part. There’s a lot of money on the table here – multiply those savings by 1000’s of parts – we need some relevant and credible parts proliferation metrics to track and manage the transformation of this activity.

Bottom line. Conference participants can email Brian Crounse ( and ask for our Transformational Objectives Scorecard. It is a spreadsheet with these (and next week’s) metrics, with BIC and worst-in-class (WIC) filled in. Key in your numbers and see how well you do. Non-participants are also welcome to call to learn more. As long as you mix in some consideration for what an awful year 2009 really was, it might point out where to start thinking about tomorrow.

1 Steven Wunning is a group president and executive office member of Caterpillar Inc. in Peoria, Ill. Wunning has administrative responsibility for the Advanced Systems Division, Core Components Division, Electronics & Machine Systems Division, Logistics Division, Product Development Center of Excellence, and Global Purchasing Division.