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.

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