Thursday, March 25, 2010

Lets Get That Second Line of Parts Out of the Box

At Colgate we had a second line of products for customers who did not want to pay for the brand name and all that goes along with it. One of my buddies was the head of cost accounting and he patiently explained how a long line of variable costs were stripped out/substituted to create competitive prices with acceptable margins. I’d describe the process at Colgate as being more like getting a flu shot compared to the brain surgery involved in establishing a second line of parts in our industry.

If you want to make millions of dollars more for your company, read the verbatims that you get from the parts manager surveys; we just read over 3,000 of them from the NASPC Recessionary Parts Survey. The dealers talk a lot about prices, and they give specifics – so, you don’t really need a lot of imagination to figure out where the problems are.

“We need quality maintenance items at better prices ... battery prices are WAY TOO HIGH!!!! Brake pads also…Do studies on the highest defect items driving our customers to the aftermarket and get in the game!!!!” (Asian OEM) “The items we purchase from independents the cost is substantially lower than the cost from “X”. I can mark them up and make the same gross and the customer will see the price as reasonable and still purchase the part.” (European OEM)

These retailers are talking about fast-moving Wal-Mart Parts (which are a source of embarrassment) and NAPA Parts (which is a source of customer defections). These are the fastest moving parts in select categories: brakes, shocks, struts, filters for the Auto guys. Let’s look at an example. I just went to Google and typed in “brakes for Ford F150.” Got back about 20 million hits. Clicked on “Auto parts Warehouse” and plugged in a search for a 2000MY F150 base model with the small V-8. That got me 104 matches. The top two choices on the list were for either a $57.44 “OE Comparable” pad set or a $116.96 set of pads. Didn’t scroll through the other 102 matches.

Time Out: I suspect Ford does not offer 104 matches through their dealers. I’m not even going to check that out.

The points are: (1) there is a lot of competition for fast-moving parts used in common maintenance/ repairs, (2) there are a lot of price-point choices that are offered to end-customers that fit different pocketbooks, and (3) yeah, a case can be made for a second line of other-branded parts.

The decision path to deciding to launch a second line of parts resembles the one used by Obama to get health care reform passed. Lots of debate; fire and brimstone opinions; prognostications that life as we know it will come to an abrupt end.

Second line parts don’t help dealers increase
their wholesale sales and re-capture lost parts
market share!

Why not? Maybe it’s not the parts, it’s the limitations
we impose on our thinking?

Second line parts are just re-boxed genuine parts
that don’t save a dime!

Not so, need to get engineering to specify
more competitive alternatives for different customer needs, and
get the supply chain team to look at cheaper distribution alternatives.

Second line will cannibalize parts sales
with cheaper alternatives that dealers will
mark-up to match old suggested list prices.

Need to focus second line on parts and services that dealers
have largely lost – some brakes, some shocks, some filters.

The gavel comes down, debate ends and the second line idea is killed or slammed through by an enlightened leader. The enterprise then spits out a bunch of generic branded parts that are near-genuine. Everybody names them differently and then supports them pretty much with zero brand marketing. That’s OK.

But, why name them differently? It seems we are missing an opportunity here.
Time Out: A large part of the attractiveness of ACDelco and Motorcraft to the independent aftermarket (IAM) is in their near-genuine affinity. Both are second-channel enterprises that sell these near-genuine parts to the IAM (and to dealers) … and in the process re-capture lost parts market share from customers who have decided against dealer service. ACDelco and Motorcraft have pretty impressive distribution capabilities. OEMs who do not have a second channel must reach the IAM through their dealers and distributors. As we all know, this does not work too well for M&R parts.

It seems to me that if one can logically justify a second line of parts, one could then justify adopting a common name for these parts – where the common brand name operates more like a protected co-op. More specifically, everybody who launches and controls a second line should use the same “brand name.” Affording all the second-line brand name protection we can dream of can be done by capable and creative lawyers. The second line would benefit from a near-genuine halo from all the other OEMs … and, more importantly, can generate cumulative brand equity from all the OEMs using the “second” brand name.

All that’s just drivel if we can’t use this to sell more parts. And to do that we actually have to get them in front of the customer. This is where ACDelco and Motorcraft come in. Why not negotiate with them to distribute this near-genuine second line of parts to the IAM? (By the way, I have not discussed this with them, so, I don’t know if they want to play in this sort of sand box). On the surface, it would make sense, because it would broaden their product lines and give them “near-genuine” all-makes line extensions … good for their Warehouse Distributors and good for the Jobbers. ACDelco and Motorcraft have feet in both the OEM and IAM camps, so they would be my first choice. If they aren’t interested, NAPA and AutoZone might be interesting distribution partners. Best of all, this need not be a “Co-op” decision … any participating second-liner OEM can choose as they see fit. It might be helpful to assume that this isn’t just another stupid idea and to think about it.

Bottom Line: If we can construe justification for a second line of parts, we need some out-of-the-box thinking about how far we, collectively, can go with it.

Wednesday, March 17, 2010

What About Recessionary Dealer Purchase Loyalty?

We recently conducted two dealer parts manager surveys that asked about dealer purchase loyalty. When we apply our professorial mindsets, we might expect that dealers would be less loyal during a recession and would migrate toward cheap IAM parts for their high-volume customer-pay maintenance and repair businesses.

Not so.

The 2009 NASPC Parts Manager Satisfaction Survey (PMSS) was launched in September of 2009 when there was not a lot of good news around. Over 8,500 dealers participated in the survey and rated satisfaction with a long lineup of issues. We have asked about purchase loyalty every year since the start of the PMSS in 2002. And each year we get very consistent scores, both as an industry overall and by OEM. We’ve noticed a few things over time: (1) that purchase loyalty is gradually increasing, (2) that it is not terribly sensitive to the typical torpedoes that sink satisfaction (changing Ts&Cs and problems with order fulfillment), and (3) OEM surveyed “purchase loyalty” rankings are consistent even outside the annual PMSS.

OK, the scientists among us might argue that the PMSS loyalty values do not foot to internal OEM-specific dealer purchase loyalty calculations. The pragmatists would counter: (1) Are you sure that you are really measuring what parts managers actually do? (2) OK, if the surveyed responses from parts managers are off, then it would be relatively the same for every parts manager (all +8,500 of them) and every OEM, … wouldn’t it?

We have had crews of people inside dealerships measuring purchase loyalty and have validated the numbers in the survey. You can learn a lot by sitting behind the parts counter with an audit sheet and sourcing the parts that go on each customer-pay RO. Dealers go to their shelves first, then other dealers, then the new car “lot” , then a jobber … only if the repair can’t wait. They have a stock of IAM belts, hoses, brakes, and filters for used cars and demanding customers (we will get to this at the conference by looking at HE). Bottom line in the chart above, don’t look at the y-intercept, look at the slope of the line. You can take the slope to the bank. What do we notice and what can we induce? (1) There is not a lot of variability in purchase loyalty from OEM to OEM. (2) Dealers for OEMs (“E” for Europeans, “A” for Asians, and “D” for Domestics) that show higher purchase loyalty were less willing to look to the IAM during the dark days of the recession.
Time Out: Hmm. If there is not a lot of variability among the OEMs in purchase loyalty, then there cannot be a lot of up-side in spending a lot of incremental time and money on efforts to improve dealer purchase loyalty. Regardless of where you think the “y-intercept” is on the scatter chart above, the slope is cast in concrete. All you can do is move up and down the slope … unless you have a “Super Soaker” game changer idea. And, I’d be a tad suspicious of this. So, a new brilliant strategy to increase dealer purchase loyalty can only yield a few percentage points … and most likely only time-shift demand… and nets to naught. It might make more sense to focus on customer service retention, where the big deltas and opportunities are. For example, if you’re a $1B company, a 1% increase in purchase loyalty gets you $10M in revenue. Now, if you’re the same $1B company with 33% service retention, that means the market for your parts is $3B. A 1% increase in service retention gets you $27M.
The big question is why is dealer purchase loyalty so high and why didn’t it sink like a rock in 2009’s recession? (We estimate it did go down by about 1% for the industry.) Here’s why:
  1. At many OEMs, RIM controls order flow and sourcing.
  2. Highly automated systems at dealers manage inventory and place automatic orders to OEMs – it is exceptionally easy to do business with the OEM as a source.
  3. Concentrated dealer bodies make it convenient to order needed parts from other dealers – D2D systems and locators facilitate this.
  4. In 2009, lots of dealers went out of business and sold their parts inventories for cents on the dollar to other dealers.
  5. Loaner cars take the sting out of customer repair wait times. All OEMs have next morning emergency orders and many/most have daily stock order deliveries.
  6. Sourcing parts to individual customer-pay ROs is time consuming for the parts department – they might have to make several calls to find the part in-stock at a familiar jobber.
  7. In 2009, parts departments shed staff (we will see the numbers at the conference), so they had fewer people to work on individual RO sourcing from a set of close-by jobbers.
  8. OEM field organizations sometimes wander through dealer parts departments and will take notice of infestations of non-genuine parts. This will not make the field rep happy.
  9. During tough times dealers do not want to rock the boat with the OEM – so, they want their partner happy. Rocking the boat is for good times when dealers are in more control of their destiny.
  10. The third biggest gripe dealers have with the OEMs is about returns – and, the OEMs are generally pretty good about returns. Managing separate return programs for different suppliers increases workload and aggravations … even if those local NAPA jobbers are saints.
  11. The thing dealers love about genuine parts is their unquestioned quality, backed up by a rock-solid warranty. Managing different levels of supplier parts quality and warranties constitutes a hassle.
  12. Service managers, advisors, and techs prefer to work with genuine parts – they fit and work better than non-genuine. So, there is almost no “pull” signal from service operations to use cheaper non-genuine parts. The “pull” signal comes from specific customers who request cheap parts, and from fixed operations management who might feel uncompetitive (and parts prices are always to blame, never labor rates). Combating internal “uncompetitive” pressures can lead to reduced dealer parts margins, migrating to different order types, pressure on the OEM to reduce prices … all the usual suspects.
  13. Many dealer parts mangers’ bonuses are tied to OEM purchases, parts accounts, order discounts … being loyal. So, there are thousands of economic incentives out there that keep them loyal.
Bottom Line: Don’t fool yourself into thinking that you can make a big splash by increasing dealer purchase loyalty. That battle has already been fought and won. The OEMs won it. Channel your growth energies into higher risk and higher reward initiatives that represent Genuine incrementality for you and your dealers/distributors. We will talk about this in Indy.

Wednesday, March 10, 2010

Core Competencies and Using Third Parties in Our Service Parts Enterprises

The NASPC and EAC have jointly worked on defining core competencies over the years, but we have not seen the traction we’d expect. We need to go back and think about what’s core and what’s not and make better use of third parties to squeeze out costs and help us march down the path to best-in-class. The journey starts where this blog ends – 10 questions.

A few years back, talking about “Core Competencies” was all the rage among consulting circles and cartoonists. Being the contrarian, I gave this phrase a 5-year moratorium because of over use. Lately, I have been thinking it might be time to bring it back under house arrest.

It was John Smith of GM, one of the brilliant guys in the industry, who pushed us into thinking about aftersales parts core competencies. The idea was to look at the aftersales enterprise and figure out what was “core” (should remain inside) and “not core” (what could best be done by a third party). This seemed easy, until we actually tried to do it. We ran the NASPC and EAC members through this core competency journey. In the process we lost two staff members from complications of ambiguity – they got hopelessly lost and left consulting.

The trap our staff fell into was assuming that this was binary – that certain aftersales enterprise processes would either be core or not core. It was like examining a watch and trying to figure out what parts could be thrown away. It drove some people insane to do this. The trick was not to look at all those gears and springs with the intent of throwing some out, but with the intent to substitute something different for the gears and springs.

This core competency journey took us down a path of “ah ha’s.”
  • The first time through these exercises we thought the critical insight was that a core competency was something that the OEM needed to directly manage and/or do; something that was non-core was either irrelevant or could be done by a third party. This got us 80% along our journey.
  • Of course, nobody would ever admit to doing something and spending money on something that was irrelevant, but they could admit that some of the stuff they did could be done by a third party. That got us to 90%.
  • So, we got to a more helpful definition of “core” and “non-core” – this revised definition centered on management, not physical activity. “Core” was an activity that you needed to directly manage (and therefore also do). “Non-core” was an activity that you could remotely manage, but the doing could be outsourced to a third party. Now we were at 95%.
  • From this it was easy to develop a prioritized list of non-core activities that could be managed by internal OEM staff who oversaw a third party doing the work. 100%.
The fruit of our efforts was the prioritized list … and the journey itself. Looking at the list from top to bottom footed to what we saw happening in the market. Nothing was sacred. The big independent aftermarket players, like Federal Mogul, used outsourced field sales staff to call on customers. Motown already had a long history with bundled service providers (third parties) providing engineering support. And, lots of companies used 3PLs for warehousing.

Time out: The key insight from this core/non-core journey is that aftersales enterprises need to maintain core competencies in managing their outcomes. Who does it is irrelevant as long as the results are engineered and managed by the enterprise. Looking back on the journey, one of the lowest priorities for using a third party was in the area of purchasing. We all thought that purchasing was central – most essential to be managed with OEM payroll staff. Not true. Purchasing has been picked apart quicker than we ever imagined. It is not uncommon to manage the lion’s share of supplier negotiations with un-empowered contract staff from the Far East. They work the process with suppliers and drill down costs with all take and no give. Ugly, but effective.

Doing this type of assessment opened our minds to new possibilities. The next set of issues had to do with managing a successful partnership with a third party. This thinking about core competencies led to an interesting/ironic conclusion – one of the most important core competencies would turn out to be the process of managing our core competencies – knowing what to keep and what to let go, and then being excellent at managing what you have let go.

So what does the decision on what is “Core” and “Non-Core” come down to? Cost and quality. Bottom line is that you use a third party to save money – it all comes down to money. It is really that simple. You can enter new markets, acquire new technology, crunch process times … all at a cost. Can a third party do it cheaper? That’s the relevant question. Some companies and 3PLs struggle with this; I really don’t know why. It only makes sense to enter into a contract with a 3PL if you are assured that they will take you on a cost and quality glide path that starts at the status quo and stretches to best-in-class. Best-in-class costs and best-in-class quality. This is easy to do if you use NASPC metrics. Failure to do this and achieve cost and quality improvements does not damn 3PLs; it damns the contract development process. Use the metrics to set the contract, and then manage to that contract.

Lets go back to that purchasing time-out story. Purchasing tore apart their processes and put different parts into different segments: (1) requirements management, (2) RFQ development and bid process, (3) qualification & selection, (4) initial negotiations, (5) middle negotiations, (6) final negotiations, (7) contract development, and (8) PDCA process management. They found that step 5 “middle negotiations” was time consuming, costly, and mindless … as long as the negotiator followed the script. Why not use cheap resources to do this? This is easy to manage. So, some decided to outsource it.

This gets us to the chart. Like Purchasing, aftersales parts has eight segments. Why can’t we look at each of these segments and evaluate third-party teaming solutions? We are 3/8ths down that journey already. Our oldest and slowest moving parts are generally scrapped and sold to companies like Vintage Parts. Here, we can extend parts coverage to customers and get a marketing allowance if we facilitate a future sale. It is not outsourcing, but it is a clever way to deal with an age old problem. Last week we talked about slow moving parts – these are orphan parts in a purgatory of sorts. It makes sense to collaborate our way to best-in-class here. This might not lead us to outsourcing, but something clever is bound to surface.

What about all those other parts categories that are not bright green? There’s got to be a better way. If Purchasing could break through the core/non-core paradigm shift, why can’t the aftersales supply chain?

The great part of getting older is that you forget things and are not worried about asking why. I have a bunch of why’s that need to be answered:
  1. Why do we think “buildings - warehouses” represent our supply chain segments? Slow moving parts warehouses? PDCs? Break-bulks? Nationals?
  2. Why can’t sales and marketing define our supply chain product segments?
  3. Why do we take an all-or-nothing attitude about 3PLs?
  4. Why can’t we carve out unique segments of our business that might make sense to outsource?
  5. Why don’t 3PLs target market segments in much the same way that we have talked about in the last several blogs?
  6. Why don’t 3PLs look at these segments and collaborate solutions to multiple OEMs, rather than walk away from the business of a single OEM?
  7. Why do 3PLs ask for and get 10 to 15-year contracts?
  8. Why won’t 3PLs step up and contractually sign up for a glide path to best-in-class costs and quality?
  9. Why do we tolerate culture conflict once we have signed with a 3PL? Why don’t we integrate cultures, goals, rewards, recognition, and recriminations?
  10. Why don’t 3PLs always get us to best-in-class? Why do we sometimes settle for a move from bad to merely OK?
First movers answer these sorts of questions and come up with clever solutions. Ford did it with DPA. Mopar did it with their terms and conditions. GM did it years ago with their ground-breaking Schneider Logistics contract. CAT did it with inventing the 3PL segment in motor vehicle parts.

Who’s going to be the first mover in this next stage of supply chain evolution?

Wednesday, March 3, 2010

Slow-Moving Parts – They Define Our Industry

Slow moving parts are a vital part of the motor-vehicle industry. This fact sets the motor-vehicle industry apart from other high-capital-cost consumer-goods industries. Take, for example, a company that sells $1,000 dishwashers. Dishwashers fit into a standard 24” hole under your kitchen counters and last about 5-7 years. They run perfectly and, after about 5-7 years, they break. A technician comes to your house for $85 an hour and tells you that you need a new part that costs $300 and that it will take a week to come in. The guy says he’ll be back to fix the machine while your eyeballs lift up to your brain as you calculate “many-x hours times $85 an hour plus many-Y days I’ve got to wash the dishes by hand.” Like Spock, you make the logical conclusion to junk it and get a new one.

It’s not the same with motor vehicle companies. Car owners tend not to junk their cars. As such, slow moving genuine parts have a distinct market, largely because of the complexity, increasing quality, longevity of the product, the cost of the whole goods, the nature of the competition, and the temperament of the customer demographics. Unlike with dishwashers, the motor vehicle customer expects you to have the part to fix their vehicle, regardless of the age of the vehicle.

What does this all mean? It means that we in the motor vehicle industry must excel at managing slow moving inventory. It’s a requirement that sets this industry apart. So let’s take a look at slow moving inventory:

Basically, there are three circumstances that cause slow moving parts:
  1. Part is slow moving at the beginning of the whole-goods production cycle because of supply-side constraints; most of the volume is going to the assembly line.
  2. Part is slow-er moving during most of the whole-goods production run because of lengthy mean-time-between-failure characteristics.
  3. Part is slow moving at end-of-life because whole-goods populations are dwindling and being replaced and/or idled by newer product. Production suppliers are on to other parts and many OEMs decide to live off their last buy.
Let’s simplify this mess. Managing Type A slow moving new model parts is like choreographing a story ballet – there’s lots of complexity and it takes a long time. Since service failures here can really tick off new customers, OEMs have been improving over time. OEMs need to directly manage this complexity so the issue is not in-stock vs. out; rather, it’s where and how much. The NASPC has focused here several times over the past 19 years.

The supply chain challenges are with Type B&C slow moving parts. When we asked OEMs how they determined “slow-moving” we got back a variety pack of definitions and break-even points. Several OEMs use “pieces” sold to define lower-limit boundaries for slow-moving parts. The cut-off ranges from 1 piece sold per year to 100 pieces sold per year. Both ends of this spectrum were from Heavy Equipment OEMs. High volume auto OEMs were on the low side. Go figure.

Generally, what we found was:
  • Limited consistency in defining a slow moving part
  • Wide variety of toolsets for forecasting slow moving parts sales – use of re-order points, Croston’s algorithm, less reactive
  • Tendency to centralize slow moving stockpiles
  • Typically horrific labor, space, and transportation efficiencies
OK, at the bottom line OEMs are of two minds about the older slow-moving stuff. The brand folks love knowing that the stuff exists in some big box somewhere because broad genuine parts coverage is a real selling point. The supply chain folks hate it because it’s just too different from all the other parts that move in and out of the warehouses with a respectable velocity. Slow-moving parts represent a “purgatory” of sorts for the parts themselves, the facilities that hold them, and the people who manage them. In a single word, excitement-not.

I grew up on a farm. One of the secrets to success in farming is liking what you are doing. For example, if you don’t like cows, you might not be very good at dairy farming. If you hate onions, you’d be a pretty bad muck farmer. There’s a certain consistency to this. Maybe if you don’t like slow moving parts, you aren’t too good at managing a bunch of acres full of them? Maybe there’s a better way?
  • Why not collaborate on slow moving parts management?
  • Why not jointly manage these with a single brain trust?
  • Why not have common slow-moving Ts & Cs?
  • Why not have a single organization manage the forecasting, materials management, and maybe even the non-current-model parts supplier purchasing?
  • Why not design unique slow-moving parts operations based on best-in-class versus worst-in-house?
  • Why not go out and find who is best-in-class in slow-moving and design a collaborative operation based on what you learn?
Finally, let’s look into our crystal ball. 3D manufacturing is coming, with the promise of lot sizes of 1 and inventories of zero. Granted, this may be 10 years away, but why wait? This is the perfect opportunity for collaboration – prototype tooling, common design, and cooperative manufacturing centers are all targets for shared resources. This is a chance for our industry to set the benchmark, rather than chase it.