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?

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