Thursday, June 24, 2010

Lifecycle Management: End-of-Life Strategies

During the NASPC discussion on end-of-life (EOL) management, it was very apparent that OEMs are devoting increasing amounts of time and resources into developing new strategies to manage this phase of the product lifecycle. OEMs justify their increased effort because improper management of EOL parts has significant impacts on costly excess and obsolete inventory. While there was concern for the need to provide support to customers in need of older parts, this was not the driving force behind major pushes to develop innovative strategies to manage these parts.

Improved Sales Forecasting Is Driving Innovation for EOL Parts
To tackle the foundation of effective EOL parts management, OEMs are drawn to developing improved sales forecasting tools to reduce errors in making all time buys (ATBs) and choosing minimum order quantities (MOQs). Getting the numbers right on ATBs and MOQs is so critical because these decisions are very long term by their very nature. So how are sales forecasts being improved? Leading the way is one OEM, where they have developed a best-in-class forecasting tool based on two new ideas: using part attributes instead of product grouped curves, and pattern recognition algorithms instead of simpler decay curves to drastically cut forecast error. If this sounds trivial, the BIC OEM’s response is that this new system has cut obsolescence by 21%, and reduced scrap by 34%. They are so confident in this tool that they use it for 30-year part sales forecasts.

Second tier strategies for managing EOL parts are focused on making the most of the inventory you have (or don’t have). CE/Ag leads the way in using creative pricing strategies to coax inventory levels closer to future forecast demand; 100% of NASPC participating CE/Ag companies adjust prices for EOL parts. When inventory is forecast high, prices are dropped and sold as non-returnable to get and keep inventory lower. If inventory is forecast low, prices are instead raised to slow demand or cover increased costs.

OEMs are also pursuing new scrap strategies by looking to 3rd party slow moving warehouses to continue to support customers. Another move is to sell parts through alternative channels if there is still residual demand.

Short Term Obsolescence and Scrap Is Way Down, but What Will Happen In 10 Years?
Clearly OEMs have increased their efforts in managing EOL parts, but what is driving this focus? While some OEMs have seen dramatic short-term gains, are they sacrificing anything long term? In many cases, EOL management impacts cash flow more than anything else. In the past 18 months, cash flow has been a critical concern for many OEMs and suppliers, so these efforts have no doubt improved their current financial health. But are OEMs simply taking out loans against future customer and dealer satisfaction in order to improve cash flow in this recession?

If demand for legacy parts rebounds as we come out of this recession, will some OEMs find that their best-in-class forecasting tool has left them with too little inventory and unhappy customers who can’t get transmission brackets for their no-longer-supported sedans? Trying to make 30-year sales forecasts based on sales from the past 18 months is a perilous position. Locking yourself into an ATB based on one of these forecasts is even more perilous.

Bottom Line: An easy defense here is to say that the sales curves were based and refined using many years of sales data, and the anomaly was that 2009 won’t even move the needle for these forecasts. But, aside from strange parts sales in 2009, the fundamentals of the service parts business have changed sharply from historical norms: cars are lasting longer than ever due to increased engineering quality, and consumers are keeping cars longer than ever in response to quality and economic reasons. The very nature of sales forecasts requires making decisions based on uncertainty – this will never change. Nevertheless, there are reasons to believe that the drastic changes OEMs have made in the past year to improve supply chain cash flow may come back to haunt them in the years to come.

Thursday, June 17, 2010

Heavy Truck Field Force Effectiveness

Heavy truck OEMs have approached the management of their field forces in the past year with a number of different new strategies, but in the end they’ve all come down to maximizing the amount of time the field reps spend on parts and service issues. All OEMs agree that current initiatives are driven by current economics of the industry … not pushes for overall increased or improved service levels. However, there is a silver lining as a few OEMs have come up with innovative ways to increase field organization cost effectiveness.

Most of these efforts are based on one fundamental idea: parts and service field reps are experts in parts and service. While they may be great at expediting parts or explaining promotions, there are other ways to communicate these non-technical issues to dealers. If OEMs can rationalize their field and reduce the time they spend on “non-technical issues”, they can deliver more parts and service expertise to dealers. Here’s some of what’s happening along these lines.

Non-Technical Support Hotline
The first gem in the latest changes to the way the field operates is one OEM’s support hotline that is available for dealers to contact directly. The hotline can handle all questions of a non-technical nature, such as parts expediting, billing, or warranty policies. Beyond that, some people on this hotline specialize in certain topics, which make them an even better resource to dealers than their parts and service field reps. Another advantage, from a corporate perspective, is that no one on the team is assigned to a dealer – they remain internally focused.

Learning and Leveraging IT Systems
One litmus test for computer programming is that if you ever find yourself copy-pasting something, there is an opportunity to automate the process. When evaluating their field force, OEMs applied this kind of thinking to realize that that their field reps were spending the first 15 or 20 minutes at each of their dealers explaining the basics of new initiatives or promotions. In other words, copy-pasting. So how did they “automate” this process and save their field 20 minutes talking about discounts and return policies? They now hold town-hall style conference calls and webinars to disseminate information about the programs that roll out on national or regional levels. While the time required to prepare this kind of meeting well exceeds 20 minutes, the number of dealers reached more than makes up for it.

Multi-Brand Responsibilities
Historically, multi-brand truck OEMs had unique field reps for each brand. In recent years, OEMs have moved from having a field force for each brand to a single field force for all brands. This trend started before the economic downturn, but has accelerated since. Much like the efficiencies gained from multiple brands sharing a DDS delivery network, multi-brand responsibilities eliminate the redundancy associated with two (or more) reps from a single OEM covering the same geographic territory.

Reinventing the Field Rep
Another source of lost time is time spent in cars driving from dealer to dealer. How do you cut the time the field spends traveling? Easy, the big car-guys know about this: “Virtual” parts and service reps that reach their dealers via phone, email, or webinar. Several OEMs are currently employing this strategy, and each of their virtual reps can serve approximately 70-100 dealers apiece. They have no travel costs, and dealers can call when they’re available and have a problem. Also gone are the days when field reps have to sit at a dealer and wait an hour for the service manager to become available.

Dealer reaction to this was neutral to positive – most dealers prefer in-person contact, but recognize the limitations of the current economy. Some rural and low volume dealers even liked this more: they end up with more contact than before, as the opportunity cost of contacting these stores has fallen drastically.

Bottom Line: Where Do We Go From Here? Reinvent the Field Rep – Again
Are there opportunities here to create hybrid field and virtual reps? When budgets loosen as we climb out of the recession, there are real opportunities to preserve some of these cost savings, but also boost service levels. A new hybrid parts or service rep could spend one week per month traveling to dealers and building face-to-face relationships, and spend the remainder of the month operating from a central office. This would keep time efficiency high while working from a central office, but the 12 weeks per year spent on the road could enable relationship-building with dealers to help the remote support be more effective.

The next phase in this evolution needs to also be accompanied by a shift in the way we measure the performance of the field. Currently, most OEMs track just sales or revenue as the metric. But the perverse incentive here is to erode margin in an effort to boost volume. Instead, the sales should be measured on profitability. One OEM is starting to experiment with this, but their efforts are just in their infancy.

We need to get the car-guys and truck-guys together to talk about what works and doesn’t work, and dream about what might work better.

Wednesday, June 9, 2010

POS Data Management – Has Anybody Cracked the Code?

No, but they are trying. Two primary observations became apparent during the POS Data Management and Utility roundtable at Indy. First, hardly any OEMs knew what the others were doing. Second, almost all OEMs were trying to do at least something with POS data. The majority of the session was spent listening to “status updates” about their basic efforts with POS data. For the most part, we learned about fairly advanced initiatives, but there were laggards – especially within the heavy truck industry.

By the time the session was over, the profile of a typical “active” user of POS data started to emerge. Active OEMs pull dealer inventory nightly or weekly for D2D programs. But this was old news – it does not carry a wow-factor anymore. At the parts counter and service lane, some OEMs use the services of a 3rd party to pull weekly invoice or transaction level data. In addition to knowing transaction details like date, part number, and price, they can also monitor retail and wholesale separately. All OEMs at this level of sophistication used the data for something; but this is where the similarities ended, and the different paths started to emerge.

Faced with this breadth and depth of data, OEMs have developed a number of unique initiatives guided almost entirely by POS data. A few interesting programs include:
  • One OEM uses the data to track individual dealer loyalty and service retention.
  • Another OEM checks dealer inventory before major marketing pushes to make sure they can handle the expected surge in demand.
  • For one OEM, 90% of loyalty and incentive programs are based on dealer sales and not dealer purchases. In other words, they are leaving push promotions behind to focus on pull promotions.
The “Holy Grail” of POS data, as one attendee put it, is being sought by one of the Asian OEMs. They want to track VINs through time to create a one-stop shop for everything about the history of a particular vehicle: manufacture, initial sale, service records, ownership history, until eventual scrap. The big issue is emerging - integrating the huge number of differently formatted data streams.

Some OEMs found themselves in a similar situation - their multitude of programs were creating so many dealer metrics that their dealers were overwhelmed and couldn’t absorb more information.

But what about heavy truck? The best-in-class performers track inventory and tie some incentive payments to parts sales. The runner-up just started using collision estimate data to learn about what was happening in the marketplace. While HT may be behind the eight ball in using POS data, they have the advantage of being able to model their efforts after one of many successful auto OEMs.

Bottom Line: What can be learned? First, an observation: the enormous breadth and stunning depth of POS data has set OEMs adrift in a sea of invoices. A few have charted rudimentary courses, but the traditional tools that OEMs have to analyze, act upon, and communicate data are simply insufficient. To remedy this, several OEMs have developed their own web-based data analysis and reporting tools to communicate with the field and their dealers. No OEMs touted the effectiveness of any system they were using. This means there is an enormous opportunity for collaboration between OEMs – or even a 3rd party – to develop effective tools to analyze and communicate the intelligence buried in this data. IT departments should not be the gatekeepers of POS data knowledge – an effective web-based reporting tool will quickly return a few actionable and timely industry standard KPIs for dealers, while the field can run simple queries on up-to-date data quickly and easily. To anyone who doubts that this could ever happen, one attendee reminded the group of a recent AAIA announcement that said 9 out of the top 10 independent aftermarket companies share POS data from 18,000 retail outlets.

Brief Glimpse at Vision of What The Potential Is: