Wednesday, August 25, 2010

Just What Is a Genuine Part?

David Carlisle

Over the past few decades I have been asked to be an expert witness in several situations. Undoubtedly the most interesting subject that I have testified on was what it means for a part to be “genuine.” It really got to the heart of my lifelong passion for this industry.

So, what is a genuine part?
Genuine is all about quality; the kind of quality that companies guarantee to their customers. Individual genuine parts work with other genuine parts to form a completed vehicle that is warranted to work for an ungodly long period of time. Ungodly is indeed the correct adjective. You go out and buy a big flat screen TV for $5,000 that has almost no moving parts; you bolt it to a wall where it never moves, watch it for about 1,000 hours during the year, and it is warranted for 12 months … and that’s just fine with everybody. Compare this to a car or truck and where you have thousands of parts; hundreds of them moving, for over 1,200 hours over 3 years, travelling over an incredible diversity of uncontrolled road and climatic conditions … and we all expect pretty much flawless performance. JD Power measures microscopic differences in defect rates (all of which are covered by warranties) and brand images are made or broken by tiny fractions important to enormous factions.

And yet, in the midst of all this we sometimes get confused by what a “Genuine Part” really is. Sometimes I think that we just need to think about all this backwards – Genuine Parts must:
  • Be identical in performance to the original part, so that
  • It can deliver flawless product quality, that
  • Can ensure perfect systemic performance with all the other parts, for
  • Over 1,200 hours of use,
  • Within a three year vehicle lifespan, or
  • The distributor of the “Genuine Part” will pay for all labor and parts needed to warranty this vehicle lifespan.
This puts a different spin on “Genuine.” Genuine is not so much about the individual part, but is about how that part works with a system of parts that are covered by a contract called a vehicle warranty.

In the auto sector many players -- Honda, VW, GM, Chrysler and others – are getting increasingly aggressive in appropriately defending their turf. Honda’s policy statement shown above makes it clear to consumers why and how non-genuine parts can decrement the performance of the systems that the OEs spend years and millions of dollars developing. VW clearly excludes from their warranty damage to other parts of their vehicles that are caused by use of several classes of non-new/non-genuine parts to repair their vehicles. GM has some excellent consumer information relating to the real differences between genuine and non-genuine parts (e.g. number of welds used in genuine versus aftermarket hoods). Chrysler has printable PDFs for consumers defining terms like “OEM Parts”, “Aftermarket Parts” and “Salvage Parts”, and includes a form letter that the car owner can sign to request that their insurance adjuster/repair facility use genuine parts in repairing their vehicle. These – and there are other examples – are appropriate efforts to be sure the consumer really understands the tradeoffs of quality versus cost for parts.

We need to do more of this. Lord knows the aftermarket isn’t shy about making their case. They bombard consumers with marketing efforts to show their parts are “just as good” – and in extreme cases claiming aftermarket parts “might even be better since it has been modified/improved” relative to what the OE developed.

So what exactly is it that these efforts are trying to combat? Here’s a plausible situation. Car or truck has a horrific crash at 70 mph, airbags go off, engine busts out of mounts, people killed. The crumpled hulk then sits in a junk car lot for a bunch of days. A company like LKQ/Keystone buys the hulk and strips out the parts that aren’t really banged up – after all, they look OK to some guy with a wrench and dirty pants. What used to be “junk car parts” are now “rebranded” as “alternative parts” or “recycled parts” or “new parts sourced from alternatives to the OEMs” Wow! No wonder our customers are confused!

Now, someone else has a fender bender and goes to a body shop to get it fixed. The insurance company specifies one of those “rebranded” parts (remember, they aren’t “junk parts” anymore) that comes from the crash I just talked about. Is the vehicle repaired with that part really the same as it was before the crash? Is it really reasonable to still hold that vehicle manufacturer responsible for a warranty contract on that vehicle when the “system” has been infected with crappy junk car parts? That just seems silly, no let’s just call it stupid, to me.

So how do we fight this? The examples cited above are a good start. I could even imagine an industry marketing campaign. Imagine the potential impact of a well executed TV ad based around the “life-cycle” of a part as described above. Giving consumers a visual, vivid illustration of where those parts have been/where they come from might really give them pause when they came to do their next repair.

Bottom line: it is very important to fully understand “Genuine” as part of a brand management strategy. It is critical to distance yourself from non-genuine.

This is a critical issue. We have seen some auto examples of what auto is doing. What is happening in heavy truck, heavy equipment, construction, agriculture? Let us hear from you!

This is so important that I want to keep this thread going. Next week I will talk about non-genuine non-collision parts. Depending on what we hear back maybe more in future weeks.

Thursday, August 19, 2010

Supply Chain Juggling Act: RIM Programs, Facing Fill, Network Density, and :-)”

One of my favorite industry friends is brilliant and very polite. She sent me an email challenging my discontent with facing fill as a key strategic metric to manage, especially under Retail Inventory Management (RIM) environments.
“After our brief discussion of the importance of Facing Fill in a RIM world, I thought I'd send you some more information. From the dealer's point of view, since they do not need quick ORT for RIM recommended parts (assuming that they allow RIM to manage them), the decision to stock the part in the facing PDC becomes a cost trade-off decision. However, for the parts that RIM does not recommend, facing fill has the same importance as before RIM - it continues to be the biggest driver of dealer satisfaction. (See - I have been listening to you all these years). …
For any one dealer, RIM does a great job at recommending the stocking strategy. But, when you try to look at the part level, very few parts are recommended to most of the dealers. I know that this is a rather simplistic look, but it gets the point across. Until we find a way to have more of the total volume of a part RIM recommended, it will still be important to stock the part close to the dealer.”
She closed the email with:
“Please feel free to correct my way of thinking - I know that I can count on you to point out the flaw in my logic. :-)”
I love those smiling faces you can make with punctuation. They kind of humanize an email.

Her logic is simple about RIM-managed parts. If you cannot get a significant portion of your dealers using RIM for each part number, then facing fill is critically important and translates into dealer satisfaction and end-customer satisfaction. You could even diminish dealer purchase loyalty by having low facing fill. Because of all this, facing fill is a very important metric.

OK, yes and no.

First let’s talk about why the answer is “yes.”

Facing fill measures order completeness within a typical order cycle (order response time – ORT) from the “facing” warehouse - the warehouse assigned to each dealer for their stock orders. If your warehouse network has been collapsed to support a RIM strategy (fewer facing warehouses), ORTs for non-RIM orders will be longer. Longer ORTs could result in dealer defections for parts that are on some dealer RIM profiles and not on other dealer RIM profiles. These longer ORTs could also result in out-of-stock conditions that could negatively impact fix-it-right-first-time (FIRFT) levels and owner satisfaction. Worse yet, if your RIM program has fairly timid objectives (e.g., covers only a fraction of parts), then a collapsed warehouse network would result in longer ORTs for a very significant population of dealer parts … and this before/after condition would disturb dealer parts managers, screw-up dealer DMS re-order points, force more inventory to dealers, and cause other sorts of enterprise havoc.
Time Out: Gene Metheny commented on this: “I think what your friend is inferring is that dealers will end up stocking different parts, and if you can’t get good parts commonality at the dealer, then it is hard to destock those at the forward warehouse. I agree with her. It may be possible for OEMs with fairly homogeneous products or dealers like Saturn to pull this off; but in general, my clients have been unable to do so. The problem, particularly for CE/Ag businesses is that dealers tend to have a focus on different types of products – Row crop vs Hay and Forage, Big vs Little construction equipment, mining etc … many parts are common across applications but may be fast moving for one dealer and very slow moving for another. With one CE/Ag client of mine there are over 500K active part numbers. If you assume each dealer is carrying from 5-10K part numbers, and their movement classes are very different, it is impossible to build a network strategy around RIM. Another CE OEM has been trying to do this, with a fairly manual RIM system where they negotiate stocking lists with each dealer and utilize emergency order depots to fill the variance. Before RIM, they used emergency order demand to figure out what to stock in emergency depots and found this was extremely volatile. What was ordered on emergency today, could be ordered on stock tomorrow, not because the dealer stocked the part, but only because the situation wasn’t urgent enough to pay the emergency order fees and emergency order freight. They are hoping that this tends to stabilize a bit more with the new RIM program with special EO terms and conditions. We will see what happens. I agree that being able to leverage RIM to modify your network is the golden egg. But I am not convinced it is possible.

Time Out: Harry Hollenberg had this to say: “Gosh, we’ve been looking at this for years and each new piece of data seems to contradict the last. I understand the theory – put dealers on RIM, make sure they have the right parts in stock, consolidate your PDCs and offer more reliable, but longer ORT deliveries for non-RIM parts. As Gene says, don’t think that’s ever been proven to work yet. Here are just some of the findings over the years. Saturn historically had the highest Availability Satisfaction in the Parts Survey, even with one PDC and up to a week ORT. We attributed that to RIM – ‘if dealers don’t actually order, they can’t calculate the response time – they just see a truck showing up on their dock with stuff they need, so they’re happy’. Of course, with only around 50K part numbers, a handful of models, and the closest Saturn dealerships also owned by the same Principal (and typically pooling their inventory) – life was pretty easy for them. Takeaway: RIM reduces need for 24 hr stock order ORT? Parts Survey analysis shows dealers have no clue what their facing fill is, and OEMs with higher facing fill do not have dealers that are more satisfied with Availability. Takeaway: Chasing facing fill may not be the right approach, since it doesn’t seem to translate into happier dealers. Corollary: Whatever your fill rate is, dealers can sense when it goes south (backorders, recalls, SAP) – and then they get really pissed. So increasing facing fill may not help, but decreasing it hurts. BTW, none of 2009 Availability Satisfaction industry BIC OEMs have a RIM system. 2010 CE Availability Satisfaction industry leaders do not have RIM systems. I haven’t done much work in this area lately, but when Mike and I did an analysis about 2 years ago for one OEM, only about 50% of a dealer’s volume was going to be “RIM” managed. That’s a lot of volume (relatively fast movers if stocked at a dealer) that still has to be handled the traditional way. So taken together, I see the benefit of RIM from the OEM’s standpoint in terms of protecting purchase loyalty and maybe even increasing sales (in Harley’s example), but I agree with Gene – I haven’t seen anyone able to get enough volume flowing through their dealers on RIM to justify consolidating the network and slowing down ORT on the other stuff. If the “other stuff” was all non-competitive product, I suppose you could say “tough luck”, ‘cause the OEM is the only option. However, I don’t think it’s all non-competitive stuff. So, it seems that until you can get 1) dealers to stock lots more parts, or 2) dealers to consolidate and share inventory locally (dealer depot??), or 3) significantly reduce your part count by sharing part #’s across models), or, agree to air-freight non-RIM orders (possibly controlled by T&Cs to avoid excessive use by dealers) – it’s going to be very hard to pull back on PDCs.

Time Out: Mike Sachs also commented: “Harry sums it up pretty well – as far as the OEM and dealer are concerned. The one thing that remains unclear to me is the end-customer. The fact is that if the part is not on the dealer’s shelf and he can’t buy it locally same-day, then the customer is either going to wait for the part to arrive or have the vehicle repaired elsewhere. The wait might be one day if the PDC is nearby or the wait might be two or three days if the PDC is farther away (I suspect the minimum wait is really two days, since the dealer is not going to call the customer back until the part is in-hand). Bottom line is that it’s still a wait. Having to wait (for any length of time) will cause some customers to go elsewhere. Having to wait three days instead of one or two will cause some additional customers to go elsewhere (this time - maybe, next time – more likely). Ultimately, this is the customer we need to satisfy.

That’s the best I can do on the “yes” side. Pretty convincing. But, I’m a contrarian on this one (or something resembling a lone Democrat Supreme Court Justice dissenting opinion on gun control; remember, I am in the NRA) Let’s look at the “no” side – the arguments that say facing fill is not that important in a RIM-world … even in timid RIM worlds.
  • The lion’s share of RIM-controlled parts should be competitive parts; RIM should ensure even higher levels of dealer purchase loyalty for these parts. You need to balance higher RIM purchase loyalty with lower non-RIM purchase loyalty. If this is not true with your RIM program, you might want to reconsider your RIM policies.
  • Larger, older, more diverse dealer bodies have many different parts stocking needs – call them RIM stocking profiles. Therefore, RIM suggestions could be wildly different from profile to profile. When you sum everything up, you will find that only fraction of your parts population is RIM stocked … and that small populations are uniformly RIM stocked at all/most dealers. Some portion of the dealers’ receipts will be RIM-controlled and some portion will be traditionally controlled by the dealers’ DMS. That’s life. If your warehouse network has been collapsed to support a uniform RIM strategy – your dealers will experience different ORTs for different parts (sort of like today with increasing ship direct, where a typical dealer order can be delivered in 8-10 different shipments and by several carriers … but, oh my, that’s OK since we save a ton of money on that … never mind). Some daily stock orders will have irrelevant ORTs because they are on RIM; they won’t even look like a stock order. Other “real” daily stock orders will take a few days longer to arrive, consistently, from a more distant facing warehouse. Big deal. OK, if this really is a big deal, I’d scratch further. It may be that the “big deal” of a few days longer on a non-RIM stock order means (1) that your dealers are using free daily stock orders for critical order situations, (2) that your terms and conditions do not encourage proper dealer stocking and use of critical order situations, (3) that your RIM objectives are too timid, (4) that you have not properly trained your dealers to work in a real-world RIM environment, and/or that (5) change stirs up the mud; the mud will settle in time and you will be able to see clearly again.
  • A collapsed “RIM” warehouse network should result in fewer and more robust inventory stockpiles; these should result in higher fill rates inside those longer ORTs, which should offset some of the negatives associated with longer ORTs. If this is not true with your RIM program, then you have very different strategies at work: (1) a RIM strategy, (2) a multi-tier warehouse strategy (where there are “RIM” warehouses and other more normal “facing” warehouses), and/or (3) an inventory-reduction-at-the-cost-of-fill strategy … so don’t blame the lack of fill upside on RIM. Square-root law effect here.
  • The industry is migrating to performance terms and conditions. RIM compliance and in-stock fill ratios should be part of the “performance” in “performance terms” – don’t blame your RIM program’s longer facing fill on not-well-thought-out terms and conditions.
Bottom Line: My inner pragmatist tells me that my brilliant friend who started this all, Gene, Harry, and Mike are correct: RIM does not obviate the importance of facing fill. My other side, the right side of my brain, is exasperated. How did we evolve to a world where taking back a couple of days of ORT causes our retail house of cards to fall? Why can’t we unwind once good decisions that are now bad decisions from the past and substitute better strategies and better decisions? Why don’t we integrate our supply chain strategies with our sales, marketing, and financial strategies? My right side of the brain sees all this and concludes that there’s still a lot to learn from Ford. Oh, :-)

Thursday, August 12, 2010

Mid-Term Look at Sales

The auto sector has a critical mass of OEMs who participate in Market Watch, so we can see how the year is shaping up. So far, it looks pretty good. Year-to-date total parts sales are up significantly, with the Asians up in double-digit territory. That’s interesting, because they were less roughed up last year on the vehicle side of the business. So, their sales gains reflect more than just a vehicle-side recovery.

Don’t you just hate charts like this? I love them. Here’s how to look at it. Assume that Accessories (chart shows year-to-date – YTD – growth vs. the same period last year) is about 15% of the total sales mix; so this growth impact gets watered down a tad. Next, look across the sets of columns and notice that YTD “Collision” is in the toilet; “Powertrain” (YTD) is outperforming total “YTD” growth, and “M&R” (again, YTD) is nearly as good as total “YTD.” To the right of “YTD” (reflecting total parts sales) is “3-MO%” which is a 3-month moving average, which is next to “June” reflecting June’s sales.
  • Collision sales have not rebounded very much due to fewer miles driven through the start of the summer (it has picked up recently) and all the other usual suspects (insurance company impacts, more totals, more competition, fewer insurance checks being converted to repair work, stuff like this). This means that dealer wholesale businesses have not yet rebounded. Contrasting this tepid news is LKQ’s second quarter results; their revenue is up 20%, with organic growth up 8.7%. So, the problems here aren’t all about the “market.” I expect this segment to increasingly look better through the remainder of the year as folks take more to the highway for pent-up get-away time. High airfares and horrible service by the airlines will help this shift to more highway miles driven. Furthermore, a healthier dealer body incentivized by hungry collision managers will order more collision parts in preparation for winter. So, I am bullish on the last half of the year for collision.
  • Powertrain sales are up due to more aggressive selling, older UIO, and unavoidable repairs for those economically forced to keep their vehicles on the road longer. Powertrain will maintain this pace through 2010.
  • M&R is in recovery and reflects rebounding customer-pay parts sales. The worst dog-days of the recession are behind us and delayed repairs can only be delayed for so long. The bar chart “YoY Sales Growth” shows recovery in the independent aftermarket; so, everybody is recovering.
  • Accessories Obviously, the best news is that the moving 3-month averages look great for all the segments – all but two OEMs show double-digit short-term growth. Where’s the growth coming from? Increased vehicle sales have pumped huge growth into accessory sales … make that incredible growth there. The chart above is fresh from this year’s accessory satisfaction survey. It is my favorite. While we celebrate increased accessory sales from rebounding vehicles sales, a little thing called market share is lost in the mix. It is astounding how much dealers buy from the aftermarket in this segment. It is astounding to look at the ranges of lost share across the OEMs – some OEMs have no excuses and do much better than others. Looks like a huge opportunity here.

Bottom Line: We are in recovery – the numbers show it. We saw the path out of last year’s mess over a year ago with the “Collaborative Forecast” process for auto and heavy truck (CE/Ag decided not to participate in this process.) If you want to participate this year, call Jessica.

One last thing. I do rant and rave about how you should focus on service retention, not dealer purchase loyalty. Let me asterisk that. Accessories is the one area that is filled with lost dealer share opportunities. It is also a business sector that most OEMs are loath to tackle with enlightened information and innovative strategies.

Wednesday, August 4, 2010

“GM’s Electric Lemon”, The New York Times, “Mister Ed” Niedermeyer, The Lies About Cars, and Other Bankrupt Myths

David Carlisle

When my eldest daughter graduated from Union with a degree in literature my sister in-law, Sandy, helped get her some “informational” interviews. Sandy is amazing and can do anything. So, she set Rebecca up with an editor from a big New England newspaper. Rebecca came back convinced that newspaper publishing was a fatally sinking ship, Titanic-like, but with no band playing on the deck. Newspaper survivors were depressed zombies. She looked elsewhere.

That’s my image of the NY Times. Young people don’t buy newspapers, because they are smart. They get the news at no added cost from the Internet and cable TV. Everybody knows that old people are stupid, immortal (OK, some are immoral as well), and can’t use the Internet. So, newspaper organizations, like the NY Times, cling to this old codger’s strategy and continue to produce fewer papers that they sell to old folks and give away for free to young people. In fact, they give the news away for free even before it makes it to ink on the papers delivered to old folks’ mailboxes. They do this because they think this is smart and, paradoxically, the best hope for making themselves profitable.

I’m an old guy and I only read the Times on the internet. I’m not supposed to do that, because I’m old. Don’t tell the Times.

This is pretty much the essence of the economic theory espoused by Mister Ed Niedermeyer in last Thursday’s (July 29th) NY Times Op-Ed piece – “GM’s Electric Lemon.” He thinks that GM should sell the Volt at a loss, “which, paradoxically, might have been the best hope for making it profitable.” He said that Toyota did that in 1997 with the Prius and that’s why they are in such good shape now. Maybe the NY Times uses Mr. Ed for their own strategy? I’m sure he and Krugman give each other high-fives in the hallways.

By the way, other Op-Ed guest writers, call them “Captain Kangaroos,” would scream bloody murder if GM sold Volts at a loss. They would say that those GM guys were idiots for selling limited supply Volts at a loss into an enormous wave of demand … where dealers would place enormous ADMs (additional dealer mark-ups) on the stickers and really tick off those greenies clamoring for a cheap Volt. They’d hoot a lot about how GM is squandering all that government bailout money by giving stuff away to dealers who just mark ‘em up like any other scarce commodity.
Hey, now hold on there Dave. You are writing this blog on your iPad. Maybe Mr. Ed has a point. Steve Jobs should have sold all those millions of iPads at a loss! “Paradoxically”, that might have been the best hope for making all those iPads, and Apple, profitable. That Steve Jobs is one dumb son of a gun.
Mister Ed thinks that the affordable Volt lease of $350 a month is shameful. It only allows “12,000 miles a year, or about 33 miles a day.” The fact that 12,000 mile coverage is pretty much standard for the millions of cars and trucks leased each year is not important to note. It is not important because if you divide the 12,000 miles a year by 365 days in a year, you get 32.876712. Call it 33. The Volt can do 40 miles on its battery; so why do you need the $8,000 frigging high-test gas engine that Nissan’s Leaf doesn’t have if all you do is 33 miles a day!? This was my favorite thought of Mister Ed’s in the Op-Ed piece. People who lease cars drive 33 miles each day. They never drive 41 miles a day.
Time Out: I have to confess that one of my most private dreams has been to author a NY Times Op-Ed piece. I want everybody who reads that paper (OK, in Boston, Manhattan, and parts of Madison Wisconsin) to see my name and think I’m smart. I read David Brooks, Paul Krugman, Gail Collins … and think it is, well, just a dream. But, it’s folks like Mister Ed, Maureen Dowd, and Tom Friedman that continue to give me hope. Mister Ed isn’t very smart, nor is Tom Friedman. And that Maureen Dowd sure can write some really nasty stuff that nobody understands. I can too. I just hope I get an opportunity to live my dream before the Times goes bankrupt.
Mister Ed thinks that the Volt looks like a Prius. Hold that thought. He also thinks that the Cruze is more or less the non-electric version of the Volt. So, the Volt really looks like a Chevy Cruze. Hmmm. I don’t think Mister Ed is very good at anything visual. Hope he doesn’t drive much. I suspect that, in Mister Ed’s mind, the real truth about cars is that he just can’t find his own car in a crowded parking lot.

Mister Ed infers that he has a direct line into GM’s product planning. He talks about how the second generation Volt is aimed at eliminating the yet-to-be launched first generation’s “considerable shortcomings.” Shortcomings that, he thinks, will be apparent, once the first batches of Volts are manufactured and used by customers who have not bought them yet. This is an Ellsworth Toohey/Genzyme kind of thought process that Mister Ed has going here. It’s like doing an amniocentesis on the Virgin Mary prior to the birth of Jesus and saying that, hey, the next one will really be great. Believing that Mister Ed has credible access to GM’s product planning is like believing that Rush Limbaugh is a close confidant to Bill Clinton.

Mister Ed says that all the government bail-out money went into the Volt. Now, I think he even thinks that some of that AIG bailout money went to the Volt. He lists a lot of numbers. When you list a lot of numbers it looks good. He says to ”start with the $50 billion bailout.” The GAO can really use a guy like Mister Ed. I’d like to see what he can do with the truth about missile programs, or the truth about nuclear submarines, or the truth about those $300 government issued hammers.

What’s the truth about the Volt? GM is doing something that should be applauded. They are inventing a new segment and will be first in. The truth is that all-electric cars scare people who only want to own a single vehicle – they do not want their every-once-in-a while road trips to be constrained by the limits of a single battery charge. GM’s EV1 experience taught them t hat. The Volt solves this riddle. Hey, we are coming out of the worst recession in our lifetimes; I’d hate to define the electric car market as a second/3rd/4th/5th-car-only rich-guys market. Seems too old-school corpulent American. GM has figured out that demand for the Volt will far outstrip supply in the years to come. So, it makes no economic sense to lose money on every one sold if you can make money. Mr. Ed must have a Soviet sense of economic theory. Krugman would agree with me on this one. JD Power taught the automakers not to sell crap … or they’d pay for it. So, GM has a Volt production plan that fits modern-day customer QC expectations.

Speaking of QC and economic theory, now that the NY Times gives the news away for free to the most important market segment, they don’t have enough money to do QC on their Op-Ed pieces. That’s why you see crap like this from Mister Ed in their paper. It would be embarrassing to charge folks for stuff like that. Reminds me of what happened to the auto industry in the 80’s. Three decades ago.