Thursday, November 18, 2010

Supply Chain Dynamics for Hybrids and Electrics

Our industry is capable of some pretty profound “do-overs.” The Chevy Volt and Nissan Leaf are two good examples. Gives me hope in those product guys and gals.

What about our supply chains? Why can’t we design and launch a “do-over” riding on the back of this incredible product innovation? Our industry is in the process of proliferating small volume eco-variants of motor vehicle technology that is very different than our mass-produced combustion engine fleet. The Volt will be a fairly low-volume product with one gas engine, one electric motor, and a humongous battery pack. It will have unique sheet metal and interior trim, with the preponderance of its powertrain components being unique and low volume as well. The Volt and Leaf are not the sort of vehicles that the aftermarket will gladly tool up for. The only parts competition will come from LKQ and their junk car recycling strategy.

These are low volume products with a fair amount of haz-mat, without significant aftermarket competition, targeted at highly educated and influential eco-minded consumers, who do not buy based on an ROI calculation.

So, are we just fine with flowing the service parts for these products through our traditional supply chains? Last week we discussed GM’s bold move of killing Mr. Goodwrench so that Caddy customers don’t get Chevy-ized service – tough move that makes sense. Why can’t we step up to the task of reinvention in our supply chains? Let’s think about it.
  1. First off, let’s think about the margin-math. We expect to see supply chain costs, as a percent of sales, that are reasonable. We mostly focus on the numerator – that’s the supply chain costs. Why not focus on the denominator? We have premium products where customers are making choices that go well beyond driving economics. They will pay more. More for the vehicle and more for the parts. So, if we want to focus on supply chain as a cost of sales, let the numerator drive the denominator … not the other way around.

    Timeout: The main concern with the denominator argument is that while cost of ownership may not matter much for the first round of buyers, it will matter (more) for the 2nd and 3rd waves of buyers, who are the buyers that really matter if these vehicles are to reach critical mass. The optics of high maintenance/repair costs may be more costly than any incremental revenue derived from pricing for the first wave of buyers.
    Timeout: Nah! The counterargument to the above argument is that the maintenance costs for EVs may be lower than conventional vehicles (e.g. no oil changes), so you may as well take back some of those savings with parts pricing. This may be more true of the Leaf than the Volt, which still has a conventional engine tucked in there … that only runs a fraction of the time. One caveat – initially, when the technology is immature, piece costs tend to be high. These high cost parts need to be reasonably priced or OEMs may get harpooned in the press, appropriately, by environmental groups.

  2. Next, we need to think of what’s the best solution for low volume parts. Easy. Single centralized warehouse located in Memphis or Indianapolis.
  3. Transportation? Air freight for all but Haz-mat.
  4. Haz-mat? Easy. Not my labor – outsourced solution.
  5. How do you run a small warehouse? Easy, make it bigger with shared/collaborative partners.

Bottom line: Looks like a great opportunity for working together as an industry, possibly with the assistance of a 3PL. The industry’s been looking for supply chain collaboration opportunities – this one is a no-brainer. It’s in all our best interests to find a low-cost way to get this new market segment off the ground. Talks should begin now, before inertia sets in and we fall back on our existing networks.

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