Thursday, December 9, 2010

Why a Second Line of Parts Was a Bad Idea and Isn’t Now

Life was simple in the old days. If you bought a Toyota or a Chevy, you tended to stick with the brand and went back to the dealer for service. The industry was selling more cars and trucks than it ever dreamed possible, and the money to be made was at the front of the store – new, used, leasing, F&I, fleet. Dealers’ brothers-in-law worked in parts and service, and they all got together once a year at Thanksgiving. The mission of the dealer service department was to service what the front of the store sold, and make a lot of money off of warranty … unless you were a Toyota store. Matrix parts pricing and monster labor charges were de rigueur. You used genuine parts for everything – warranty repair and 150,000 mile fix-er-uppers.

Life was good in the old days.

Well, these are now the OK new days. The front of the store is break-even most years, and now “fixed operations” is expected to provide 85 - 100% retailer fixed cost coverage. The customers changed, and now they are not all that loyal to the brand. They shop and have a zillion little helpers on the internet that help them find the best products, the best deals, the best negotiating strategies, and the best satisfaction. This is all old news. Thank goodness for parts and service.

Not so fast.

Our service customers are also evolving. Younger customers are displacing dying off old customers, are less dealer-loyal for service, and are searching for all those internet helpers that helped them buy their car. Some of those helpers are here today. AutoMD is a good example. It “shifts the power to you.” Let’s say that I have a 2005 Camry and live in Acton, Massachusetts, and I want to replace my brake pads. It tells me that I can pay $65.69 for the pads if I put them in myself, or pay $86.25 if I go to a shop. The shop will charge me $92.22 for 1.3 hours of repair time with a “benchmark” labor rate of $71 per hour.

I can even buy the brake pads on-line and pay $63.74 (“saving $20.21”).

Or, I can ask it to find me a shop. It comes up with a list sorted how I like it. Here, I discover that there are some close-by shops that will do the repair for $25-$35 an hour, and I see that the closest Toyota dealer charges $95 an hour.
30% of all service customers use on-line research, so this is not just a short-term anomaly. We call this new generation of service customers “Digital Service Customers” – “DSCs” for short.

The fact is, our service customers are becoming zombies, just like our sales customers, who became zombies just like our purchasing organizations …. once they understood the power of data and negotiation. We are stuck with our dependence on the parts operations to cover fixed costs and generate profits – heavy equipment came to this realization well before the car-guys did. The facts all line up telling us that one-size-fits-all genuine parts branding strategies are not sustainable. I’m not going to talk about uncompetitive labor rates at dealers in this blog.
Timeout: OK, I lied. I can’t resist talking a little about those labor rates that give dealers a high-cost reputation. Just spend a few minutes on the internet and you can find thousands of price points for common maintenance and repair parts – like brake pads. The “evidence” to support dealer high-cost stereotypes is in extreme abundance. A DSC can shop the web and find brake pads for their vehicle at a fraction of the cost of the pads offered by their dealer. Now, they might be inferior pads, but the DSC will never know because the dealer parts counterperson rarely, if ever, sells the advantages of genuine. So, to the consumer, a $29 brake pad for a 100,000 mile Camry looks just as good as a $100 brake pad. To change this misconception requires training hundreds/thousands of unappreciated parts managers with skinny recessionary budgets using brain-dead dealer trainers. Not a horse I’d like to bet on. OK, let’s assume we can fix all that with some genius 2x2 matrices of rising cows and lazy ducks. Then, we’d have to tackle the problem of AutoMD’s list of $25 an hour labor alternatives vs. Bob Moran Toyota’s $95 an hour labor. We’d need to convince the DSC, with some clever web-stuff, that paying four times as much an hour for a wrench is a good deal. Sounds pretty tough, eh? Well I’m not all that concerned. Most fixed operations managers are smart, and labor costs are under their control. Ultimately, the smart ones will market-price their labor and use smart menu pricing. (The not-so-smart ones will continue to be good brothers-in-law and will show up on Thanksgiving … until things get worse in the front of the store.) The big problem will be in the stuff not under the control of the smart fixed operations managers – like the price of genuine parts in shrinking segments.

Next Time Out: OK, let’s take a bold leap and crystal ball this. It’s easy. Just forget everything you know, look at a very simple set of thirteen facts, and think like an entrepreneur. Here are the facts: (1) there are lots of IAM dollars going to buy right to repair legislation, (2) the internet tells you how much parts cost for lots of common maintenance and repairs, (3) AutoMD tells you how much labor costs, (4) AutoMD is only one third-party provider and others will surface and probably be a lot better than AutoMD, (5) there are thousands of dealers out there, (6) they service a lot of cars and trucks, (7) most OEMs only provide their dealers with genuine parts, (8) lots of these genuine parts are a lot more expensive than IAM parts, (9) historically, dealers have been very loyal to their OEMs, (10) younger Digital Service Customers are less dealer loyal and very dependent on the internet for research, (11) dealers will lose these customers to cheaper service providers that the internet tells them about, (12) these younger DSCs will grow as older customers die off, (13) dealers will become less loyal to OEMs. What does this all add up to? “DWDs” - Dealer Warehouse Distributors. Some smart chain like AutoZone will kiosk parts at dealers so dealers will not lose their service business as a consequence of web-enabled service shopping. That wasn’t so hard, was it?
The OEMs need to think out and roll out second lines of parts. Soon. This is no small feat. First off, the OEMs need to un-learn old, obsolete, and cluttered wisdom concerning why second lines don’t work: part number proliferation, cannibalization, parts quality, engineering costs and compliance, untested new global suppliers, eroded profits, small volumes, warranty terms & conditions complications – you know, things like these.

Let’s take a stab at this re-think.

#1: First find some comfort in knowing that other OEMs in Europe are moving in this direction. Several OEMs have second lines in Europe. In fact, there is an explosion of OEMs going in this direction. Block exemption is the catalyst. However, there are also lots of things to think about. A globally tested poor idea is taking a genuine part and putting it in a different box and selling it 20% cheaper as a second line. No wonder you see cannibalization; dealer’s aren’t stupid. And with the internet, consumers won’t stay stupid for very long either. Trying to do second-line and all-makes at the same time (these are different topics) will get you into trouble unless you are a heavy truck, agriculture, or construction equipment OEM. So, Auto-guys, just forget about all-makes (as was explained to me a decade ago by an old sage, “it all makes no sense”). Start by taking a look at what some companies in Europe have done – the collective wisdom here does not all lie between Oregon and Ohio.

#2: Segmentation should control the growth of parts proliferation. A market study will identify product lines/segments that have lower-than-expected market shares. Using a pareto analysis at a part number level will identify the smallest set of parts largely responsible for the lost segment shares. This handful of part numbers needs to be subjected to the 5-whys to understand what happened to all the volume. When the answer is largely “price” and the vehicle applications are for non-current models, then you should consider a second line. If the answer is largely “price” and the vehicle applications are current model – then, you need to re-price the main line and do not need a second-line part. Also, remember that “second line” really means second line – it is in addition to the genuine line. This more surgical approach provides a fair degree of inoculation against cannibalization. Don’t have the resources to do all this? Farm it out.

#3: Second lines are not “genuine.” This is important. Genuine parts represent a bundle of capabilities and caveats that cost a lot of money. For example, they can be used in vehicle warranty repair and they have more robust parts warranties. They have more “delicate” supply chains, they have higher fill rates, and they are built to exacting new-vehicle replacement standards. The product matches the promise. The product/promise relationship is also true for the stuff that AutoZone and LKQ sell. So, it is important not to overbuild, over promise, or overprice for non-genuine. These parts should be globally sourced and direct-shipped to dealers in order to control costs and provide for competitive margins.

#4: Second lines have different part numbers and terms and conditions. This is important. The benchmark here is tired, old, but still alive – NAPA. Parts warranty coverage should line up with NAPA for the class of part that the second line represents. This one is simple – just line the T&Cs up with the market icon and don’t think much more about it. Put a third party into business to audit retailer compliance by having them match up RO sales history with warranty claims: just like freight bill audits, they can work off a fraction of the savings. Saddle the third party with the responsibility to pay audited claims within the same time-frame window that NAPA does. Now, you don’t have to worry about retailer compliance or internal staff requirements.

#5: Farm out the engineering, too. That’s what aftermarket does. Find out how the IAM does all this to such an extent that they can merchandise their products as conforming to original equipment specifications. Then do what they do. Alternatively, consider using the engineering model used by OEMs who are growing their accessory business: push the product development and engineering to a separate skunk works legal entity to leverage entrepreneurial energy and fast time-to-market … while they contain legal exposure and mitigate risk.

#6: Train your retailers on how to un-learn stuff that no longer works and learn stuff that really does work in this web-influenced selling environment – how to compete in this new frontier. This includes qualifying the buyer, responding quickly, nailing down competitive quotes, managing a competitive internet presence, closing the deal, and following up upon completion. It isn’t about long hold times, off-the-cuff double-net pricing, switching to the service advisor for the labor cost, and sounding like a zombie.

#7: Think about the long term potential of a second line being an enabler to grow wholesale mechanical sales to IRFs … AFTER you get IRF fill, delivery and service nailed.

Bottom Line: Wipe away your excuses not to act and act like an entrepreneur.

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