Wednesday, March 30, 2011

The Story of GM’s 19-Year Ascent to Best-in-Class Warehouse Productivity

- by David P. Carlisle

It has taken 19 years of steady, measured, year-over-year improvement for GM to make it to the top of the heap in North American parts warehousing productivity. The charts show parts warehouse productivity1 from 1992 through 2010. In 1992, the productivity quintiles represented 70 or so parts warehouses of 7 different OEMs. In 2010 there are over 200 warehouses and nearly 30 OEMs in the mix. The quintiles separate all the warehouses in the mix into five groups, ranging from most productive (green) to least (red). Aftermarket parts, you might think, what’s the big deal? Well, it’s nearly a trillion dollar global segment, deceptively (almost blindingly) complex, nicely profitable, significantly responsible for customer ownership satisfaction, and GM’s a very big global player. So, it is a big deal.

It has actually taken GM twenty three years to achieve best-in-class. That’s the story behind this blog; it is not about who’s number one - it’s about the journey one takes to improve.

GM’s 23-Year Plan

My first introduction to long-term strategic plans was doing work for Toyota Aviation. We were in the middle of a project and I asked the Japanese team members if they had a strategic plan. Enthusiastically, they unrolled a timeline showing the next 50 years, with incredible detail, of what they had thought out. I was impressed. In late 1988, I met with GM’s aftersales planning czars: Stu Wagner and David Sergeant. Wagner, since retired, is a brilliant man - he will insult me when he reads this, because he is incredibly tough too. At that point in time I had only worked with the importers in parts warehousing, and I had a pretty good working knowledge of their labor productivity. Twenty three years ago, when asked who to learn from, I’d simply say Toyota. Wagner, Sergeant, and I talked a lot. Wagner questioned GM’s parts leadership attitude - that everything was fine and GM “had game”. No, they did not have game. It took us 4 years of talking, cajoling, challenging, learning, and planning to launch the first warehousing benchmark conference in 1993. Toyota blew everyone away - their overwhelming superiority in this space was pretty clear to everybody within about 5 minutes of arriving at their LA parts warehouse. Mopar, too, was dazzling - they were the best of the Big-3. And, err, well, once we made it to their turf, they had a new Viper under covers, in a conference room. They were so Mopar.

GM did not dazzle - in fact, we were a bit dazed by what we saw. Barbed wire fences, second floor sorting operations with no air conditioning; their place was a mess. I attended their debriefing after the conference. Not a lot of excuses; mostly embarrassment. That was 1993, and Bill Lovejoy headed up GM’s parts operation. You all should remember him - he moved from parts to sales and “saved the industry” post 9/11 with a gutsy rolling out of $0/0% - everybody followed suit; it cured the tower-shock and it brought folks back into dealerships to buy cars and trucks again. We avoided a recession. Well, Lovejoy, Wagner, and Sergeant embraced the benchmark metrics and kept GM in the benchmark group, in spite of the continued embarrassment this activity brought on. You can see the charts - the numbers were pretty bad there for about 8 years. That didn’t mean that nothing was happening. Seemingly small gains on top of a very low base provided ample rewards for continuing their journey of change. They developed “a plan” - to scrap most, if not all, of their existing warehouses and replace them with “Template” warehouses. The Template warehouses employed modern Lean work methods and were designed based on best-in-class methods they’d learned from their benchmarking. It takes a lot of time, patience, courage, cash, and commitment to do this. Let me stress that one word, “time”.

The Concept of “Unlearning”

I learned my concept of “unlearning” from GM. When you are young and foolish, you learn that American companies only have strategies that span to their next quarterly 10Q report. When you are young and foolish, you learn that strategy longevity is tied to the strategy’s architects or founding fathers. 23 years. That’s a long time that goes well beyond the 10Qs, plan architects, and founding fathers. GM forced me to unlearn a bunch of stuff. Bill Lovejoy passed the VP baton to John Smith (who resuscitated Cadillac and went on to head corporate product planning with Bob Lutz), then to Doug Herberger (now president of Allstate Dealer Services), Kevin Williams (heads up GM Canada), and now Steve Hill. Supply chain leadership during GM’s transformation started with Rodney O’Neal (now President and CEO of Delphi), then to Ron West (now retired); but it is Charlie Hyndman who has spent the last 10 years marching his team to the goal line. Even a cursory examination of these pedigrees of leadership is impressive. Early on, GM’s supply chain certainly did not have game, but these guys did and still do.

The Hyndman Era

Charlie Hyndman will hate this heading, but it really does describe the past decade of change within the GM parts supply chain. Hyndman came out of GM’s lean manufacturing operations with a knack for listening and a talent for innovation. He is an enabler: he enables talented staff to innovate from a mix-up of ideas and experience. The bottom chart in this blog shows what we call “quality”, expressed in warehouse error rates (North America) - again you can see a 19-year progression from back of the pack to nearly front of the pack. Hyndman brought manufacturing’s “Quality Wall” to parts warehouses to give visibility to poor quality and attention to systematic improvement. GM looked to some of the more ground breaking supply chain innovations that Ford brought to market and then rewired their “Template” distribution strategy. More recently they re-thought the roles of their transportation carriers. They have been in the forefront of OEM parts logistics evolution, which has paralleled the evolution we’ve seen in inbound to assembly logistics (they did this with some help from transplanted manufacturing logistics staff).
  • Increased use of small parcel freight that has different PDC handling characteristics and costs that are offset by different negotiated carrier rates and terms.
  • Hybrid network structures that incorporate carrier/3PL-operated mixing centers.
  • Further, we’ve seen the evolution of DDS to look more like traditional LTL freight with carrier/3PL-operated in-market mixing centers.
A lot at GM changed under Hyndman’s leadership. “Change” is not a word that some of the more hardened associate with the UAW. I had to work my way through college and joined the UAW at a foundry that made Delco parts. I know this culture a bit from the inside. GM made all these changes with a UAW work force - and, I credit Hyndman’s leadership for making this happen. It is time for many folks out there to unlearn some stuff they think they know about the UAW. However, the big take-away from all this is that this is not a series of anomalies. It’s pretty consistent with a culture that has the incredible patience to wait 23 years and battle against what seemed to be impossible odds to see a strategy work out.

Bottom Line

I grow tired of people who take a superficial look at what’s in the papers and conclude that GM lags behind true automotive modernity.
Time Out: One last story. Back in 1995, GM hired me to evaluate their aftersales purchasing practices - those draconian ones that purchasing Czar Ignacio Lopez brought to GM; the same practices that have spread to nearly every other OEM still in business today. I moderated focus groups attended by nearly 100 suppliers. This was the high stress point in my career - higher than my 3 days of IRS depositions in an expert witness case. My supplier focus group conclusion was that these miserable practices were certainly dehumanizing and polarizing, but they were sustainable in the short run. As long as there was a plentiful supply of cannon fodder-like suppliers. Toyota and Honda emerged as best-in-class from a supplier perspective - and they still are today. Well, I wasn’t very popular calling GM’s baby ugly. Harold Kutner, who replaced Lopez, refused to see me. It is now 16 years later. GM has put some personality and teamwork back into purchasing ... while most other OEMs are still stirring up their witches brew of dehumanizing practices. We deal with all the purchasing OEM departments, so we see and experience, first hand, the type of treatment that the supply community gets. It ranges from professional in GM’s case, to being treated like trailer trash. Mostly trailer trash. With the devastation of the Japanese supply base and the Darwinian culling of suppliers since the recession, it might be time to change strategies. So, maybe, GM’s really ahead of the curve, not at all behind it.
Now, 23 years later, when asked who to learn from, I don’t have a single point of reference. I say, Toyota, GM, Volkswagen, Hyundai, Ford, Mopar, Deere ....

_________________
1 “Method 1” for hourly PDC workers, and “Method 5” representing hourly and salaried PDC workers.

Thursday, March 24, 2011

Just for Dealers: So, What Can You Do to Survive in a Collapsing Customer Pay Parts Market? - Part 3

We should really call this “one last thing.” The purpose of this, and the prior two blogs, is to give retailers some ideas for improving back-end profitability, now, that do not require hiring expensive consultants or waiting for their respective OEMs to encourage them with more hand-holding and payment for performance. These ideas are easy to understand and easy to implement.

The “one last thing” is simply a number – 15%.


This chart explains what I mean – it is derived from a customer survey that correlated dealer service customer satisfaction with their intent to remain loyal – “dealer service repurchase likelihood.”

It is easy to see from this chart that “very satisfied” service customers are much more likely to remain loyal than are merely “satisfied” customers. Using conservative estimates for translating “likelihood” into actual repurchase loyalty, we come up with the “15%” I just mentioned.
Timeout: In plain English, a very satisfied customer is 15% more loyal than a merely satisfied customer. In even plainer English, a very satisfied customer will, for all practical purposes, remain loyal and “your” customer for as long as you continue to make him/her “very satisfied.” Once you slip and deliver merely “good” service, not “great” service, there is a chance that the customer will defect. Call it a 15% chance. That’s a roughly right number.
Now, imagine if you knew, at the precise point of deflection, when a customer was about to become merely satisfied? Like one of those Fox time-machine TV shows, where “Hiro” Nakamura can go back in time and fix things that got screwed up. Here’s the script:
Mary Doe: “Hi! You said to come back at 2pm so here I am. Where’s my car?”

“Hiro” as Service Advisor: (Smiles and is thinking; background thinking-voice: “Well, that car’s no way near to being done … just didn’t get to it … crap, what do I say? … Do I tell her that the parts were really rusty and we are taking longer than we thought? … Oh, crap, I used that last time with what’s-her-name … Heck, I know that I can dance around this one and make her OK … but, she’s not going to be really happy … what do I do? The boss sent that blog around and making her just ‘OK’ will cut down on our revenues from what’s-her-name by 15% … heck, her car’s 4 years old and I’d expect about $1200 from her just in the next two years … so, I’m going to risk $180 on this screw-up! … What do I do? … What do I do?”
What does he do? It is easy. Hiro’s about to lose $180 for the dealer if he does not step up and make what’s-her-name very satisfied.

What does he do? He goes back in time and does what it takes to make Mary very satisfied.
  1. He calls her by name.
  2. He’s already staggered appointment times to prevent things like this from happening.
  3. He began the conversation when she brought the car in by making sure that all bulletins were discussed.
  4. He spent some time with Mary on a visual inspection and strengthened their relationship.
  5. He can make sure that all shuttle operators give her priority treatment.
  6. If the shuttle isn’t appropriate he can get her into a loaner that is an upgrade to her car in the shop.
  7. He gave Mary his cell phone number so she can call to get the status of her car.
  8. He asked Mary how she wants to be communicated with – she prefers text messages and that’s OK.
  9. He ironed out the process of how we can review the work being done with Mary so that it is easy, effective, and convenient.
  10. Mary has a credit card on file – so, she’s on express check-out. Otherwise, ...
  11. …Mary can just settle up with Hiro.
  12. He knows enough to book the next appointment right now and he can do it so that she feels like a very special customer.
  13. We always wash the car – this time we will go the extra mile here to make it up to her.
What does he do? If Hiro did what he should have been doing, he simply tells her the truth. He tells her that they screwed up, that the repair flow got choked up, and that it won’t happen again. He tells her that he’s sorry. If she is a loyal customer who is treated like a valued customer, honesty will forge an even stronger relationship.

Bottom Line: The one last thing is 15%. I want you to see 15% of your revenue vaporize whenever a customer leaves your store merely satisfied. That’s a lot of money. That’s a lot of reason to change and improve. That’s why you do all the other stuff we talked about in the last few blogs.

Monday, March 14, 2011

Just for Dealers: So, What Can You Do to Survive in a Collapsing Customer Pay Parts Market? - Part 2

Last week we compared a dealership to a group of cars on a roller coaster. Up front, in sales, they ride in the first car. They are pleasantly petrified when the track falls. They scream. They yell. They even raise their hands off the hand rail as their car plummets down into the unknown. Hey, having your heart in your throat is part of the fun – up front.

Back here in the last car, in service, we like to have a little warning. We see the first car drop out of sight and know our car will soon hit that same drop. It gives us a chance to hold onto that hand rail a little harder. We are ready. Hey, having a little warning is part of the fun – in back.

So guess what? The segment of the car parc in our service-parts sweet spot will soon hit the point where the roller coaster track plummets. Be afraid … be very afraid … unless you have prepared to increase both customer retention and customer conquest. Both topics warrant their own discussion, so let’s focus on retention today.

Think about your favorite sit-down restaurant. What brings you back? For me, it is that I recognize the servers, they call me by name, and my drink & food order requires nothing more than nodding to the question … “the usual?”. Occasionally, based on their knowing me, they talk me into a “special” – and I like it. Sure, excellent food is important; but for me to return, the experience must be just as excellent. The combination is why I pay a premium – and happily return to do so again.

Of course you do excellent work in your service department; but, is the experience just as excellent? Below are a few ideas from very high customer service retention dealerships that might help you answer “yes” even more frequently.

Call me by name.
When I walk into my dealer’s service department, Chris Lutton always says “Hello Mr. Cremins”. Maybe I’m too easy; but, this impresses me. So I asked Chris “I’m only here twice a year. How do you always remember my name?”. Easy, he just sees me drive up and puts my front license plate number into his computer and … up pops my name. Chris calls me by name. I like it. I go back.

I’ve since discovered that my favorite hotel in Milwaukee has the bell staff look at my luggage tag when I get out of the taxi and communicate my name to the front desk staff … who never fails to say “Welcome back Mr. Cremins” when I walk up to register. I like it. I go back.

Stagger appointment times to allow appropriate time with me at drop off.
“So Chris” , I say, “How come you always have a few un-preoccupied minutes to spend with me?” Easy, he staggers appointments in the morning to allow time to chat. Chris never looks at a computer while talking to me. Chris … talks … to … me. I like it. I go back.

Begin with my service history and any current bulletins in hand.
Now, I’ll explain this one. Wait. No, I won’t. You should be able to get it just from the title.

While I watch, conduct a very quick multi-point inspection that includes tire wear and battery life, among others.
My wife loves this one. She goes in to the dealership for service and her Service Advisor (note that she isn’t a Service Advisor, she is my wife’s Service Advisor) takes out the multi-point inspection form from her last visit and says “Well, last time we told you that you were likely to need a battery next time. Looking at the battery test this time, you don’t – unless it gets really cold. Do you want to wait, or just do it now?” She gets the same update on tire wear, brake wear, and other predictable maintenance items. It is honest, transparent, and builds trust. She likes it. She goes back.

Your shuttle operator is a conduit of the voice of the customer and “nips problems in the bud”.
I’m biased on this one because I used to drive service shuttles during the summer when I was in high school, and I literally heard it all. When the shuttle talk begins to get a little ugly, the shuttle driver can save your bacon by doing something – or burn your bacon by doing nothing. Assign a BDC (Business Development Center) person to drive the shuttle. Do not assign the lowest paid person on staff with a driver’s license.

If I’m getting a loaner while my car is in for service, give me one that is at least as nice as the car I’m leaving in your care.
Don’t give me the smallest, smelliest car with cigarette burns in the interior. And don’t make me feel bad about taking a loaner for the afternoon, day, or overnight if that works better for my busy schedule. If you are really smart, give me the newest model or higher trim of the car I just dropped off, or a different model that is one step up from my current ride. I will see it in my driveway or parking spot at work, I will love it, and then I will want to buy or lease it when it’s time to trade in. (Your friends up front will thank you, and you’ll see me back in the service lane with my new car in no time.)

Allow me to check if my vehicle is ready without my having to talk to a Service Advisor.
Let me “see” into your system for the status of my vehicle. Don’t put me on hold. I said, don’t put me on … dang! I don’t like it. I won’t be back.

Communicate with me, in the manner I wish to be communicated with, as the vehicle progresses through service.
Don’t wait until you are completely done to tell me the status of my baby. Keep me up to date as my baby moves from place to place. “We’re at five centimeters Mr. Cremins!” I’m interested. I want to know.

No really, let me know when my vehicle has made it into the stall, when you are ordering parts, when the work is complete and you are waiting to have it washed, when it has been washed and I should come get my baby. I’m interested. I want to know.

How to let me know? Don’t page me over the loud speaker system (why do you even still have a loud speaker system?) because I might have walked across the street for a doughnut after the sales meeting has ended and the doughnuts are gone. Don’t call and leave a voice mail because I might be sitting ten feet away in the lounge watching Jerry Springer. Ask me if I want updates via text, phone, or email (just so you know, I prefer that you alert me by text). I would like it. I would be back.

Allow me to see and review the work done before I show up at the store for pick-up.
Is what you’ve done to my vehicle a state secret? No one but your cashier can tell me what was done? Really? Email a copy of the invoice. Post it on a secure page, just for me, on your website. Draw a picture and fax it to me. Just don’t make me stand in line with three other people while the first person in line waits at 5pm for a Service Advisor to explain his bill. I don’t like it. I won’t be back.

Let me pre-pay and use express pick up instead of standing in line.
Do the above and this is an option. It’ll save us both time and aggravation. And it makes me feel special, which means I’ll be back.

My Service Advisor is my cashier.
I love Canadians. Ok, I love my wife; but, I really like Canadians. My experience in Canadian service drives is that my Advisor is my cashier. We laugh, we cry, my bill is thoroughly explained, I pay, I like it, I go back.

Like my dentist, set my next appointment now.
My dentist’s staff knows that I like first thing in the morning on Fridays. So before I leave after each appointment, they ask if an appointment in six months on a Friday morning is suitable. I say yes. I go back.

By the way, they contact me a week in advance – by text because that’s how I like them to communicate with me (see a couple of items up) – to remind me and ask if that day and time still works for me.

If you are going to wash my vehicle, do a good job.
Ok, I’m picky here too. I spent several summers detailing cars at the dealership and want mine done right. When done right, I am a generous tipper who has surprised the heck out of wash guys with twenty bucks – a big time surprise for a wash guy. When done wrong, I don’t like it. I don’t go back.

How about a little training for the wash crew? I mean, really, just a little training please? Oh no! That’s not a buffer is it? Ayyyyyyy!

Add them up.
None of these ideas are world changers; but add them up, and they make me go back. You, I’m sure, can do much better than my little list. So … do it.

Jay Cremins, a principal at Carlisle & Company, specializes in dealer operations and OEM Field development. Before joining the consulting ranks he enjoyed a previous life in the retail world, starting at age sixteen washing cars and moving up the ladder into dealership management positions. In addition to project work, Jay has presented featured workshops at a half-a-dozen NADA conventions, as well as international meetings on five continents.

Monday, March 7, 2011

Just for Dealers: So, What Can You Do to Survive in a Collapsing Customer Pay Parts Market? - Part 1

When you go to a Six Flags/Disney/Cedar Point or similar amusement park, are you the person clamoring to be in the first car of the roller coaster (so you can be the first to experience that death defying drop and loop-de-loop) or are you the person positioning yourself in line for the last car (so that you can have a few seconds to anticipate your impending doom)?

This is similar to what it’s like to work in a dealership. If you work in variable ops you are the one at the front of the roller coaster – you are the first to experience that drop with little, if any, warning. Exciting, but dangerous. If you work in fixed ops you get a bit more notice. The momentum of vehicles in operation (car parc) gives you a bit of warning about when you are going to die.

Well, consider yourself warned.

Two years ago, vehicle sales went over the point where the track drops precipitously (and may be now starting a slow climb back); but, our service parts roller coaster car is just about to hit that same spot. And trust me, I’ve been on this ride before – it is a nasty plunge.

As we said last week, there’s little we can do to prevent the aftersales parts market from “slimming” down. Moving from 16-plus million vehicle sales years to a painful post-recession recovery that starts us back at 10 to 12 million puts a real dent in the car parc. So, by 2015 we can expect the customer pay parts market to shrink by about 14% and for market competition to significantly increase.

The question is … what actions are you planning to meet that future challenge? Our fixed operations model needs to evolve. There’s no denying it. We’ve got about two years to make this happen.

Get in the Mood for Change – Again!

Sometimes I get solace from simple observations of success. My favorite is the Supersoaker – look in previous blogs for this one. Here’s another: China has become the global manufacturing powerhouse for consumer goods. This is a fairly recent phenomenon. Go to Wal-Mart and buy a big-boxed something for your patio. It’s made in China. Read the directions on how to put it together – terrible, complex, inaccurate, grammatically incorrect, misspelled English. But, it works. We spend hours putting it together and it looks good sitting there next to the grill. Next week we go back to Wal-Mart and buy more big-boxed stuff made in China. China is now a very big deal.

So, what’s the lesson of all this? To paraphrase James Carville (when he was Clinton’s campaign manager), “It’s the price, stupid.” We do not buy stuff from China because it is, like, sooooo great. We buy it because it is “good enough” and the price is right.

Well, aftermarket parts and independent repair facilities are the China of the auto repair business. People go to the aftermarket because it is “good enough” and the price is right. Dealer service is the “high priced spread” -- and that really won’t work anymore. There are simply fewer consumers out there for which the real or perceived higher quality of dealer service will justify a higher price – or at least the perception of higher price.

So what do we do? We will suggest some low-to-no cost retention ideas (for keeping customers we have) in upcoming blogs. This week, let’s look at just a few conquest ideas (for getting customers back from the aftermarket).

First, You Should Thoroughly Understand Why Many of Our “Non-Loyal” Customers Hate Us.

Don’t look much further than price. Think about how much you “love” your plumber. Apologies to any plumbers out there; but, imagine some backwater plumber with a toothless smile, squatting over a toilet with half his butt busting from his JC Penney work pants, constantly on the cell phone with his buddy talking about getting drunk last weekend – and charging you $100 an hour. Makes you crazy. You really don’t know how long it should take to fix your toilet, but you are damn sure that $100 per hour is too much to pay this Jethro Bodine-like character.

Now, compare that to the person who cuts your hair. Looks good, sounds smart, works in a nice place, and it’s not uncommon to be charged a heck of a lot more per hour than your plumber. And you realize that, if you did the math, your stylist is probably making an obscene amount per hour. But you don’t do the math. That is not how you buy haircuts. You buy the end result, and since you like the look you get, you don’t really consider switching to CheapCuts and paying $12 with tip.

What we need to do is be sure that our customers associate us more with your hair stylist and less with your plumber. We want them buying the result (a working vehicle) and not the job. Here are a few things that will move us in that direction:
  • Get rid of your “labor rate” signs in any customer area.
  • Menu price most of your common repairs to include parts and labor – make sure you are competitive for the high volume jobs.
  • Figure out your average “effective labor rate” for a bunch of menu items by simply backing into them assuming full retail for all parts and incidentals. It will be a low number. Now, write this down on a Post it Note and slap it under each Service Advisor’s computer key pad. Tell them to never, ever, divulge the shop’s labor rate. But, if all else fails and they have to quote a rate, they should say, “Like everybody else we have different rates for different skills, but our effective labor rate for most of our work is $X per hour. We think that this is very competitive. And, more than that, very honest.”
  • Merchandise the quality of your parts and your technicians – people want to pay more for heroes, not a Hero. Anybody can make a Hero sandwich. But, everybody wants a Hero made by the Iron Chef – a hero. So, merchandise your people.
  • If you have staff that can’t be merchandised, get rid of them.
  • Find out, really, how your customers feel when they call your service department. Try an experiment. First, call your cell phone provider and try to talk to a human being. Now, hold on to those feelings. Next, call Cabellas and ask for some information on anything. Hold on to those feelings. Now, buy a disposable phone, thinly disguise your voice, and call your service department and ask for a firm quote on new brakes for a recent model vehicle. Which experience is it more like?
Next, You Need to Know Why Formerly Loyal Customers Left You.
They leave you for a bunch of reasons. First is price – but after you’ve done the above you’ve got that one knocked. Beyond price, some dealers are still pretty good at kicking customers out through treatment. It sometimes seems that dealer service operations are based on the Coyote Ugly model (It’s a bar in a John Goodman movie). When asked what they serve, “Jack, Johnny Red, Johnny Black, and Jose; all my favorite men. You can have it any way you like it, as long as it's in a shot glass.” If someone comes in and orders a Dewar’s on the rocks, they get squirted with soda water by a beautiful barmaid. Similarly, if a customer comes back to their dealer for services that are not in the dealer sweet spot (say quick-lube, state inspections, collision repair, etc.) many service departments effectively squirt them with soda water -- and there ain’t no pretty barmaid to take the sting out. You’ve got to stop doing that.

So, how do dealers reverse this?
  • First off, don’t call a slow lane an “express lane.” If you can’t compete with Jiffy Lube on time and convenience, then change what you are doing. Let me save you a ton of money on consulting…..go get your oil changed at a Jiffy Lube and copy what they do. Stuff like customer handling and turnaround time. Buy some stuff for your Express Lane operation with all the money you will save.
  • If you don’t offer state inspections, then offer them. And think about providing them for free to loyal customers. Pack in a more comprehensive free inspection that does not come off like Bernie Madoff selling derivatives. Just be honest and offer to do the stuff that is screwed up on the car or truck. Offer it at a reasonable price – all in, no labor charge split out.
  • If you don’t have a body shop, that’s OK. Find a good independent one and offer your customers valet service in case they have an accident. You could pick them up at the site of the crash and take them where they need to go, make arrangements for repairing their car at the “good body shop”, etc. Make it look like your body shop to your customers. Charge the independent shop a reasonable fee for your valet services and make sure that they don’t charge it back to your customers. If they do, replace them.
These are just a few simple ideas. Trust me, I haven’t even gotten started yet. Tune in next week as we offer another “just for dealers” post that shares low-to-no cost retention ideas for enjoying the roller coaster ride.

Tuesday, March 1, 2011

2013 Light Vehicle Parts Market Contraction - Expect a 14% Slimdown - Winners and Losers, and Winning and Losing Strategies

by David Carlisle

By 2015 the customer pay light vehicle aftersales parts market is likely to shrink by around 14% (uninflated dollars). We didn’t really miss the recessionary “bullet” in aftermarket car-parts sales in 2009 and 2010. 2009’s sales declines were the direct result of Keynesian Paradox of Thrift that mostly canceled or delayed light vehicle maintenance and repair. 2010’s sales rebounds did not get us to 2008 levels; rather they were propelled by inventory and ordering bullwhip effects on the market, and consumer belt loosening. 2011 will see the market return to more normative conditions, with the tail-end of the recovery bullwhip softening out; my guess is that this will add about 5% to the “normative” market. However, 2013 will be our comeuppance. This is simple math, so no one in the light vehicle aftersales space should find this surprising.

You can see the impact of this on the second chart – “Normative Case Indexed Size of Customer Pay Parts Market.” Under “normative conditions” the size of the customer pay parts market would contract by about 8-9% from today to 2015 (assuming constant dollars, where retail pricing is in line with normal inflation). This conclusion is derived from very simple math – multiplying fleet age parts consumption and volumes. The third chart, “Normative Case Indexed OEM Customer Pay Market Share” shows how these age consumption/volume/share profiles translate into OEM market share. Here, we see the OEMs losing about 4% of their existing market share from now through 2015 (e.g., they will retain 96% of their current market share in 2015). It’s a double whammy for the OEMs – contracting market coupled with contracting market share for the most profitable parts business.

As we’ve seen in the past two years, “normative conditions” have not played out in the market. So, the last two charts need to be sensitized to probable realities that will impact both the size of the market and market shares.

GDP Consumer confidence and various economic factors get blended into “GDP”. GDP could climb 4% or more this year and should continue to increase over the next five years as we come out of the worst recession since the 30’s. Global volatility, state fiscal crises, energy costs and the housing disaster could slow the upward trend but most economists expect continued growth through 2015. Unfortunately, it is unlikely that moderate GDP growth will have any positive (or negative) impacts on either part market size of share shifts.

Fuel Prices & Miles Travelled Retail gas prices peaked in 2008 at just over $4 and we seem to be headed back that way. The chart below shows retail gas pricing since 1990. This will likely result in increased sales of cars vs. trucks, higher fuel efficiency across the entire fleet of new vehicles, and a push towards alternative fuels. If fuel prices continue to climb we can expect a negative effect on consumer income, a slowing of miles driven, fewer light truck sales and, therefore fewer accessory sales, and increased maintenance and repair (M&R) consumer “thrift”. This will have a dampening impact on the total parts market, and result in share shifts away from the OEMs to the IAM.

New Light Vehicle Sales Year over year sales increases are built into the normative case. Considering the age of the vehicles on the road, the expected growth in GDP, and subsequent rise in consumer confidence we can anticipate 15 million new vehicle sales per year by 2014, or earlier if we’re lucky. Increased vehicle sales are practically inevitable assuming GDP and economic recovery, coupled with lots of pent up demand and aging vehicles. Tighter credit, declines in home prices, and job instability could slow the growth curve, but should not derail the upward trend. What’s not built into the normative case are changes to the car/truck sales mix – rising fuel prices and evolving vehicle choices favor a long-term trend of a leaner light truck mix. This will dampen accessory sales and further cause parts market contraction.

Digital Demographics We’ve spent a lot of time talking recently about the emerging digital customer who tends to be young, technologically savvy and influenced by social media. They also aren’t particularly loyal to dealers, as shown by the radar chart “Digital Service Customer Behavior”. Today’s youth will age and be replaced by more technology-inclined youngsters as the size of the older, most dealer loyal group will gradually decline. Furthermore, older non-digital service customers are evolving, too. They are transforming themselves into digital customers. Currently, one-third of all service customers are “DSCs”. It is a safe bet to assume that by 2015 two thirds will be DSCs.

Technology & Quality The ‘”Crashes” chart shows the significant decline in total crashes since 2005, with estimates out to 2015 based on current rates of crash shrinkage. We should expect continued decreases in crashes as light vehicle manufacturers build safer vehicles with better handling and braking systems. New crash avoidance systems are showing up in high-end vehicles and will spread across the entire industry over time, reducing incidents through smart computer systems. Beyond this, the recession and subsequent decline in miles coupled with stricter drunken driving enforcement has impacted the number of crashes. All of this will act to shrink collision parts sales. Consistent with these safety-tech trends are overall vehicle quality improvements that will reduce the need for replacement parts over the entire life of each vehicle. But, for the OEMs, there is some good news – better brand and patent enforcement is gaining momentum and will bolster OEM collision parts market share stability. Ultimately, active Telematics vehicular systems should increase dealer service market share. These OEM advantages are likely to be countered by the independent aftermarket (IAM) through aggressive marketing, legislative lobbying, and insurance company “partnering”, leading to zero-sum share gains for both the OEMs and IAM.

So, What Are the Likely Bottom Line Impacts?


We expect even further market shrinkage and share shifting based on the characteristics of the aging fleet and the key fundamentals that impact how many motor vehicle parts you need and where you buy them.
We need to think of these shifts as significant tidal forces that reflect the enormous momentum of how we build vehicles, how they are serviced, and how many we are selling (of what type) in this post-recessionary world.


System Dynamics and Unintended Consequences
There’s not much that can be done to bolster the market itself – on a constant dollar basis. It’s hard to get someone excited about going out and buying new struts for their 2005 Tahoe when they don’t need them. All of the real action will be in market share battles pitting the OEMs against the IAM. This is not rocket science, and the conclusions are inescapable – the investment community will figure this out all on their own. Thinking realistically, nothing can be done to grow the normative market. The smarter IAM companies will start putting pressure on selling more to dealers, pumping even more money into Right to Repair, launching much more sophisticated pricing strategies that go after any one-size-fits-most OEM pricing rulesets, and pumping big bucks into internet purchase funnel strategies. Emerging from a horrendous 2009, many OEMs are carefully preserving aftersales profitability as part of a natural breather strategy. This might make them late to react to these more direct frontal attacks. Denial and hope will play important roles in numbing their strategic responses: denial of the math behind the simple forecast numbers, and hope that their current set of market share expansion strategies will be low-ball homeruns. Given normative conditions, 2012 will be a down sales year, and for many OEMs it will be difficult to budget significant additional investment for the right strategies. So, many OEMs are bound to price their parts significantly beyond an inflation adjustment. And, things will get worse from there.

Winners and Losers
The OEMs who fared the best in 2009-2010 will emerge from the next few years in the best shape – VW, Hyundai, Subaru top the list here. Obviously, some other OEMs did not fare so well and might see even tougher times in 2013-2015. Some IAM players will be very hard hit – LKQ/Keystone looks like it is holding a losing hand. It reminds me of Blockbuster … in today’s market; wrong product in the wrong market with the wrong value proposition. Declining crash rates will hurt them significantly, and the older car parc will change the nature of their customers. The margins from hanging old junk car parts on old cars that survive a crash (and are not totaled) … well, it looks pretty unattractive to me. They will be competing with tubes of Bondo and it won’t be pretty. NAPA/Genuine Parts will do better in the 2014-25 market – their strengths are their number of locations, history of selling to the older car parc, historical diversification into all vehicle segments, and the loyalty of traditional Independent Repair Facilities (IRFs). AutoZone will struggle, but is brilliant and will figure things out. The others? If you have any stock in the dogs-breath of other IAM companies, sell soon. The market will soon start to stink to investors.

Twelve Winning Strategies for Crappy Market Conditions

  1. Market share expansion strategies targeting older vehicles
  2. Telematics strategies that are active and target older VINs – this is absolutely critical for survival
  3. T&C strategies that reward dealer purchase loyalty and share expansion – wholesale
  4. Brilliant pricing strategies that cut your product lines at a very fine level of detail
  5. Extremely effective tire and round-the-wheel program
  6. Effective fast lane LOF program to stop early customer defections
  7. Dealer digital customer service training
  8. Extremely effective free inspection programs
  9. Fresh and well thought-out customer rewards programs
  10. B2C, B2B, B2B2C web strategies
  11. Customer owner center on the web that is “sticky”
  12. Strategic (not tactical) third party and social media strategies that ensure your dealers get a fair shake when customers research service options