Friday, February 24, 2012

Retail Inventory Management Continues to Evolve - by Gene Metheny

Earlier this month, we conducted our 3rd annual focus day dedicated to retail inventory management (RIM). After 3 years of spending a full day drilling down into the details of RIM, the participants continued to learn from each other and evolve their systems. At the end of the session, there was unanimous agreement to do another event on RIM next year, potentially extending it to two days and including some live RIM demonstrations.

We have been following RIM development since the early 1990s and it has been astonishing to watch the progression of sophistication and effectiveness in the various solutions. Back in 2006, we identified a progression of system functionality that was providing increasing levels of OEM control over dealer stocking decisions.

Back then, companies were fairly evenly distributed along the continuum of functionality. We made the clear case for the advantages of policy recommendation and automatic order generation and predicted that companies would continue to move in this direction. This year, almost all of the participating companies were clustered toward the right side of the chart. Those that were not, were considering moving in that direction.
The reason for the trend is simple; automatic order generation provides some great advantages over other RIM approaches:
  • Much higher dealer compliance with stocking recommendations – also easier to measure compliance
  • Much faster restocking of dealers, since there is no delay for dealers to review and process orders
  • Higher dealer purchase loyalty because dealers are not making as many buy decisions; the parts just show up
  • The ability to control when these stock orders are picked and shipped, enabling potential improvements in OEM warehouse and transportation efficiency
In 2011, we delved deeply into the stocking algorithms and methodologies that determine the dealer stocking recommendations. The wide variety of stocking methods used can be detected just by looking at the variation of forecasting methodologies being used.

In an attempt to determine the relative merits of various stocking logic approaches, we are working to benchmark fill and inventory performance (similar to the way we measure warehouse inventory performance at NAPB). The biggest obstacle to effective benchmarking has been the diversity of methods used to measure off-the-shelf fill rates at dealers. This year, we categorized the various methods being used and discussed the relative merits of each approach. We agreed to work together to harmonize these metrics and will work to influence DMS providers to generate a standard data feed that all OEMs can use to calculate fill going forward.

Various Dealer “Off-the-Shelf” Fill Metrics

Companies are continuing to examine how RIM and D2D can be leveraged to both improve availability and increase purchase loyalty. These methods are getting increasingly sophisticated as companies learn to leverage a combination of technology, commercial terms, and promotions to achieve results. One example is the use of D2D to administer a dealer exchange program that is tied in with OEM repurchase terms for the selling dealer.

Bottom Line: Manufacturers are leveraging increasingly sophisticated technology to manage the dealers as an extension of their own supply chains. As companies gain experience, they are learning how to push the boundaries and expand the use of RIM to improve supply chain efficiencies and enhance their commercial relationship with their dealers.

I continue to be excited and encouraged by the creativity and progress in Retail Inventory Management. Even after almost 20 years, RIM is continuing to evolve, generating more value for customers, dealers, and manufacturers. As we share our experiences with each other, companies are using these tools to truly change the industry.

Friday, February 17, 2012

Trading Off Cost vs. Service – You Can Have Both with Collaboration

It’s the eternal challenge – deciding how to optimize the tradeoff between cost and service. In the parts business one of our biggest costs is transportation and one of our key service metrics is delivery frequency and timeliness. When serving dealers in major metros the cost vs. service tradeoff is relatively small, since the outbound distance traveled is short, and, with the high density of dealers in the area, dedicated delivery trucks are full and the distance between stops is short.

The bigger challenge is outlying dealers. Here, we have the issues of long travel distances and low dealer density. As such, we have to choose between expensive dedicated delivery service and less expensive LTL service. The latter provides a lower level of service, since it takes longer and doesn’t generally offer fixed delivery schedules, not to mention the damages from all the handling. Dealers hate receiving their parts orders via LTL.

It turns out that finding the optimal cost vs. service tradeoff when only looking within the boundaries of your own business can lead to suboptimal results. Last month, we facilitated a day-long Focus Day session on Supply Chain Collaboration. Nine motor-vehicle OEMs participated; representing a cross-section of autos and heavy equipment. The day was devoted to exchanging information about where OEMs have capacity to share and where they have a need for more. By the way, this wasn’t limited to just transportation lanes to outlying areas; think warehouse space, exporting, Alaska, Hawaii, etc.
Timeout: There’s nothing new about the concept of collaboration. OEMs have been sharing transportation routes for years. With recent changes in the economy, the pressure is on to increase efficiencies without compromising service. The key is finding the opportunities and then exploiting them.
At the end of the day, nearly all of the OEMs had identified at least one opportunity to collaborate with another OEM to raise the bar on the cost vs. service tradeoff. Many of these opportunities are worth hundreds of thousands of dollars per year, if not millions. Not bad for one day’s work. Well, ok, there’s a lot more work to do in order to cash in on the opportunity. Nevertheless, it was a day well spent by all.

This was our second year of hosting the Supply Chain Collaboration session. In addition to telling us how satisfied they were with the day, repeat attendees also commented on how it gets a little easier each year as OEMs get more comfortable with the process and give more thought to the collaboration possibilities.

Bottom Line: Optimizing the cost vs. service tradeoff without getting outside the boundaries of your own business will often yield suboptimal results. Unless you explore the possibilities, you’ll never know how suboptimal your results are. Given the ROI for the time spent to identify collaboration opportunities, think about getting involved the next time a collaboration opportunity presents itself.

Thursday, February 9, 2012

Something to Think About – Trivia from the 2012 Consumer Sentiment Survey

We recently completed the 2012 Consumer Sentiment Survey. We can now look at the evolution of service customer sentiment/behavior/satisfaction over a bunch of years. One of the interesting things we see in 2012 is the degradation of top-box satisfaction (shown as “Very Satisfied”) with treatment when coming in for an appointment … across all channels. Total top-box satisfaction dropped 16% [calculated as (70% - 59%) / 70%] - chains fared the best with an 11% drop, versus dealers dropping 19%. These drops are all material and statistically significant.

What’s going on? A bunch of things.
  • The aftermarket rebounded in 2011, pretty much across all segments. Capacity was tightened in 2009 and 2010, and we met 2011 with much leaner service capacity.
  • My guess is that car dealers reacted faster to the recession by cutting capacity (we saw this in the 2010 Recessionary Dealer Survey) and were less willing than the other channels to add back once the market rebounded.
  • We will be showing more data from the 2012 Customer Sentiment Survey in future blogs and the upcoming Service Benchmark session, as well as the Digital Summit that focuses on hand-held device strategies. By looking further into the data we see that the number of consumers who use the internet (including owner centers) for service research skyrocketed – in 2010 our survey found that 32% of consumers were Digital Service Customers “DSCs” vs. 55% in 2012 (and this is with 2012 survey responders who were somewhat older than in 2010; in 2010 we identified that DSCs tend to be younger). This increase surpassed our forecast. Switching behaviors went down proportionally (predictable as internet offerings mature), but for the population at large netted out to an overall 29% increase in switching (as a result of internet research). So, people are using the internet more for research and are, as a group, switching providers a lot more than they did last year.
Bottom Line: The parts and service market was in recovery in 2011and this strained service capacity across all channels. Service customers were less satisfied, partly, because of this. Internet use grew at the same time and our service customers grew smarter and better informed of their choices. This education, in and of itself, bred dissatisfaction and, overall, this group increased channel-switching behavior. Real-time information coupled with old-time processes creates disconnects and satisfaction erosion. The service fleet composition from 2012 to 2015 will reflect the devastating whole-goods sales setbacks we saw from 2009 to 2011. This will shrink demand. Service capacity will better align with demand, and whatever influence this had on depressing satisfaction will disappear. What won’t disappear is the steadily increasing use of the internet to educate our service customers, the increased amount of channel switching, and the disconnects customers experience from mismatched expectations.

Friday, February 3, 2012

Protecting Collision Parts Share

By Korin Hasegawa-John

We’ve talked a lot about the “good old days” in this blog. Back before the digital revolution, when we could make our customers run the gauntlet that was our 1-800 numbers, hold times, and elusive customer service reps. Well, back in those good old days, OEMs owned the collision market. When a customer took their car to the body shop, the insurance adjuster wrote an all-OEM estimate and the car would be repaired to pre-accident condition. The customer was happy (well, as happy as they could be following an accident), the body shop was happy to use original parts, and we were fat, dumb and happy making a hefty margin on millions of dollars in collision parts sales. The only people who weren’t happy were the insurance carriers, who eventually decided they’d like to keep a little more of that money for themselves. They started using all kinds of aftermarket, “recycled” and repaired parts, all the while telling their customers that it was part of an effort to keep those nasty premiums down. And the customers bought this, hook, line and sinker. Consequently, auto OEMs’ share in the collision market went from 90% to 80% to 70% and on downward, which brings us to the present day.

OEMs are playing defense when it comes to collision parts. How do we slow, stop and reverse the market share gains of our competitors? In the auto segment, OEMs have developed price matching programs, which can be an effective way to retain market share without resorting to drastic price cuts.

The key to price-match programs is the data extracted from estimate-writing systems. Almost all collision estimates in the United States are written using one of three major estimate-writing systems – Mitchell, CCC and Audatex. OEM price-match programs rely on the data generated from these systems to feed their wholesaling dealers competitive opportunities.

How does a price-match program work? There are many variations, but the common concept is as follows:
  1. The dealer can see a non-OEM part written on an estimate.
  2. The dealer can offer to sell the OEM part in its place at a substantial discount.
  3. If the shop selects the OEM part, the OEM reimburses the dealer to help support the deeper discounting needed to make the sale.
Here’s the key: If the body shop writes an OEM part on the estimate in the first place, the dealer sells the part at their usual price and both the dealer and OEM make their ordinary margins. The price match is only triggered by the presence of competition. We keep those nice margins when insurance writes our parts, and we can price-match with the aftermarket when we need to.

So what’s the problem? Well, as it stands, most OEM systems effectively support market share, but don’t support OEM profitability. The pitfall is pursuing an easy solution rather than a profitable one.

We are fighting a losing battle when we simply go out and match prices with the aftermarket. Here’s how that process goes:
  1. The insurance rep writes the estimate and the body shop orders the parts.
  2. The dealer converts some of the aftermarket parts to OEM.
  3. The shop installs the OEM parts, saving time and, therefore, labor.
  4. The insurance rep gets promoted because he just got the insurance company more OEM parts than they paid for.
  5. In the future, the insurance rep will write even more non-OEM parts because, hey, he’ll get the OEM ones cheap! And once he identifies a part number that’s eligible, he’ll never write that part as OEM again.
Sense a problem? By offering the price match once, we’re in danger of always price matching on that part. Sure, we may be growing our market share with every price match, but if we are losing money, or barely breaking even every time, what’s the point?

Body shops universally want to install OEM parts. This is because they fit better than the aftermarket equivalents and fewer labor hours spent adjusting parts mean faster, cheaper repairs for the shop. Shops will even pay a small premium for OEM to replace aftermarket, but a straight price-match program doesn’t take advantage of this. If the shop is willing to pay more money for our product, why not allow them to do so?

How do we avoid the constant price matching, and capitalize on the premium for OEM parts? The first is relatively simple. Don’t put parts on the program until there is competition in the aftermarket. Don’t put all part numbers on the program, and have groups of part numbers that cycle in and out of eligibility. This variability in the parts list prevents your part numbers from becoming guaranteed conversions and encourages insurance adjusters to write more OEM parts.

The second requires a little more work by the dealer, and constant vigilance on the part of the OEM. OEMs can offer variable reimbursements based on the sale price of the part, rather than a straight price match to the aftermarket price. The deeper dealers have to discount, the more OEMs support them with reimbursement. This means that if the dealer doesn’t have to discount the part to make the sale, the OEM pays less reimbursement. In this way, dealers can charge the shop exactly the price they’re willing to pay for the part, maximizing their margins. This type of system is more complicated and requires more management, but can substantially increase dealer and OEM margins on converted parts. In fact, if OEMs want to get really creative they could change the pricing structure based on part types, or vehicle age, or any number of other factors.

Bottom Line: If we’re willing to dive deep into the data and take a microscope to every transaction, we can leverage price-match programs to improve profitability. As the number of non-OEM parts on estimates continues to increase, the importance of price-match programs will grow proportionately. We have incredibly powerful tools that enable us to be smart about our price matching, and squeeze all the revenue and profit we can out of these valuable programs. No one can afford to run a price-match program as a charity.