Wednesday, April 4, 2012

System Fill vs. Facing Fill – Which Way’s The Strategy?

This used to be an easy question … if you stayed strictly theoretical and assumed that recessions were finally behind us, that parts managers did what we told them to, and that our new programs were just stunningly brilliant. It still is a fairly easy question to answer if we stick with reality.

Our dealers are still stuck with a recessionary hangover and this shows up in lean parts inventories. Our customers don’t have a lot to spend, so suppliers have flooded the e-market (as well as the other markets) with cheap parts. As a consequence of this, jobbers and WDs have to supply a broader assortment of parts with more spotty demand, availability, and ORTs. This is good for our dealers...if they have the parts.

If our parts managers would simply use our brilliant RIM (Retail Inventory Management) solutions to stock all their parts, we would be happy in a system fill world. We could design their inventories to nearly always be in stock and we could replenish these inventories at our convenience.

Well, that certainly doesn’t work.

Part populations are still growing as OEMs kick out more vehicle configurations with more parts and more complexity. It simply is not economically practical for a dealer to have near perfect in-stock performance. So, we design RIM systems to make sure that the best bunch of parts is usually in stock. RIM does a better job of this than a parts manager, simply because of the richness of the information and technology that goes into the decision-making.

Inevitably, dealer parts managers will rely on fairly crude non-RIM processes for replenishing parts inventories not on RIM. This might represent a significant portion of their sales … or, lost sales. Non-RIM dealer inventories also suffer from unintended consequences. RIM inventories have the most favorable returns policies …we do this to encourage parts managers to use RIM. The problem with this policy carrot is that it creates a disincentive to hold many non-RIM parts in inventory – breadth-wise and depth-wise. So, we end up with worse-than-normal fill rates for parts not managed by RIM. For non-RIM parts, facing fill is critically important, while system fill can be somewhat irrelevant. Dealers will predictably be out-of-stock for certain parts. And, for a bunch of these parts, parts managers will rely on their daily stock order for replenishment. It’s cheaper that way. Remember, “recessionary hangover.” And, while we may have very high system fill for these parts, they will take longer to replenish. More dissatisfied customers and lost sales.
Timeout: (Gene Metheny) I would say that the mix of facing versus system fill may be a bit different in the CE/AG world. It is simply impossible to carry everything facing and the ability to carry less-critical items centrally can lower inventory costs dramatically without severely impacting service.
It is not just parts managers who suffer from a recessionary hangover. The OEMs are infected, too. To make RIM work in this market, we need to support it with higher levels of facing fill. But, we might not want to travel down that path. Higher facing fill leads to higher inventories (that can be manageable) and denser warehouse parts slotting (OK, now this represents a lot of work). The offsets are lower referral costs, lower expedited freight, higher customer satisfaction, and lower lost sales. Hard and soft savings. Messy. I thought that “lean” meant flexible? Maybe it does, and maybe we aren’t.

Bottom line: Your system fill metric is only as good as the lack of competitiveness of your parts, the ORT of your stock order referral process, or breadth of RIM coverage. Five things can happen when a part is called for at a dealership and it’s not there: (1) they get if from another dealer and lose margin, (2) they buy non-Genuine from the aftermarket, (3) they lose the parts sale, (4) they lose the service sale, or (5) they tell a story to the customer and the customer waits until they get the part. None of these outcomes are positive. In all five cases, high facing fill provides better (not perfect) outcomes.

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