Thursday, February 14, 2013

Why Would Anyone Put High Volume Parts on Ship-Direct?

Imagine the following. It is Sunday night and your spouse says, “Honey, I forgot to go to the grocery store today. Can you run out and pick up some milk, bread and eggs to get us through tomorrow?” Being a good person, you of course say, “Yes.” However, when you get to your local store, you find that the dairy section has no milk or eggs, and the baked goods aisle has no bread. You track down the store manager and ask, “What’s the problem?” He quickly apologizes, and explains that his store recently introduced a new ship-direct supply chain to save you, the customer, some money on your most frequent purchases. As a consequence, they are out of stock on items like milk, bread and eggs “just every once in a while”!

Does this ever happen to you with grocery staples? No, of course not, because if it did, you and everyone else would quickly shop at the store down the road that always (well, nearly always) has milk in stock. Who cares if you can save five cents on a hypothetical gallon of milk if the milk isn’t there?

Hmm… what does this have to do with motor vehicle service parts? Everything! Based on our North America Parts Benchmark (NAPB) research, and looking at over 20 motor vehicle OEMs, nearly 15% of net sales, on average, is delivered to dealers via ship-direct. For some individual construction, agricultural, truck and auto OEMs the volume is nearly 30%. In many cases, some of the fastest moving parts, such as filters, are delivered ship-direct. By the way, we think of ship-direct as a distribution flow that physically bypasses most or all of an OEM’s distribution network (i.e., ship-direct parts are most often shipped directly from the supplier to the dealer). Sometimes ship-direct parts go to a consolidation center or a cross-dock facility to minimize transportation costs or reduce the number of deliveries a dealer receives.

Okay, some facts to frame this issue.

Fact #1, What OEMs Think - OEMs love ship-direct because it saves money – both supply chain costs and inventory holding costs – but, certainly not because it improves service. Our research with OEMs shows this loud and clear.

Fact #2, What Dealers Think – On the other hand, dealers dislike ship-direct. As shown below, our research from 11,000 dealer parts managers tells us that they would much rather get their parts from their facing parts distribution center. Why? Availability is higher, order response time is shorter, visibility is clearer, and so forth. In fact, here is a quote from a dealer parts manager that neatly summarizes what many think, “I perceive the drop ship [ship-direct] program as your ‘red headed step-child’. It allows you to stock less at your depots, spend less on warehousing, facilities, delivery expense and personnel. It is a win-win for you. No so for the dealers. It is high maintenance for the dealers. Invoicing is inconsistent at best. We have to be in constant interaction with the vendors to check on orders, delivery times and reconciling orders / invoicing, etc. For all the time and money you save by shifting the responsibility of these items to the drop ship program, the support just isn't up to par. I would prefer all the drop ship billing be seamless with the genuine parts billing…”

So, what does this mean? Is the answer to never use ship-direct? Of course not. Ship-direct is a sensible distribution strategy for hazardous parts, such as batteries, that we do not want in our distribution centers, or for slow-moving, end-of-life parts that are prone to high levels of obsolescence and scrap. For hard-to-handle parts, such as tires, there are specialists who have perfected a niche in which we will always struggle to keep up.

Conversely, ship-direct is absolutely the wrong strategy for the fastest moving maintenance and repair parts (think milk, bread, and eggs!). Your customers need these parts off the dealer’s shelf or available on the same day. As the OEM, you need to support your dealers and provide the highest level of fill, as well as the shortest order response time. That means the parts come from your local PDC within a couple hundred miles, not from a supplier three time zones away. Further, keep in mind that your dealers have choices for obtaining those fast moving parts. You’ve got competition; if you cannot deliver these parts quickly and consistently, NAPA can. They are probably within 10 to 15 miles of most of your dealers and will deliver several times a day, within an hour’s notice.

Systemically, to convert these ideas to sustained action, Carlisle & Company uses a ship-direct part selection model that considers the customer’s need, the supplier, and the costs.

The bottom line is that ship-direct is the right distribution strategy for some parts, such as less competitive slow-mover parts. And is not the right distribution strategy for other parts, particularly high volume competitive parts that are essential for customer uptime. I could write a lot more about selecting the right parts for ship-direct, but my wife is calling. She still needs me to go pick up some milk, bread, and eggs at the grocery store...

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