Friday, April 19, 2013

Bits Instead of Atoms

Objects, like car parts, are made out of atoms. So are warehouses, trucks, and the fuel that powers them. Reactionary repositioning of these atoms could be costing the motor vehicle service industry the better part of $300M / year – more about that in a moment. Information is composed of “bits” – those little ones and zeroes that can describe numbers, words, pictures, music, and movies.

A couple of years ago, Marc Andreessen, the guy who helped build the first web browser (Netscape) and is now a notable venture capitalist, wrote a WSJ op-ed called “Software Is Eating the World.” Unfortunately, that article now lives behind the Journal’s pay wall, but Wired editor Chris Anderson sums up the idea: “Software eating the world is dematerialization, in some sense: … sectors of the economy get transformed into coding problems.” In short, our increasing ability to obtain and analyze information (bits) is changing how we interact with the physical world (atoms).

This can happen in a few different ways. Software can help us use resources more efficiently. One example of this is the growing sharing economy. For example, ZipCar’s founder claims that every car it puts into service replaces 15 vehicles.

Software (plus a little hardware) can also reduce our need for physical objects. The obvious example is the smartphone. My phone has replaced my need for: an alarm clock, a camera, a video camera, a music tuner, a GPS device, a Walkman (did I just age myself?), a newspaper, an address book, a calendar… and that list is not complete. Not convinced? How about the fact that since 2011, Amazon has been selling more Kindle books than physical books? Or that today’s 16 year olds aren’t so concerned about getting driver’s licenses because they conduct their social lives through their phones? "The Internet has made the freedom that comes with a license anticlimactic."

So, bits are replacing atoms in our economy and our lives. What does this mean for motor vehicle aftersales (beyond leading to a possible long-term decline in vehicle sales)?

I can think of a few things.
  • Remember how Amazon drove Borders out of business? Amazon’s interface for ordering car parts has improved in recent months. It’s still not an amazing buying experience, but it’s getting better. And a lot of parts are available on Amazon Prime- next day delivery for $4 a part, or 2nd day for free. We’ll talk about this at our next Digital Summit.
  • We fly a lot of parts around in planes, burning a lot of fuel along the way; a lot of atoms, and a lot of cost. Our NAPB members collectively pay over $300M a year for air shipments. In many cases, if we had one or two more day’s notice, we could ship these parts on the ground. Currently, the rule we use for stocking parts at dealers and warehouses are fairly crude: we stock based on forecasts that are driven by what happened last month or last year. If Target can figure out if a girl is pregnant before her family did, and Obama can use predictive persuasion to win an election, maybe we can start forecasting demand using methods other than looking in the rear view mirror?
  • Closer to home, the next version of Optricity’s OptiSlot slotting software will allow stock managers to identify which parts are often purchased in the same order (like rotors and pads), and stock these parts closer together in the warehouse, while also obeying a host of other optimization rules. The benefit is increased warehouse productivity. We’ll be learning more about state of the art slotting software at the NAPB Warehouse Technology Roundtable in late April.
  • Progressive has collected data for over five billion miles driven through its SnapShot program, and used this information to construct improved automotive insurance risk models. This data has value; Progressive offers discounts of up to 35% to drivers that it has identified as low-risk. Says Progressive, “The predictive power associated with driving behavior is more than twice as powerful as the second most powerful variable, which is driving record points.” Most other automotive insurers have similar programs, called Usage Based Insurance (UBI). The leading UBI provider in the United Kingdom measures whether you “Drive Like A Girl.” And State Farm’s In-Drive service takes matters further – the device it uses to monitor driving behavior can also provide emergency assistance, remote monitoring of vehicle location (“Stop losing sleep worrying when your teen is out with the car”), and even “monitor safety and performance with diagnostics.” It’s a plug-in telematics system.
  • Along the same lines, the U.S. Dept. of Energy (DOE) recently ran an “Apps for Vehicles” contest, the goal of which was to “demonstrate how the open data available on most vehicles can be used to improve vehicle safety, fuel efficiency and comfort.” Winners included: Dash, myCarma, Green Button Gamer, and Fuel Economy Coach. All of these apps rely on the same basic idea: Combining a smart phone with a wireless OBD-II plug-in provides a stream of actionable data that can help people drive safer and more efficiently. Of the start-ups listed, only Dash talks about using the data stream for vehicle diagnostics, but that’s the next logical step.
My question for the reader is: why are we letting insurance companies and start-ups capture all this great on-the-road vehicle information? I can understand letting the start-ups figure this stuff out, and then buying one of the winners, but that wait-and-watch approach is less effective with insurance companies.

After we sell a vehicle, we want to stay engaged with the customer. But, if their cars are reliable (and we sure hope they are), we’ll only see them once or twice a year. Meanwhile, we know they don’t visit the Owner Center portion of our websites very frequently; they just don’t have the need. Similarly, the only automotive-related phone apps that have any traction today are gas price references like GasBuddy. But, when you pair an OBD-II reader with a smart phone, you have a rich, dynamic stream of information that vehicle owners can take action upon. Others see the value in this data, and are racing to acquire it; why aren’t we?

The bottom line: Software is eating the world; bits are becoming more important than atoms. This trend poses threats (read: AMAZON) and opportunities (read: CUSTOMER ENGAGEMENT) for our business. The consequences of not reacting to this trend are obvious; just ask the management at Borders.

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