Friday, May 31, 2013

“I’ve Gotta Have It!”

OEMs want to develop and market products that appeal to us as consumers, right? They supply genuine parts to fix our vehicles – parts that provide the machines with longevity and us with peace of mind. They come up with new accessories and add features to enhance our ownership experience. Some OEMs even offer clothing so that we can wear our pride in the brand.

What drives demand for these products? Price, quality, customer service, warranty, and functionality to name a few. However, look past these “tangibles”. What about the “intangibles”? From a retailing perspective, consumers are subject to whims and desires for products that go beyond a rational thought process. When they see a product, they think “I’ve gotta have it!”

I was recently exposed to the “I’ve gotta have it!” aspect of the aftersales business while working on-site at Harley-Davidson. Though I was only slightly acquainted with Harley products, when I walked into Harley’s historic Milwaukee headquarters, I was overwhelmed by Harley’s history and tradition. Everywhere I turned, I saw bikes, gas tanks, and other parts and accessories decorating the hallways, offices, and cubicles. Even tables were built using V-twins as legs! Nearly every employee was wearing some sort of Harley gear, and judging by the number of bikes parked outside, many were also riders. After spending significant time working on Harley projects, I became more familiar with how Harley’s culture permeates through its employees, dealers, and customer base. Without knowing it, I started to become an “I’ve gotta have it!” customer.

A bike was out of my budget, so I began looking for Harley merchandise to make me feel more connected with the brand. On my second visit to Milwaukee, I visited the Harley company store. My first reaction was surprise – the prices were higher than I expected – but then the “I’ve gotta have it!” mentality set in, and I left with some t-shirts, not only for myself, but for family and friends as well. In Boston, I visited the local Harley dealers in Faneuil Hall and Everett to get some Boston Harley-Davidson branded clothing. Now, I felt connected not only to the brand, but also to the local version of the brand. I was almost ready to quit my job, purchase a Sportster Iron 883, and ride cross-country before reality (a.k.a., my significant other) stepped in.

Finally, sitting down to drink coffee from my Harley-Davidson replica oil can mug, I reflected on what had occurred. I wasn’t a Harley customer, but I had purchased Harley products because I was swept up in the company culture and wanted to be a part of it. Imagine the earnings potential from an avid Harley rider who attends meets and rallies and has a close relationship with a local dealer? These customers are probably the “I’ve gotta have it!” types. At (almost) any price point, they are willing to purchase Harley parts, accessories, and clothing simply because they have such a strong connection to the brand. Heck, there’s even a commercial for motorcycle insurance where two riders tease a third about his noisy bike (“That sounds like a weed whacker”). The problem? The biker’s insurance company hadn’t used genuine parts to make repairs.

Of course, being a powersports company, Harley has a unique customer base compared to other OEMs. While many customers purchase vehicles for transportation or commercial use, powersports vehicles are generally discretionary purchases used for leisure. Customers make the purchase to buy into the brand and the lifestyle it represents. Nevertheless, there are “I’ve gotta have it!” customers for every brand. In agriculture, I’ve heard people say, “My family’s blood is [green/red/blue]”, referring to their chosen equipment OEM. Switching brands is like switching religions. Can you say that about your customers?

BOTTOM LINE: The ideal customer is the “I’ve gotta have it!” customer. Not every OEM is steeped in tradition or associated with a lifestyle or culture, but all OEMs should focus on selling the brand – not just a vehicle, a part, an accessory, or an item of clothing. If a customer buys the brand, he or she will likely keep coming back for more. Creating a brand identity isn’t easy, but there are certain things OEMs can do to help build one:
  • Use consistent theme colors in products and marketing campaigns to help customers associate with the brand
  • Offer a line-up of accessories so that customers can customize their vehicles and add personal touches
  • Offer various clothing items so that customers can show their brand pride in or out of the vehicle
  • Offer toys so that children can begin to associate with the brand at a young age

Thursday, May 23, 2013

If You Ran a Fleet Consuming $200,000 Worth of Parts Annually, Would You Want Your Parts Orders Delivered Through a Dealer?

The inventor Thomas Edison once said: “There’s a better way to do it – find it!” Now, think what that might mean for heavy truck and heavy equipment dealers. Their customer base isn’t the individual auto owner, but is dominated, instead, by large fleets that perform their own maintenance. Some of the fleets they serve can be really big - at a heavy truck dealer, it isn’t unusual to see the top 10 customers accounting for 50% of the dealer’s total parts sales volume. As a result, heavy equipment dealers sell more parts over-the-counter than in the service lane; the opposite of auto.

There are also two general “flavors” of fleet parts orders. The first is standard daily or weekly orders of fast-moving maintenance parts that replenish inventory stored at fleets’ service facilities. The second type is smaller, one-off orders for unplanned repairs. Many OEM-provided e-commerce solutions let customers store their standard orders and submit them as needed. These predictable orders typically consist of large quantities of relatively lower cost parts, like filters or brakes (i.e., not cylinder heads or clutch assemblies)

At the same time, OEMs are sending mountains of maintenance parts to dealers, who receive, sort, and deliver half of them to only 10 different addresses. Who knows how many of those parts are also stored by the dealer between receipt and delivery? The magnitude and cost of this labor must limit the amount of time and money that dealers invest in growing their business through sales development and improving customer service.

There must be a better way to do this!

The standard daily/weekly customer orders placed to dealers are prime targets for reform. Why not adjust e-commerce platforms to let customers request direct shipping from the OEM for qualified parts and orders? Fleets would need to be reminded of the slower order response time for the parts shipped from the OEM depot rather than their dealer. Perhaps pricing could reflect this. Regardless, dealers should maintain the pricing, billing, and customer relationship. The OEM would simply execute the delivery of the large order on expanded DDS/LTL routes.

Suggested Order Flow

Suggested Material Flow

A shift like this could drive a host of other benefits. Dealer inventory investment and capacity could be shifted towards adding breadth and lowering depth to reduce lost sales – RIM programs should be leveraged to help execute this adjustment. The change would also reduce the labor required to get parts to the same destination, and it would limit damage opportunities. OEM inventory management could benefit, too, as more visibility to end consumption demand improves forecasting accuracy. Smoother and less “lumpy” outbound demand could also improve inventory planning and operations.

But there are risks. Fragmenting delivery points typically increases total delivery costs. And, while dealers would save on labor and inventory costs, OEMs would take on incremental transportation costs. Terms and Conditions would need to be thoroughly reevaluated to ensure that customers, dealers, and OEMs each benefit from the changes.

As always, change management is a major undertaking. This strategy could have the unintended consequence of hurting the dealer-customer relationship if it is used to reduce, rather than refocus, customer contact. Dealers would likely resist ceding this aspect of their business to the OEM, as well.

Bottom line: The end of the supply chain (dealers) that serves the largest and most sophisticated fleet customers is generally unsophisticated and inefficient for those fleets’ routine orders. The advent of online parts ordering for fleets gives OEMs and dealers an opportunity to improve service, potentially reduce costs, and support the evolution of parts managers from being order managers to becoming sales managers. It is only a matter of time before someone tries this.

Wednesday, May 15, 2013

Inside an IRF

I know a guy who runs an independent repair facility – a good one at that. He and his team of technicians (mostly former dealer employees) work primarily on European imports, doing everything from oil changes to complicated engine rebuilds. They have invested significantly in diagnostic equipment and special tools, and buy mostly OEM parts from local dealers or OES (Original Equipment Supplier) parts from WorldPac. Not your average local garage, but interesting nonetheless.

These guys make a living by stealing business from dealers. Actually, they would probably resent the term “stealing” – as they do little marketing. Rather, they provide an outlet for dissatisfied dealer service customers, who flock to them in droves after their warranties expire.

How are they able to do this? They don’t have many Yelp reviews and aren’t smart about Search Engine Optimization. They don’t have a fancy waiting room. They don’t have nice loaner cars. They don’t offer online appointment scheduling. They aren’t open late or on weekends. They don’t charge less for parts. They don’t even have a significantly lower labor rate than area dealers. Nevertheless, they do have a loyal following and, through word of mouth, continue to conquer new customers every day.

So what is their edge? When asked, their customers say things like “better service” and “lower cost.” On the surface, these are head scratchers, since most dealers (particularly of European brands) provide more amenities and what would be considered higher service levels. Then there’s the price issue – again, this particular IRF charges his customers dealer list price for parts and has a similar labor rate. Hmmm…

When I presented this data to a customer, he accused me of being na├»ve (“Dealers have higher overhead, so they need to charge more”). To reinforce his point, he told me about his last experience at a dealer. He went in for an 80k mile service – he dubbed it “a glorified oil change” – which cost him far more than the $60 he pays for an oil change at the IRF. Not exactly an apples-to-apples price comparison, but it does illustrate a fundamental perception issue that plagues our business.

Of course, the folks at this IRF do many things well – they take a long view of their customer relationships and never do a hard sell for additional repairs. They remember names of their customers’ kids, “squeeze people in” without appointments, and sometimes perform basic maintenance “on the house.” They cater their approach to the individual customer, always delivering the right level of technical explanation and friendly conversation. They also have some structural advantages, such as extremely low staff turnover.

Bottom Line: We know there’s no silver bullet that will change customer perceptions overnight, but the stakes are high, and we need to keep a pulse on customer attitudes and react accordingly. For research and thoughts on how to tackle some of these challenges, check out our MyGuy website:

Saturday, May 11, 2013

Service to Government-Owned Vehicles – Avoiding Risk While Preserving Opportunity

In the search for new revenue streams, why not go straight to the greatest source of wealth – the government? Local, state, and federal governments own over one million vehicles, which presents a huge opportunity for whoever services them. Unfortunately, doing business with government at any level isn’t as simple as firing up a great marketing campaign. For one thing, governments perform a great deal of fleet maintenance in-house or outsource it to fleet services providers; for what business remains, competition is high. Weigh the pros and cons of competing for government work—then decide if it is right for your organization.

To prevent fraud and favoritism, governments must ensure fair competition for products and services. Complex oversight rules often mean lengthy competitions – understandable if a billion-dollar missile system is on the line, but not if the service is an oil change or brake job. To speed up small purchases and avoid the long contracting process, governments often create “preferred vendor lists” of preapproved service providers.

Preferred vendor lists may sound like miracle water to a service provider looking for more business, but these lists are not a cure-all. The federal government does so much business through large fleet maintenance contracts that little revenue flows to the five pre-approved service providers. Moreover, a $15,000 minimum investment is required to gain placement on the federal preferred list (GSA Schedule 23 V). In the end, the potential gain hardly seems worth the effort.

Getting on state and local preferred vendor lists presents more opportunities for business and requires just a few days of paperwork. In exchange for a new source of revenue and a great marketing tool (“The township trusts us with their vehicles…trust us with yours”) expect to provide some concessions. As you fill out the price lists and forms, be aware of a few factors that may not be clearly stated:
  • The rates you provide will be expected to apply to all vehicle types.
    • Very few preferred lists differentiate between vehicles or vehicle types. This means that the $80 A/C service on your price list must apply when the government brings in a vehicle requiring two hours of labor.
  • The government will expect a discount over your current rates – and then another discount on top of that.
    • The government always expects to be the “most favored customer” and, as a result, expects better rates than your regular customers. You’re also competing with others on the list, so don’t give up your entire margin when you create your price list. You may need to provide another discount further down the line.
  • You may be forced to guarantee a service turnaround time.
    • Service turnaround guarantees can be especially risky if the government drops off multiple vehicles at one time. Don’t expect them to give you any leeway.
  • You may be paid late.
    • The government always pays, but it frequently pays late. Keep close track of payments due to ensure you get paid.
Bottom Line: Becoming a preferred vendor for the federal government may not be worth the investment. On the other hand, the potential profit from state and local governments can justify up-front costs—if you’re mindful of those unwritten rules.