Sunday, July 21, 2013

Parts Trader

If you're involved with the collision repair industry, you've no doubt heard the hullaballoo regarding State Farm and Parts Trader. For those who haven’t, here's a brief summary:

State Farm recently launched Parts Trader, a mandatory online parts ordering platform for their Select Service (Direct Repair Program (DRP)) shops. These Select Service shops receive State Farm's collision customers in return for ceding some control to the insurer. The parts ordering platform is meant to capitalize on all the efficiencies of e-commerce, reducing the cost of parts by requiring suppliers to submit competitive bids. Parts Trader is undergoing a gradual rollout throughout the United States.

It's clear that State Farm isn't just interested in an efficient online ordering platform. Otherwise, they could just mandate that their Select Service shops use any online platform for parts ordering, and do this at no cost to themselves. Instead, they've spent millions of dollars on a brand-new online ordering platform. Why?

The collision parts market in the United States is about $16 billion. At present, insurance carriers pay about $10 billion dollars of that total, but have little influence over the parts procurement process or pricing. State Farm’s competitive online parts marketplace provides leverage by pitting suppliers against each other to offer the best price on parts. Even a one percent reduction in parts cost represents a $100 million savings for insurance companies.

There are two significant negative impacts for OEMs.
  1. Loss of market share: A wider reach throughout salvage yards and aftermarket suppliers in the United States for parts sourcing will eventually mean that more alternative parts are used. This impacts OEM profitability and customer repair quality.
  2. Financial harm to dealers: A competitive marketplace means that dealers will have to offer even greater discounts. Parts suppliers, including dealers, will also be required to pay a fee to participate in Parts Trader.
Unfortunately, even if OEMs and IRFs band together and manage to kill State Farm’s Parts Trader, Nationwide or GEICO will almost certainly come out with a similar program. The business case is far too compelling and the stakes far too high for insurance carriers to leave parts cost in the hands of the parts supplier, the shop and the claims adjuster. Eventually, this concept is going to be implemented in such a way that it takes off. It may not be this go-around with Parts Trader, but the competitive online parts marketplace will happen. The industry is consolidating, and there's even more incentive for large multi-store operators to follow the insurance companies' policies in return for repairs. After all, keeping the doors open at a big shop requires a healthy volume, and the easiest way to a healthy volume is through DRP.

If the concept is here to stay, what strategies should OEMs explore?
  1. Adopt, use and manage smarter pricing. Right now, OEMs have access to tremendous quantities of data through estimating platforms and CollisionLink. OEMs also have relatively sophisticated pricing systems and access to robust analytical platforms. Together, pricing systems and data enable surgical precision on parts pricing far in advance of what aftermarket parts providers can manage. Separate out collision parts pricing from the rest of your pricing rules and strategies, and get down into the details. This means creating strategies for pricing specific part numbers and car models. Although OEMs do pursue pricing strategies and aging curves, this is usually done at a broad, part-type level. In other words, your strategy for pricing a bumper for a full-size pickup truck should not necessarily be the same as your pricing strategy for a bumper for a midsize sedan. And the key to the success of pricing strategies is dynamic management of strategies, rather than “set, forget and revisit in 5-10 years.”
  2. Promote price competitive programs and alternative online ordering tools. Insurers may have leverage over behavior for their DRP shops, but OEMs have first-mover advantage here. CollisionLink has been in the market for nearly a decade, and combines online ordering with OEM price-competitive capabilities. In contrast, Parts Trader is only in a few markets, but more are sure to follow, and other insurance carriers will jump in the game shortly. An aggressive push by the OEMs to get their tools embedded in the market at the dealer and shop level before the insurance carriers enter will make the road harder for insurance companies and promote OEM market share. Your price competitive programs have to be integrated into your smart pricing strategy, or you’ll be working at cross-purposes.
  3. Expansion of advanced technical training. Factors such as CAFE, safety regulations, and the natural order of progress—that is, advanced materials and design—have made parts more complex, and more expensive. That complexity works to OEMs’ advantage. 95% of body shops in the United States can't competently complete repairs on structural aluminum. 99.9% of body shops in the United States can't competently complete repairs on structural carbon fiber or CFRP. If OEMs can control the training associated with advanced materials, they can make sure that vehicles get repaired at shops which use more OEM parts.
  4. Core returns and salvage leakage. How does a part wind up in an LKQ yard? If OEMs can control the spread of cores and salvageable parts using core return charges and total-loss buyback programs, they can starve the network of salvage parts. Of course, this comes at a cost, but salvage parts are the fastest-growing segment and the most risky for OEMs. After all, it is easy to argue that an aftermarket-produced part does not meet or exceed OEM standards. It is more challenging when that part came from the OEM at some point. Many OEMs are already active in this area – but they need to dial up the breadth of parts covered and the aggressiveness of the programs.
  5. Certified Body Shops. A certified shop network provides the OEM with additional input into the repair process and helps take some of the leverage away from insurance carriers. When combined with advanced training and access to OEM tools, equipment and techniques, certified body shops are in a position to capture more of the high end of the increasingly complex repair market. OEMs may lose the battle on covers and similar nonstructural parts, but there are opportunities to make up ground in structural, safety, and specialized parts.
The bottom line: Expect insurance companies to increase their involvement in the parts procurement process, and expect it to have a significant negative impact on OEM market share. Just maintaining current market share will require a tremendous amount of additional effort.

No comments: