Friday, August 23, 2013

Powersports Companies: Don’t Spoil a Good First Impression

Like most industries looking to sustain their growth, manufacturers of heavy motorcycle (500cc +) and recreational products (jet skis, snowmobiles, ATVs) are targeting the developing world. The strategy makes sense: motorsports products are generally luxury items that appeal to the rapidly expanding middle and upper-middle classes in these regions1. OEMs have successfully brought their products to market, but a common sore point for consumers is aftersales support, especially the availability of parts and accessories. Customers can purchase vehicles, but still have a hard time getting parts to repair or accessorize them.

OEMs have always faced hurdles in getting their products into these countries. While mopeds are common, motorcycles greater than 250cc are not allowed in cities or on highways in Asia’s emerging markets. Recreational vehicles are often in demand in remote areas, where the challenge is to develop a base for sales and support. All OEMs struggle with high tariffs. The logistics in many countries can be diabolical, requiring a large number of dealerships relative to sales; this can impact training, service, and financial stability. Serving the developing world is not easy, but that’s no excuse for poor service.

Several common issues drive the problem of aftersales product availability.
  • Corporate governance: Some organizations do not have a centrally led strategy that sets goals on service levels for their dealers and end-customers. The result? Regional managers don’t set retail fill targets or make decisions that align with corporate goals in the region.
  • Dealer capabilities: Dealers in developing countries are often considerably smaller than those in the developed world; they have less money to invest in a broad inventory and less mindshare for inventory planning.
  • Longer lead times: The supply chain for the developing world is improving, but it can still take weeks to get products into rural areas of China, Brazil, and India.
Poor retail product availability has serious short and long term implications for powersports OEMs.
  1. Repurchase Loyalty
    The link between aftersales customer satisfaction and same-brand repurchase intent is clear and strong: every customer interaction is an opportunity to reinforce the brand and create an impression. However, when we discussed with several OEMs the issue of parts service levels (retail availability and lead times) in the developing world, they admitted this was a weakness.
    The bottom line: OEMs can’t grow or make profits, they can’t develop their brand or retain customers unless they can get parts into the markets and make them available for profitable sale.
  2. Evaporating Demand
    For most repair and wear parts, demand is inelastic: these parts must be replaced or the unit will not run. At the same time, accessories are often impulse purchases, with the majority made at the time of the unit’s sale. If these demands are not satisfied, they can evaporate along with the profit that comes with them.
  3. Counterfeiting
    Counterfeit parts are a growing issue in the developing world; an estimated $45 billion2 was lost in 2011. Counterfeit apparel is a challenge in its own right. The majority of the genuine products are produced in these same developing countries. Their consistently poor availability is the equivalent of firing a flare gun to would-be counterfeiters. They may find you anyway, but why make yourself a target?
What can OEMs do to improve their service levels in developing markets?

The solution to effective aftersales product availability will vary considerably by OEM and market segment. Each segment faces unique challenges; those with larger parent companies (e.g., Honda, BMW) can be better positioned for success. However, all OEMs can take steps to solve their problems.

Some places to start driving improvement include:
  • Global Inventory Deployment: This means having the right product available in the right place at the right time within the OEM network. If the part can’t be in the right place at the right time, someone needs to know exactly how to get it there. When sales are relatively low in developing markets, OEMs naturally want to keep inventory low, but they often focus too heavily on depth (stocking large quantities of a small number of parts) instead of breadth (stocking smaller quantities of more parts).
  • Retail Inventory Management (RIM): This means systematically recommending or automatically determining the products that dealers should stock, and how much. This is especially important for developing markets where dealers are often smaller and less technically sophisticated. One of the challenges in launching a sophisticated RIM program in the developing world is the many dealer management systems in use, all of which require data interfaces. However, some simple RIM implementations do exist. They can be used to improve fill rates to dealers until OEMs can implement a more robust system. The earlier a RIM program can be implemented in the lifecycle of a dealer, the easier it is to manage in the long term. The most successful RIM programs, in terms of uptake, have been a requirement at the time of dealer creation.
  • Service Level Product Segmentation: This strategy focuses on simplifying the challenge OEMs face when setting service targets for thousands of products. The goal is to link OEM and dealer goals in a way that produces maximum sales with minimum inventory, but also factors in customer expectations. Both RIM and global inventory management must provide informed, consistent, and actionable objectives to execute both of those programs.
Bottom Line: Globally, the solutions will vary widely depending on the organization’s size and structure. The solutions may also vary by region. However, the most important first step is organizational alignment to: (1) agree that there is an issue, (2) agree on the objectives and timelines for improvement, and (3) agree on how reaching those objectives can be supported centrally and locally.

1 “China and India: tomorrow’s middle classes”, Ernst & Young Global Limited, accessed June 10, 2013, http://www.ey.com/GL/en/Issues/Driving-growth/Middle-class-growth-in-emerging-markets---China-and-India-tomorrow-s-middle-classes 

2 On the Road: U.S. Automotive Parts Industry Annual Assessment 2011 http://www.trade.gov/mas/manufacturing/oaai/build/groups/public/@tg_oaai/documents/webcontent/tg_oaai_003660.pdf

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