Monday, November 25, 2013

DMP – Dynamic Menu Pricing For Dealer Service Operations; The Next Evolution In “Parts” Pricing

Preface: Everything in life is connected, and sometimes the connections are quite simple. “Dynamic Menu Pricing” is all about some simple connections that our industry hasn’t been able to achieve. Until now. Menu pricing is simple – it allows a dealer to offer a competitive price for oil and filter changes at, say, $39.95. Or, it allows a competitive price for brake and rotor replacement at, say, $295.95. For service customers, menu pricing is compelling because it gives them something they can understand and something they can trust. It’s the real price -- without the $100-an-hour labor charges that seem suspiciously high.

“DMP” is all about making everything a dealer sells just as simple. Price elasticity is simple in concept … but really hard to determine. Price elasticity is ultimately all about selling more volume or less volume by changing the price of what you sell. Like airline seats, hotel rooms, blue jeans at WalMart, and automotive parts and labor. The problem is that it has always been very difficult to calibrate the price elasticity of automotive parts. Or maybe not. If you plug in the simple menu pricing concept while calculating price elasticity, you enrich both concepts, and help dealers and OEMs make more money from more loyal customers. That is what DMP is really all about.

The current mix of parts pricing software technologies and operating philosophies is fairly primitive. It represents the best “Gen-1” thinking possible; but, it has not evolved sufficiently. Most employ pricing algorithms and segmentation logic that Carlisle developed 20 years ago. The “secret sauce” to the parts pricing we slaved over decades ago uses curve-pricing for “captive” parts, which account for about 20% of typical OEM parts revenue, and 80% of their
part numbers. The industry has harvested billions of dollars of added profits and improved satisfaction with this simple concept. But it was too simple and too good to be true. So, other stuff was stirred into the pot to cure client goose bumps – things like price benchmarking other OEM captive parts (this always made me queasy because captive parts ultimately have no benchmarks), and engineer-related benchmarking of parts (as if an end-customer can see any physical differences that can be translated into prices). My favorite is selling (or buying) a pricing software package based on Virgin-Atlantic-like airline seat price “elasticities”. This is simply too naive an idea to waste any more words on it.

Oh, what the hell; I can’t stop myself. Let me first explain price elasticity of demand. This concept governs sales volumes – if you lower your price, you sell more. If you raise your price, you sell less. The “elasticity” is all about the relationship between the price delta and the sales volume delta. The bar chart (End Customer Total …) shows clusters of hypothetical price discounts from a 10-step discounting process. This simulates many years of potential price elasticity market testing; prices were reduced step-by-step to see how the market sales volume reacted. At each step we reduced the prior step’s parts price by 5%, or the labor cost by 5%, or both parts and labor by 5%. The height of each bar reflects the cumulative customer repair order discount from the start of the process. At step 10, cumulative parts discounts alone represent a total customer “repair order” discount of 17%; for labor alone, the discount would be 20%; and for parts and labor together, it would be 37%. The most anemic way to calibrate “price elasticity” is to focus on parts pricing at the factory/OEM level. OEM discounts on part costs are diluted by the other piece to the RO: labor. You’d get a bigger bang for your buck by discounting labor rates as well… but only dealers can do this. A careful progression of discounts on both parts and labor will result in discounts with a much better chance of truly and operationally calibrating real price elasticities.

So what does this mean? It means that the next evolution of “parts pricing” needs to accommodate total service pricing (labor and parts) under free market conditions. It means that OEMs should work only with willing dealers – the fraction of dealers that volunteer to cooperate in making more money. Pricing strategies need not be “brittle”; they don’t require all enterprise partners to participate. Only a fraction of “can-do” dealers need to play ball; that will be enough to kick start the next evolution of “parts” pricing. Of course, OEMs can use Performance Terms & Conditions to grease the implementation skids here.

Dynamic Menu Pricing (DMP) embedded in pricing software leverages the power of undiscovered price elasticities in the global “parts” (and service) market. Used at its most basic level, DMP is a simple way to menu-price every single part and service component in your flat rate manual … and what falls outside the guide as well. DMP eliminates advertising static (possibly seen as uncompetitive) dealer labor rates, which have recently become the focal point for digital service customer cost comparisons. In some states with archaic laws that pre-date “menu pricing”, dealers will still have to post some form of labor rates, possibly a range, somewhere (perhaps in the new car showroom?) However, the posted ranges of labor prices in the hands of a good state lawyer will eliminate the ugly duckling effects we currently suffer from.

Service customers are very interested in costs, as seen in the top ten customer values; being informed of cost upfront is #2, a reasonable labor rate is #4, and a reasonable cost for parts is #9. Give customers what they want and value, and you will increase their vehicle and service repurchase likelihood.
If cost represents three of the top ten value drivers (and two of the top five), it might make sense to improve how a dealer bellies up to the cost bar. Carlisle has historically bifurcated its approach to helping OEMs retain more service customers at the highest possible operating profit. On the profit side, about 30% of the work we do is in global pricing, including software development. On the satisfaction side, about 25% of the work we do, and nearly 100% of our R&D, is in some of the softer aspects of customer retention. DMP brings both sides of our shop together.

Here’s how DMP works – there are three steps:
  1. Dealer Determined Labor Rate Matrix (LRM)– Can-do dealers need to think in terms of variable labor rate pricing. What’s there to think about? Easy. If you set a lower labor price on something, will you sell more of it? Or, if you set a higher labor price, will you sell less of it? This is independent of parts pricing. A good example is pads and rotor replacements, where the part costs are, say, $200, and your labor rate can vary from $50 an hour to $150 an hour. Let’s say that the job takes four hours of labor. The Dynamic Menu Price-spread from this would be from $400 ($200 + 4 times $50) to $800 ($200 + 4 times $150.) Obviously, the cheaper labor rate will sell more brake jobs … but, the big question is, “will I make more money?”

    Good question. To make more money the labor rate matrix must be set up to reflect maintenance and repair clusters, with labor discounts/surcharges that have similar market characteristics.
    1. Fast moving highly competitive procedures like LOF, tire replacement and rotation … stuff like this
    2. Initial service intervals – the first time they come back for a 20K or a 30K maintenance interval
    3. Second service interval visits
    4. Third and beyond service interval visits
    5. Brakes and rotors for vehicles under 30K miles
    6. Brakes and rotors for vehicles with 20K to 70K miles
    7. Brake and rotors for vehicles with more than 100K miles
    8. Light repair
    9. Heavy repair

    Note that managing the labor rate matrix is entirely up to the dealer. He/she can set up a generic LRM at 100%, which reflects straight labor rate across all job clusters. Furthermore, pricing program rules need to clearly accommodate warranty labor pricing. The simple fact is that we have an overabundance of great lawyers in this country. Use them to solve this riddle and enable OEMs and dealers to work together, rather than against each other.

    Using the LRM, coupled with dealer parts prices, to produce customer repair orders and quotes, enables the dealer to menu-price 100% of their service counter work. It replaces a two-step process that looks ugly to customers with a simple one-step process.

  2. Dealer/OEM Determine Menu Overrides – These are maybe a dozen or so highly competitive service operations that have market driven price points. Perhaps LOF for 4-cylinder gasoline vehicles, wiper replacements for certain models, or others. If the dealer doesn’t trust their OEM, they can determine these overrides on their own. Or, if they have a good relationship with their OEM and appropriate performance terms are in place, they can work with their OEM to set menu overrides. For example, an OEM’s performance terms and conditions might be sensitive to joint dealer/OEM menu overrides where compliance equals more terms cash

  3. OEM-Provided Total Price Elasticities – This is the game-changer. Look at the Dynamic Menu Pricing-Labor Rate Matrix chart. This is the concept at its most simple level. There are ten job clusters, and three columns of labor “discounts.” The dealer is in charge of the two left-most columns. “Start/Last” represents labor rate discounts that are currently in effect – it is a reference point. “Next” represents the labor rate discounts that the dealer wants to load at this time.

    The “OEM/Best” column is the game changer. It represents the result of crunching all DMP dealer data across all active dealers using the technology, and understanding the operative pricing elasticities of the total market. It also represents the optimal labor pricing discount that yields the maximum dealer fixed operations profit.

    Again, playing the pricing game at this level is entirely up to each dealer. They can simply enter “100%” in each of the two left-most cells, and take no discount. Of course, they will miss out on another level of performance terms that rewards participating dealers with more cash (more about this to follow).
Bottom line: Twenty years ago we discovered different ways to look at parts pricing and increase total value-chain partner margins. Our original algorithms have been codified into a broad array of software package alternatives … that have not evolved much in the last 20 years. This is not terribly surprising. DMP is the next evolution. This should not be a surprise to anybody.

Monday, November 18, 2013

2014 Crystal Ball – What Do We See, Looking Back From 2019?

by David P. Carlisle

Let’s transport ourselves to the not so distant, and not so uncertain, future. It’s 2019 and we’re taking stock of things that we call innovations, but that 2019 takes for granted. Much of what we see springs from changes that dawned with the new millennium. So, before we take a stroll around 2019, let’s go back to Y2000.

In Y2000 we plotted the course of industrial evolution – how technology would provide the consumer with more convenience – and used the video industry as an example. Wayne Huizenga made billions by picking up the trash with Waste Management and serving up the trash with Blockbuster. At its peak, Blockbuster was the ultimate convenience in video rental, but it eventually lost out to the even greater convenience of satellite and pay-per-view.

Back in Y2000, GM’s annual report showed a schematic of the web-connected car that dovetailed quite nicely with Motorola’s “smart vehicles” discussion in their annual report. Well, both companies were certainly on-target. The vehicles and the infrastructure are in place today.

Back in Y2000 we clearly saw what was going to happen to service shop sales. The internet would enable more convenience and better information, collapsing dealer service sales and margins. We nailed that one.

But, we screwed up in our choice of enabling technology. We thought that the Y2000 crop of B2B internet ventures would work out and change our lives. Most of these failed because either the market was not ready or the industry itself was to blame.

Back in Y2000 we definitely had enough tea leaves spread out on the saucer to get a pretty clear glimpse of the future.

Let’s move on to 2019. Collision avoidance systems will become as common as airbags and will save lives that are now lost in big wrecks.

These same systems will save bruises (to car and driver) in the smaller fender benders. Hey, they will even save egos from parking lot scrapes and scratches. Insurance costs will go down. So will collision parts sales. Collision parts sales currently account for about 40% of all parts sales by dealers – much of these sales are wholesaled to independent collision shops. So, let’s say that collision avoidance technology takes a hefty bite out of this part of the business … say, 30%. That might be a very big change. Hmm. A lot of companies feed off the collision parts business. LKQ comes to mind. Remember what happened in the 1980’s when the OEMs extended exhaust lifetimes from three to ten years? That really screwed up companies like Monro, Midas, and Meineke. They had to evolve to survive, and this evolution took them into full service repair and maintenance.

Likewise, the collision parts feeder companies will have to change in order to survive, which means they must move into the non-collision business. LKQ already has.

Lives will be saved, and our businesses will change from both of these first order and second order effects. What else will be different?

Just about everything.

The “connected vehicle” that we saw in GM’s and Motorola’s annual reports from Y2000 will become a reality. The health and maintenance needs of vehicles will be monitored by the vehicle itself, with collaboration from a benevolent supercomputer. The driver will interact with their vehicle via the internet. The Service Advisor will become the human interface – a kind of greeter – and the dealer workflows will become more predictable. Finally, finally, the customer will be in control via the computer–no matter how much the customer doesn’t know, the computer will prevent upselling to the uninformed.

This will make things interesting.

I have used the term “boiling frogs” to describe slow dealer reaction to the threat of chain service providers. (That is, a frog won’t jump out of water that is very slowly heated to boiling – and eventually it boils to death. This is also applies to people who won’t or can’t respond to change that occurs gradually.)

We will have a different pot of boiling frogs in the future. This time, it’s the independent repair specialists who will be contentedly croaking in their steamy bath of hot water.

And we really don’t have to worry about those second order effects stemming from collision avoidance systems, because they will be crushed by second order impacts from the connected vehicles.

Bottom Line: In the next few weeks let’s look at the industrial vehicle sectors – construction, agriculture, and heavy truck. Life is going to change in the next few years. Carlisle & Company will be conducting a massive amount of research into what 2019 will bring us – numbers, interviews with change agents and focus groups. All of this will come together at the Crystal Ball during the 2014 NAPB.

Friday, November 8, 2013

The More Connected Our Cars, The More Connected Our Contact Centers May Become

By Brian Crounse
Last week, I attended and presented at a session of SOCAP’s Automotive Summit in Scottsdale, AZ. This event focuses on automotive contact center and customer support operations. In the session I attended, we discussed drivers of near-term (the next 1-2 years) customer contact volume and subsequent contact center resource requirements. One data point that we brought to the group, from our own Customer-Facing Contact Center Focus Day this past June, is that several OEMs have significant contact volumes pertaining to telematics, navigation systems, and, in particular, assistance with pairing phones to cars’ infotainment systems. Another OEM participant shared their trends in infotainment-related contacts (a steep increase in recent months), and noted that these calls tend to take much longer to handle than other call types. This finding was confirmed by another guest speaker whose business is in consumer electronics support. Another participant mentioned that customers can get particularly emotional about phone-pairing issues - it’s really frustrating when you phone won’t talk to your car!

My takeaway was that figuring out how to efficiently and effectively help these customers—particularly those with phone issues—should be a top priority for automotive OEMs. These contacts will be a key driver of cost and customer satisfaction.

As luck would have it, the night after I returned home from this event, I realized that my new Netgear wireless router was actually slower than the ancient one it had replaced. Being someone who used to be good at figuring out consumer electronics, I first tried self-serve help via Google. No luck. I then tried, and got a “website under repair” message.

Blood pressure increasing.

Next up, I tried Netgear’s live support chat. I know that live chat support is relatively new in the automotive space, so I was curious to have this experience. What I found: no agents available; don’t close this window; don’t go anywhere.

Blood pressure increasing further.

But at least I was free to zoom around the house and put kids in bed, as long as I didn’t forget to swing by the computer from time to time. Eventually, success. After entering my router’s serial number, my passport number, and my first-born’s social security number, I got through to a person:
Joseph: Hi, my name is Joseph, with Expert ID xxxxx. How can I assist you today?
We walked through the script to debug my router. Thankfully, this was clearly more structured than reboot and pray. After around half an hour (including a few instances where I had to step away to put kids back in bed; thankfully the chat never dropped), we finally found the magic setting that, when changed, increased the router’s throughput 20x. Success! Despite my initial frustrations, I really felt better at this point.
Joseph: Anyways, upon closing this case, you will receive a survey via e-mail. Please help Netgear improve our products and services by taking a few minutes to tell us about your experience today. Okay?
One advantage we have with our contact centers is that it’s much harder for agents to game the surveys than, say, service advisors. As the survey was mercifully short, I was happy to provide feedback. I gave Netgear mixed marks on my overall experience (I was still sore about the long wait time), but gave my agent high marks, in both the skill and empathy categories (that’s another finding from our Focus Day—most of us ask about agent performance, but we all do it in different and hard-to-compare manners!).

The Bottom Line

My findings from this experience are:

General observations:
  • Yes, consumer electronics calls—and this includes automotive infotainment support—do take a long time to successfully complete. Our chat took at least half an hour and 1,500 words. All this, for support on a $50 router.
  • Yes, consumers do get emotional over these issues, myself included.
What worked:
  • The chat never dropped, even when I disappeared for a few minutes without explanation— an inadvertent drop would have sent me over the edge.
  • My agent established credibility—even if Joseph was simply following a debug script, the steps we took suggested to me that we might actually find a solution.
  • No “on hold”. Responses from my agent never took too long. This speediness helped offset my frustration with the initially long wait.
  • We found a solution. Of course this is everyone’s objective; success went a long way (but not all the way) toward satisfying me.
What didn’t work:
  • The downed support page. It’s up at the time of this writing, so maybe I just had bad luck.
  • Too much data entry up front. I realize the agents can act more quickly if they have info about my equipment up front, but having to enter a lot of info, after a long wait, with no gratification, was slightly vexing.
  • The long wait for a chat agent. I hated this. Some contact centers (airlines, in my experience) will call you back if there’s a long wait time. I love this. For chat, I would have loved the option of a text message when the wait time was down under a couple minutes.
The Bottom, Bottom Line

I’m only a sample size of one, but I really want two things from customer support:
  • A successful resolution. No surprise there.
  • Even if the problem is complex, minimal time lost due to waiting. If I have to wait, I want to be told how long, and/or get called back. Having reviewed metrics and survey instruments for a number of customer contact centers, this is one area where I think we don’t place enough emphasis.

Friday, November 1, 2013

Interview with Charlie Hyndman – Is He Still A Supply Chain Guy?

by David P. Carlisle

The summer flashed by like a speeding bullet. I interviewed Charlie Hyndman at the beginning of the summer to feature GM’s Customer Care division as an organization that stood out as not being typical. Cataracts are a condition that makes things blurry. When you are young, and true, you see “blurry lines” defining things that you simply do not have the context to understand. You don’t really have cataracts at these moments, but you might as well have them. As you get older you might once again see blurry lines. And you might have cataracts, but they’re not the culprit. You now have ample “context” – here the blurry lines single out the unexpected. The interesting stuff. Innovation. Things that are important.

At the beginning of the summer, I asked Charlie what’s new, and he enthusiastically started talking about crummy market share for fascias and grills and about sheet metal market share. If he could get the fascias and grills closer to the market, in time and distance, GM likely could increase its market share.

“How are you going to do that Charlie?” I asked. He replied by telling me that 95% of the volume in fascias and grills was in very few part numbers. If he moved them to the PDCs he’d have to add inventory and take a transportation and variable labor cost hit.

Charlie next talked about the customer requirements of a world-class RIM system, and that he really needed over 100,000 part numbers in “facing fill.” GM historically had around 50K part numbers in their PDCs. To get enough part numbers to “look” like the facing fill GM really needed, GM had bring back some ship-direct parts, buy some more inventory and load it into the PDCs. They also needed to be clever and utilize “finesse” by upgrading a batch of referred parts to free “critical” order status in order to achieve next-day service. He also might have to re-slot his PDCs and move into the mezzanines.

Lots of moving parts in a world-class solution to the necessities of the market. He didn’t mind this at all.

He didn’t mind because GM could leverage his increased PDC productivity to cover these extra costs, plus a whole lot more.

I saw blurry lines. Was Charlie a marketing guy, a sales guy, or, a supply chain guy? Who was this man?

Charlie talks a lot about “team.” Here, in Boston, we understand when a team’s a team versus when the team is an extension of a man. Bobby Valentine managed the Red Sox to worst-in-class because it was all about him. John Farrell took the Sox to the World Series because he understood that the guys pitching and hitting were on the field while he was in the dugout. It’s easy. You want to suck at what you do? Become a Bobby Valentine. You want to win? Model yourself after Farrell. Charlie’s a Tigers fan who we welcome to Red Sox Nation. He led his team, his pitchers and hitters, to world-class results. But, they made it happen.

Taking a look at the data for a minute, we can see that GM has made great strides in several supply chain areas over the last 15 years. The following charts compare GM to the best-in-class peer for each of the years, using a subset of the North America Parts Benchmark (NAPB) participants that are most comparable as this peer group.

Network line productivity, which measures how many lines are shipped per hour across all warehouses, is up 254% since 1997 for GM. Warehouse worker productivity at the facing warehouses is also up 246% since 1997 for GM. GM has had best-in-class performance since 2007 in both productivity metrics, as compared to this peer group.

At the same time, warehouse errors, which occur when the dealer either receives the wrong part or is short a part, are down 83% since 1997 for GM. GM is quickly closing the gap to best-in-class quality, and at these levels we’re talking about a gap of only about 100 errors per million lines shipped.

After a dip during the recession years, GM has caught up to its best-in-class peer group in system fill.

This increase in system fill has enabled back orders at GM to be reduced by 87% since the recession-driven peak of 2009, giving GM best-in-class results compared to the peer group in 2012.

Now you’re thinking, “Sure, we could get faster and better too, but it’s going to cost an arm and a leg to do it!” GM found that wasn’t the case. Since 2002, GM has reduced variable costs, which mostly consist of labor costs, like employee wages and benefits, by 57%. By comparison, the peer group has reduced costs as well, but not as quickly or by as much.

GM is best-in-class in all these areas and still reducing costs? Sounds like a plan I’d want to sign up for!

Months flash by and I am sitting down at a break in the NAPB Steering Committee meeting. I start reading my email and find a notice that Charlie was now Vice President, GM Global Aftersales Supply Chain, Warehousing and Logistics, … “leading an all-new organization to improve safety, quality, cost and customer service. The organization will bring together GM’s regional aftersales warehousing with warehouses aligned with manufacturing operations around the world. Working as an integrated team, the group will apply lean common processes to deliver benchmark levels of service to customers in every region while reducing complexity and cost. “

Must be cataracts. Because, the lines got ever blurrier. Charlie’s team is now global and encompasses everything that even looks like a warehouse or non-production operation. The conundrum here is that, if I was a lot younger, and saw true, I’d not see any blurry lines at all here. Because it makes sense.

The North America Parts Benchmark has spawned global benchmark groups, all using the same metrics and data dictionary. It has expanded to include Heavy Truck, Agriculture, Construction, and other like industries. When companies come into the benchmark group, they tend to cling to their differences. Parts warehouses come in all sizes and shapes; all sorts of different functionality, encompassing widely different missions, spanning light production (packaging) to incredibly simple transportation-related functions (break-bulk centers). When companies stay in the group (pretty much all do), they better understand comparability at a sub-function level. Receiving, scanning, put-away, picking, re-warehousing, slotting, sorting, … the list is endless. These sub-processes can be measured, benchmarked, and sorted from best to worst practices. Carlisle’s roles are to manage the measurements, ensure quality and comparability, and document best practices in such a manner that they are transplantable. There are no blurry lines in all this.

GM’s reorganization of responsibilities, now shepherded by Charlie, makes complete sense, and is consistent with the evolution that most of the 50 or so companies have seen in their decades-long benchmarking journey.

Yes, we can dissect diverse operations into common elemental parts, and deliver benchmark levels of service and cost. Or, in GM’s words: “working as an integrated team, the group will apply lean common processes to deliver benchmark levels of service to customers in every region while reducing complexity and cost. “

Bottom line: As we get older we, each of us, might once again see blurry lines. And, we might have cataracts, but they’re not the culprit. We now have ample “context” – the blurry lines now single out the unexpected. The interesting stuff. Innovation. Things that are important. GM’s reorganization is important. Think about it.