Tuesday, June 23, 2015

Why Ford Is Brilliant – Carlisle Scrapbook
by David P. Carlisle

Thirteen years ago, in 2002, Ford announced Daily Parts Advantage (DPA) to the world. Back then, it seemed simply brilliant. Now, more than a decade later, it seems even more brilliant.
DPA was an integrated strategy of revised stock order cycle times (“daily”), revised terms and conditions, and revised network structure. Perhaps the cleverest aspect of DPA was looking at parts very differently than anyone ever had previously. Ford concluded that parts were of three different types : (1) parts that needed to be close to dealers for a 24-hour cycle time and 24-hour order response time (ORT), (2) small parts that could be easily shipped by a parcel carrier and beat a 24-hour ORT, and (3) large bulky parts, typically used in collision repairs, that required a sparser network and could easily flourish with a 48-hour ORT.

Seems obvious. But, it sparked a lot of debate … particularly concerning the large bulky parts. Did dealers need them in 24 hours, or was 48 hours sufficient? Would collision market share suffer with longer ORTs? Would insurance companies react to longer ORTs that could ripple over to longer rental contracts for the insured? After thirteen years, the answers are in:
  • Nah
  • Nah
  • Nope
Collision market research that we are currently conducting confirms all this, and more. Ford was right and kudos to their team of innovators: Don Johnson, Kent O’Hara, Frederiek Toney, Anu Goel, Joe Kory, John Sullivan, Helmut Nittman, Brad Wallis, and many many more. Cisco Codena headed up aftersales at the time and his leadership (call it courage) deserves mentioning.

The collision research we are doing spans a wide area – the primary objective is to refine our estimate of the impact driverless vehicles and collision avoidance technologies will have on collision parts sales. However, one work stream involves process mapping typical current-state collision repair facilities. So far, we’ve seen three things that are interesting:
  1. Price. Because the insurance industry largely controls what goes on in a collision repair shop, the advantage always goes to the low price option. This explains why non-genuine parts dominate repair orders for “unprotected” vehicles. In some states, laws protect some owners from repairs using non-genuine parts. However, these laws typically only cover only newer cars and not all specify “genuine.” States with significant “genuine parts” protective legislation cover only about 22% of the population. Outside that, it’s the wild, wild west.
  2. Price. Order lead-time differences between genuine and aftermarket (AM) parts are not much of a deciding factor when sourcing a collision part. For “competitive” parts, OE order lead-times are generally competitive with aftermarket parts. However, aftermarket return rates are ~30%; almost six times the return rates of OEs. Factoring in this return rate differential (in order to receive a correct part) the expected cycle time difference between an AM and OE nearly vanishes. Problems arise with “non-competitive,” slower moving, genuine parts that have erratic lead-times. Since they are “non-competitive,” this is not much of an issue . I suspect that there’s never been a successful aftermarket company that decided to invest in tooling simply because they thought that having inventory and quicker-than-OE lead-times would make a difference. No, the decision is always made on volume and price.
  3. Price. OEs’ aggressive collision parts “price matching” programs might not cut it. In a case study of one collision shop, the owner took advantage of every price matching program offered by OEM dealers. Most of the OEM parts were bought at either an extended 11% discount off the already reduced OE part list price or a 30% discount off the independent aftermarket part list price. At the end of the eight months, the shop analyzed the results: labor profits increased 3 points, while whole parts profits decreased 12 points due to the price matching programs. The part profit impact is a pure, measurable loss, while the labor gain isn’t even necessarily absorbed by the shop. Overall, shop profits dropped by 5%. So, while collision shops readily admit OE fit makes for timelier repairs, the benefits do not drop to the bottom line.
So, yes, Ford was brilliant. Carving out separate supply chain strategies for different classes of parts saved money … and worked well in an integrated
strategy that led to huge improvements in dealer and end-customer service.
(Most of these customer benefits were encapsulated in Ford’s move to a daily stock order.) Our research, so far, seems rock-solid in supporting what Ford did with their bulk parts centers – because the big issues in the collision market are price, price, price. Marginal advantages in lead-times have about the same lasting market impact that larger tail fins did on late 50’s sedans.

Bottom Line: That was the good news. The collision market is steadily becoming even more price driven, and Ford got ahead of the curve here. The bad news is that the insurance companies have been busy and have effectively commoditized the market during the past few decades. Price is more important than ever, and the squeeze will continue to tighten. Most of the genuine collision parts are used in the newer car parc, which is still continuing to recover from the 2008/9 recession. This makes for pretty nice year-over-year sales gains in this segment. However, when we finally achieve a steady state that resembles pre-recession conditions, we are bound to see that the OE segment of the collision market has shrunk. Big time. Then, when we lay on the anticipated market-melting impacts from collision avoidance technology and driverless vehicles … as my grandmother in-law would say, “oy veh!”

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