Parts Proliferation and Inventory – Part 2

Or, Give Me a Lever Long Enough and a Fulcrum On Which to Place It, and I Shall Move the World – by Paul Gurizzian



Introduction

Last week I made the case that if Archimedes (an ancient Greek mathematician, physicist, engineer, inventor, and astronomer) were a modern day motor vehicle service-parts inventory manager; his lever would be eliminating parts proliferation. This means working with product engineering to reuse existing parts rather than releasing new or superseded parts into the catalog when new and modified vehicles are introduced. I then went on to show, with lots of facts and data, that by reducing the number of parts released for new vehicles, from industry laggard to best-in-class, an OEM can:

• Reduce parts inventory by up to 30%
• Reduce operating costs by $50 million over the duration of each vehicle’s life
• Improve and sustain system fill at over 98%

Well, this week we are on the same topic, but this time the focus is on how you can achieve these results. To provide this insight, I present best practices from our European Aftersales Conference (EAC) and North American Service Parts Conference (NASPC) from the past several years. These best practices are broadly put into areas of focus: 1) Stopping the creation of new parts, and 2) Eliminating unneeded existing parts.

Focus #1: Stop the Creation of New Parts

“An ounce of prevention is worth a pound of cure” is a well know idiom. Preventing parts from being born is much more powerful than subsequently eliminating unneeded parts (the second focus). Below are some of the best practices implemented by OEMs over the past few years that may well be relevant for you.

Release Engineering Organization Integrated With Service Parts – Organizational silos between vehicle product engineering and service parts are a key driver of proliferation. This is particularly a problem for service parts business units that provide supply chain support to multiple vehicle business units, when each has their own product engineering function. To address this issue at one OEM, the engineering release staff that was formerly fragmented in each business unit was realigned into the parts division. This group now has responsibility for parts reuse and creating data, tools, and standards to mitigate unnecessary parts across the entire company.

Product Development Process That Includes Parts Reuse Gates – OEMs have documented and prescriptive product development processes with specific gates for cost, quality, and other product attributes. However, at many of these companies, service parts is not a stakeholder in the product development process. As you would expect, there has not been an effective engineering incentive to reuse parts. To change this, parts reuse has been added into the product delivery process at a leading OEM and is reviewed at each gate in the process. The parts organization now has a voice in the product development process.

Metrics and Incentives to Encourage Reuse at the Point Parts Are Created – You know the old business adage, “what you do not measure, you cannot manage”. For one OEM, the parts division worked with executive management to incorporate a part reuse metric into each of their vehicle business units’ key measurements. Parts reuse is now a key metric reviewed by the senior management of each vehicle business unit and the performance on this measure impacts compensation for executives outside of the aftersales group.

Systems and Data to Make Finding Similar Parts Easy – As another preventive measure, one OEM enhanced the functionality of its product development system to allow engineers to easily search for existing and similar parts. The system and the data structure allows for sophisticated searches based on combinations of part function, name, dimensions, weights, materials and other key attributes. The point being is that it’s as easy, or easier, to reuse a part than it is to create a new part.

Training to Create Awareness – Most people want to do the right thing. They just need to know what the right thing is. At one OEM, ongoing training is provided to all stakeholders in vehicle development and service parts who create parts. The purpose of the training is to teach the business case of why everyone should be concerned about service parts and reuse. This training is emphasized by executive management and attendance is tracked.

Focus #2: Eliminate Unneeded Existing Parts

Who doesn’t love prevention? But the simple reality is that many of you have a current parts proliferation problem and the time and support to create change outside of your organization is daunting. Given this, what have OEMs done to eliminate existing parts?

The Special Case of Mergers & Acquisitions – Acquisitions bring special challenges to parts supply chain executives. In a matter of months a new set of several hundred thousand parts can be added to the catalog. In many cases, these parts are common to existing parts at the parent company, but the time and cost to identify these are a challenge. Aftersales is involved in the acquisition process at one OEM. In fact, they have gone so far as to have specific contract language in place authorizing the review and substitution of parts, plus access to drawings and supplier data during the due diligence and subsequent integration stages.

Common Systems to Support Parts Standardization – Let’s discuss mergers some more. Without common systems at merged and acquired companies, parts are eliminated via the brute force method: one engineer and one part at a time. A key enabler for parts reuse at companies that are formed from acquisitions is the development of common service parts systems that include the purchasing, materials, and warehouse management functions. One OEM reports that parts standardization was one of the “low hanging fruit” opportunities afforded by common systems. This made it possible to identify multiple part numbers en masse with common supplier reference numbers.

OEM Original Parts Brand to Cover Multiple Vehicle Brands – One of the causes of high part count for companies is unique packaging and part numbers for each part-brand combination. To minimize part count, while at the same time maintaining their commitment to a multi-brand business model, one OEM created an “OEM Original Parts” brand. This common package brand covers about 90% of the part count and 65% of the revenue. The remaining 10% of parts that are of the highest visibility with the end user, representing 35% of revenue, still maintain the individual brand identity. So, in most cases several parts are now covered by the OEM Original Parts brand and compressed to one part.

Releasing Serviceable Assemblies Rather Than Components – A way to reduce part count complexity is by bundling component parts into subassemblies and kits. One OEM has pursued this philosophy aggressively. Take a radiator fan assembly for example. Rather than releasing 16 unique component part numbers, this OEM releases a single part; the radiator fan assembly. Combining parts to take out proliferation complexity is easy. Striking the right balance with the customer’s cost of repair needs is the challenge. This OEM has developed a set of business rules to guide rational decision making.

Bottom Line

Last week I made the case, with the help of Archimedes, that reducing parts proliferation can have a profound positive impact on inventory, operating costs and service. This week I discussed a series of best practices from a diverse set of OEMs, highlighting leading practices on how results were achieved.

Some practices were focused on stopping the creation of new parts and these include:

• Release engineering organization integrated with service parts
• Product development process that includes parts reuse gates
• Metrics and incentives to encourage reuse at the point parts are created
• Systems and data to make finding similar parts easy
• Training to create awareness

Other practices were focused on eliminating unneeded existing parts:

• The special case of mergers & acquisitions
• Common systems to support parts standardization
• OEM original parts brand to cover multiple vehicle brands
• Releasing serviceable assemblies rather than components

Parts Proliferation and Inventory Or, Give Me a Lever Long Enough and a Fulcrum On Which to Place It, and I Shall Move the World

Introduction

Archimedes of Syracuse (287 BC – 212 BC) was an ancient Greek mathematician, physicist, engineer, inventor, and astronomer. He is regarded as one of the leading scientists and mathematicians of history. Among many achievements, Archimedes is credited with saying about the lever, “Give me a place to stand on, and I will move the world.” If Archimedes were a modern day motor vehicle service-parts inventory manager, I wonder what lever he would use to move inventory levels, operating costs, and service levels.

It might well be parts proliferation or, more specifically, working with product engineering to reuse existing parts rather than releasing new or superseded parts into the catalog when new and modified vehicles are introduced. In this week’s blog we look at the impact of parts proliferation on:

• Inventory levels
• Operating costs
• Service levels
• The entire supply chain

In next week’s blog we will provide several best practice OEM case studies on what these companies are doing to reduce parts proliferation.

Summary

Inventory Managers, if Archimedes were alive today, reducing parts proliferation would be the lever he would be using to reduce inventory, reduce operating costs, and improve service throughout the extended supply chain. Reducing the number of parts released for new vehicles, from industry laggard to best-in-class can:

• Reduce your parts inventory by up to 30%
• Reduce your operating costs by $50 million over the duration of each vehicle’s life
• Improve and sustain your system fill at over 98%

Parts Proliferation and Inventory Levels

The graph below shows the relationship between the number of new parts introduced per new model and total service-parts inventory for nine relevant comparable motor vehicle OEMs. In 2009, we asked North American Service-Parts (NASPC) OEMs for the average number of new parts that are released when a new model is introduced. This is an average over the past few years and you can see on the X-axis that the count ranges from less than 500 part numbers for OEM #5 to nearly 9,000 for OEM #3. This is an enormous range.

The Y-axis shows OEMs’ average service parts inventory level in 2008, measured in months of supply (MOS). Obviously, OEM #8 with about 2.5 MOS is in a better position than OEM #7 at 7.0 MOS.

The dark blue trend line on this chart tells an interesting story. It is a linear regression for eight of the OEMs. OEM #7 is a bit of an outlier in terms of inventory, fill, and business model and is excluded from the trend line calculation. The line is upward sloping as you move to the right. This makes sense; more parts getting added to the catalog each year means more inventory, because the OEM is spreading demand over more parts, resulting in more slower-moving parts and fewer faster-moving parts.

Beyond the common sense direction of the trend line, let’s consider the slope of the blue line. Suppose you have $1 billion in annual parts sales. If you are near OEM #5, #8 or #9, you are holding about $135 million of inventory assuming a 50% gross margin. But, if your are OEM #6 or #3 you are holding $220 million for this same billion dollars in sales. This is an incremental $85 million of inventory. The simple calculation suggests that this is a 60% plus penalty in inventory. However, as practical matter there are other factors also impacting this result. For this reason I have banded the trend line in light blue to indicate there is a range of impact. Let’s convert all of this Archimedean math to a simple statement: Reducing the number of parts released for new vehicles to the best-in-class level can reduce your parts inventory by a very significant amount – 30% is not out of the question.

Parts Proliferation and Operating Costs

By the way, Archimedes, our inventory manager, is also responsible for reducing operating costs. Beyond inventory benefits, reducing parts proliferation also eliminates operating costs. In fact, three motor vehicle service-parts OEMs from both North America and Europe have independently estimated over the past several years that there is between a $7,000 and $10,000 savings associated with not creating each new part. These cost savings include engineering set-up costs and end-of-life scrap costs (but not inventory holding costs). These OEMs use this $7,000 to $10,000 value as an input into new part and parts change approval processes.

In our graph above, at one extreme OEM #3 creates about 8,500 new parts per new vehicle launched while OEM #9, at the other end of the spectrum, creates only 1,000 new parts. This is a difference of 7,500 parts per new vehicle introduction and, at $8,500 (mid-point of the range) per part, this represents a potential cost savings of nearly $64 million. To summarize, Archimedes can save a poor performing OEM more than $50 million in operating costs over the duration of each vehicle’s life if he can move the organization to reuse parts at the level of a best performing OEM.

Parts Proliferation and Service Levels

Okay, Archimedes, our 21st century inventory manager, has shown us the value of reducing inventory and operating costs by holding the line on new parts. But, what about service? To illustrate this issue, we look at data from motor vehicle service parts OEMs in Europe.

OEM X is a volume automaker selling and servicing in Europe. OEM X has provided system fill to its European dealers (i.e., from Poland to the United Kingdom) at over 98% for about five years running, while consistently improving inventory turns. In fact, their reported performance was so good (unbelievably good) that our European Aftersales Conference (EAC) participants asked us to audit their metrics and processes to understand how OEM X could achieve such outstanding results.

In short, we found OEM X does many things well, including supplier management, to drive high fill. However, they are unique in one specific area: low parts proliferation. The chart above is a comparison of OEM X to another volume automaker selling parts in the United Kingdom (the UK is representative of other markets). It shows the cumulative count of parts that are required to satisfy total line demand. What we see is that only 24,000 part numbers are required by OEM X to fulfill 98% of demand. In contrast, a comparable OEM requires 31,000 part numbers to cover this same 98% demand level. In other words, because of parts proliferation controls, OEM X has to effectively manage about 25% fewer parts than its peers to cover most customer needs. As a consequence, OEM X consistently achieves one of the highest system fill and inventory turns performance levels across the Continent. According to Archimedes, limiting parts proliferation is a key lever to increasing service.

Impact on the Entire Supply Chain

The effects of parts proliferation on inventory, operating costs, and service impact all supply chain partners (suppliers, distributors, and dealers); not just OEMs. By reducing part count-related complexity, suppliers have lower manufacturing costs. Both direct activities (e.g., number of machine set-ups) and indirect activities (e.g., material handling and bill of material maintenance) are reduced. With demand concentrated on fewer parts, both dealers and distributors need to hold less inventory to achieve a target fill. Alternatively, they can invest in the same inventory and achieve higher off-the-shelf fill. Also, beyond the obvious benefits to customers, there are second order effects from higher off-the-shelf fill, such as lower premium transportation costs resulting from fewer emergency orders placed by dealers on behalf of customers.

Archimedes’ parts proliferation lever not only moves the OEM world, it also moves the supplier, distributor, and dealer world.

Heavy Truck and Auto Parts Sales Outlook 2010 – The Politics of Parts

We are looking at some growth in 2010 for heavy truck parts and auto parts, but we might be missing the opportunity for more significant growth. Why? Two reasons: (1) we will grow in 2009 simply because it is the bottom of the hole and everything looks like up from here, and (2) we might not realize our growth potential because our pace for climbing out of this hole has a lot to do with consumer confidence.

We recently finished two “collaborative” parts sales forecasts for 2010 – 2012; one for auto parts sales, and another for heavy truck parts sales. The process was interesting and consisted of two rounds of participation. First off, we provided the OEMs data on sales “drivers” (things like fuel prices and miles driven) and what we saw as implications. The OEMs then critiqued our drivers and our implications. In the second round, we mentally “ingested” all these drivers and took a whack at forecasting each OEM’s year-over-year parts sales for 2010 (the red “Carlisle” line in the top chart). Each OEM was given a code so that the final results were blind. The OEMs then provided their blind forecasts, which, generally, were less bullish than ours. For the most part, we all agreed that 2010 looks better than 2009 when looking at year-over-year parts sales.

Many of the big drivers of a parts sales upturn seem to stem from consumer confidence. Consumer confidence drives increased spending, which drives increased retail sales and production, which translates into more goods to be moved for HT, and more new retail sales for auto.

The OE auto parts sales forecast differs significantly from the heavy truck forecast. It is simpler. The light vehicle sales market is selling below the replacement rate of 15 million units or so. In fact, just getting to the replacement level of sales would be great; all we need is some more consumer confidence to get to this level.

Heavy truck parts sales service the general economy. We need to move more freight over the roads to drive increased parts sales; more construction, more consumption, more manufacturing, more jobs, more use of parked trucks. Coupled with some positive signals in a somewhat recovering economy, new emissions regulations could hasten fleet replacement, and a surge in HT parts sales. However, even with all this, modal trends do not favor a return to the good old days. Warren Buffett just bought the Burlington Northern Railroad. He’s a pretty smart billionaire. Buffett thinks that evolving market conditions favor more rail and more intermodal.

Going back to the top chart, the big difference between the bullish “Carlisle” forecasts and the OEM forecasts is all about the speed of the recession recovery. There’s good news here and some not-so-good news.

The Dow hit 10,000 again in October and people don’t feel so poor anymore. The big question is how this growth in paper wealth will translate into spending. The last few months have shown some expected improvements in certain fundamentals of the economy, but we’ve had some disappointments on some of the soft things that ultimately drive consumer confidence. Things could be better.

Consumer confidence with the present situation is at a very low point. Why? Hey, we missed the bullet and avoided a depression with Obama’s controversial economic stimulus. The meltdown of the economy was certainly a top worry for many consumers, but now we are on to the next score of worries. Americans are worried about the government going broke. Thomas Friedman (I still really do not care for him) described this as the Warren Buffett principle:

The Warren Buffett principle: Everything I’ve ever gotten in life is largely due to the fact that I was born in this country, America, at this time with these opportunities for its citizens. It is the primary obligation of our generation to turn over a similar America to our kids.

Obama’s job approval numbers are also at a low point. It was not enough for him to dodge the depression bullet; much of his magic was all about change (that really is not happening), trust, brilliance, and hoped-for decisiveness. Few see the brilliance or “change” with his indecisive efforts in healthcare reform efforts. Afghanistan war policy is another matter. Healthcare reform is all about same-old-same-old compromises. Afghanistan is pretty much all about Pakistan. So, folks - call them consumers - have lost trust in him. Even the NY Times is riding hard on Mr. Middling. Maureen Dowd has some new nicknames for him, and Paul Krugman never drank the Obama Kool-Aid. Obama’s job approval is tanking, and this will have a significant negative impact on consumer confidence … now that we all know it will take 2 years for the jobs to come back. Since we are a consumer economy, this will snowball into lagging GDP, and continued consumerism belt-tightening (that dreaded Keynesian paradox). Consumer confidence will just have to reflect reality and not partly trust, respect, and hope.

Bottom Line: Pretty much everybody agrees that we should see year-over-year parts sales growth in 2010. The big question is, how much? There are certain certainties out there that guarantee a slower recovery: a still bursting mortgage bubble and very high unemployment. Offsetting this anchor is pretty much a lone soldier: consumer confidence. How much growth? It pretty much depends on Barack Obama. Is he a Jimmy Carter? Or the good parts of Bill Clinton?

In the next few weeks we will scratch beneath the surface and look at key parts sales driver

Honda’s Three Joys – by David Carlisle

In 1978, fresh out of Rensselaer Polytechnic Institute, I went to Colgate Palmolive and immediately started working on corporate global supply chain strategy. It was a great education. My coaches were Juan Panellas and Ed Healy – they directed Colgate’s global supply chains. I can’t thank them enough for my education and attitude – I still think about these guys every day. I continued to do strategic planning through the 1980s, but it was not until the late 1980s that I happened upon Honda’s “Three Joys.”

After Colgate, my next coach was Honda’s Richard Colliver. Everybody knows Dick. We would spend hours, days, months thinking – I never learned more in my life. The kernel of our thinking for about 15 years was Honda’s Three Joys – the Joy of Producing, Selling, and Buying. There’s nothing secret about it – you can find it here: The Three Joys

The Three Joys first appeared in 1951, and by 1956 were transformed into a mission: “Maintaining an international viewpoint, we are dedicated to supplying products of the highest efficiency, yet at reasonable prices, for worldwide customer satisfaction." This is coupled with Honda’s foundational principle: "Respect for the Individual" – a philosophy made actionable by an organizational commitment to the Three Joys.

Before I go any further, I have a situational confession to make. Some IT integrators call me a “rogue consultant.” They don’t like me. I’m a Democrat who detests Sarah Palin, so I’m not her kind of going rogue. I’m just not afraid to be brutally honest. She’s running for president. OK, ever been in a sidebar, or even a real bar, and the conversation strays from baseball (the world’s greatest sport) to corporate strategy? Somebody mentions Michael Porter, Bain’s secret Hershey strategy, BCG’s lazy cows, McKinsey’s rarified clicks, or some author with the latest trick ‘n win play. You are supposed to be knowledgeable in all this, and expected to say something profound. But, inside your mind you are going “Zzzzzzzzzzzzzzzzzzz.” OK, maybe it’s just me. Why are so many strategists so damn boring? It’s because if they ever studied the Three Joys, they’d skip the buzzword bingo and be talking about baseball.

Honda is the most strategic-focused, and inherently ethical (don’t be confused by pre-1993 history – Honda is all about becoming perfect, not being perfect), car company; often overlooked because industry watchers do not understand them. Just drive a Honda for a few miles and you will understand that this is a different kind of vehicle that, indeed, we can understand. It is marvelous. This differentness, this marvelousness, goes back about 48 years.

Honda’s Three Joys constitute the perfect consumer goods manufacturing strategy. If you achieve the Three Joys, you will be successful. It starts with the Joy of Producing. This is all about the joy you gain from making the stuff you sell. Soichiro Honda said that this is a joy only known for the engineer. I generalize this Joy to be the joy of creation – the folks who create the products of your enterprise; Products that are “of superior quality so that society welcomes it.” This joy comes from creating things of superior quality that people want and are willing to obtain. It is important to note that Joy is the objective here, which talks to real human beings and culture. Recognition and acceptance of this Joy can and should drive the culture of any organization that “produces.”

I strongly believe that most of us in this industry are creators of sort. We exist in our business enterprises to create a work product. It can be to create a new powertrain, a new policy, to install an instrument panel, to create a repair order, to answer a question. In each thing we create I ask three questions: (1) Is what I created of superior quality? (2) Is my customer willing to obtain it? (3) Am I happy doing my job?

The second Joy is the Joy of Selling. Honda-san postulated that if your product was high quality, of superior performance, and reasonably priced, then people all along the value chain who sell it will experience joy. I substitute “service” for product to accommodate all the products in our enterprises. We can all identify with this by reflecting on our restaurant experiences. The litmus test for a good restaurant is the attitude of your server. Typically, if an experienced server is obviously happy, they have made employment choices that reflect the quality of what they are selling. So, if your server is happy, you can safely order the specials. This is the most difficult Joy to instill and nurture in your enterprise – it is all about becoming, not being. It represents a lifetime of work.

I strongly believe that we are, also, all “sellers” in our work place. We sell the fruits of labor (ours and others’) down the value chain. If we cannot experience the joy of selling, then something is wrong. Something might be wrong with the enterprise, or something might be wrong with the individual. I always ask people if they are happy. I have thick skin; I can take tough feedback. I want to know if they are unhappy and why they are unhappy. I might find out that we have some problems with our Joy of Producing, and I will search elsewhere. Or, I might find that the problem lies with some personal issue. We can help there, too. Discerning this Joy, and any root causes, is critical for enterprise success.

The third Joy is the Joy of Buying. Honda-san described this with “…it is none other than the purchaser who uses the product in their daily life. There is happiness in thinking, 'Oh, I’m so glad I bought this'.” I call this the joy of ownership; it is all about the joy of use. This is the acid test of a strategy – if your buyers are not happy, they will quit buying.

We are all buyers and owners in our enterprises. We all use stuff, not just cars. We use tools that are supplied to fix a vehicle, we use policies created by others, we use IT to make our jobs easier, we use office space bought by our services department, we use paper in our copy machines, we use information given over the telephone to diagnose a problem. Each of us chooses to use stuff in our companies – when we choose not to “use”, we coin cool excuses called “shortcuts”, “renegade”, or “skunk works.” When there is no Joy in “use” then we really have a problem. Although this is the Third Joy, it is the most telling – if one fails to deliver on the Joy of Buying, they will inevitably have problems in producing or selling.

The Joy of Producing, Selling, and Buying are the core elements of one of the world’s most successful enterprises. Implicit is a focus on the unique ability and contributions of individuals – “Respect for the Indvidual.” Many people simply do not “get” Honda – they try to fit it in some pigeon hole, or write it off as hopelessly unique – a rogue car company. All this is not some hokey airport self-help book slogan or motto. Only individuals, people, can experience Joy; Companies can’t, organizations can’t, nor can “divisions.”

Dick Colliver retired this year from Honda. I spent about 20 years thinking with him. Once he moved to Honda we spent 15 years of thought focused on the Three Joys. We never needed another strategy, even when we encountered dips in the road. He is a great friend and Honda certainly is a great company. Both deliver on the Three Joys.

LKQ&U, or Neuf Ou D'occasion Pacotille

Last week we eked out some interesting tidbits from the 2009 NASPC Parts Manager Survey (over 8,500 dealers participated with a 54% response rate). There’s more gold to be mined here. In the survey we asked dealers to name top IAM suppliers and to rate their performance. LKQ/Keystone was on the list.

As a bit of background, one part of LKQ’s business sells junked car/truck collision parts that are typically removed from totaled or wrecked vehicles. They call these parts “salvage” and sell them as if they are “Genuine.” This is like calling maggot larvae “caviar blanc.” Junk parts certainly are not “Genuine” … why do we let them get away with this?

Another part of their product line comes from their “Keystone” acquisition – these are “knock-off” parts. These knock-offs are sort of like $15 Rolex watches that you can buy on the street near NYC’s Times Square. So, it’s either new or used cheap junk. It sounds better in French: “neuf ou d'occasion pacotille!”

Last week’s big message was, quite understandably, Order Response Time (ORT). Dealers use close-by jobbers for parts that they do not have and can get quickly. They can return them pretty much no-questions-asked if things don’t work out. Compared to the OEM supply chains providing genuine parts, parts breath, fill rates, and warranty terms are lousy, but hey, they can get the part fast.

LKQ’s performance is particularly lousy compared to the big guys in the aftermarket. My reading of the chart is:

• LKQ’s parts breath is just plain awful – it only “works” for a very small percentage of dealers.
• LKQ’s fill rates are not much better.
• OTD is awful compared to the big program groups or jobber chains.
• LKQ’s warranty is awful – maybe that’s why they just changed it.
• Return policies lag what one would expect from the IAM, but represent the high point in this pile of scrap.

LKQ’s revenue was up 3.4% in the first 9 months of 2009, and their stock price has been steadily recovering.

LKQ’s success is all about the worst parts of the US – it reminds me of the old Soviet industrial economy: LKQ sells a cheap sub-standard product with dismal service to unsuspecting citizens. This business model works because insurance companies are steadily increasing their control of the collision market; forcing body shops to buy crap like that saves them some money. Don’t get me wrong. I really like LKQ. Reasonably brained-out investors love companies that have a sustainable competitive advantage and a lock on a market. LKQ/Keystone is the biggest dog in town selling junk car parts. If you can’t find a junk car for cheap parts that kind of fit, you typically go for “Taiwan Tin”, a.k.a. Keystone. So, it is a great stock to buy. Another Orwellian Paradox of sorts.

Bottom Line: Selling Genuine Parts against the dog's breath of product sold by LKQ/Keystone is a pretty much hopeless proposition. At the end of the day, the end-consumer has no knowledge or appreciation of the differences between LKQ’s junk pile and “Genuine**.” Furthermore, the entire process is managed by trusted third parties (I call them trusted third pirates): insurance companies. These are the “good hands” companies who make ducks quack out their name. They are the good guys – just watch Yogi Berra on TV and have a good laugh. They are the guys stopping Barack in his tracks and making us worry about bankrupting the nation by providing health care to folks too poor to live beyond what should be a reasonable poor-man’s lifetime.

OK, it really isn’t quite hopeless, but it is difficult. Here’s what we need to do:

• Support lower repair cycle times. This results in lower repair costs for insurance companies, and they like this. We can do this through large collision wholesaling dealers that stock a lot of breadth and can deliver the part same-day if necessary. If the body shop needs additional parts, the dealer can get those through the PDC in a day or two, max.
• High levels of service will trump low part cost when it directly impacts the customers’ time. OEMs need to make sure they are providing large collision wholesalers the right tools to succeed: OEC repair link, inventory stocking support, special returns privileges, special express order (maybe drop ship) privileges to support key body shop accounts, and training.
• OEMs need programs to certify body shops on the use of OEM-specific repair processes, which should include the use of genuine parts. This would also help maintain brand images, as the vehicles are repaired to “Genuine” OEM specs.
• Maybe the consumer does not have a choice (and frankly the body shop has limited decision-making as well), but certainly they do have the right to know. Mr. and Mrs. Consumer pay their monthly insurance premium on a timely basis, hoping to never get into an accident. In the unlikely event this occurs, the insurance company can repair their vehicle to below pre-wreck conditions by using junk and sub-quality parts. This isn’t an assumption; it’s a fact. In many cases, the consumer never knows this has occurred; state legislators know this and allow it to happen. OEMs need to develop strategies/tactics to communicate to customers and body shops (and even insurance companies) the benefits of using genuine parts (for instance, point of sale materials at dealerships or body shops highlighting the benefits of OE parts, language in lease agreements requiring the use of OE parts, online/social media messaging, etc.). Someone needs to start making a stink about this. We see some good efforts here by GM and VW. Maybe others should take notice.

** Email Jessica to get the free NASPC white paper on Genuine jshea@carlisle-co.com. All photos in these blogs are copied from Google’s internet image search engine.

Blog 52: Why Do Dealers Stray?

We just completed the 2009 Parts Manager Survey (over 8,500 dealers participated with a 54% response rate) and were able to probe into areas we’ve always had some questions about. One area we always wonder about is, “why do dealers stray?” Why do they go to the independent aftermarket rather than buying all of their parts from their OE?

For the past 20 years I have heard “pricing” in response to that question. Not true. When we plot Parts Manager satisfaction with pricing versus purchase loyalty (% of purchases from their OE) we find no correlation. Once we strip out two outliers, where the purchase data is not apples-to-apples, we see a pretty-much flat line – so purchase dis-loyalty is driven by something other than pricing. Hmm, I wonder if everybody knows this.

But, we know that dealers stray. Where do they go? This is interesting. We asked dealers to name their top two non-OEM suppliers. I will describe these suppliers, but not name them, since the NASPC survey group already got all the gory details.

“Other” came out on top. A monster jobber group was second, and “Nobody” was third.

These three answers provide the clue as to why dealers stray. Smaller import dealers tended to say “Nobody” simply because nobody – no nearby jobber – stocked many of their parts. This is because those makes have smaller UIO counts, which do not attract the attention of the IAM. Larger importers and domestics had smaller “Nobody” responses simply because ample supply of their parts is available in the aftermarket.

“Other” is an interesting choice – it really means that a dealer tended to use jobbers that were nearby and/or familiar to them (“Joe’s Jobber”) and were either a) not affiliated with a recognizable program group, or b) the parts manger simply did not know the affiliation of that jobber. Or, it means that the dealer did not think about a “brand”, they thought about the relationship. They buy from “Joe” down the street, and they either do not know or do not care what program group “Joe” is associated with. In many cases this may be because “Joe’s” association has changed (he used to be independent, but recently became a CarQuest jobber) or it may be that the program group association is transparent to existing customers. While “Other” seems to be a big slice of the pie, it really is not. “Other” is more likely a collection of local accessory suppliers, bulk oil, and local jobbers. After reading almost 500 verbatim dealer comments on this one, there is no lurking monster out there.

So far, I have just interpolated the data. For the top three IAM suppliers we asked dealers to rate various aspects of their service relative to the OEM. Hey, it’s a recession and dealers are down and out. It is the kind of environment that you think would make dealers unkind. So, they were not just blowing smoke. Just looking at the big jobber monster, it is not “better” than the OEM in any area – it never got more than 50% of the vote. However, it shines in two areas: OTD (order-to-delivery time) and returns. These are not surprising. When a dealer needs a part, a jobber is only minutes away. Dealers have an immediate need that they get filled within hours, if not minutes, and they can return almost everything without penalties. Who wouldn’t like that?

So, why do dealers stray? First off, it is not about pricing. They stray because local jobbers just might have a critical part, delivered within minutes, while the vehicle is still on the lift and the repair can be performed immediately. Also, sometimes it’s not the OEM parts manager who makes the choice. Many service advisors let the customer decide and consequently, it is often the customer who strays rather than the dealer.

Mr. Customer, I can order the part from the manufacturer – and it will be here tomorrow and we can install it the following day. Or we can get it from a local supplier this morning – this can be installed this afternoon and you can pick up the car on your way home from work. Which would you prefer?

Outside the OEM, dealers are not particularly IAM brand loyal – the “Other” choices tell us this. They tend to go to close by jobbers who they have a relationship with.

Bottom Line: It’s all about OTD. This gives us a lot to think about as our dealer networks are collapsing. Let me leave you with a few thoughts on this one.

• Hint: The best OTD to the repair is from the dealer’s parts room bin. RIM really is an OTD strategy. It is more important than all the political mud it sometimes stirs up.
• D2D is an OTD strategy, too.
• It is important for OEMs to figure out if their dealers are straying for reasons other than OTD – if so, then their share losses are inexcusable.
• For importers, it’s pretty important to understand if they are straying at all – the “Nobody” patterns are pretty telling.

Reinventing Extended Warranties - The Super Soaker Effect

[Or: How to convert a Beverly Hillbilly Internet Extended Service Plan into a Super Soaker]
Let’s take a quick tour of the woes in the auto world to set the table on this one. A few years back we’d wonder if sales would be 16.5 million units, or 17 million. I made side bets with some clients and made money several times. Well, this year we are looking at 10 million units and some change. Next year looks like 12.5 million. It takes 15 million units a year just to replace the aging fleet. What’s going on?

Risk aversion. Fear. Belt tightening. It’s not just the auto segment, it’s all segments.

People are afraid to commit to the $20K - $30K in loans or cash to replace the car/truck they are driving. Our internal debaters and researchers will spend the next year jawboning on this and by the time they are finished we will have a nice piece of history to reflect on. Risk aversion, fear, belt tightening, is roughly right without being precisely correct.

So, what do you want to be? A historian?

Let’s run with this fear concept.

If customers are not buying new cars and trucks because of risk aversion, and are holding on to what they’ve got for longer, they might be interested in an extended warranty. That would certainly take the risk out of holding a vehicle longer, past the warranty period. We just finished a recent European customer survey and found this to be true there.

You might say that’s easy to check – just have someone go and fetch the numbers. The problem with this is that it ignores the “Super Soaker” effect. A Super Soaker is the 1989 brainchild of Lonnie Johnson (a rocket scientist). It is a gigantic pneumatic $25-$35 squirt gun that the world never saw before. Lonnie reinvented a toy segment that was characterized by 89¢ just-plain-awful squirt guns. The numbers for this segment were different before 1989. We need a Lonnie Johnson to reinvent the extended warranty segment.

Let’s play Lonnie. But, before we do, let me take a whack at describing the current state of our 89¢ squirt gun that we call “extended warranties.”

The story starts at Radio Shack and K-Mart when the cash register operator asks me if I want to spend another $4 on an extended warranty on a $10 sale-priced Mr. Coffee. After hearing this about a hundred times, I feel like slapping them and shouting back, “whadya think, I’m an idiot?” I buy a shiny new car or truck and the F&I manager tells me I’m stupid for not buying that mop & glop and security system. Next, with a smirk on his face, he wants to sell me an extended warranty. My K-Mart conditioning comes to play and I say, “no.” Freedom is 5 minutes away when I’m rid of this slime-ball F&I zombie. Besides, hey, a 3 year warranty is forever and why do I need to bother myself planning for the future? Three years pass by and I throw out a dozen cleverly designed unopened envelopes of junk mail from who-knows-who trying to sell me crap I’m suspicious of. If it were important, why would they use the US mail? The mail is for catalogs and just-plain-crap. Three years ago things were better. I think I’ll hold on to this baby for a few years longer. But, what if it breaks down? Warranty’s out. I’d like to take some of the risk out of my extended ownership. Wish I hadn’t thrown out all those envelopes. What do I do?

What do you do? Well, you can go to the manufacturer’s web site and find out about their extended warranty plans (let’s call them extended service plans – ESPs.). They typically use the Beverly Hillbillies TV show as their design inspiration. Beverly Hills = internet merchandising. Elly May Clampett = the promise. Granny Moses = the real process to buy the ESP. Jethro Bodine = the boneheads who think this stuff up. I’m Jed. Typically, you have to work the process through the dealer – the F&I manager sells it, the service manager needs to do an “inspection”, you need to bring the vehicle back and forth. Elly May ain’t nowhere to be seen. (By the way, giving an aftersales internet lead to an F&I manager makes about as much sense as Diane Von Furstenberg hosting a farting contest during Fashion Week.)

I just bought a prototype Super Soaker 48-month ESP for a 5 year old SUV that had 54,000 miles on it. I gladly spent $2,000 and another $700 for new brakes and a tie rod end. I’d do the same thing for my tractors and excavator. I really wanted the ESP “my way” and worked with a very progressive OEM and a remarkable dealer to make it happen. Rather than go through the rough-edged prototyping process, let me share with you the ultimate “my way” vision of how to convert a Beverly Hillbilly internet ESP into a Super Soaker (this is how the process should work).

1. The process starts out in the online Owner Center where my VIN and all the service records are stored and advice is given on my car. Ford’s Owner Center is the benchmark. (GM’s is way too cluttered and compromised to focus on something like this; remember, GM’s Owner Center is the “General Store” serving up a goulash of interests appeasing a huge cross-section of GM insiders with a piece of the Yahoo turf. What we need here is a category killer).
2. The Owner Center knows my car. It knows my mileage. It knows that it is out of warranty. It knows I need new front brakes and tie rod ends because the folks who designed the Owner Center have mined millions and millions of ROs and know what’s going on with the fleet at different times in the lifecycle.
3. The Owner Center merchandising banners are designed like the OnStar email (OnStar is the benchmark for getting customer attention) that gives me color-coded alerts to draw my attention to things that need attention – like low tire pressure, oil changes, or, maybe, the need for an ESP.
4. The Owner Center knows I’m a good candidate for an ESP and merchandises it to me.
5. The Owner Center uses the data it has and calculates what the estimated payments would be on a 48-month ESP. Lump sum or monthly payments.
6. The Owner Center has a click-to-buy button. It directs me to a fork in the path. I can contact the closest dealer and buy direct from them (button 1), or I can be directed to the closest dealer who uses an OEM-sponsored internet selling process (button 2). Stihl is the benchmark for this.
7. I select button 2. Button 1 is pretty much reserved for the dealer’s friends and family.
8. I am informed that I can pay now and get a 5% discount, or pay later without the discount. I can select the terms (lump sum or monthly). The 5% was easy to fund based on higher closing rates associated with an early “ask” and costs of lost sales.
9. I am informed that my vehicle will need an inspection and I am told why that makes sense. I am told that the inspection will bring the vehicle up to “certification levels” to start the new warranty period and that the vehicle might need some maintenance or repair work.
   
   I am told that the dealer will pick up and drop off the vehicle for the inspection work and that this will be done at my convenience. Many dealers already do this for normal service– it is a best practice. Heck, even Herb Chambers does this and he’s no dummy.
10. I am informed that it will be my choice to have the dealer perform this maintenance and repair, or that I may take the vehicle to an independent. Once the maintenance and repair work is completed, the warranty period starts.
    
    The dealer has been trained not to get greedy at this point in the process. Do not overlook this.
11. The dealer picks up the vehicle. I get a call telling me that the vehicle needs new front brakes and a tie-rod end. No surprise here; I’ve already been conditioned to expect this. He/she emails me pictures of the damage on my vehicle and explains the “surgery” needed. Alternatively, I can get all the dealer feedback through the Owner Center. The correspondence hits on trust/value/cost/convenience.
12. I agree to the repair work that needs to be done.
13. I get my 5 year old 54,000 mile vehicle back with a risk adverse 48-month warranty.

Bottom Line: We need to think like Lonnie, not Granny Moses.