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The Evolution of Aftermarket Product Lines: Part IV


11/15/2007
By Dave Caracci

Technology and the global economy are forcing the industry to ask some fundamental questions about the way suppliers and distributors address the products they make, buy and sell. In part four of a five-part series, Dave Caracci continues to look at some of these questions and offers some possible answers.
 

In this series of articles, I have posed some questions that, depending on the answers, could change the very fabric of the industry, altering the way manufacturers offer product, the way warehouses source and the relationships between the two. I’ve attempted to answer some of these questions and come up with some conclusions about the new dynamics that the answers may provide.

I’ve written about how global manufacturing and sourcing/e-cat technologies have changed the way manufacturers source and manufacture product, along with how distributors and retailers source. Last month, I began to answer some of the questions posed by these new realities:
• Should a manufacturer make more SKUs or less?
• Should the product lines offered by manufacturers become smaller as low- or no-profit SKUs are trimmed?
• Should the full-line manufacturer source more from offshore, low-cost countries to improve margin?
Continuing my Q & A from last month:
• Could full-line suppliers create agreements whereby certain suppliers would make a certain SKU, supplying all the other ‘full liners’ with that SKU to achieve a higher volume productivity on slow moving SKUs?

Just as distributors, program groups or store chains may make sourcing choices that improve manufacturing or product-line productivity, so too may competing manufacturers. A possibility being explored is the idea of having one or two manufacturers agree to tool and make specific SKUs, while the other ‘full line’ suppliers simply buy those specified SKUs from the manufacturers that agree to manufacture them. There are various antitrust issues that need to be addressed, but such manufacturing/purchasing agreements are interesting to consider.

With such an agreement and the resulting lack of duplication of production/tooling cost, low-demand parts could be supplied to the aftermarket at a cost much more competitive with the OEs. For example, when three competing firms invest in tooling for the same slow-selling silicone water outlet gasket, the cost for all three manufacturers will be far higher than if one firm tools and manufactures the part while the other two buy that SKU from the other manufacturer. Higher production runs of low-demand SKUs, done more often with lower overall tooling costs would be good for the entire independent aftermarket.

• Should a full-line US-based manufacturer source from low-cost countries?

Of course they should. In today’s global economy with multinational enterprises producing all over the globe, it’s hardly appropriate to even ask this question. How can a store compete with the OE dealership for parts and service if aftermarket suppliers do not source globally just as the OEMs have for two decades?

• Since WDs, buying groups or store chains can specify and source individual SKUs from an OE supplier, could they source individual SKUs from offshore aftermarket manufacturers in low-cost countries?

Yes, but the real question is: Should they?

As already discussed over the past three articles, the use of electronic cataloging, combined with changes in business models, will enable companies to build and sell the most profitable and complete aftermarket product lines of tomorrow. This is true for distributors, buying groups and retailers, as well as the manufacturers/suppliers.

Unfortunately, incorrectly implementing these new technologies could result in worse productivity for the entire industry and make the OE dealer the winner in the battle for the professional technician’s business. Why?

Consider the number of people it takes to create and manage a product line. It requires application engineers to figure out what fits what, someone else to research makes, models and vehicle platforms each year, more people to buy, inspect, track and compare all the sample parts, quality-control personnel to go to the source-manufacturers, as well as inspect incoming product, etc. Furthermore, low-cost production changes at least every decade. The low-cost country of aftermarket choice has moved from Canada to Mexico to China, Thailand and India. Every time that happens, it takes teams of product personnel to research, negotiate, train and inspect new suppliers to ensure a successful sourcing of each SKU.

Once multiple distribution segments begin sourcing the same products from many global sources, the duplication and escalation of costs per unit/$ sold could be enormous. For example, look at brakes. Today, one major aftermarket brake parts manufacturer/supplier employs 15 people in the product management department. If the US aftermarket is supplied by three major brake manufacturers, we could say it takes 45 product personnel to handle the US brake parts sales volume. If five buying groups, three major WDs and five retail chains decide to source product themselves from offshore, they must develop the same types of product departments to ensure that the product they buy and resell will fit and perform properly. A rough estimate would put that at 13 companies with 15 product personnel = 195 people, plus the 45 already doing it today for a total of 240 brake-line product people.

It doesn’t take a rocket scientist to figure out the aftermarket product management cost per brake sale would increase 300 and 500 percent. Who does that make more competitive? The OE dealer.
Let’s consider the size of production runs and the cost per unit made. Again we can look at a real-life aftermarket example. With three major engine gasket manufacturers/suppliers in the US, we could say that on every part number, there are three production runs of an SKU. Again, if buying groups, several major WDs and the retail chains decide to create the product lines themselves and purchase from various aftermarket overseas suppliers, we would have another 13 companies all creating production runs of each SKU. Again, the total aftermarket demand wouldn’t change, so the industry would have the same dollar sales volume supporting 13 very small production runs per SKU.

Now let’s think about tooling. Let’s assume there are three major gasket manufacturers/suppliers for the entire aftermarket today on a Ford 4.6 cylinder head gasket. That means three firms have already invested in the tooling for that SKU. If the WDs, retailers and groups source these gaskets offshore from multiple suppliers, the market would need lots of tools, even though the sales volume has not changed. And what would happen if each of the distributors specified a slight difference in aftermarket product design? The market would end up with more varied tooling than it could ever support with sales.

PRICING
Full-line supplier pricing and the ability to supply may be at risk when making multiple offshore aftermarket sourcing choices by individual SKU. One source explained that due to low profitability on the slow-moving SKUs needed for full-line coverage, a major chain offshoring just the top-moving valve cover gaskets does more harm to the full-line supplier than if it offshored all the valve cover gaskets.

If the pricing base for higher volume aftermarket widgets includes enough to cover the costs of producing, warehousing, etc. the slower moving SKUs, (long term), one or two things will happen once the WD, retailer or buying group sources the high-volume parts overseas:

1) The slower parts will take a huge increase in cost (200 to 300 percent according to one source) making the aftermarket uncompetitive with the OE dealer.

2) The parts manufacturer will simply stop supplying the slow or no-profit parts, again making the aftermarket uncompetitive with the OE dealer.

Overseas sourcing of various products will certainly continue to be done by WDs, retailers, buying groups and manufacturers. But if done without due consideration, communication and total knowledge of the design, performance and quality assurance processes, this sourcing in the name of lower cost could result in the loss of significant aftermarket business to the OE dealer.
When it comes to global sourcing, total communication in the aftermarket supply chain is the key to preventing aftermarket losses in productivity, which eventually correlates to decreased profitability for all aftermarket channel participants.

Next month, we’ll look at offshoring’s dangerous side, along with questions distributors should ask themselves if they think they might want to source direct from overseas.













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