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Evolution of Aftermarket Product Lines: Part I


8/12/2007
By Dave Caracci

The complexities of today’s aftermarket product lines challenge every distributor and manufacturer. How did we get to this point and how will the future of domestic and off-shore sourcing shape tomorrow’s aftermarket? In Part I (of a four part series), Dave Caracci writes about how aftermarket product lines evolved, setting the stage for tomorrow’s new supplier dynamics and relationships.
 

In today’s high-tech business world, the rate of evolutionary change continues to accelerate. As the aftermarket evolves, so do the product lines you carry in your stores or warehouses. The old saying, “History repeats itself and those who don’t understand it are bound to repeat it,” applies to the product-line choices you make for your stores, both today and tomorrow. By ignoring the history of those evolutionary product-line changes, the entire industry severely limits its ability to make intelligent, profitable product-line choices. In this four-part series of articles, I will review the evolution of aftermarket product lines, how they are developed, built and priced, and how that has changed. In future articles, I’ll continue this subject by considering the continued evolution of product lines and the increased sourcing of specific aftermarket products from low-cost countries such as India and China.

Note: The following examples may seem like they happened a long time ago, but it’s important to understand how the aftermarket arrived at its current situation in the evolution of product lines when making product line choices now and in the future.

SINGLE LINE PARTS MANUFACTURERS
Until the mid 1970s, many aftermarket parts were made and supplied to warehouses and stores from single-product manufacturers. Perfect Circle Piston Rings, Autolite Spark Plugs, DAB (Michigan Engine Bearings), Ertel Valve Guides and others, for example, each manufactured parts and sold them into the aftermarket. When an installer wanted a particular type of part, it was up to the counterperson to know which brand his store carried for that type of application and in which part of his giant catalog rack it could be located.

Just consider for a moment how one would find pistons for an installer to rebuild an engine. Back in the 1970s, these individual products were not in one all-inclusive engine parts catalog under a single brand or company name. To make it more difficult, the counterperson could not simply look under ‘Pistons’ in a catalog. Instead, she or he had to know where to look — in the Ertel, Permite or some other piston manufacturer’s catalog.

To further complicate the process of finding the part for the customer, no one company manufactured all of the parts necessary to have complete coverage. For example, if a local garage in Miami called Northwest Auto Parts for a head gasket set for a 289 CI Ford, the counterperson may have looked it up in the McCord brand gasket catalog. If the customer had a Ford Pinto 1600, the counterperson may have looked it up in the Payen gasket catalog, since it was a British engine.
As one can imagine, locating the correct brand or manufacturer carrying the part needed was often a difficult task and the experienced counterperson, who developed the knowledge and skill, was highly valued by both the installer and the store owner.

SO WHY NOT JUST MAKE ALL THE PARTS?
You may ask why a manufacturer wouldn’t make the pistons to fit all vehicles or the gasket sets to cover all the engines. While there are many considerations for such manufacturing choices, possibly the biggest two reasons were (and still are) tooling investment and inventory investment. These considerations were then compared to the sales-volume potential. Some cars were so popular that aftermarket sales could justify and bear high production costs. For others, the only way to justify tooling or inventory investment was to be the OE manufacturer on that part. As for pure aftermarket volume, the 20/80 rule definitely applied: 20 percent of the part numbers accounted for 80 percent of the aftermarket business.

Needless to say, the sales volumes on the slow movers (80 percent of the SKUs) were very low and affected a manufacturer’s decision to make a part. For example, the mold for a cast aluminum piston might cost around $40,000 per part number back in the late 1970s. So when a manufacturer looked at total coverage and found that the annual sales potential on many part numbers was less than $100 a year, the math was simple: $100 x $6 (typical WD net for a piston) = $600 per year in sales. At that rate, it would take 67 years to sell enough pistons to pay for that tooling!

Examining the decision to make and offer a gasket set demonstrates the inventory consideration. As an example, a cylinder head set used for a valve job (a common job in the 1970s/80s), would have contained valve stem seals, valve cover gaskets, head gaskets, a few o-rings and perhaps two or more other components. The first thing to consider would be tooling for the head gasket (about $20,000 per SKU) verses the sales potential. As with the piston example, a slow mover would never sell well enough to pay for the tooling for a part that sold for less than $8.

Assuming the manufacturer decided to make the pistons, it would need to source all the other components, like valve stem seals, from outside vendors. This caused the cost of inventory to go through the roof since each of the individual component’s manufacturers required minimum production orders. This created some interesting inventory challenges since a valve-seal manufacturer might require a production order for 2,000 seals. With eight seals in a set, this would make 250 head sets. Some car models, like a Volvo in the 1970s/80s, would not move 50 head sets in an entire year nationwide! That means, in order to offer that part number, the manufacturer would need to order a five-year inventory!

From these two examples, you can see that the decision to offer parts for all makes and models was not always a smart business move. To make it worse, often the 20/80 rule ended up being even more skewed toward the slow mover end. For example, one major engine gasket manufacturer in the mid-to-late 1980s generated 50 percent of its total annual aftermarket gasket sales dollars from one part number, the small block Chevy valve cover gasket!

So, why did any company invest to make medium to slow movers? As mentioned earlier, typically the manufacturer that offered the medium to slow numbers was the same company that made it for the OEM. Or, it happened to be a part that had a very low tooling cost, like an air filter or perhaps a water outlet (thermostat) gasket.

ENTER THE FULL-LINE MANUFACTURERS
By the early 1980s, marketing-savvy WDs and jobbers began to look for a better way to purchase and resell product lines. The average WD, having to buy from more than one hundred vendors, realized that it took huge purchasing staffs and overhead to deal with all these narrowly focused manufacturers. And, when they didn’t do business with the firm that did manufacturer a particular part, that WD or jobber often lost a sale because of a lack of availability. Furthermore, because jobber locations were expanding and thus competing for personnel, they found it difficult to locate enough experienced counter people, who knew which part came from which manufacturer for which car. The solution for the WD and jobber was to search for manufacturers that could offer “full-line coverage.” And so, by the mid 1980s, manufacturers had to catalog and supply all the parts that the WD and jobber “thought” they needed.

To the manufacturer’s sales department, this was a grand sales opportunity since offering more part numbers meant selling more product. To the manufacturer’s product/marketing teams, however, it was a nightmare. Since no firm could justify tooling for all of the medium to slow movers, they had to locate suppliers that already owned the tooling and possibly were already making the part for the OEM. The product/marketing teams had to research which part, from which manufacturer, fit which vehicle make and model. Plus, they had to run testing and quality checks to be sure that the part they sourced and put in their box under their brand to ship to their distributor customer was indeed the correct (and high-quality) part for the job.

Needless to say, sourcing the parts to fill out product lines and paying for the product/marketing teams’ overhead proved to be extremely unprofitable for companies that originally sold only what they manufactured. Where a major manufacturer of parts might make 45 percent gross margin on manufactured parts, the gross margin on sourced parts could be between zero and 15 percent. These unprofitable numbers didn’t really matter because WDs and jobbers needed full, multi-line coverage to make them more efficient. As they say: “Rule #1 — The customer is always right. Rule #2 – When the customer is wrong, see Rule #1.”

DID FULL LINE CONCEPT WORK?
As expected, sales for the firms that developed complete product lines rose rapidly while the ‘single liners’ started to close or merge into the larger full-line brands. It’s interesting to note that not one of the firms named earlier in this article exists today, and have instead become part of other full-line suppliers. Furthermore, the term “supplier” became common, as many companies didn’t make much of what they sold to the WD/jobber anyway.

It doesn’t take a rocket scientist to figure out that if you make 20 percent of the SKUs, source 80 percent to sell at little or no gross margin, then inventory 100 percent of it and expand your product and marketing teams to handle four times more part numbers than you manufacture, you probably won’t make as much money as you did before when you sold only what you made. Yes, there were and are exceptions, but often those niches didn’t last long.

CHANGING PRICING STRATEGIES TO SURVIVE
To survive the decline in gross and net margins caused by becoming ‘full line,’ manufacturers had to adopt various pricing practices. The common-sense move was to price the slower-moving sourced parts so that they produced enough gross margin not to drag down the profit of the faster-moving manufactured parts. This practice lasted only a few years before the jobber’s aftermarket price became much higher than the OEM dealer price on many part numbers. Since the OEM dealer didn’t support ‘full lines,’ and usually didn’t stock numbers for older vehicles anyway, they never needed to raise their prices to cover the slow movers of a ‘full line.’ The big WDs and jobbers needed their parts manufacturers to keep them competitive with the OEM dealers, even if the part offered in the manufacturer’s ‘full line’ catalog was a sourced part. As a result, manufacturers had to adjust those prices lower to satisfy their WD/jobber customers. In the long-term, it was an unprofitable move.

UNEXPECTED PART NUMBER PROLIFERATION
What had looked like a big investment in slow-moving numbers during the mid 1980s became an unexpectedly huge inventory investment by the late 1990s as the number of part numbers needed to service the market exploded. According to sources, the number of parts offered by a full-line engine or chassis parts manufacturer increased by 75 to 80 percent in the past decade. Because the added parts are nearly all slow movers, this added tremendously to the cost of being a ‘full liner.’

Next month, I’ll look at the effect this full-line sourcing had on traditional and retail distributors, their pricing and cataloging.













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