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Top 10 Distribution Influences


12/1/2002
By Brian Cruickshank

A variety of factors - both positive and negative - impact aftermarket distribution. For the sixth year, Counterman editors present their view of the top 10 influences that impact the industry.
 

1. Inventory Management
Inventory, and how to effectively and efficiently manage it, is one of the toughest things with which the industry grapples. Simply, there is too much inventory in too many wrong places. This situation has created an aftermarket where the right part is not necessarily in the right place at the right time.

For the aftermarket, inventory management problems cost the industry billions of dollars annually. It manifests itself in low inventory turns, high return rates, margin compression and hyper competition - all hallmarks of the modern aftermarket.

But before the industry as a whole can address the inventory issue, it must first understand it. Individual manufacturers see their own inventory levels as appropriate, yet the entire industry views the total inventory situation as excessive - and therein lies the dichotomy.

There are two key initiatives currently underway to better understand the inventory problem. The first is a study that aims to gain a better understanding of the complex excess inventory issue. MEMA, with the support of AAIA, AWDA and SEMA, is conducting this in-depth study to determine the root causes of the excess inventory problem. Northwood University is aiding in the research, tabulation and analysis of the data. The preliminary findings were first presented at last month's Automotive Aftermarket Industry Week in Las Vegas, with the final results slated for early 2003. A more in-depth look at this project will be presented in an upcoming issue as results become available.

The other initiative is being headed up by AAIA. Called Enhanced Line Review (ELR), the project seeks to share good, reliable point-of-sales (POS) data that manufacturers can use to forecast production, distributors can use to make sensible stocking decisions and stores can use to make better use of precious shelf space. For more information on this project, see the July 2002 issue of Counterman.

The ELR initiative seeks to accomplish this through the sharing of the sometimes closely guarded POS data. Already, participating retailers such as AutoZone, Advance Auto Parts, Pep Boys, Murrays and CSK send their own POS data to a neutral third-party, which compiles the information and makes it available to participating companies. This data helps the industry paint a better overall picture of what sells when and where.

Whether the aftermarket fixes its inventory management problems is not the issue - it must do so in order to survive. How the market accomplishes it and at what level of cooperation are the real issues to solving this broad-reaching influence.

2. Store & WD Ownership
Consolidation of stores and WDs hit a fevered pitch between 1999 and 2000 when there were some 57 distribution acquisitions to the tune of $2.5 billion. The rate of acquisition has slowed over the following years, but has not stopped. A few notable companies such as O'Reilly, GPI, BWP and Uni-Select have recently made some impressive additions to their store and WD groups.

That's not to say that these companies are the only ones looking to buy. There are many more WDs and store groups in the industry that want to buy other WDs and store groups; conversely, there are WDs and stores that want to sell. Putting those two groups together often depends heavily on cash availability. When rates for cash rise, consolidation slows.

The aftermarket's poor image extends well beyond the motoring public. Lenders who set advance rates also have a less-than-favorable view of the market and are less willing to offer good rates to companies looking to expand through acquisition. The desire to acquire is tempered by the disposition of lenders, whose influence directly affects who owns the industry's stores and WDs.

3. Parts Proliferation
Too many parts. That's the simple explanation for the proliferation problem. It is, however, not a problem wholly of our own creation. "Dis-standardization" by vehicle manufacturers has created many SKUs for parts categories that used to get by with fewer than 10.

But the aftermarket is culpable as well. The addition of value lines has double or tripled coverage, squeezed precious shelf space and created a glut of inventory that no one can manage effectively (See Influence #1).

In fact, three decades ago, the typical WD carried about 71,000 classified part numbers. Twenty years later, that number jumped to 108,000. Today the average WD carries some 223,000 part numbers. The NAPA system alone carried a quarter-million part numbers.

This proliferation of SKUs is an influence that gets at the heart of many of the channel's inefficiencies. Is there a solution? Vehicle manufacturers say they want to start standardizing platforms again, but that's only half of the puzzle. The aftermarket must reduce the number of SKUs it produces or get much better at managing the parts it now handles. This requires not only increased investment in inventory, but it also requires more infrastructure to handle the volume.

But no matter what vehicle manufacturers do, the simple fact that vehicles are lasting longer necessitates further SKU explosion. Solving the proliferation puzzle, rather than eliminating it, is probably the key to this on-going influence.

4. Technology
Advancing technology for the auto industry is good, and has created vehicles that self-diagnose (sort of), last longer and run more cleanly than ever before. In fact, the average vehicle today runs 70,000 more miles than it did 40 years ago.

But technology only goes so far, and despite the industry's efforts to convince the public that vehicles are technologically advanced, the industry may actually have gone too far. Now many people believe that on-board diagnostic systems can self-diagnose a specific problem, requiring no additional detective (read: paid diagnostic) work. Automotive technology, while good, just isn't that good. Only a skilled and trained technician can decide exactly what has caused a particular failure. To assume otherwise cheapens their profession and unfairly puts out-of-reach expectations in the mind of the consumer.

As technology gets more advanced, it will continue to drive the industry and consumer expectations, remaining one of the strongest influences on the market.

5. Asbestos Litigation
If King Midas turned everything he touched into gold, the opposite is true when it comes to asbestos. Everything it touches turns into a lawsuit.

Manufacturers were among the first to be hit with severe asbestos-liability litigation and more than a few have filed for bankruptcy because of it. Now the ire of legions of lawyers have turned on the distribution channel.

This year some California jobbers and a few notable retailers were named in an asbestos liability suit. The parameters appear simple: Anyone who handled an asbestos product anywhere in the distribution channel could be fair game for a lawsuit. The ramifications, which have already proved ruinous for some companies, now have the possibility to cast a dark shadow over WDs, jobbers and retailers. The market is just beginning to see the impact of this influence. Stay tuned.

6. Brand Erosion
Erosion of premium branded product is a game played by many of the very manufacturers that disdain it.

Some in the industry contend that value line product proliferation and promotion are slowly eroding margins and place all product, premium brand and otherwise, into the dangerous "commodity status." Now that retailers are getting deeper into premium-branded parts, brands (and the price of those brands) take on an even stronger influence.

7. Operational Inefficiencies
The war over who wins and who loses is not based on who has the lowest price. The overall winners will be those who have the best price (not necessarily the lowest), the best service and the most efficient operation.

But in general, aftermarket distribution is an unwieldy and inefficient animal. Academics say that mature industries, after a period of time, naturally turn to trying to create efficiencies. That's where the aftermarket is now as it begins to seek ways to tidy up inventories, streamline WD networks, solidify store operations and create the most efficient distribution system possible. Those who succeed in this tall endeavor will be the ones who influence the market in profound ways.

8. Vehicle Demographics
The demographics of the vehicle population are fundamentally changing, creating both opportunity and challenges for the aftermarket.

The number of miles today's vehicle can attain before it's scrapped has increased nearly 63 percent over the last 30 years. Today parts need to be replaced less often, but when a vehicle lasts longer, more parts and service will be required over a longer period of time. But at the same time, this creates a distribution channel in which a greater volume of SKUs need to be stocked.

The good news is that aftermarket-age vehicles are the fastest growing segment of the vehicle population, creating a customer base that will (hopefully) flush out some of the excess inventory we now have.

Understanding the demographics of vehicles is an important on-going influence on the long-term success of the aftermarket.

9. Legislation
Vehicle manufacturers make the cars; the aftermarket makes the parts when the originals break. This should be a seamless, symbiotic relationship, but it's not. Vehicle manufacturers insist that critical vehicle repair information is proprietary, and they refuse to share it with the aftermarket.

In order for the aftermarket to continue as a viable industry, it must have access to this information. Like it or not, the key to the future of the aftermarket rests in Congress' questionably capable hands.

Readers can help out by actively supporting the Right to Repair Act, which seeks to force vehicle manufacturers to share this vital service and repair information. You can write your senator or congressman by using the pre-written letter found at www.counterman.com. Don't let special interests and deep-pocketed lobbyists influence your business in negative ways.

10. Consumer Education
Americans can't live without their cars, so you'd think that they would take care of them. Guess again.

Even though a motor vehicle ends up generally being the second-most expensive item people buy during their lives, these same people are typically indifferent when it comes to caring for and maintaining these vehicles. And that's an influence that continues to limit the industry's ability to grow.

If each motorist would only spend an additional $25 annually on automotive care and maintenance, that would translate into an additional 5+ billion dollars annually to stores, distributors and manufacturers.

But old habits die hard, and getting the country to make automotive maintenance a priority is a steep hill to climb, especially in a tough economy.

To help with the situation, AAIA recently launched the "Be Car Care Aware" consumer education campaign, which is specially designed to create interest in automotive maintenance. (For more information on the campaign, see the Sept. 2000 issue).

It's really a win-win situation. The pay off for your customers is great: They get a cleaner burning, longer running, more reliable, more attractive vehicle. For your store, however, the payoff is sweeter, with the potential to share in the $60 billion in automotive maintenance that goes ignored year after year.

And so in the end, as with all industries, it is the customer who has the most influence on the market. Take care of your customer and you will take care of the biggest influence of them all.













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