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You might think that a business segment generating nearly half of auto industry profits would get a lot of attention from supply chain executives. But that isn't the case. When it comes to finding innovative ways of moving goods to market, companies have shortchanged the aftermarket parts business.
They've paid a price for their oversight. Less than 30 percent of the aftermarket today is controlled by vehicle manufacturers, according to Kevin Mixer, research director for automotive and heavy equipment with AMR Research, Boston. Once a vehicle is out of warranty-typically, three years from purchase-most owners turn to independent parts suppliers for repairs and accessories.
What's more, says Mixer, the efficient management of aftermarket parts can be crucial to customer loyalty. Many consumers base their choice of a new car on prior ownership experience. When the vehicle was serviced or repaired, were parts easily available? Or did snags in the supply chain prolong the agony of having the car in the shop? The answer is likely to determine whether the owner sticks with a particular brand.
There has been plenty of innovation in the way companies move parts for manufacturing. The just-in-time supply strategies of Japanese automakers (drawing on American management theories) have been widely adapted by the industry. Parts and components flow seamlessly from supplier to assembly line, often at the precise moment they are needed in the production cycle. Vendors manage parts inventories through an array of sophisticated software tools.
Meanwhile, the aftermarket parts supply chain is marred by stockouts, slow-moving shipments and excess inventories. "When you look at this, you would be truly amazed at all the discipline on one side of the house and all the lack of discipline on the other side," says Debbie Hall, vice president of logistics solutions with TNT Logistics North America in Jacksonville, Fla.
Why the disparity between inbound and aftermarket? The latter has a unique set of complexities, says Mixer. A lack of industry standards for software hinders the link between suppliers and automakers. Vehicles are growing ever more technologically complex, thanks to computerized systems and a raft of options available to buyers. And the supply chains of the two areas are distinctly different. A well-run inbound network seeks to minimize stocking points; the aftermarket equivalent thrives on multiple sites. The unidirectional flow of manufacturing parts becomes multi-directional in the aftermarket, which includes a reverse logistics element for worn, obsolete or malfunctioning components.
Experts point to another paradox in the automotive industry: shrinking model lifecycles on one hand, and longer vehicle lifetimes on the other. Automakers are flooding the market with new designs, forcing dealers to stock a fresh array of parts. At the same time, buyers are hanging onto their cars longer, up to 10 years in many cases. So parts suppliers and dealers must stock large inventories of parts for older models, stretching back 25 years under current consumer law. Add to that a staggering menu of options and accessories for new vehicles-BMW's Mini Cooper offers thousands of configurations-and the parts landscape becomes more complex than ever.
Relations between suppliers and original equipment manufacturers can be strained. Often, says Mixer, the tier-one supplier to an OEM will turn around and sell the same part under a different brand name, or offer foreign-made items in the North American gray market. The economics of the aftermarket, with its typically high markups and profit margins, are just too compelling to pass up.
Hall says automakers have paid less attention to their aftermarket networks because there has been enough buffer stock in the system to insulate buyers from the effects of a supply glitch. (On the manufacturing side, by contrast, a missed delivery can shut down the production line.) Now, she says, they are beginning to wake up to the potential of their aftermarket supply chains. They are taking a new look at the ways in which parts are ordered, and inventory allocated, across distribution networks. Their challenge is twofold: to reduce inventories and overhead, while raising the quality of service to dealers, retailers, repair shops and the end customer.
One solution, says Hall, is to reduce stocks at the dealer level and replace them with daily deliveries. Dealers no longer must pay costly shipping fees, or forecast their needs for an entire week. The strategy can be applied to everything from complex maintenance parts to windshield wipers, she says.
Such a system can't work without better forecasting. The demand for aftermarket parts is notoriously difficult to predict, given that much of it is driven by accidents and breakdowns. Now, automakers are partnering with dealers and insurance companies to examine such factors as accident rates within a given geographic area or time of year, says Bill Sheeran, director and general manager of TNT's automotive office and business development team in Southfield, Mich.
Better visibility of dealer stocks can also help to narrow the gap between supply and demand, adds Louis Lambremont, TNT's manager of business development. The right information systems allow all partners to agree on a demand forecast while providing a better picture of where inventory actually is.
But the toughest link to forge is the one between manufacturer and consumer. The problem is global in scale, says Jim Commiskey, vice president of the automotive and industrial manufacturing sector of Alpharetta, Ga.-based UPS Supply Chain Solutions. Even as automakers struggle to get closer to the customer, obstacles emerge to pull them apart. Infrastructure congestion, driver shortages and soaring fuel prices hamper efforts to keep aftermarket parts moving, and minimize expensive stores of safety stock.
Search for Solutions
Manufacturers are responding with a variety of creative solutions. With the help of logistics service providers like UPS SCS, they are turning to dedicated delivery services. Parts get loaded onto rolling racks that are delivered to dealerships at night. At the same time, says Commiskey, automakers are adopting lean principles derived from manufacturing, with the goal of flushing waste of the system.
Classic lean manufacturing principles identify seven areas of potential waste: overproduction, defects, inappropriate processing, waiting, unnecessary inventory, excessive transportation and unnecessary motion. Companies are looking for equivalents in the areas of distribution, warehousing and transportation. An example, says Commiskey, is keeping all items for a given shipment within the picker's line of sight, so that picking takes place within a confined area. Another is the use of handcarts instead of forklifts within the warehouse.
The result, says Commiskey, is "faster-moving parts and less inventory, so you're consuming what you've brought in that day."
Lean transportation also allows shippers to reduce their reliance on premium transportation options such as airfreight. UPS hubs in the Philippines, Germany and Kentucky can get parts to dealers around the world within 48 hours, Commiskey says. But better planning and forecasting, derived from lean principles, can cut back on pricey expedited services and emphasize ground transportation.
Parts sellers are coupling new transportation strategies with reconfigured distribution networks, Commiskey says. They are assigning frequently needed items to smaller, more flexible distribution centers that are close to dealers. Slower-moving parts, including those for older vehicles, reside in centralized distribution centers in order to keep storage costs down.
The Mopar parts division of DaimlerChrysler is working with UPS SCS on a pair of initiatives that is intended to streamline the parts supply chain and enhance service to dealers. The first, launched nearly seven years ago, involved the establishment of two order consolidation centers, in the Milwaukee and greater Detroit areas. When a dealer needs parts that aren't available at its nearest regional distribution center, the items in question are first routed through one of the two consolidation points, where UPS combines them into a single shipment and determines the best means of delivery, depending on criticality. The program eliminates much of the labor that Mopar was expending on individual piece packing, and actually speeds up the company's response to dealer orders, says Douglas Zopfi, director of parts operations in Centerline, Mich.
The second Mopar initiative, which was about to be launched as of mid-summer, calls for bypassing one or more stops in the company's extensive delivery network. Mopar manages 27 distribution centers and 140,000 active parts, purchased from approximately 2,500 suppliers. Previously, the company had been moving certain large, bulky items in truckload quantities, bypassing its inbound logistics providers and national distribution centers, and going straight to regional DCs. Now it plans to do the same with much smaller items. Simulations have already shown that the plan can eliminate between seven and 10 days of cycle time, Zopfi says. That savings would come on top of the 45-percent reduction in parts inventories that Mopar has realized over the last five years-with the same level of sales and no impact on customer service.
The Software Solution
An army of software vendors has emerged to help companies optimize their service-parts networks. Among them is Atlanta-based Servigistics Inc. Cliff Isaacson, director of product marketing, says automakers today are speeding up the introduction of new models and platforms, creating fresh demand for aftermarket parts. At the same time, they are being squeezed between demanding retailers at one end of the chain, and offshore manufacturers of gray-market goods at the other.
Pricing is an especially knotty problem. The price of a given aftermarket part varies widely, depending on its origin and point of sale, says Isaacson. Opportunists are swooping in and competing directly with branded parts makers. They buy parts off the shelf in Asia or Europe, then sell them at cut rates in North America. Original equipment manufacturers are fighting back with systems that give them visibility of pricing in global markets, and help to reduce the differential, says Isaacson.
Servigistics also offers systems for inventory optimization, forecasting and advance order planning, all built around the internet. Users can realize increased service levels while reducing inventories by more than 20 percent, Isaacson claims.
Subaru of New England turned to Servigistics to improve service parts management at its 62 franchised dealers. The company wanted to wean dealers off their reliance on parts from suppliers other than Subaru, including gray-market sources. It needed a system that could increase dealership fill rates while improving forecasts and reducing inventories in the pipeline. To do that, Subaru had to be able to draw data directly from dealers' systems, and track sales on a nightly basis.
The new software allowed for better planning and the recommendation to dealers of daily parts purchases. It created a common data pool that collects information from multiple dealer management systems. The result: fill rates shot up past 90 percent, prompting 97 percent of the automaker's New England dealers to buy parts exclusively from Subaru. At the same time, Subaru slashed its service parts inventory by nearly 50 percent, achieved better than 11 turns in its monthly inventories, and boosted revenue by up to 20 percent.
Karin Bursa, vice president of marketing with Atlanta-based Logility Inc., says an increasing number of parts providers are scrutinizing their operations from a profit-and-loss perspective. One Logility client, Remy International, was determined to improve its forecasting of both sales and reverse logistics.
With revenues of more than $1bn, Remy makes electrical aftermarket parts, including starters and alternators. Customers on the manufacturing end include every automaker in North America and Europe, and most in Asia. In the aftermarket, the bulk of Remy's product line is sold through automotive retailers. Bursa says the company had to find a system that could get product to the shelves within 24 hours, "or risk losing that channel."
The key lay in obtaining a better view of the marketplace, based on actual demand. Seasonal patterns, geography, distribution of cars in the marketplace and vehicle longevity were among the factors that had to be considered. Reams of spreadsheets could no longer do the job.
Complicating matters was the unique nature of Remy's supply pipeline. Worn-out alternators, called cores, are returned to the company for refurbishing and resale. But timing of the two-way flow is critical. Remy must match inbound and outbound volumes to actual demand, even as week-to-week sales vary by up to 400 percent.
Logility's Voyager software suite helped Remy to create better forecasts, incorporating historical information as well as current sales. Voyager builds standard profiles for different types of products, then predicts when a given part will fail or require replacement. It can also account for diminishing demand as older vehicles and parts reach the end of their lives, Bursa says.
Forecasting reverse logistics entailed a special challenge. The ratio of sales to returns shifts over the lifetime of a part, requiring Remy to adjust its manufacturing and refurbishing operations accordingly. But with the new software, the company was able to predict refurbishing needs even more accurately than those related to the sale of new product, says Bursa.
The system began paying off right away. Within the first six months, Remy improved service levels to dealers from 97.8 percent to 99.6 percent. Finished goods forecast error fell from 20 percent to 7 percent. Forecast error for core returns dropped to less than 5 percent. Finished goods inventory was reduced by 17 percent, with a goal of 25 percent by the summer of 2005. ("We're on track to meet or exceed that," Bursa said in mid-July.) In addition, with the ability to integrate gross sales, returns and net sales into its forecasting process, Remy could better balance demand among its factories throughout the year.
Content Management Tools
Fixing the aftermarket supply chain can require multiple applications. Nancy Koenig, executive vice president of operations with Chicago-based Click Commerce, argues for the importance of Web-driven content management software. Big automakers such as Hyundai and Kia Motors use it to ensure that independent and franchise dealers get equal access to manuals, bulletins and other materials needed to repair cars quickly and economically. They are motivated partly by the Motor Vehicle Right to Repair Act, recent legislation which affirms the right of consumers to have their cars repaired or maintained by the shop of their choice, using either the original manufacturer's parts or those of independent aftermarket producers.
Automakers acknowledge the need to improve their brand identity in the aftermarket channel, Koenig says, "by providing better customer service to end-users." Hyundai and Kia are pursuing that goal by setting up internet links through which independent repair shops can obtain up-to-date information, training and certification materials.
Of equal importance is a tool that can optimize the storage and distribution of service parts. In figuring out the quantity and location of inventory, parts suppliers can't just fall back on traditional optimization models, Koenig says. The trends don't correlate with quantifiable factors like the economy, interest rates and consumer spending. Service parts optimization (SPO) programs must also account for accident and repair trends, as well as a multiplicity of dealer, repair shop and retail channels. These days, aftermarket parts can be found anywhere from authorized dealerships to eBay and other internet sites. "Some very complex mathematical models are required," Koenig says.
Radio frequency identification technology offers additional promise. Up to now, the focus of most RFID programs has been on the consumer-goods channel, driven by big merchandisers such as Wal-Mart Stores. But Koenig says RFID tags, with their wealth of data and ease of tracking, can help companies manage the flow of expensive aftermarket components. In theory, a repair technician could assess the operating or warranty status of various subassemblies without even lifting the hood of the car. With the price of tags and readers coming down, says Koenig, "we believe there is a very real application here."
Nor should parts suppliers forget more established applications such as warehouse management systems. A good WMS package can help companies to manage the huge array of SKUs that make up a typical aftermarket parts supply chain. It can lead to improvements in receiving and picking accuracy of better than 90 percent, Koenig claims.
Carole Sheridan-Weir, senior director of shipping and transportation with Redwood Shores, Calif.-based Oracle Corp., urges companies to examine the upstream portion of their supply chains as well. The problem is more than one of distribution, she says. It starts with efficient management of the design stage, as manufacturers seek to deploy components across multiple vehicle platforms for greater efficiencies. Still, the end goal is the same: to reduce the risk of stockouts and obsolescence, through better collaboration with supply-chain partners.
Optimization software can lower the cost of operations and boost profitability within the parts supply chain, says Sheridan-Weir. As manufacturers whittle away the margins on new vehicles in order to attract fickle buyers, they must find ways to make up the profit shortfall.
Backed by high visibility of parts in the network, suppliers can use optimization programs to go beyond considerations of speed. They can determine "the most lucrative way to fill an order, rather than the most expedient," says Sheridan-Weir. The system can also make recommendations in response to changes in demand.
On the design side, parts manufacturers can employ product lifecycle management (PLM) software to manage the production, storage and distribution of parts throughout their lifetimes, says Timothy Heyer, senior director of Oracle's automotive and industries business unit. PLM reaches all the way back to initial design drawings, so that all partners, both inside and outside the manufacturer's walls, can agree on demand levels at various stages of maturity.
Are companies really embracing this wide range of applications for their aftermarket supply chains? "It's a mixed bag," says Sheridan-Weir. For many suppliers, the big awakening comes when they start making parts in Asia and other locations, then discover the difficulties of getting product to buyers expeditiously.
"They need to step back and determine what is the real advantage to how they're moving imports," Sheridan-Weir says. "It's not just about the transportation cycle. It's about filling a more profitable demand channel at the lowest cost."
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