Marcia MacLeod discovers how logistics companies and manufacturers in the US are waking up to the benefits of shared services and more collaboration in the aftermarket supply chain.
The sheer size of North America, with more than 3,000 miles between east and west coasts and more from northern Canada to southern Mexico, presents huge challenges to anyone trying to provide an aftermarket service. Throw in a couple of deserts, mountain ranges, national borders and the fact that much of the continent is sparsely populated, and the development of an efficient aftermarket supply chain almost becomes an impossibility.
Many of the trends and issues found in the North American aftermarket sector are the same found everywhere: the need to cut costs and improve efficiency; the growth of global sourcing, leading to a more complex supply chain and the need to deal with customs and security issues; increasing legislation governing transport, labour and other business requirements; and the increasing need and desire to reduce the industry’s impact on the environment.
“Things like the increased globalisation of the supply base and increasing levels of security and other compliance requirements have a greater impact on the supply chain,” points out Paul Freyermuth, from Caterpillar Logistics. “The whole issue of the environment and greener policies is also important: customers are increasingly considering greenhouse emissions as a factor in decision making.”
These added burdens don’t help what Exel’s Ted Nikolai calls an already “dynamic” supply chain. “There are a lot of macros in the aftermarket sector,” he says. “But while there is greater price sensitivity, the reduction in the number of vehicle manufacturers and the higher quality coming off the production line has resulted in a reduced demand for car parts. There are fewer warranty claims and the time between maintenance is lengthening.”
North America is perhaps unique in the way the aftermarket sector is split. While OEMs and dealers take care of in-warranty parts, much of the rest of the market is handled by wholesalers or retailers–and increasingly parts are available online. Many of these parts are generic, not branded; often they are purchased by the end consumer, who either fixes the vehicle themselves, or takes the parts to an independent mechanic.
Some large dealers are also parts wholesalers and one 3PL–Ryder Supply Chain Solutions–also acts as a retailer of truck parts, as Jim Moore explains: “Because we service our large truck rental fleet, we have a wide range of parts. It makes sense to also offer these retail, both at bricks-and-mortar outlets and online. We carry approximately 75,000 lines; 25% of our sales are made over the Internet.
“There are a lot of channels through which consumers can buy wiper blades, accessories and generic parts,” Moore continues. “Some retailers specialise in particular parts, such as brakes, mufflers and exhausts or lubricants. Getting your oil changed can take as little time as buying a McDonalds’ hamburger and cost just $30.
“A lot of common parts are bought direct from tier one suppliers. While some things, like trim, have to be purchased through the OEM channel, others, like anti-freeze, don’t. And tyres have their own channel.”
According to VW’s Jack McEowen, some insurance companies, especially in Canada, are even insisting on salvaged–rather than new–parts in the case of accident repair. “We’re trying to counter that by promoting the service levels, loyalty and so on that consumers get from an approved dealer. We are trying to help dealers with wholesale accounts to hold on to them.”
Jim Moore adds that the proliferation of retailers has meant that the dealer supply chain has become more like retail in terms of replenishment, although dealers still carry OEM parts. “OEMs are beginning to use retail terminology in order to compete with these other channels,” he says. “WalMart actually drives the market–and overshadows it: it has the biggest share of the retail automotive parts business in North America.
“When it comes to critical service parts for a specific vehicle, the OEMs have a referral chain, in which they can locate the part through their dealer network; there is a big shortage of critical parts in the retail and wholesale channel. Dealers are rebounding in the aftermarket, too. Service sales in dealerships are up by around 40%, despite a reduction in the number of dealers in business.”
Service levels are critical, regardless of the channel used. Competition among dealers has increased, making customer retention key to success–and if customers can’t get the parts they want, when they want them, they may go elsewhere.
“OEM customers want dedicated delivery with at least daily replenishments,” says Jeff Hurley at Ceva Logistics. “The challenge in the aftermarket is finding a way to replenish the dealer’s inventory on a more frequent basis in a more costeffective way. OEMs want dealers to be more efficient and replenish based on real-time consumer demand.”
That is easier said than done. Most OEMs admit that part availability isn’t good enough, although they are working hard to rectify this shortfall. “One of the biggest logistical problems is availability of both aftermarket and production parts,” says Thomas Lindquist, at Chrysler’s aftermarket division. “Our availability level wasn’t what it should be [when we came out of bankruptcy], but our order fill rate has improved more than 25% in the past year.
“We need to understand customer expectations. We’ve taken some functions in-house in order to improve efficiency and cut costs. Our staff carry out order picks, optimising order fulfilment to reduce or eliminate the use of express carriers. We still rely on 3PLs for transport, though,” he says.
Half of Chrysler’s aftermarket network was working in this way by the end of January, with the rest due to follow suit by the beginning of March. Automatic re-ordering (AOR) is also being rolled out: when a dealership reaches a certain stock level of any part, it triggers an order. “Dealers never reach crisis point,” Lindquist emphasises. “We don’t have to expedite shipments, either, and the dealer’s off-the-shelf fill increases. More than 90% of dealers are using AOR.”
Chrysler is just one company also addressing the level of damaged parts seen in the aftermarket sector. The introduction of new packaging equipment and bringing packaging in-house has led to a 26% reduction in the damage rate. Carriers are aware of the need to reduce damage, too. Exel, for example, can supply data on which parts are damaged on which routes, which dealers complain the most about damaged parts, and so on. “This allows customers to see trends–where damage occurs the most, for example–so they can try to do something about it,” says Nikolai.
Another benefit of dedicated, daily delivery is improvement in reverse logistics. If the OEM is calling at the dealership every day, it can also collect faulty warranty parts every day, as well as retrieve returnable containers such as totes and cages. And because at least 75% of dealer deliveries are unattended–with parts dropped off in a locked box or other facility at night–no one has to be in to receive the order.
But the cost of providing a dedicated service, daily or not, can be prohibitive–and the need for efficiency and costcutting, particularly during the recent downturn, has finally led to collaboration. “OEMs have talked about collaboration for a number of years,” Nikolai points out, “but it has only really begun to take off over the last two years.”
Hurley agrees. “OEMs are starting to share assets and transport to reach dealers outside the mainstream–further away from urban centres and parts distribution centres (DCs)–so they can still provide a daily delivery, but do it cost-effectively. Where dealers are further from the parts centres, it is not cost-effective to provide a dedicated service.”
Ryder believes it has a head start on the collaborative front because of its experience in Mexico. “We’re the largest service provider in Mexico,” Moore comments. “The Mexican market is smaller than that in the US or Canada and volumes normally are not big enough to fill a vehicle, so smaller OEMs ‘hitchhike’ with larger ones. We’re taking this concept back into the US and Canada. As the OEMs in Mexico also serve the rest of North America, they are already used to sharing assets. The downturn has encouraged collaboration, too: OEMs are much more willing to share back-end functions than they were two years ago.”
“We are sharing services with other OEMs,” says Lindquist. “Collaborating in this way leads to a 20% improvement in costs. So far we’re doing it in two regions–the midwest and western US–but are aggressively pursuing more opportunities this year and hope to begin collaborating in two more US regions.”
Volkswagen relies on larger OEMs to help it reach remote areas. “We have more than 800 dealers in the US, but have been a relatively small player up until now,” says McEowen. “But there are often ‘auto malls’ in rural locations and it is fairly easy finding someone who is going there and is willing to take our parts, too.”
Pirelli Tires is also embracing the shared service concept. “Pool shipments are growing,” emphasises John Godfrey. “We don’t have warehouses in the northeast, for example, but drive a full truckload to New Jersey, where our 3PL, Kuehne+Nagel, arranges delivery to smaller DCs using a regional less-then-truckload carrier, JP Express.”
And it’s not just other automotive companies that OEMs are collaborating with. “On-demand shared service is growing,” says Nissan North America’s Health Holtz. “We look to our 3PL to provide the solution, but this has meant we are sharing services with other OEMs and with the carrier’s customers in other industries. We all face the same challenges of balancing cost with service and improving service levels. We now use these solutions to serve 100 of our dealers–and we see more consolidation opportunities emerging this year.”
OEMs and suppliers are also looking to share services between retailers and dealers. “OEMs and suppliers are collaborating with other aftermarket partners such as retailers,” says Nikolai. “Sometimes they share a DC, with their supplier using it to co-locate–maybe with the OEM–and the retailer using it for final distribution. The whole industry is more concerned about getting the right part to the right place in the right condition.”
Small warehouses are also being developed as shared trans-load or cross-docking facilities. “A trailer is loaded with orders for a number of dealers,” Hurley explains. “This is unloaded at a smaller trans-load facility where the cargo is broken down into individual orders and transported by local delivery companies, usually in smaller vehicles.” Sometimes more than one OEM will use the same trans-load facility.
“Discount Tire is our biggest customer,” explains Godfrey. “We used to deliver LTL shipments to individual stores, but this is expensive. As all the suppliers were doing the same thing, Discount Tire opened three cross-dock facilities taking daily deliveries from all suppliers, consolidating these into store deliveries and taking care of the final delivery themselves. We pay a fee to do this, but it is much less than the cost of serving each store.”
Pirelli Tires is also one of the pioneers in combining production and aftermarket supply chains. “We used to have separate aftermarket and production warehouses,” Godfrey continues. “Now we are consolidating them. We have closed four in the last year, including Alabama, Kansas and Chicago, although we opened a new one in Vancouver. Canada is a growing market and we could no longer serve the west coast effectively from Montreal.”
Ceva has also explored this type of collaboration. “Say a company makes a pick up on a milk run,” suggests Hurley. “Why go to the same supplier for an aftermarket order? Both shipments can be put on the same vehicle, delivered to a cross-docking centre and broken down. Then all production parts from different suppliers can be loaded on one trailer for the plant and all aftermarket parts on another for the parts centre.”
Ryder is also working on optimising express movements. “We found some OEMs were sending several expedited shipments on the same day, often from the same warehouse,” Moore explains. “Our software identifies delivery dates and works out which shipments can go together. If, for example, an expedite shipment is identified on a Thursday for delivery on Monday, it can wait until Friday and be consolidated with other shipments, because the weekend gives us two extra days.”
Many of these innovations are introduced by 3PLs, partly because they are the experts in logistics and partly because not all of their customers are large enough to initiate new procedures by themselves.
“Larger companies can do more things,” McEowen points out. “We are looking at some of the innovations taking place but we are not yet big enough to take advantage of them.”
Volkswagen’s regional presence will change, though, as the German carmaker expands its North American business. “A new plant in Chattanooga, Tennessee is building a Passat designed for the American market,” explains McEowen. “This will give us a large supply base in North America. We are also planning a second distribution centre to support the existing facility in New Jersey, although we have not yet decided where it will be.”
“Suppliers and retailers in particular are reducing the amount of SKUs they hold, which means they have to have improved demand planning,” says Nikoli. “This presents a new challenge, though: if the inventory is reduced too much, service levels go down because parts may not be available and cost goes up because more expedited transport must be used.
“Along with our customers, we used to have a six-, nine- or 12-month supply chain network. Now we have to respond to what’s happening in the market in real time. We try to innovate our existing services by putting in standard processes and optimising labour management. Any company not using labour management software will operate at as little as 70% of potential productivity. Better IT, more and better data and selective automation of the warehouse all help to improve the aftermarket service.
“The fuel crises has had an impact on our operations, too. We need to optimise vehicle routing and scheduling in order to be more aerodynamic–and to ensure suitable driver training is in place, because drivers have a significant influence on the efficiency of the vehicle.”
“Our OEM customers are continually looking at tiers of solutions to provide more frequent delivery,” Hurley emphasised. But speed continues to be key, as Nikolai emphasises: “There has always been a sense of urgency in the production supply chain,” he says. “Now we have to instil the same sense of urgency in the aftermarket sector.”
It would certainly please both dealers and end consumers. But with such a large and complex market to serve, North American OEMs may find more than a few potholes on the road to success.