The automotive aftermarket in Europe has become radically more competitive thanks to the Block Exemption and global sourcing. Malcolm Wheatley investigates the approaches carmakers and providers are taking to save costs and increase speed in the supply chain
China, it transpires, is now Jaguar Land Rover’s third-largest market. At the time of writing, year-to-date Land Rover sales in China are up 1,000% since 2005, and 111% on 2009–a truly sparkling performance given the stresses and strains in the global economy over the period.
But spare a thought for the aftermarket supply chain that must support that growth. And Chinese consumers, like consumers everywhere else in the world, expect parts to be available on demand so as to be able to repair and maintain those vehicles.
And China isn’t just a fast-growing market. It’s also a very large country–and one that is thousands of miles from Land Rover’s Solihull, UK assembly plant and associated supplier base. In short, the logistics challenges are obvious.
“We’re sending ten containers a week to China,” says Chris Roberts, global accounts director at Oxford-based Unipart Logistics, which handles Jaguar Land Rover’s aftermarket supply chain. “We’ve opened up three warehouses in the country in the last two years alone, with a fourth due to open in the first quarter of 2011.”
And it’s a similar–if slightly less dramatic–story in other emerging markets, he adds. Over a similar period, warehouses have also been opened in South Africa, South Korea, Russia and India. The investment is enormous–and not just in terms of finance.
“Each new country is a significant undertaking, involving the transfer or establishment of capabilities in supplier relationship management, inventory management, people recruitment, finance and everything else that a successful operation requires,” Roberts says.
IT systems, too, can prove a challenge, he adds. They need to be multi-lingual, obviously, but also reflect the realities of business practice in the new markets.
“You might have a common system and common business process across operations in the UK and United States, but once you’re operating in countries such as Russia and China, there can be very different ways of doing things, and if you don’t listen to the locals, your business will grind to a halt,” he warns.
Writ large, Unipart’s story reflects the rapid changes taking place in the wider world of aftermarket logistics. After years of being a quiet sideline for automotive manufacturers, the downstream provision of spare parts and service items is coming under the spotlight.
For it’s not just new vehicle markets that are opening the door to the winds of change. A host of factors, it transpires, are prompting new thinking and fresh imperatives in the aftermarket logistics market–changed market conditions, low-cost country sourcing, Block Exemption, inventory pressures, multi-user facilities and multi-brand franchising combinations, to name but a few.
The result: challenges and changes to logistics operations, with parts flows, network design, drop sizes and warehousing practice all in flux.
Profitability is under pressure, for one thing. According to one estimate, aftermarket parts supply contributes only 20% of a typical dealer’s revenues–but generates 50% of its profits.
Yet the long-term trend is towards fewer consumers and fleet operators taking vehicles back to dealerships for routine maintenance. Again, while figures vary by brand and national market, estimates suggest that no more than 50% of newlypurchased vehicles are returning to a dealer for servicing after three years.
And volumes are down too, asserts Ben Waller, senior researcher with Solihull, UK-headquartered automotive industry membership-based research body ICDP.
“Aftermarket volumes are in long-term decline, due to a number of trends and structural factors, such as elongating service intervals on new cars, increased reliability and the slow but inevitable shift in parc mix,” he explains.
Indeed, he adds, modelling analyses undertaken by ICDP estimates that the impact of these trends on future aftermarket demand in the parc of the main four European Union markets will be an average decline in operations per vehicle of around 13% from 2009 to 2015–although this average sees significant differences by individual market and brand.
“These predicted declines in volumes present a serious challenge to aftermarket suppliers, as well as impacting on workshop numbers and capacity,” stresses Waller.
And, he notes, the consequent fall in logistics drop density–and rise in delivery dispersal costs–will see a change in aftermarket logistics practice. In particular, he predicts, there will be an increase in logistics initiatives designed to reduce costs so as to preserve margins threatened by declining volume and rising costs.
Honda Europe reshapes delivery approach
In the aftermarket operations of Honda Europe, for instance, such initiatives are already happening.
“The overall network design hasn’t really changed,” says James Goodliffe, business unit manager responsible for sales and marketing in the company’s European, Middle East and African spare parts business. “But what has changed, and is changing, is the approach that we take to the size of our inventory stockholdings, the speed of re-supply, and load utilisation.”
Europe, for instance, is served by a master warehouse in Ghent, with satellite warehouses located in the UK, Italy, Spain, Sweden, Poland and Austria. By design, the operations of those warehouses are cross-border, he stresses: while most of France is served directly by the Ghent warehouse, the south of the country is supplied by the Spanish satellite warehouse, located in Barcelona.
The focus, Goodliffe explains, is on managing dealer inventories so that fast-moving parts are always available in dealer stock, with slower-moving parts available on a next day basis. But that’s not the same as saying that the optimum re-supply frequency is also the next day, he emphasises.
“The idea is that we only rush out on a next day basis what is genuinely needed on a next day basis,” he says. “We’re actually trying to move to a standard 2-3 day delivery interval, which makes it easier to plan the warehouse and transportation workload, as you’re spreading the peaks and troughs in demand over two days, as opposed to dealing with them immediately.”
And besides seeing improvements in warehouse operations, the strategy should also see better vehicle utilisation and a reduction in miles travelled, he adds.
“It’s about keeping the speed of service up, while removing unnecessary costs wherever possible,” he says.
Can’t spare the profits from spares
Yet elsewhere in Europe, other automotive manufacturers and their logistics service providers are pursuing a different strategy–impelled to do so by competitor pressure.
The competition in question, it transpires, doesn’t necessarily come from fellow automotive manufacturers, says Andreas Gissler, director responsible for the automotive industry and manufacturing at the Wiesbaden, Germany office of international consulting firm Arthur D Little.
“Spare parts are a very important profit generator for automotive manufacturers, and they are doing everything that they can to keep it that way,” he notes. “Vehicle sales generate the bulk of the revenues, but parts contribute a lot of the profit.”
And those profits are under increasing pressure as independent non-tied service and repair operators–aided, it must be said, by Europe’s Block Exemption regulations, which further opened up distribution to independent retailers–take an increasing share of the vehicle maintenance market.
“Dealers and automotive manufacturers are working hard to be better than the independent service companies,” says Gissler. “They’re trying hard to come up with offerings and packages that will help to keep the business that they’ve got, as well as win back business that has historically gone to independent service providers, such as maintenance and repair contracts for fleet customers, who see such work as a commodity.”
And the result has been to pit automotive aftermarket spare parts supply chains against those of the independent servicing sector–a sector driven by very different imperatives.
One such imperative is price. A lower overall maintenance or repair cost is a major part of the independent sector’s go-to-market proposition, and lower cost parts are inevitably an aspect of how that lower price is delivered.
Increasingly, then, the independent sector buys on-line, or from wholesalers supplying low-cost country sourced parts (either genuine or own-brand), or from suppliers offering ‘grey imports’–that is, legal imports from other countries that occur nevertheless outside of the manufacturer’s distribution network.
Automotive manufacturers have responded by seeking to at least supply some of this demand themselves, albeit at lower margins than would ideally be the case.
ICDP’s Waller, for instance, points to a variety of automotive manufacturer-led initiatives as indicative of this trend. In the UK, for instance, independent servicing and repair companies can order discounted parts direct from Volkswagen, although they must first go through an application process.
Renault–both in France and elsewhere–offers an alternative to its own branded parts in the form of an own-label variant called ‘Motrio’. It’s described by the company as being ‘a brand of replacement parts approved by Renault, suitable for repairing older Renault and other brands of vehicles, making it an ideal and attractive solution for both Renault workshops and independent motor traders.”
These are Renault parts, in short, but priced to appeal to those who can’t afford Renault parts badged as such.
OEMs need to get faster to compete
But just as important as price is speed of delivery, and here the approach taken by the supply chains of the independent sector and those of automotive vehicle manufacturers is very different.
Again, ICDP’s Waller sums it up well: “Generally speaking, compared with car manufacturer aftermarket supply chains, the independent sector supply chains operate with more stock in the end-to-end supply chain, but the delivery to the enduser is more frequent.”
And it’s this greater frequency of delivery to the end-user workshop that the automotive manufacturers are attempting to emulate–with the workshops in question being primarily those of their own dealer network, of course.
BMW, for instance, is deploying this high-frequency approach, relying on companies such as logistics service provider Logwin to supply workshops in continental Europe several times a day if required.
“The model is similar to the pharmacy model, with deliveries three to four times a day,” says Stephan Freichel, Aschaffenburg, Germany-based managing director of Logwin Solutions. “And it’s definitely being driven by the rise of independent service and repair providers, who are using rapid parts delivery to offer their customers a better service at a better price.”
From its Berlin local distribution hub, for instance, Logwin operates 40 dealer supply routes for BMW, each vehicle following a fixed route, and visiting up to 15 car dealers and workshops before returning to the distribution hub. In all, the vehicles depart from the hub seven times each day, with the first delivery run commencing at 8:45 and the final journey commencing at 14:45 pm.
“Some dealers may receive deliveries four times a day, others twice–and some only once, depending on their needs,“ says Freichel.
In the UK, Volvo has been another early adopter of this mode of distribution, moving to eliminate a national parts distribution warehouse in Daventry, and replacing it with two regional distribution centres backed by a number of local distribution centres tasked with supplying dealers two or three times a day.
“The idea is that the dealer can get the part that they need within two to three hours of identifying a need for it,” says Simon Hobbs, vice-president for automotive aftermarket at DHL Supply Chain, which handles Volvo aftermarket logistics, as well as aftermarket provision for the Mitsubishi Colt and Mercedes cars and trucks.
Yet intriguingly, such rapid replenishment inventory models need not add as much cost to the business model as might be feared. Look carefully, and the rapid replenishment model suggests savings in all sorts of areas.
Perhaps surprisingly, for instance, the faster workshop throughput time yields a small but nonetheless tangible saving in the provision of courtesy cars, says DHL’s Hobbs. The sudden requirement for a part not stocked at dealer level need not, he explains, require that the return of the vehicle in the end customer to be delayed: if same day completion is what was promised, then same day completion can still be met.
More significantly, there are serious savings in inventory holding: the more that stock holdings can be centralised as opposed to spread over the dealer network, the more that demand variability can be consolidated and smoothed out–in the process yielding significantly lower levels of safety stock.
At dealer level, says Logwin’s Freichel, “the inventory model is very flat–almost a ‘sell one, buy one’ kind of operation.”
The trick, he adds, is to back this up by adequate stocks held at a local distribution centre that is itself replenished regularly by a national distribution centre or warehousing operation.
Globalisation is here to stay–and is forcing changes in both the aftermarket spare parts market and the global supply networks that serve it.
“Sourcing trends for spares tend to follow those for new vehicles with a little extra time lag,” says Chris Senior, global key account director for automotive at Ceva Logistics. “That means manufacturers and logistics providers now have to cope with new sourcing ‘basins’ as parts suppliers have followed the assembly plants in the main.”
“Most manufacturers moved quickly into sourcing spares in low-cost countries, with mixed results, but now that the production of new vehicles is taking off in those low-cost economies, there will be an automatic growth of sourcing from those regions: the more that they sell cars produced in India, for example, the more that they’ll have to bring in parts sourced from there, too.”
And increasingly, also, European carmakers are buying original equipment components in low-cost economies for use in European assembly plants–a move that he sees as further enhancing the volume of spare parts sourcing from outside Europe.
What’s more, that flow of parts is augmented by the flow of own-label and generic parts arriving in European ports.
“Low-cost country sourcing is alive and well, and proving a thorn in the side for many brands, both in terms of legitimate competing parts and counterfeit parts,” says Ben Waller, a senior researcher with automotive industry research body ICDP.
“Independent service firms are now low-cost country sourcing on their own, and we’re getting involved in handling the inbound supply chain for them,” adds Simon Hobbs, vicepresident for automotive aftermarket at DHL Supply Chain.
Again, the number of stock-holding units (SKUs) will vary by marque and manufacturer, but logistics providers’ description of practice on the ground are remarkably consistent.
While Freichel speaks of 10,000-15,000 SKUs in terms of the customer base served by Logwin, for instance, DHL’s Hobbs talks of around 10,000 SKUs. Chris Senior, Hoofdoorp, Netherlands-based global key account director for automotive at Ceva Logistics, meanwhile, speaks of around 15,000 SKUs.
What’s more, Senior adds, as automotive manufacturers move their aftermarket supply chain networks over to a multiday delivery and local distribution centre model, it turns out that still further opportunities for reduced inventory holding may be found.
“There’s a massive gap between the number of months of supply different manufacturers carry in Europe today–but there’s not such a big difference between their fill rates,” he says. “That suggests that some of them are carrying a lot more stock than they really need to.”
Savings, too, can emerge from using smaller delivery vehicles and shipping containers than is currently the case. Chris Wells, general manager for automotive at logistics service provider Norbert Dentressangle, for instance, points out that as overall volumes fall, and multi-day deliveries shrink the drop size, then the use of smaller and cheaper trucks becomes a possibility. So too does finding an alternative to the traditional roll-cage pallet.
“A roll-cage with just two parts in it is shipping a lot of fresh air,” Wells observes. “Moving to tote pans, or even individual items, can make a big difference in terms of vehicle utilisation. It also makes sense to look at the delivery fleet: we’re currently using 18-tonne vehicles and urban-rated articulated vehicles– but arguably vehicles of 7.5 tonnes and below might well suffice.”
Similarly, savings can come from multi-user and shared user logistics provisions–either in the case of vehicles or warehouse operations.
DHL’s Hobbs, for instance, points out that automotive manufacturers’ initial reluctance to go down the shared user logistics route significantly eased during the 2008-2009 downturn. In the case of UK tyre distribution, for instance, the company’s entire network now operates on a shared user basis, with tyres for Pirelli, Cooper Tires, Toyo, and Hankook being transported on a single fleet.
“The Pirelli fleet is the core, supplemented by cross-docking for the others at a central depot,” he says. “This enables us to dynamically manage costs: at 5:30pm each night we can plan the following day’s deliveries, using a combination of our own vehicles and drivers, and supplementing them with subcontract capacity as required.
“The result is fewer vehicles, less miles travelled, much lower carbon emissions–and a growing consensus that this is the way forward for automotive parts, as well.”
Norbert Dentressangle’s Wells agrees, pointing out that the company’s UK operations on behalf of General Motors, Land Rover, Ford and Saab now operate this way, with ten distribution hubs across the country, strategically located for the cost-effective as well as the timely distribution of spare parts.
“We’ve moved to a fully shared-user distribution network,” Wells says. “Three years ago it was separate networks for the larger manufacturers, and a shared one for the smaller brands. Now it’s fully shared-user–and the move to multi-brand dealerships simply reinforces this.”
Logwin, meanwhile, deserves the prize for perhaps the most imaginative example of shared-user distribution. While delivering automotive parts during the day, its fleet spends the night delivering newspapers. Proof, surely, that there’s plenty of room to improve the productivity of the deceptively humble business of automotive aftermarket supply chains.