Carmakers and suppliers are driving down inventory and consolidating distribution for aftermarket logistics following the economic slowdown, but as Marcus Williams discovers, there could be many more collaborative benefits to be found
Aftermarket sales are typically more stable than car sales–generally unexcited in the booms, steady in the bust, but lagging either by several years. Even in 2008, when the slowdown had already cut the US market by nearly 20%, the aftermarket maintained growth. But that doesn’t mean it has escaped the cutbacks affecting the whole industry and indeed, the nature of the current cost cutting environment has made certain features of aftermarket distribution–including dedicated services and shared warehousing–candidates for major change or wider application.
In an effort to protect sales in this sector, which brings in greater profit than vehicle revenue even in good years– accounting, for instance, for about half of the profits of European OEMS before the downturn in 2008 compared to 18% from selling vehicles–carmakers and suppliers are now also more keen than ever to protect those profits.
That is especially so as a potential payback looms in the aftermarket following the recent government incentives, which led to scrapping older vehicles–and with them the need for replacement parts–particularly in Europe.
Despite recent findings by US vehicle repair organisation AutoMD that car owners are holding onto vehicles for about 50,000 extra miles (240,000km) during the tough economy, there is already evidence of a drop in service parts volumes since the downturn, with Ford, for one, recording an average drop of 8-10% in order lines in the US.
The last 12 to 18 months have seen an increased focus on driving down inventory and lowering cost.
“There has certainly been greater focus on lowering inventory levels for aftermarket, largely driven by the economic challenges of 2009, but also because it has not traditionally been seen as an area where significant cost savings can be achieved,” says Chris Senior, global key account director for automotive at Ceva Logistics.
This demands good visibility and control but it also requires a supply chain agile enough to respond to changes in demand. In the US Ford has reduced inventory since the slowdown about 15% according to Helmut Nittmann, head of service parts supply and logistics.
The company has 19 high velocity centres for parts with the highest demand across the US, with approximately 85% of orders placed guaranteeing next-morning delivery, as well as three high cube centres (mainly for body repair) that provide 48-hour delivery. In terms of low volume it has one low cube centre for next-day delivery and one national parts distribution centre for the slowest moving parts.
Recently, the company has seen the availability of parts across these centres suffer, largely because of insolvent suppliers, according to Nittmann. This has begun to improve again recently, he says, but maintaining lower inventory while suffering problems of availability raises the question of how to simultaneously maintain good service levels in which Ford has also experienced fluctuation.
“Service levels have also declined,” he says. “Our historical fill rate had been running at plus 98%. During 2009 it has dropped to mid-95% levels, recently improving to approximately 97% with some recent resolution–resourcing, for example–on long standing issues.”
Making sure this improvement continues means carmakers like Ford need good visibility in the supply chain and this depends on having as clear a view of inventory as possible.
“It is not unusual to see a dealer providing only 60% availability over the counter but also having significant excess and obsolete inventories,” says Daniel Aston, marketing executive for Syncron, a supply chain software provider.
Under retail inventory management (RIM) the manufacturer works with the dealer to develop a stocking profile and uses end-customer demand to develop a forecast and stocking policy.
“A RIM approach has significant benefits for both parties,” says Aston. “The dealer gets a more effective stocking profile, typically leading to higher parts sales, reduced administration costs and lower inventories, and in particular a reduced risk of excess and obsolescence.
“The manufacturer can benefit from smoother logistics processes, particularly in terms of transportation costs and warehouse efficiency, plus reap the benefit from increased dealer parts sales and loyalty.”
Loyalty has become something crucial to the manufacturer in this area because carmakers and dealerships need to keep customers buying from them even after the warranties on vehicles have expired, which means there should be lower prices and fast, reliable parts delivery. And as Aston points out, “there is a clear link between a customer’s aftersales experience and their willingness to repeat the purchase of a new vehicle.”
Protecting this loyalty and maintaining service levels during a difficult market has led manufacturers and service providers to look more closely at new collaborative strategies.
“Manufacturers have certainly become more willing to consider a variety of options, compared to two or three years ago, and collaboration has been one of the biggest areas of discussion,” says Chris Senior.
Already offering similar services in Italy, at the end of last year Ceva secured a spare parts delivery contract based on a collaborative network that sees it deliver a full range of spare parts to 200 BMW and MINI dealerships across the UK. Seven of Ceva’s common outbase platforms support the distribution, as well as a number of other premises owned by Ceva’s other automotive customers that are used for cross-docking. The company has since added Nissan to the network and is currently in discussions with a further two companies for 2010 yet to be announced.
In terms of inbound movements, elsewhere in the UK, Jaguar Land Rover’s crossdock in Solihull shares space for inbound parts with Ford and BMW, as well as suppliers Visteon and IAC. JLR’s supplier base has around 50% commonality with Ford and the company’s inbound logistics provider, DHL Supply Chain, has taken advantage of the carmakers’ common supply base to bring benefits to each of the companies involved. “Rather than go and pick up a palette for Ford and two for JLR, we go in the same vehicle,” says Laurie Cogger, DHL Supply Chain’s VP of LLP Automotive.
According to Chris Senior there are other areas of collaboration to consider, warehousing being a good example, which, along with distribution centres, represents the largest share of the outsourced market for 3PLs. “We are working with several manufacturers who have really excellent control over their inventories and have managed to reduce stock to the point where they now have space in their warehouses,” he says. “We are looking at how best to use that space with other customers, not necessarily just the automotive industry.
Collaboration at this level raises issues of trust. Control of warehousing is usually maintained by the OEM, but the execution, picking, packing and IT capabilities are increasingly being handled by 3PLs.
At the shared-user tyre facility that Norbert Dentressangle Logistics (NDL) operates for Goodyear Dunlop, Continental and Bridgestone at the TyreFort facility in the UK Midlands, data for the respective companies is protected.
“Our customers provide us with a variety of information which is privileged, sensitive and commercially confidential,” says Tom Chapple, regional general manager for Norbert Dentressangle Logistics UK.
The information NDL handles for its customers at TyreFort includes long-term business plan sales forecasts and potential volume variances, as well as detailed sales information allowing it to plan and expedite deliveries.
“No one sees anyone else’s information,” continues Chapple. “Norbert Dentressangle utilises its own systems in order to collate and plan deliveries. The customers systems interface into our system, passing data to us when available. We then aggregate this volume together using complex algorithms in order to optimise routes. In this way, we ensure that the sensitive data never falls into the hands of a competitor.”
But it is important to consider that success for this sort of collaborative approach, which looks likely to define an aftermarket in an industry that will not revoke the savings it makes during a time of enforced consolidation, depends on meeting the requirements of the customer as much as it does on the size of the operation and, importantly, the openness of OEMs to the concept.
“Whilst adding more companies to the network may seem the obvious solution in terms of reducing costs even further, it doesn’t suit every company,” says Ceva’s vice president for automotive in the UK, David Jackman. “In a market that has been facing dramatic change and unpredictability, it’s becoming increasingly clear to us that one solution most definitely does not suit all.”
In the US, Ford has limited collaboration with other carmakers in part because of the perceived differences in service standards, says Nittmann. However, the company is looking at how it can improve transport costs together with OEMs and distributors.
More generally in the US, the shared user solution isn’t huge, but Ceva says it is continuing to look at ways of optimising the transport routes it has in place for manufacturers, which are on the whole dedicated to each customer.
“It’s up to us to provide OEMs with a solution that works best for them and their operating environment,” says Ceva’s senior vice president for Global Automotive, Matt Brand. “The real discussion is not whether it’s a dedicated or shared network, but whether that particular solution delivers the flexibility, visibility and control that will help enhance the customers supply chain.”