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Aftermarket Inefficiencies

Eclipsed by the production and sales of new vehicles is the industry's huge aftermarket business.

Eclipsed by the production and sales of new vehicles is the industry's huge aftermarket business. This sector provides all the parts necessary to maintain, repair and customize the 200 million vehicles now running on U.S. roads.

The Internet is revolutionizing both the demand side (customer facing) and the supply side of this business. Whole industries are fighting to own the "eyeballs" of vehicle owners and thereby influence their service choices. At the same time, the manufacture and distribution of aftermarket parts is ripe for an overhaul. It currently is saddled with very high inventories and business inefficiencies. Several Internet-based marketplaces and virtual private networks are jostling to dominate the fragmented aftermarket industry.

Every firm in the aftermarket business strives for high service levels. Ideally, this means a customer never waits for a replacement part, especially the critical ones necessary to keep the vehicle operating. Unfortunately, the industry attains high service levels only by holding extraordinarily excessive amounts of inventory. This leads to a huge number of returns, obsolete inventory and duplication of inventory.

Not helping matters is that seemingly every player in the aftermarket business insists on its own naming/numbering scheme for parts. One part may pass through multiple companies on its way to being installed on a vehicle. The lack of standards here is costly, resulting in the wrong parts being ordered and stocked. Shipping parts is their costliest element. Aftermarket-expert Kathleen Hynes of Descartes Systems Group estimates that a whopping 37% of the cost of a typical aftermarket part is in transportation. While the rest of the auto industry has aggressively moved to pull systems, the aftermarket business is still in make-to-stock mode.

The industry's greatest problem, however, is its longstanding supply chain. It has far too many channels, middlemen and complexity. About 600 major manufacturers such as Genuine Parts and Federal-Mogul feed parts into a network that includes 80,000 jobbers such as Snap-on Tools. Jobbers in turn serve over 210,000 repair shops in the U.S. alone. Large retailers such as Carquest and Autozone have thousands of stores fed by multiple distribution centers. Given the enormous potential for improvement, the aftermarket business of tomorrow will surely shed much of the inventory and inefficiencies it has today. Expect the Internet to play a key role in this transformation.

Original equipment manufacturers (OEMs) have their own private, supply networks. The service levels of some OEMs is not good. For instance, Fiat has some owners marooned for weeks without their vehicles due to logistics snafus in Fiat's distribution system. But other OEMs do much better. Toyota has two national centers that feed 10 regional distribution centers. Toyota sells over 200,000 stock keeping units (SKUs) through this network that serves only its U.S. dealerships. Toyota is implementing i2 Technologies' supply-chain optimization software to reduce delivery times and lower inventories. DaimlerChrysler's Mopar business is using supply-chain software from SeeCommerce. Visteon has tapped ebusiness vendors, Exel and Descartes for its Internet-based, aftermarket distribution.

Given the complexity and many-to-many connections, a number of dot-com startups and spin-offs have emerged hoping to streamline this business. iStarExchange has been formed by Toyota, Sun Microsystems and i2 Technologies. Others have included Partsdriver.com, Dega.com, Fleetscape.com and Autopartsbin.com. Many of these exchanges have already disappeared or been acquired.

Computer and traditional auto in-dustry firms are jostling to capture the "eyeballs" of today's vehicle owners through Web-based services. To do so greatly influences where these owners will take their vehicles for servicing and repair. Perhaps the most important vehicle-oriented Web site is Microsoft's Carpoint. Its Personal Auto Page reminds over one mil-lion vehicle owners when to schedule maintenance. Myautogarage.com is a similar service that was launched by IBM and ADP; it works closely with new-car dealerships.

Meanwhile, OEMs strongly want to "own" the ongoing customer relationship. Their aim is more than to merely sell parts. OEMs want the maintenance "eyeballs" so they can better maintain the loyalty of existing customers and thereby influence their future vehicle purchases. OEMs have a unique, although still unplayed, card in the telematics area; this could put them squarely in control of much of the repair business. It combines automated diagnostic capability in the vehicle with wireless communication. After the vehicle automatically detects a failing component, the vehicle itself communicates with the service center. That center, in turn, alerts a parts manufacturer that then ships the part. All this can happen before the vehicle owner even knows there is a repair problem.

"Given the enormous potential for improvement, the aftermarket business of tomorrow will surely shed much of the inventory and inefficiencies it has today. Expect the Internet to play a key role in this transformation."

"OEMs want the maintenance "eyeballs" so they can better maintain the loyalty of existing customers and thereby influence their future vehicle purchases."

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