NEW DISTRIBUTION CHALLENGES FOR AUTO AFTERMARKET
A business sector that hinges on flawless service is seeing more competition, price pressure and consumer choice.
Carmakers can lure buyers with elegant designs, attractive features and billions of dollars in advertising. But long-term customer loyalty often rests on something far less sexy: the dependability of the aftermarket parts supply chain.
The quality of a maintenance or repair job often will determine a car owner’s ultimate opinion of a given manufacturer. What’s more, in the age of social media and the Internet, a bad customer experience can quickly go viral and do serious damage to the brand.
Recognizing the Aftermarket Opportunity
Even for reasons beyond customer service, the automotive industry would do well to pay attention to the aftermarket opportunity. It offers potentially strong revenues and margins, at a time when new car sales are flat in many major markets, especially Western Europe.
According to Capgemini Consulting research, European original equipment manufacturers (OEMs) and original equipment suppliers (OESs) relied on the aftermarket business for half of their profits. That compared with 26 percent for new car sales, and 18 percent for auto manufacturing.
Managing the aftermarket parts supply chain is no easy task, however. The sector is rife with challenges, including the difficulty of storing, moving and tracking countless numbers of parts, every one of them crucial to the completion of a maintenance or repair job.
On the repair side, the market divides into two primary channels – authorised and independent service providers. The first is made up of vehicle manufacturers, their associated dealer networks and repair businesses. The second consists of providers that aren’t affiliated with the manufacturers. They might be full-service franchises, large automotive repair centres dealing in over-the-counter parts, or smaller, “mom-and-pop” style repair shops.
A Massive Market
Taken as a whole, the size and scope of the market is immense. In 2010, according to the Boston Consulting Group (BCG), the value of the aftermarket for cars more than eight years old was around $77.3 billion, and nearly $20.7 billion for vehicles up to four years old. Since then, says BCG, the trend has been a gradual shift from authorised repair shops to independent service providers.
Add in an explosion in the number of parts, caused by the growing complexity of new vehicle models. A Ford Mondeo, for example, might require some 27,000 separate parts. Service providers can’t possibly keep all of those items in the shop at once. Yet given the high degree of computer technology in today’s cars, owners need professional repair and maintenance more than ever before – and they expect to be served quickly and efficiently.
The reasons are many. The economic woes of recent years have caused vehicle owners to delay regular service visits, and even defer both minor and major repairs. As a result, parts providers and repair shops are finding it harder to predict which inventories they need to have on hand.
Why is Competition so Fierce
Where they go to get that service is changing as well. New consumer-protection laws are loosening the manufacturers’ grip on new-car work. In the European Union, for example, vehicle owners were granted more freedom of choice by the Block Exemption Regulation of 2010, which prevents vehicle manufacturers from requiring that cars be serviced at their affiliated dealerships. “It created a dynamic for somebody to go to virtually any outlet,” Millar says. And it weakened manufacturers’ “vertical” control over the life of a vehicle and associated profits.
Such consumer freedoms already exist in Asia, where manufacturers don’t have a lock on buyers’ post-sales business, and many smaller repair operations thrive. Nevertheless, Asian automakers strive to hold on to that work through generous customer incentives, especially during the first several years of a new car’s life. Moreover, the resale value of a car in Asia if often tied directly to whether the first owner used approved servicing, says Millar.
Even as manufacturers battle independent shops for the buyer’s loyalty, more entities are jumping into the game. Leasing companies, fleet operators, and insurance companies are asserting more power over where and when a vehicle is serviced. Many are seeking partnerships with chosen repair-shop networks, challenging original manufacturers’ traditional territory.
All of which means that competition for the car owner’s business is fiercer than ever. Regardless of who’s doing the work, service providers must be able to turn around a repair or maintenance job quickly, often in half a day. Their supply chains need to be set up and calibrated accordingly.
EU: A Three Tiered Network
In much of the EU, orders are fulfiled via a three-tiered network. There’s the centralised distribution centre, providing all parts for all cars on a global basis, and run by the manufacturer. There are regional DCs that generally align with national boundaries and keep a slightly more limited stock. And then there are the local distribution centres (LDCs), which are strategically placed at the edge of major cities and can supply up to 85 percent of the parts needed for that area.
In Europe, LDCs, which have emerged as a force in the last seven or so years, have a geographic service radius of 50 to 70 miles. They might serve multiple cities if they are clustered together. Millar says these entities are the key to providing the level of service that aftermarket customers demand.
Aftermarket LDCs are following a pattern seen in the larger consumer-products arena, as e-commerce providers such as Amazon.com seek to fulfil Internet orders within a day or less. By locating key inventories close to major markets, they raise buyers’ expectations of near-instant gratification. That, of course, has always been a priority in the automotive repair world, where a delayed shipment can cause substantial inconvenience to the customer.
The Role of Local Distribution Centres
Typically, an automotive LDC will be run by a distribution specialist, not the manufacturer or supplier of parts. These middlemen are skilled in the receipt, storage and rapid processing of orders, as well as the physical logistics required to get parts to the shops within a matter of hours.
LDCs are also popular in parts of Asia, especially China. Their role in that part of the world is expected to grow dramatically, as car ownership extends into less-industrialised portions of the country, which are more difficult to reach from regional DCs. India, too, is ripe for a huge expansion of car ownership, which will require a broader network of support facilities, Millar says. Currently, car ownership in India stands at 10 out of every 1,000 people. That compares with 55 in China, and around 565 in Germany.
The role of the European LDC becomes even more critical as customers increasingly take control of their aftermarket experience. With the advent of the Internet, they can purchase parts directly, and then pick the location at which they want them to be fitted. A neutral LDC has the ability to capture those movements within a multi-channel, fragmented supply chain, says Millar – especially if it’s experienced in the handling of parcel shipments.
All of the players in the modern-day automotive aftermarket are dedicated to operating leaner yet faster supply chains. As consumers exercise their greater power of choice, vehicles grow in complexity, and demand becomes increasingly unpredictable, their task can only get more challenging.