The auto industry in India went through one of the worst phases in the early 2010s. With many OEMs announcing frequent block closures of their plants, coupled with the need to correct for excess components inventory in the <a target="_blank" rel="noopener noreferrer" href="https://www.vectorconsulting.in/en/research-and-publication/blogs/first-among-equals-marketing-or-supply-chain/">supply chain</a>, the resultant effect was a de-growth of sales for most component vendors.  Although the OEM market was in a slump, the aftermarket witnessed an unparalleled increase in demand, primarily driven by the replacement of worn-out parts. It emerged as a ‘recession-proof’ segment since the number of vehicles in use was on a continuous increase year on year. Moreover, most ‘first-fit’ component vendors could sell their products in the aftermarket.  The aftermarket is also financially lucrative since the average gross contributions of the same parts are higher than what component vendors get from the OEMs. However, over the years of rapid growth, the component manufacturers have neglected this segment. The reason is not strategic but operational since component manufacturers are expected to expedite orders placed by the OEMs. Since missing supplies to OEM assembly lines can have huge ramifications on future business, the capacity of component manufacturers, in the short term, is mostly diverted to serve the OEM assembly plants. The residual capacity is made available to the aftermarket, thereby making the supply intermittent and highly unreliable. <figure class="image"><img style="aspect-ratio:16668/10892;" src="https://web-assets.vectorconsulting.in/storage/editor_uploads//auto-article-8-img-1-01-1733062243_1777351608.jpg" width="16668" height="10892"></figure>In such times, with the current underutilisation of capacity due to lower OEM demand, the aftermarket looks to be the saviour in the short term. This opportunity can be exploited with better distributor management and by devising aggressive time-bound schemes for the channel partners.  The auto OEM industry will always go through a business cycle over a few years. Suppose the component vendors continue the short-term opportunistic outlook towards the aftermarket. In that case, they will never be able to use this lucrative segment to buffer for the trough in the business cycle. The key question, staring at the component companies, is: How to increase aftermarket sales in the short-term as well as the long-term?  One can start to answer by understanding the dynamics of sales at the retail point.  For most spare parts, the customer’s tolerance time (willingness to wait) is nearly ero. Hence, if the item is available at most retailers in an area, then the demand in that area can be exploited significantly.  On the other hand, if the brand is frequently unavailable, the retailer and customer lose interest in it. This results in reduced ordering by the retailer. Hence, even if the material is available at the distributor, demand by the retailer can be considerably low. <figure class="image"><img style="aspect-ratio:16668/12773;" src="https://web-assets.vectorconsulting.in/storage/editor_uploads//auto-article-8-img-2-01-01-1733062253_1777351618.jpg" width="16668" height="12773"></figure>Companies that supply to the aftermarket intermittently usually do so through a few large wholesalers in the country. The wholesalers buy only fast movers in large batches and then sell across the country to a few retail points without any territory allegiance. This way of operation does not ensure reach and range penetration of the brand in the territory. To enhance reach and range, companies need to focus on distributor management.  The only way to capture the full potential of the range and reach potential is to ensure the placement and continuous availability of relevant range at maximum retail points in an area. When the retailer has limited capital, he can hold a wider range solely by having a very low inventory of each item. This requires a distribution capability to service all the mapped retailers in the area with small orders per SKU at a very high frequency (every week). Distributor management is key.  Critical conditions to ensure this availability at the retail point are: 1. Daily high availability of the complete range at the distributor – to ensure continuous supply and prevent hoarding tendencies by the retailer.  2. Territory limitation and demarcation for each distributor to ensure deeper penetration of reach with the prevention of cross-territory dumping.  3. Dedicated distributor sales representative to execute a weekly beat plan for order collection and a reliable service frequency. This model requires a significant investment of resources and commitment from the distributor. Unless he has a significant win, he cannot be expected to put in this disciplined effort. Sales teams need to invest time and effort in distributor management.  <h5>How to create a win for the distributor?</h5>Providing a distributor with a higher ROI, which is way beyond his expectations, can motivate him to invest resources in the required procedures of frequent retail servicing. Increasing his margins is not a viable option for any company. The only option is to provide nearly 100% availability of the complete range with significantly reduced inventory.  Our research shows that most distributors of auto spare parts in India carry about a 60-day inventory and still suffer from unavailability. If one can provide very high availability at 15 days of inventory, the ROI can go up by at least three times.  With such fantastic ROI, every year, the distributor can be expected to follow all the procedures of retail servicing – a win-win for both parties. This is integral to distributor management.  <h5>Building the supply chain for delivering a higher ROI</h5>To enable low inventory levels, the lead time of supply to the distributor has to be less than 10 days (15 day stock will be enough to prevent stockouts if the lead time is around 10 days). Such a lead time cannot be achieved by producing to order from distributors.  Having a warehouse with consistent availability and replenishing the distributors frequently based on consumption ensures high availability at lower inventory at the distributors. This is a change from the current predominant practice of the distributor forecasting (or the salesman pushing high volumes) for a more extended period.  If one wants to move inventory only as per consumption, it is imperative that the component manufacturer does not have surplus or stockouts. So, production systems need to be diligently aligned to avoid these situations.  The current typical approach in production for most companies is the monthly planning system, which is driven by a forecast for the OEM and the aftermarket.  A made-to-forecast system will invariably lead to the pressure of liquidating unwanted inventory resulting from forecasting errors.  The planning starts at the end of the previous month (about 10 days before) after netting for the inventory, and the same is converted to materials required for vendors. This way of planning makes the system’s reaction time about 40 days. So, as the month progresses, the ability of the entire system to accommodate changes is limited – the resultant effect is excess inventory of items produced, which is not required immediately, while creating a shortage of other items.  This production model cannot ensure consistent availability to the warehouses. The only solution is to move production away from made-to-forecast to replenish-to-buffers in warehouses.  In most auto component manufacturing systems, if the raw material is available, the lead time for actual production is about one to three days. A buffer of double the production lead time will allow enough flexibility for the plant to react to any fluctuations in demand. This allows the plant to plan according to the daily consumption of the warehouses. With this system, the inventory required in the distribution warehouses is also reduced dramatically. The model also solves the conflict between OEM and the aftermarket supply, as the production system uses capacity to produce what is needed immediately rather than creating a surplus with a delayed off-take.  The suggested model is a paradigm shift from ‘push’ to ‘pull’, from the creation of inventory at manufacturing to its distributors and retailers.

Key Takeaways

The aftermarket is a huge untapped market for auto components companies. Auto companies can tap into this without much extra effort.

An afterthought on the aftermarket

The Indian auto industry went through one of its worst phases in the early 2010s. With many OEMs announcing frequent block closures of their plants, coupled with the need to correct for excess inventory of components in the <a target="_blank" rel="noopener noreferrer" href="https://www.vectorconsulting.in/en/research-and-publication/blogs/first-among-equals-marketing-or-supply-chain/">supply chain</a>, resulting in a de-growth in sales for most component vendors.  Although the OEM market was in a slump, the aftermarket witnessed an unprecedented increase in demand, driven primarily by the replacement of worn-out parts. It emerged as a ‘recession-proof’ segment as the number of vehicles in use continued to increase year on year. Moreover, most ‘first-fit’ component vendors could sell their products in the aftermarket.  The aftermarket is also financially lucrative, as the average gross contribution for the same parts is higher than what component vendors get from OEMs. However, over the years of rapid growth, the component manufacturers have neglected this segment. The reason is not strategic but operational since component manufacturers are expected to expedite orders placed by the OEMs. Since missing supplies to OEM assembly lines can have huge ramifications for future business, component manufacturer's capacity, in the short term, is mostly diverted to serve the OEM assembly plants. The residual capacity is made available to the aftermarket, thereby making the supply intermittent and highly unreliable. <figure class="image"><img style="aspect-ratio:16668/10892;" src="https://web-assets.vectorconsulting.in/storage/editor_uploads//auto-article-8-img-1-01-1733062243_1777351583.jpg" width="16668" height="10892"></figure>In such times, with the current underutilisation of capacity due to lower OEM demand, the aftermarket seems to be the saviour in the short term. This opportunity can be exploited through better distributor management and by devising aggressive, time-bound schemes for channel partners.  The auto OEM industry will always go through a business cycle over a few years. Suppose the component vendors maintain a short-term opportunistic outlook towards the aftermarket. In that case, they will never be able to use this lucrative segment to buffer for the trough in the business cycle. The key question, staring at the component companies, is: How to increase aftermarket sales in the short- and long-term?  One can start by understanding the dynamics of sales at the retail point.  For most spare parts, the customer’s tolerance time (willingness to wait) is nearly zero. Hence, if the item is available at most retailers in an area, then the demand in that area can be exploited significantly.  On the other hand, if the brand is frequently unavailable, the retailer and customer lose interest in it. This results in reduced ordering by the retailer. Hence, even if the material is available at the distributor, the retailer's demand can be considerably low. <figure class="image"><img style="aspect-ratio:16668/12773;" src="https://web-assets.vectorconsulting.in/storage/editor_uploads//auto-article-8-img-2-01-01-1733062253_1777351593.jpg" width="16668" height="12773"></figure>Companies that supply to the aftermarket intermittently usually do so through a few large wholesalers in the country. The wholesalers buy only fast movers in large batches and then sell across the country to a few retail points without any territory allegiance. This way of operating does not ensure range and reach penetration for the brand in the territory. To enhance range and reach, companies need to focus on distributor management.  The only way to capture the full potential of the range and reach potential is to ensure the placement and continuous availability of relevant the range at maximum retail points in an area. When the retailer has limited capital, he can hold a wider range solely by keeping a very low inventory for each item. This requires a distribution capability to service all the mapped retailers in the area with small orders per SKU at a very high frequency (every week). Distributor management is key.  Critical conditions to ensure this availability at the retail point are: 1. Daily high availability of the complete range at the distributor – to ensure continuous supply and prevent hoarding tendencies by the retailer.  2. Territory limitation and demarcation for each distributor to ensure deeper penetration of reach with the prevention of cross-territory dumping.  3. Dedicated distributor sales representative to execute a weekly beat plan for order collection and a reliable service frequency. This model requires a significant investment of resources and commitment from the distributor. Unless he has a significant win, he cannot be expected to put in this disciplined effort. Sales teams need to invest time and effort in distributor management.  <h5>How to create a win for the distributor?</h5>Providing a distributor with a higher ROI, which is way beyond his expectations, can motivate him to invest resources in the required procedures of frequent retail servicing. Increasing his margins is not a viable option for any company. The only option is to provide nearly 100% availability of the complete range with significantly lower inventory.  Our research shows that most distributors of auto spare parts in India maintain about a 60-day inventory and still suffer from unavailability. If one can provide very high availability with 15 days of inventory, the ROI can go up by at least three times.  With such fantastic ROI, every year, the distributor can be expected to follow all the procedures of retail servicing – a win-win for both parties. This is integral to distributor management.  <h5>Building the supply chain for delivering a higher ROI</h5>To enable low inventory levels, the supply lead time to the distributor has to be <10 days (15-day stock will be enough to prevent stockouts if the lead time is around 10 days). Such a lead time cannot be achieved by producing to order from distributors.  Having a warehouse with consistent availability and replenishing the distributors frequently based on consumption ensures high availability at lower inventory at the distributors. This is a change from the current predominant practice of the distributor forecasting (or the salesperson pushing high volumes) for a more extended period.  If one wants to move inventory only as per consumption, it is imperative that the component manufacturer does not have surplus or stockouts. So, production systems need to be diligently aligned to avoid these situations.  The typical approach in production for most companies is a monthly planning system, driven by forecasts for the OEM and the aftermarket.  A made-to-forecast system will invariably put pressure of liquidating unwanted inventory resulting from forecasting errors.  Planning starts at the end of the previous month (~10 days before), after netting for the inventory on hand, and the same is converted into the materials required for vendors. This planning approach results in the system’s reaction time to be ~40 days. So, as the month progresses, the entire system's ability to accommodate changes is limited – the result is excess inventory of items that are not required immediately, while creating a shortage of other items.  This production model cannot ensure consistent availability to the warehouses. The only solution is to move production away from made-to-forecast to replenish-to-buffers in warehouses.  In most auto component manufacturing systems, if the raw material is available, the lead time for actual production is about one to three days. A buffer equal to twice the production lead time will provide enough flexibility for the plant to respond to any demand fluctuations. This allows the plant to plan according to the daily consumption of the warehouses. With this system, the inventory required in the distribution warehouses is also reduced dramatically. The model also resolves the conflict between OEMs and the aftermarket suppliers, as the production system uses capacity to produce what is needed immediately rather than creating a surplus with delayed off take.  The suggested model is a paradigm shift from ‘push’ to ‘pull’, from the creation of inventory at manufacturing facilities to its distribution to distributors and retailers.

<h4>An afterthought in the aftermarket</h4>

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<h4>An afterthought in the aftermarket</h4><h4>  </h4>

Explore the strategic challenges faced by auto component manufacturers in leveraging the aftermarket segment amidst fluctuating OEM demands. Discover insights on distributor management and supply chain optimization to enhance aftermarket sales efficiency.