An After Thought on The After Market

An After Thought on The After Market

- Puneet Kulraj

An After Thought on The After Market

Published by Economic Times August 02, 2013

The auto industry in India is going through one of the worst phases in the recent past. With many OEMs announcing frequent block closure of their plants, coupled with the need to correct for excess components inventory in the supply chain, the resultant effect is de-growth of sales for most component vendors.

Although, the OEM market has been under a slump, the After Market has witnessed an unparalleled increase in demand, triggered primarily through replacements of worn out parts. It has emerged as ‘recession proof’ segment, since the number of vehicles in use has been on a continuous increase year on year. Moreover, most ‘first-fit’component vendors can sell their products in After Market.

The After Market 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 in nature, 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 After Market, thereby making the supply intermittent and highly unreliable.

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With the current under-utilisation of capacity due to lower OEM demand, the After Market 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. If the component vendors continue the short-term opportunistic outlook towards After Market, 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 After Market 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 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, demand by the retailer can be considerably low.

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Companies that supply to the After Market 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 enchance reach and range, companies need to focus on distributor management.

The only way to capture the range and reach potential is to ensure 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:

 Daily high availability of complete range at the distributor – to ensure continuous supply and prevent hoarding tendencies by the retailer.
 Territory limitation and demarcation for each distributor to ensure deeper penetration of reach with prevention of cross-territory dumping.
 Dedicated distributor sales representative to execute a weekly beat plan for order collection and a reliable service frequency.

This model requires 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 energy in distributor management.

How to create a win for the distributor

Providing a distributor with a higher ROI, which is way beyond his expectation, can motivate him to invest resources for the required procedures of frequent retail servicing. Increasing his margins is not a viable option for any company. So, the only option is to provide near 100 per cent availability of the complete range, at much lower inventory.

Our research shows that most distributors of auto spare parts in India carry about 60 day inventory and still suffer from unavailability. If one can provide very high availability at 15 days inventory, the ROI can go up by 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.

Building the supply chain for delivering a higher ROI

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 stock outs if 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 salesman pushing high volumes) for a longer period.

If one wants to move inventory only as per consumption, it is imperative that the component manufacturer does not have surplus or stock outs. 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 After Market.

A made-to-forecast system will invariably lead to pressure of liquidating unwanted inventory borne out of forecasting errors

The planning starts about 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 actually makes the system’s reaction time to be about 40 days. So, as the month progresses, the ability of the entire system to accommodate changes is limited – 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 high 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 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 After Market supply, as the production system uses capacity to produce what is needed immediately rather than producing surplus with a delayed off take.

The suggested model is a paradigm shift from ‘push’ to ‘pull’, right from creation of inventory at manufacturing to moving it to distributors and retailer.

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