When The Going Gets Tough, Turn To After Market

ETAuto.com, August 27, 2014, Mumbai

Times have been tough for the auto industry in India. Original equipment manufacturers (OEMs) have been forced to declare block closure of plants intermittently to correct for excess components inventory in the supply chain. This has had a direct impact on vendors, who, in the absence of orders by OEMs, have been left in the lurch.

While the OEM market fell, the After Market rose as vehicle owners continued to buy new parts to replace worn out ones. ‘First-fit’ component vendors also began to sell in the after-market. It paid better, too; the same parts fetched a higher price in the Aftermarket than they did at the OEMs.

Thanks to its robust growth and perennial demand, this segment is now being seen as recession-proof.

Despite its many advantages, the segment has suffered neglect at the hands of component vendors for whom OEMs are first priority. The vendors bend over backwards to fulfil the demand of OEMs; they do not set aside bandwidth for Aftermarket which sustains itself from what’s left after the OEMs have had their fill.

This step-motherly treatment to Aftermarket is a side effect of vendors being heavily dependent on OEMs. Vendors cannot afford to miss supplies to OEM assembly lines; defaulting on deliveries can adversely impact continued business and future orders.

Fearful of losing favour with the OEMs, vendors dedicate all capacity to serve the OEMs. What the Aftermarket gets is residual capacity, and therefore, residual stocks. Thus, supply to this segment is frustratingly irregular and unreliable.

It is during recession months and years, when the number of orders from OEMs dips, that the Aftermarket gets due attention. The weakening of OEMs’ hold over vendors can prove to be a boon for both vendors and the Aftermarket segment. Vendors can channelize their newly-freed capacities to nurture the segment.

They can grow this business by enlisting new distributors and conceptualising aggressive time-bound schemes for channel partners.

This focus on After Market, however, cannot be short-lived. The efforts need to be sustained beyond the recession. With the return of OEM orders, vendors are bound to get back to channelizing all energies to fulfil them, leaving Aftermarket to make do with scraps.

The Aftermarket is again left to languish on the side-lines until the next slump. Vendors should guard against this trend. Their short-term opportunistic outlook towards the Aftermarket could hamper long-term growth and gain.

So, how can component vendors increase Aftermarket sales in the short term and long term? To answer this question, one needs to understand the dynamics of sales at the retail point.

Customers do not, and will not, wait for spare parts. Their tolerance time for most spare parts is zero. These customers can be served and retained by making the parts available to them all the time.

These same customers can be lost if the items and brand are not available at the counters. Both customers and retailers lose interest in such brands. Retailers would refrain from placing orders for parts of these brands at the distributors’ even if they (the distributors) have plenty of stock. So, eventually, companies lose customers, lose sales.

To understand another reason – besides variance in manufacturing capacities – for why spare parts are frequently unavailable at retail counters, one needs to study how companies manage supply to the counters. Companies in the Aftermarket spare parts business look to a few large wholesalers to help them reach retail counters.

The wholesalers buy fast-movers in large lots and offload the lots at a few retail points. The wholesalers do not bother with details such as reach and range penetration of the brand. Clearly, they are not concerned with ensuring that the counters are well-serviced and that the spare parts are perennially available.

When the retailers run out of stocks, they have no way of procuring more. Customers cannot buy, companies cannot sell.

Companies can sell and keep selling if they can get customers to buy. And one of the ways to ensure that is to make their spare parts – the entire range – available at the maximum retail points.

To achieve this, companies need to enlist the help of distributors who will frequently service all mapped retailers in their areas. They need to take and deliver small orders regularly, preferably once or twice a week.

How can companies ensure that the retail points are well stocked?

1. Ensure that distributors carry complete range at all time. This way, retailers would be assured of continuous supply, too.

2. Demarcate and limit territories for each distributor, discourage cross-territory dumping. This step would push distributors to focus on and reach out to all retailers in their territories, thus improving reach of the brand.

3. Appoint distributor sales representatives to execute weekly beat plan – take orders and fulfill them reliably.

It is critical that the distributors partner with the company to improve reach and range. They need to invest significant resources to take these steps. Why would they do so? What’s in it for them?

Creating a win for the distributor

High ROI. That’s the most attractive incentive companies can offer distributors to invest resources to boost reach and range. The route to achieving this is through ensuring, at the distributors’, 100 per cent availability of complete range at much lower inventory. Enabling a distributor to gain high ROI, far exceeding his expectations, would motivate him to work closely with the retailer to improve reach and range.

Our research has found that most distributors of auto spare parts in India hold about 60 days’ of inventory and, at the same time, suffer unavailability. ROI can be improved by lowering inventory levels to 15 days while maintaining availability. The company, its distributors and retailers all stand to gain.

Shrinking supply lead time
Inventory levels and lead time of supply to distributors are tied together. If the former has to be low, the latter has to be low, too. A supply lead time that is less than 10 days will allow 15 days inventory while protecting distributors from stock outs.

Currently, the supply lead time for most component manufacturing companies is 40 days. This is because companies follow a monthly planning system, which is driven by a forecast. Planning for any month begins towards the end of the previous month. The production plan is arrived at after netting off the inventory. These forecasts or plans are shared with suppliers. Several days go into finalising these forecasts. Any change would take equally long to be communicated to vendors who will then need more time to alter their plans. This explains why the entire production system’s reaction time is justifiably long at 40 days.

A supply lead time of 10 days – crucial to keeping inventory low at the distributors’ location, – therefore, cannot be achieved by producing-to-order for distributors or by following the forecast system. It is evident that such a production model cannot ensure high consistent availability at the distributors’ location. Instead, companies need to establish well-stocked warehouses that will replenish distributors’ inventory. Replenishment – based on consumption – will fulfil the twin objectives of high availability and low inventory at the same time. There couldn’t be a stronger case for switching from made-to-forecast to replenish-to-buffers in warehouses.

Making the big switch

Shrinking the supply lead time to a quarter of the current lead time might seem like a painful process. It isn’t. In most auto component manufacturing setups, the actual assembly or production consumes anywhere between one and three days.

So, the first step would be to create a buffer stock enough to last for twice the lead time. With the buffer stock in place, the manufacturer is now free to react to demand fluctuations daily.

He is also free to plan production to refill shelves at the warehouse which would be replenishing the distributors’ stock.

Manufacturers should never lose sight of consumption; they should closely and steadfastly follow its lead. They should allow consumption at the central warehouse to dictate daily schedules. The central warehouse feeds the appetite of regional warehouses. Regional warehouses take orders from distributors who are clued in to the retailers’ consumption. Every link in the supply chain submits completely to the diktats of the king – the consumer. This is the paradigm of pull-based production and pull-based distribution.

Multiple objectives are achieved. Inventory at the distributors’ location is reduced dramatically. The needs of Aftermarket are defined and fulfilled. With the picture of consumption becoming clearer, manufacturer is able to set aside capacities for Aftermarket with eyes fixed on assured gains.

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