Episode 25
Auto industry OEM spare parts – Solving the conflict between rapid service and inventory costs
Category : Sales & Distribution
In an earlier episode, we had touched upon the challenges faced by the OEMs in managing spare parts availability for servicing vehicles. In that discussion, we had identified the core problem behind this challenge. In this episode, we try to counter the conflict with a sustainable solution that enables higher availability and parts sales at much lower inventory as compared to the conventional way of managing spare parts. Also learn about how the shift to electric vehicles can impact the future supply chains of spare parts. For more details of the solution visit https://www.vectorconsulting.in/research-publications/auto-auto-components/spare-parts-strategy-for-oems-in-automobile-sector/
Transcript
| Shubham Agarwal : | Hello, and welcome to the Counterpoint Podcast. I’m Shubham Agarwal. And we are back to the second episode of a previous one that we had promised, we’re going to discuss about the solution in this part and look at how can we sustainably solve the problem of OEMs managing spare parts. So we have Mohit with us again in the episode, and we’re going to discuss deep down into how the solution can be looked at how the problems that we had discussed in the previous episode, can all be addressed, and also ensure that there are no new problems that exist or arise out of the solution that we implement. Before we start on the solution. Let’s let’s look at a quick brief on what we discussed in the last episode. I would still urge all the listeners if you have not had a chance to listen to the last one, please do so, the link is in the details. And you can then come to this episode. However, we will still share a quick brief.So let’s welcome Mohit, Hi Mohit. Welcome to the counterpoint podcast. Welcome back. |
| Mohit Saini : | Hi shubham how are you? |
| Shubham Agarwal : | I’m good. Thank you. So, Mohit let us first start with the quick brief of the the problem that we discussed in the previous episode. So that we set the context right. So, what we have discussed as a problem in the last episode was that the automotive OEM has two major and at time conflicting needs, which it needs to satisfy one is that it needs to ensure spares delivery to the customer at the shortest possible time. And it needs to be done in a manner with that is financially beneficial to the company and we said that root of this is that there is a huge range of parts and the way companies managing that is they are managing on a forecast based system that is what is the root of this problem. |
| Shubham Agarwal : | Right. So, my question is very obvious, how do we start to solve these issues you know, which are crippling the system. |
| Mohit Saini : | Okay, so, if you see Shubham as any solution, which we need to put in place, it should aim at ensuring that parts are available at the shortest possible time. And this has to be realised at the same level or or at a lower level of inventory. And while doing so that nobody in the entire supply chain should be burdened with the extra investment. This should be the basic tenant of structuring a solution.t |
| Shubham Agarwal : | Right. No, the reason I’m laughing is because, you know, I’m sure the listeners are like, is this really possible? Because we get that a lot? |
| Mohit Saini : | Yeah, that whenever we discuss this kind of solution, this is the first impact or the first reaction which we get from the audience Yeah. So now let’s let’s do one thing, let’s do a simple structural, because we have said that there’s a huge range of part. So now, it is imperative to classify these items into various categories, and then create a distribution strategy based on that, then we’ll be able to have a structured conversation around it. So, if you see based on frequency of demand, at a point of sale, the parts can be classified roughly into three four categories. One is a fast mover item, these are regular maintenance part like filters, oil, brake lining, clutches, belts, oil seals, battery, and tires wiper, and these are replaced as a part of regular maintenance. And if you look these item in terms of sale, these are usually 60 to 70% of the total spare parts sold by volume as well as by value. Now, there is a second category of item which we call as a slow moving item. These are infrequently used during repairs or certain failures which happens the examples would be user can visualise like a radiator, window glass or a fuel injection pump or a crankshaft, these are the certain part categories, which are slow moving items. Then there’s another category which is like stranger items are rare items. These are only included in a major accident or a rare repair and so and the chances of these part failures is not very high. Examples of these would be your axles, transmission, cabin, frame and central locking system. And usually if you see these are the kinds of items which usually gets damaged during accident. So, which if you see the accident insurance, accidental insurance policy there is a process of the claim to be made and then it will be getting approved which takes around 10 to 14 days in our country. So then even if these parts are not available at the point of sale, these can be arranged by the policy while the things are getting formed. Now next set of part are erratic part and these are the parts which are prone to frequent damages like gear parts, bumper, windshields, and they may they may also be exclusive parts needed for preventive maintenance for lesser popular models these are the or we call as long tail models which are not being sold very high in the market or these these item might be required for minor incidents while these vehicles of particular model may not be frequently visiting the service centre as in if you look at the entire set of vehicle visiting service centre, but if you see from the customer perspective, it doesn’t matter for them these are the these are regular item so, and patient for them to wait for these kinds of items is low because the for them these are regular running items which are required for maintenance there have their model Yeah. |
| Shubham Agarwal : | Right, right. |
| Mohit Saini : | And then there’s a set of which is only kind of category is pertaining to the spare part business is out of circulation item and these are usually stranger part that belongs to four to 10 year models of OEMs which are no longer in production and even though these parts are not used in current modules, no OEM is legally expected to maintain these items for repair and replacement in the market. So, these are the broader i said three four, now, we have five categories. |
| Shubham Agarwal : | Right. So, basically, just to summarise, we have five categories. The first one is the first move parts the second is slow parts, then we have the erratic parts and the other two categories that we spoke about are the stranger parts or rare parts and the out of circulation paths right? |
| Mohit Saini : | Correct. |
| Shubham Agarwal : | Right. So, let us look at what strategy would be implemented for each of them one by one |
| Mohit Saini : | So now if the distribution strategy has to be based on on the above categorization, now, it is evident that frequency with which each part is demanded at a point of sale and customer willing to wait can be used to decide which SKU has to be stocked where, for an example, while the fast movers have to be readily available at the service centre, customer service is not usually jeopardised if a stranger part is not available immediately on hand. |
| Shubham Agarwal : | Makes sense, Yeah. |
| Mohit Saini : | Yeah. Similarly, most customers are willing to wait for out of circulation part, this means the frequency the frequently needed items have to be held closer to the consumption point, the less frequently demanded parts can be held further upstreams in the supply chain. Now, the implication of this kind of strategy is that this reduces the SKUs that has to be held at different stocking points, but the challenge in this kind of environment is that there are at times you are the customer tolerance for waiting and repair for blocking is limited as in they get bogged, bogged down if the SKU is not available. And that is the reason why at times the channel partners have a huge variety of part in the supply chain or they end up having huge variety of part at the dealer location. Now, if you see what we have said is we have said that the decision can be taken based on the frequency and at the point of sale. And we can have a lot of inventory a lot of item at the upstream and the fastest moving item we can keep at the point of sales. Now, there’s a second aspect which is a very fundamental aspect of our distribution strategy. The stock which we need to carry is a function of lead time therefore, significantly reducing the lead time of dealership and distributor from the next node which might be a regional warehouse or distribution centre in the service distribution network can aid in reducing the stock which a dealer has to maintain. |
| Shubham Agarwal : | Okay, could we look at an example here quickly? |
| Mohit Saini : | Okay, if you see all I’ll just take a recent example this This is however COVID example is exception, but I just want to drive out a point. So you remember them in the first wave. When the first lockdown was announced, all of us actually went to shops and Kirana stores and hoarded the inventory we kept instead of keeping 15-20 days of groceries, we all went and kept one and a half month or two months at points actually people had six months of groceries and this happened. Now what fundamentally changed. There was an uncertainty in lead time and at times for many of the item the lead time become became longer because the logistic network were disrupted. So, this is this we can see that whenever the lead time is becoming higher or it is becoming variable, as a result, what we are doing is we are carrying higher stock that means, the stock is actually a function of lead time. |
| Shubham Agarwal : | So, can we quickly look at the example Mohit here. |
| Mohit Saini : | Okay. So, if you see suppose a company is there it is actually sourcing items and certain vendors are located very nearby in the vicinity and it is also importing some other item which is coming from suppose a country like China. So, you will see the the amount of inventory which it is carrying for locally sourced item would be roughly 10 days, 15 days and the amount of inventory which it is carrying from China would be a month inventory or a two months inventory what is different between vendors which is supplying from locally and China the lead times, locally based vendor is able to supply him in a matter of days. That is why he’s carrying inventory of 15 days, but anything which is coming outside India will have a lead time of one to two months. |
| Shubham Agarwal : | All right. So, yeah that makes it clear. Right. So, yeah, let’s get back to the solution. Yeah. |
| Mohit Saini : | So, similarly, availability at central warehouse can help reduce inventory, which is need to be carried at regional warehouses right, when the lead time is reduced, the minimum inventory to be held at various nodes in the supply chain network for every SKU will reduce what will be the result this enables stocking of higher range or increased range in the supply chain within the same working capital. in addition to decoupling the supply lead time from the replenishment lead time, a central warehouse is also needed to act as a dampener to absorb fluctuation in spares demand. |
| Shubham Agarwal : | Okay. |
| Mohit Saini : | The greatest variability in spares demand is is logically at the point of sales |
| Shubham Agarwal : | Right. So, which we know by law you know that aggregation reduces the variability Correct? |
| Mohit Saini : | Correct Correct. So, using this benefit of aggregation a CWH is able to serve many different destination in the supply chain far more efficiently while keeping the keeping the lowest inventory possible in the system. |
| Shubham Agarwal : | Okay, So, great, Mohit, could we quickly summarise. |
| Mohit Saini : | Okay. So, now, what we have done is let me just summarise we have said that we’ll be keeping stock based upon the frequency, we also said we will be having a distribution network where, there will be a CWH there will be regional warehouses, and then comes the dealership or the distributors. |
| Shubham Agarwal : | Right. |
| Mohit Saini : | And the key things which we are going to change is we are reducing the lead time of servicing the next node in the supply chain. And as we said, stock to be carried as a function of lead time, as and when we are reducing the lead time, the amount of inventory at the SKU level we need to carry lower, which gives us immense leverage point that within the same working capital, we can actually ensure a higher range which can be maintained at a stocking location. |
| Shubham Agarwal : | Right. So I think the solution is quite detailed. And I think it takes care of all the aspects that have to be you know that the OEMs or the dealers or any any node in the supply chain faces and I think that lays the foundation of the tenets on which we should build the solution. But I’m sure you know, as we all know that Murphy can hit any time and it becomes really uncertain, you know, the entire supply chain becomes really uncertain to be handled right these Murphy’s or these unknown circumstances can create a difference. So, how do we look at a sustainable distribution strategy, which ensures that there’s availability in the market at all times at all locations at all points. |
| Mohit Saini : | So, this is a very valid point Shubham here when we talk about reducing the lead time and reducing thereby reducing the stock which needs to be carried. If we do not ensure availability at the previous node of the supply chain, then we can we can end up in a situation where we can have stock outs and then lose the entire power of the solution. So for what it means is for this strategy to be successful, availability has to be ensured at all points in the supply chain, be it a central warehouse, be it a regional warehouse, be it your distributor or dealership or be it your retailer. This is only possible if the supply chain moves away from damaging push systems and implements a pull based replenishment system wherein the inventory moves in the supply chain based on the consumption happening based on the pull happening in the system. |
| Shubham Agarwal : | Right, could you elaborate a little bit more on this? Yeah, new strategy that we are talking about. |
| Mohit Saini : | So, let me just take an example here, just to explain, we all have water supplies in our home water, water supply or water distribution is a perfect example what we’re talking so, nobody is an when what you do is you open a tap and the water flows, this is the distribution cycle. But if you see how the distribution network is there, there’s a dam which is like a reservoir, which is acting like a CWH, and there’s a municipal a small tank which is there in the locality, which is like acting like a regional distribution centre, and at times, either you might have an overhead tank at your home or might not have or at a society level, you might have an overhead tank right, which is acting like distribution or a dealership and distribution centre. So if you see you are in the system, you’re not holding any inventory, but you’re almost enjoying 100% availability of water, how it’s getting possible, zero inventory and 100% availability, because the supply lead time is instantaneous, yes, you whenever you open the tap, the water flows in your house. So, this is this is the kind of system which where we can say this is a pull based system, you only are filling the like the dam is filling the or the reservoir is is filling the your municipal tank, which is located in society or for big catchment area as and when the water is getting consumed from that tank same way your society level or a household level water tank is getting refilled only when there is a consumption happening in that in that housing or society or that area . |
| Shubham Agarwal : | Right. Make sense. |
| Mohit Saini : | Yeah. So, this is a pull based system, where instead of push the inventory is flowing based upon the demand or the consumption which is happening at the supply point. |
| Shubham Agarwal : | Okay. |
| Mohit Saini : | So, now, just like the water distributions distribution network, the vendor in the system has to supply as per the actual consumption from the central warehouse, instead of a forecasted schedule, the prevalent approach right now, which we have is a schedule based planning for spares, which we discussed in detail in the last podcast can not only create desync with the real demand, but it also leads to leading to FG inventory piling up either at the vendor end or at the centre warehouses or at some other point which at the end leads to surpluses in the system. Moving away from this push system to a pull system, wherein movement of inventory is based on actual consumption takes away the need to arrive at an accurate forecast and send in monthly schedules. As in we are all sure of that forecast is an estimate it can never be accurate, but wherein when we move to a pull based system, there is no need to have an actual forecast whatever is the consumption happening, the previous need on the supply chain need to supply or replenish the inventory which is being consumed by the next node of the supply chain. So, now, we can have a communication system that indicates a level of stock against the inventory which is to be carried and this can be set up between the OEM warehouses and the vendors and there could be a daily trigger which can be happening based upon which the order needs to be put in. Now vendor can manufacture the corresponding part and replenish stock at the OEM as per the priority said based on the actual level of stock in the system rather than the forecasted demand or the planned demand. This enables the suppliers to receive purchase order in a hassle free manner. The constant change in order priority which used to cause capacity loss at a supplier and unneeded FG can also be eliminated because now the vendors are only producing which is actually moving from the CWH which is actually an inventory moving from the CWH is the actual demanded inventory in the market. Same way, if you extend this similarly the consumption based inventory movement can be triggered between a CWH and a regional warehouse from regional warehouse to a depo or a distributor from a depo or a distributor to the service centre even to the retailers. |
| Shubham Agarwal : | Okay. |
| Mohit Saini : | And at any two links the inventory should be moved only based on the immediate pull signal based on the actual consumption with the buffer level signalling the priority for replenishment. We can also have suppose if there are certain shortages, which are happening we can have a courier services which can be engaged for rapid movement for a stranger part or a slow moving item from the regional warehouses or the central warehouse to the point of sale directly. |
| Shubham Agarwal : | So, great Mohit could you quickly summarise the solution once because, so, that it becomes really, you know, easy for the listeners to gather the thought again. |
| Mohit Saini : | Correct. So, what we said is the distribution strategy for it needs to succeed the availability is prime most important and we can arrive or get to the availability, if we have if we move to a pull based system that means, we have inventory movement happening in the supply chain based on the actual consumption rather than the forecasted demand. That means, what we are saying is the vendor will be seeing a buffer at a CWH level. And they will be asked to fill those buffers, same way from the CWH to the RWH there’ll be certain buffers in place at a CWH as well as RWH so the RWH buffer whatever is the consumption happening in the market, the next node of the supply chain, there will be a trigger which will be coming to the CWH and CWH will be filling those buffers and the same same strategy can be deployed across the supply chain. |
| Shubham Agarwal : | Right. Great, I think the solution part is really clear now and I also see that we have touched upon all the different areas that you know the solution touches wherever we saw a problem like we discussed earlier. So Mohit could you share with us some of the benefits some of the improvements that you’ve seen as a result of the implementation of such a solution? |
| Mohit Saini : | Okay, this model of managing spares in most of the cases give immediate benefit to the service dealerships and distributors, higher sales is achieved as an effect of better availability in the entire entire supply chain. And without increasing the inventory dealer is able to have higher part they are able to ensure higher range that means translate to higher sales, higher ROI and what we’ve seen is that it also motivates them to invest more resources towards improving the region range to service the customer in the market because now they’re able to do it with some financial gains. |
| Shubham Agarwal : | Right, great. Do you have any case study probably which you know, you you would like to share with us today which which has worked on a similar model |
| Mohit Saini : | Okay. If we say there are many Indian OEMs who have implemented this pull base replenishment system for their supply chain, some of them actually have engaged Vector consulting for this transformation. For example, we have worked with Tata Motors, Ashok Leyland, Volvo Eicher and Royal Enfield, TVS motor for their spare part business, we have also worked with sonalika tractor for their spare part business, we have also worked with some OE vendors like fleet guard filter, Sriram pistons, Fenner, and SKF bearing. So there are many companies who have whom we have actually deployed this TOC based replenishment system in their supply chains. |
| Shubham Agarwal : | Okay, great, thanks a lot for the discussion Mohit I think this this really puts out a very strong argument and strong message of the new strategy that, you know, everyone in OEM spares industry can can benefit from. So, you know, while you have while you have talked about the case studies, or you know, the impact that you have seen, could you also share some numbers and metrics that you have evaluated, which have improved over time, because, you know, it really becomes objective and easy to relate to numbers. |
| Mohit Saini : | Yeah, so actually, it makes sense. So let’s take a case of Tata Motors, and to give a context, they had more than one lakh part for their aftermarket business. They had five warehouses from which they were operating and servicing almost more than 1000 channel partners, and they were sourcing from almost 450 vendors. So now when we started the implementation, what we said is that we’ll be keeping around 35,000 parts, which they’ve sold in last one year at their CWH and the metric if you see, when we started the implementation, the availability of these items were around 65% and it jumped to 94% during the implementation |
| Shubham Agarwal : | Oh, wow that’s huge |
| Mohit Saini : | And at the same time, the inventory which they were carrying was on 67 days of sale, which reduced to 57 days of sales. And if you see, the fill rate in 10 days improved from around 66 to 85%. Now, this is this is happening at the CWH level, if you look at the impact at the dealership partners, their availability, daily availability improved from 75% to north of 93%. The sales for that channel, which was sales growth was there was a plateau of sales for last three financial years, it went to around 11% year in year. Now, while doing all of this, if you see the velocity of the part moment went up, and and while doing all of this, the logistics cost for the company went down by 50 basis point that it went from 4.64% to 4.4114% of the sales. And this resulted into a saving of around 10 Cr which is actually happening year on year for the company. If you see apart from this objective or numbers, the most significant impact which as a consultant, which I saw in front of my eyes, was a transformation of a company from chaos to harmony, the entire supply chain. The firefights went down the VOR reduced the inter department conflict reduced, and we were able to actually create a much better as in supply chain in terms of harmony in the entire supply chain. |
| Shubham Agarwal : | Wow, okay, that’s, that’s really phenomenal. I mean, I asked for numbers, but I didn’t know the numbers were so you know, overwhelming in a very positive sense, which is great. And I think what you said at the last is really meaningful and makes a lot of sense. Because you know, there is no cost that you can put to peace of mind. Which, which is the biggest asset or the biggest outcome I would say, of the implementation. |
| Mohit Saini : | Yeah, not all things which can be counted counts. |
| Shubham Agarwal : | That’s true. Great. So I have just one more question. Before we end the discussion today, Mohit, EVs or electric vehicles are the new upcoming thing they are the next big thing that we see around the world, how does the change in the vehicle mix on the road is going to change the dynamics of the spare parts, the spare parts operation because you know, for the for these kinds of vehicles, the spare part definition might be entirely different. |
| Mohit Saini : | So it’s a very interesting point Shubham, there’s a lot of enthusiasm about EVs right now, and it should be there because as a generation, we are going to see the shift as in all the fossil fuel burning vehicles, we are going to see a range of electric vehicles. Now, EV definitely brings a lot of modality in terms of standardisation of many child components, specifically the drive line items, your engines, gearbox your differentials, your rear axles would no longer be needed, there will be a standard motor, which will be fitted on a wheel. However, the underlying challenge for distribution are still going to remains the same. As in that is unforeseen changes in the market demand, huge variety at an aggregate level for parts and the supply variations. Now, if you see the TOC replenishment solution, in my eyes would help any auto EV company to a similar or similar degree of impact it is it has helped the non EV company that is my take on this EV versus non EV and the kind of impact it is going to have on the spare part markets. |
| Shubham Agarwal : | Great. So that really solves for us because if the solution remains the same, however, whatever new segments we open, we are still guarded. Great Mohit, i think that was a wonderful discussion. And I really thank you for taking us through the solution in such detail and helping all the listeners to understand and also find solutions to some of the problems that they might be having in their everyday, everyday operation. |
| Mohit Saini : | Thank you Shubham. Yeah, great speaking to you. |
| Shubham Agarwal : | Thank you so much Mohit. And thanks to all the listeners. You can find more details on this topic in the details to this episode. And you can also check out the previous episode once again, which is in the details to this episode. If you have any questions you want to write to us, you want to have more details on this topic. We can write to us either on our website, or you can also write to us on our social media handles. Thank you. We’ll come back with another episode in the next one. Until then, this is Shubham signing off. Bye bye |
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Vector Management Consulting Pvt. Ltd.
10th floor, Thane One, DIL Complex,
Ghodbunder Road, Majiwada,
Thane (West), Maharashtra - 400610, India.