In 2011, when the unthinkable happened – the Fukushima tsunami and nuclear meltdown in Japan – the global automotive industry was already struggling to recover from the U.S. financial crisis, dealing with the Eurozone debt crisis and global recession, and scrambling to meet demand in growth markets like China and India.
In the wake of the Japanese disaster, the auto industry learned that while its just-in-time (JIT) business model and super lean, highly inter-dependent supply chains were wildly efficient, they also were brittle - susceptible to disruption on a potentially massive scale. Simply put, traditional just-in-time automotive supply chains were not resilient and, as a result, were at increasingly high risk of failure.
While new vehicle production suffered the greatest trauma, the automotive aftermarket sector also experienced shockwaves.
In the highly competitive after-sales environment, it is especially critical for supply chains to hard-wire in the capacity and capability to meet urgent delivery demands – same-day, overnight and next day. Customer/consumer expectations are high. Immediate access to parts is the name of the game. Lost sales and, worse, customer defections are the price of failure.
The lessons of Fukushima continue to be studied. But the industry as a whole, including the aftermarket sector, has embarked on efforts to craft a revised operating model: Supply chains that are simultaneously lean and resilient. This hybrid model retains the principles of JIT and lean, but adds in controlled redundancy and contingent options to improve resiliency and protect against failure. It also maintains a laser focus on cutting cost and eliminating waste.
There are four major trends re-shaping the automotive industry as a whole. These trends carry implications for the aftermarket business.
Trend #1: Global growth and emerging markets
Despite the drag effect of the debt crisis on the European market, global automotive production is forecast to hit record levels each year through 2017, with emerging markets driving the growth. That’s good news for the OEMs. The aftermarket and parts sector picture may be a more complicated story.
The aftermarket industry typically is counter-cyclical. It benefits when consumers postpone new car purchases. But the economic volatility of the past five years, particularly in the hard-hit economies of the U.S. and Europe, hurt sales even in the face of behavior that would normally produce a volume upturn – i.e., the fact that consumers put off buying new cars.
Such behavior meant one thing – the counter-cyclical model was no longer necessarily a given or reliable.
This new reality forced aftermarket parts manufacturers to re-think and restructure their business. The process, although painful, produced an industry that according to IHS is now more efficient, with higher productivity and utilization. It is better positioned to handle volatility and major demand fluctuations should they occur again.
Trend #2: Mega-plants and multiple platforms
Automakers are investing heavily in building mega-plants in growth markets such as China and Mexico, capable of building multiple platforms based on greater modularity of component systems. OEMs are asking component suppliers to follow them into supplier business parks - or clusters – in order to provide greater support.
As automakers expand production and platforms in these high-growth markets, demand for aftermarket parts naturally will rise over time. However, serving emerging markets is highly complex from a supply chain perspective. Infrastructure issues, local requirements and regulations, capacity challenges, and high transportation costs put new pressures on parts suppliers. The associated costs can easily consume any profit potential.
Trend #3: Getting closer to the customer
Automakers have moved from manufacturing in their home countries and shipping finished vehicles to market, to a model of geographically regionalized production – i.e. manufacturing at, or near the point of consumption. This means the industry is setting up regionalized manufacturing plants and supplier clusters in new locations all over the world.
As these regionalized production markets build out, it makes sense that the aftermarket production would follow a similar pattern. However, the aftermarket sector, with its need for instant or near-instant inventory availability and service, faces even tougher customer service requirements and greater customer proximity needs. Thus, aftermarket suppliers are building distribution networks that mirror the regionalization trend but take it a step further – to localization. The trick – and it is not easy to do – is to optimize cost effectively across this locally distributed network.
One solution is to partner with a strategic aftermarket service provider experienced in service parts logistics. These providers, located close to the aftermarket dealership and retail networks, can meet parts demand for fast movers (same day), replenishment, and stock orders (overnight) by using same-day delivery service in conjunction with their local distribution centers or dealer re-supply centers. They also provide a shared logistics network cost model, meaning that the cost of replenishment and delivery is spread across multiple customers and therefore lower. This means suppliers can provide the near-instant fulfillment service required to capture sales, but do so at a cost that won’t break the bank.
Trend #4: Relentless cost pressure
Logistics costs typically represent five to 10 percent of manufacturing revenues in automotive. Given the relentless pressure to reduce costs, remain competitive and improve market share, companies must use every trick in the book to lean out their cost structures. This is even truer in aftermarket supply chains, where high service requirements for speed to market can quickly destroy profit margins.
Closer proximity to the customer in the case of aftermarket means reduced distribution costs, improved service levels, greater delivery accuracy and on time performance and enhanced customer satisfaction. It also facilitates reverse logistics and recalls.
No longer an afterthought
For auto dealers, after-sales service drives revenue and, when well managed, is not only a big profit center but also cements customer loyalty to the brand. While original equipment supply chains in the automotive industry have been the focus of intensive review and investment over recent years, automotive aftermarket ‘demand chains’ by contrast have been widely neglected. They often under-perform, are inefficient and suffer from a lack of investment, despite their high profit potential.
Building a better, more resilient aftermarket supply chain, therefore, must address several overriding factors:
• The need to aggressively control distribution costs in the face of high demand volatility – particularly steep downturns;
• The need to increase service levels and customer satisfaction in the aftermarket dealership network, as well as in the retail channel;
• The need to create responsive delivery systems capable of providing efficient, “milk run” parts deliveries in a highly fragmented network, with short lead times and a strong focus on high quality and accuracy;
• The ability to manage returns effectively; and
• The ability to support faster inventory throughput and reduced inventory obsolescence
Building the lean and resilient supply chain
For OEMs, the new resilient automotive supply chain is built on true supply chain partnerships that create agility and contingent scale/capability, delivered in an “on-call” model. These partnerships span all players in the sector: OEMs, suppliers and supply chain service providers. This same model can be adapted to the service parts/aftermarket sector to capture money (profit) that today is simply being left on the table, and to provide the resiliency needed to adjust rapidly to demand swings.
Building a supply chain that is both lean and resilient means creating a new hybrid that balances the need to reduce costs with effective use of network and service capability, strategic redundancy to prevent service failures, and outsourced on-call capacity provided by logistics service providers with robust expertise in the service parts logistics arena. These solutions must be specially tailored to geographic regions anywhere in the world – and executed all the way down to a granular, local level. A pooled resource model – where logistics assets, capabilities and services are shared across multiple customers – makes eminent sense in this price-pressured, service-intensive sector.
Evolution continues
The evolution toward this hybrid supply chain model is ongoing. Automotive companies and aftermarket suppliers are re-balancing their supply chains to build in carefully managed tolerances for volatility.
Those companies that embrace the ‘new normal’ of continuous – and sometimes radical –supply chain volatility and risk, and put the processes and systems in place to better manage both, regularly outperform their competitors. They see volatility as “opportunity” and are able to act quickly to capitalize on it. Companies that ignore or lag behind in addressing supply chain volatility do so at the peril of their bottom lines.
Editor’s note: This article is based on a new Exel white paper called Lean and Resilient: The New Automotive Supply Chain Hybrid.
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