Nadeem Mazhar is CEO of Custom Technology Solutions, an IT and asset management services company based in Houston. Mazhar has decades of experience in the aftermarket industry, having previously worked for American Parts Systems.
What do you see as some of the key challenges the aftermarket faces when it comes to inventory and supply chain management?
If you look at the supply chain, the burden of inventory management lies at the distribution level. Right now, credit facilities, interest rates and the credit market are changing.
The distribution side of the chain has pushed for longer terms. In an industry that has less than two turns in a year, the push has been toward manufacturers providing longer terms. Payment terms of nine months are becoming the norm, and it could go higher. There’s a credit crunch and interest rates could rise, which will increase financing costs.
There’s a looming challenge for the aftermarket because once the financial dynamics change, smaller and midsize manufacturers, because they aren’t just dealing with one customer, there are going to be issues related to working capital and asset management.
The industry is going to have to look at things in a different way. The distribution side purchases and manages inventory, but the amount of slow-moving or obsolete inventory in the supply chain is in the hundreds of millions of dollars, if not more.
The question is, do they have the capacity to fix this when they are dealing with 60 different manufacturers at a given time? If there are 10 percent to 12 percent of parts not being used, the traditional way of managing this phenomenon has been pushback for more returns than the manufacturer allows. If those negotiations do not work, the answer has been to change lines and go with another manufacturer. That game of musical chairs has been going on for a while, but it can’t work long term.
What the manufacturer records as a sale is completely cut off from what is flowing downstream. They are making parts whether what they’ve sold has been consumed or not, because they conducted a sale. But those parts may languish on the shelf for years.
So what can be done?
First, the industry as a whole has to basically do some thinking in terms of where are we and do we have a better way of managing this.
Wal-Mart is a good example. They do not manage one stitch of inventory. They rely on the manufacturer to move the part. You have product on these shelves, and you manage that inventory. The manufacturer owns the inventory until it is consumed.
If you look at what people are doing in the aftermarket, not a single P&L in the industry has the carrying cost of inventory as a line item. We’ve never looked at inventory as an investment that has a financial cost on the P&L.
We have to move to a more modern way of doing things. If I say I can manage inventory better, you have to ask how that is going to help me generate more revenue. How do you guarantee margin?
The approach should be to have visibility from inception to consumption, and that responsibility lies in manufacturing. I’ll go way ahead and say, in a perfect scenario, the manufacturers shouldn’t sell anything. They should control everything, and say, ‘When you sell the part, I get paid.’ Visibility is very important. There has to be technology in place that shows you what is happening downstream.
That will take the use of artificial intelligence and predictive analytics based on statistical algorithms for forecasting, procurement and supply chain management at all levels.
In the food industry the margins are so thin they work on volume. The inventory purchase has to be tied to revenue generation. The problem in our industry is that the number of SKUs are phenomenal and that is a complex dynamic. But if every manufacturer took the same level of interest in their product on everybody’s shelf, this could be handled in a much more efficient and profitable manner.
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