The aftermarket distribution system is truly a paradox. It’s built on a costly and inefficient distribution system, but at the same time it has performed beyond comparison with any other industry you can name. And therein lies the problem.
For decades, suppliers have flooded the market with their products in an attempt to cover just about every possible maintenance or repair scenario for every vehicle on the road. The result is that installers can get their hands on the parts they need so that they can usually fix customers’ vehicles the same day. You won’t get that kind of repair service from any other brick-and mortar retail establishment.
Unfortunately, there’s another result to contend with: the system creates so much inventory that much of it will be returned, which is the last thing, other than a legal dispute, a manufacturer or distributor should want.
An Automotive Aftermarket Supplier Association’s Special Report, written by Epicor and the AASA Technology Council, bluntly points out that “…by investing in the ‘best’ coverage in any given product category, the supplier is likely committing its finite capital on hundreds, or perhaps thousands, of parts that will sit on distributor shelves for extended periods. Offering the ‘best’ coverage is not synonymous with offering the ‘right’ coverage for a given market –- a fact with serious bottom-line implications.”
In essence, the aftermarket game has been played as an individual sport rather than as a team sport. Manufacturers and distributors often have adversarial relationships instead of working together for their mutual benefit. Clearly, manufacturers and distributors are working to get their best deal, which inherently breeds supply chain inefficiency. Distributors lose when unsold inventory collects dust and manufacturers lose when those parts eventually get returned.
Why tolerate inefficiency?
So why has the aftermarket tolerated this inefficiency? It’s not only been tolerated, it’s been encouraged because both manufacturers and distributors were earning huge profits and enjoying hefty margins. But that has been changing over the last few years, according to the AASA report.
“In a market that for many years experienced double-digit sales growth and which consistently provided healthy margins for its participants, attacking supply chain inefficiency was a secondary consideration for many aftermarket trade partners. But as growth has slowed to the mid-single digits or lower, and with margins under ever-increasing pressure, suppliers of all types are seeking business intelligence solutions that can transform the development and movement of parts from plant to end user.”
And as the report points out, the business solutions that can handle down-channel visibility already exist. The technology tools needed to track every product to the point of sale have been in use for years by major retailers, including large auto parts retailers and to some extent some large independent distributors. Unfortunately, the practice is not universal on the traditional/independent side of the business even though down-channel visibility can enable distributors “to enhance their stocking and pricing strategies and eliminate underperforming brands and product lines,” which obviously can benefit both distributors and manufacturers.
A lack of understanding at the top
With such profound benefits to be reaped, it seems like down-channel visibility would be a priority. However, according to the AASA report, a huge obstacle stands in the way: company executives have not embraced the concept. In fact, the report says they view “IT and business intelligence as cost centers rather than critical selling tools.”
In order for down-channel visibility to work, the report says it’s not a matter of just adding and assigning IT personnel. “IT requires a viable, well-articulated strategy by finance, production, marketing and sales professionals who want to accomplish specific goals.”
Moreover, the report concludes, “It’s not uncommon for supplier executives to discover they already have access to important down-channel transactional data as a result of their support of customer-driven data warehouse programs. What’s missing is a shared appreciation of the value of this information for multiple levels of an aftermarket manufacturing, marketing and selling enterprise. Also missing, quite logically, is an internal ‘champion’ who will help the organization harvest this value.”
Bill Long, president and COO of AASA, presented a strong case in a column for manufacturers and distributors to work more closely. Most importantly, he pressed for greater collaboration and visibility among channel partners and emphasized that suppliers need to take the lead.
“Host a formal top-to-top meeting to present your business plan for growth with each of your channel partners,” he told suppliers. “Include specific measurements like inventory-turn targets, sales by month, monthly line-fill goals, customer-forecasting accuracy tracking, warranty metrics and a mutually workable solution. Outline your pain-points and quantify those of your customer and, most important, develop a monthly process for follow-up and action.”
Finally, he recommended, “Establish a top-level platform for dialogue, feedback and problem solving that will lead to innovation for you and your customer.”
If suppliers and distributors can’t do it, who can?
Long articulates a persuasive collaboration message for suppliers and distributors. And the AASA report provides a logical and reasoned argument for down-channel visibility, which in essence, underscores the value of enhanced collaboration between trading partners. Clearly, the bottom line is to implement policies and processes that benefit both parties equally.
It is good news that AASA was willing to produce this report and that Long is on record of strongly supporting collaboration. The bad news is that profound collaboration isn’t happening fast enough. Undoubtedly, the discussion needs to be more urgent, which apparently isn’t going to happen — or happen fast enough — if left up to just the suppliers and distributors.
That being the case, it would be appropriate to bring in other outside entities, such as third-party providers (3PLs) to discuss how their expertise can benefit collaboration. With services ranging from warehousing and distribution to final delivery and warranty returns, 3PLs might be able to help break the aftermarket’s long-running paradox of providing comprehensive coverage at the expense of channel efficiency. Given that progressive supply chain management technologies and practices are proven to work in all other major industries, it is time the aftermarket trades its dysfunctional paradox for a new distribution paradigm.
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