Aftermarket Auto Parts Supply Chain: No Time To Spare
To compete in this fast-shifting sector, aftermarket auto parts companies have to speed into e-commerce and get their supply chains in high gear.
Americans’ cars are going gray right alongside their drivers. Along with an aging population, the average age of the cars on the road in the United States has inched up to 11.8 years. Moreover, the number of vehicles between six and 11 years old will jump 27% between 2018 and 2023, according to IHS Markit.
This is good news for the aftermarket auto parts sector. Vehicles between roughly five and eight years old are in the repair “sweet spot,” says John Giangrande, director of sales with Fortna, a consulting firm focused on distribution operations. Most of these cars are out of warranty, so their owners are less likely to head to dealers for repair. Yet many are still in decent shape and worth an investment in parts and repairs.
At the same time, aftermarket auto parts businesses are facing significant challenges and changes. E-commerce is upending sales and delivery channels, while other advances in technology are changing the makeup of vehicles themselves. The businesses that succeed will learn how to leverage these changes to both retain and capture market share and reduce costs.
The aftermarket auto parts supply chain can be broken roughly into two channels, says Chris Gardner, senior vice president with the Automotive Aftermarket Suppliers Association (AASA). One encompasses independent repair shops and service chains, such as Firestone and Jiffy Lube, as well as retailers like AutoZone and O’Reilly Automotive. These companies typically buy aftermarket parts from a range of third-party suppliers.
In 2018, performance parts, such as turbochargers, accounted for more than $10 billion of the U.S. aftermarket auto segment. Accessory and appearance products grabbed a $23-billion share.
The other channel consists of the original equipment supplier companies (OES). These are the companies that made the original factory parts for a vehicle.
To be sure, some overlap between the channels occurs. For instance, ACDelco is a General Motors brand. It’s also “the brand we go to market with, with independent retailers,” says Vince Faletti, general director, global customer care and aftersales, supply chain and logistics with General Motors. Many aftermarket retailers, as well as online marketplaces, stock ACDelco products.
As in many other sectors, e-commerce is putting significant pressure on the distribution practices of aftermarket players. E-commerce, and especially Amazon, has been a “game changer” in the aftermarket, says Dennis Hamann, director, logistics, North and South America, with HELLA GmbH & Co. KGaA, a developer and manufacturer of lighting technology and electronic products for the automotive industry.
The reason? It combines requirements traditionally associated with original equipment customers, such as on-time delivery performance, with those typical of retailers, such as a large variety of products. Add fluctuating demand, and these shifts are “increasing the importance of proper demand planning and inventory forecasting,” Hamann says.
The global automotive aftermarket sector is expected to grow from its current value of approximately $1 trillion to more than $1.42 trillion by 2024, according to Global Market Insights.
Changing customer expectations for convenience, speed, selection, and value should prompt players in the aftermarket supply chain to develop their O2O, or online to offline capabilities. That’s according to a recent report, “Digital Transformation: The ‘New Retail’ Future of the Aftermarket (and How to Win),” by AASA and strategy consulting firm Roland Berger. “A new retail aftermarket is emerging, characterized by a strong integration between the online and the offline worlds, differentiated customer experience, and lower cost-to-serve and working capital requirements,” states the report.
This shift will create both winners and losers in the supply chain. The companies that develop a strong omnichannel strategy and capabilities will be best positioned for success, with a flexible supply chain that aligns with evolving consumer expectations, targeted marketing, and consistent pricing across channels.
Another key criterion is cost-effective management of the last mile, the movement of parts from distribution hubs to consumers—a widespread industry challenge. “Whoever can get to market first with the quickest way to handle the last mile will benefit,” says Karl Borgman, principal with Tompkins International, a supply chain consulting firm.
To compete, manufacturers need to apply the “Amazon model of logistics,” says Gigi Ho, data co-op director of operations with the Specialty Equipment Market Association (SEMA). That is, they may need to stock parts across multiple locations so they can quickly fill orders.
Partnerships also can be a way to move toward an omnichannel world. In late 2018, Advance Auto Parts and Walmart announced plans for an automotive specialty store on walmart.com. “At Advance, we are absolutely committed to building a best-in-class omnichannel experience,” Tom Greco, president and chief executive officer with Advance Auto Parts, said in an official statement.
The two companies are also partnering on fulfillment options, including home delivery and parts installation.
Brick-and-mortar service providers will still have a role to play, especially for more complicated services. “This isn’t like buying shoes or clothes,” Giangrande notes. When it comes to some services, such as installing new parts, only a small segment of consumers can reasonably do it themselves.
To address the many consumers that need assistance, some online marketplaces, including Amazon, allow customers to select a service option when purchasing some car parts. Their purchases are delivered to service providers near them, who then handle installation. “It’s a major business model change,” with small garages now getting referrals from major internet providers, says Mike Rayne, managing director in the corporate finance segment with business advisory firm FTI Consulting.
Along with changing sales channels, technology is altering cars themselves. “Today, you open the hood, and you have to work for NASA in order to do something,” Giangrande notes.
That’s impacting supply chains by driving growth in the “do-it-for-me,” or DIFM, market. In turn, that’s prompting some retailers to carry more parts geared to this market.
Repair shops also need to boost their tooling and employee training so they can effectively work on increasingly technical cars. And that costs money.
Upgrades to pickup trucks account for the largest segment of the aftermarket sector, representing 27% of total retail dollars. Mid-range cars and SUVs are second and third with 16% and 13% market share respectively, according to the Specialty Equipment Market Association (SEMA).
To meet this challenge, many independent garages in Europe have joined together to share parts distribution, training, marketing, and other services. GROUPAUTO International, a spare parts distribution and services network for passenger cars and commercial vehicles, spans 60 countries, encompasses more than 1,300 distributors, and provides a cost-effective alternative to vehicle manufacturers, according to its website.
Advancing technology is just one driver behind parts proliferation, along with the ever-increasing number of brands and models. Faletti’s division at GM works with nearly 500,000 parts. “It adds complexity,” he says.
The sheer volume of aftermarket parts can complicate inventory planning and management. Not only does it create more products to track, but some of the parts also lack decent historical information that could be used to estimate future sales.
While the difference between high- and low-tech products has always existed, it has become more pronounced as cars get more computerized. “Before, anyone could change a shock absorber,” Rayne says. That’s less true today.
Both the low- and high-tech sub-sectors face challenges. Lower-tech, commodity parts are vulnerable to pricing pressure, especially now that consumers can check prices with the click of a mouse.
This pressure is especially challenging for some historical players with established large infrastructures, like lengthy distribution networks. “It makes it difficult to reduce prices,” Rayne says.
Conversely, some original equipment manufacturers and suppliers are making their high-tech parts and systems proprietary. Down the road, by using predictive failure analysis and vehicle monitoring, they may be able to predict when these parts will fail and will need repairs.
HELLA, a manufacturer of lighting and electronic products for the auto industry, combines its aftermarket expertise with its diagnostic capabilities to anticipate demand.
HELLA, for instance, is combining its competence in aftermarket parts with its diagnostics capabilities. “In order to be able to better understand our customers’ requirements, we need more and more customer- and part-specific information to know when a part needs to be replaced and where,” Hamann says.
Taking this capability a step further, a vehicle could even link to a service provider near its owner, so the owner could schedule the repair. “The entire industry changes from helter-skelter to more predictive,” Rayne says.
The provider could order any parts needed on a just-in-time basis, reducing its need to carry inventory. In fact, as this transition occurs, much of the inventory currently in the field may not be required, says Barry Neal, partner with Roland Berger and author of the AASA report.
At the moment, however, only a portion of car parts contains sensors. Even when the sensors are included, a fragmented market means data may flow to a range of companies, making it difficult to use it to develop a reliable maintenance schedule.
Right to Repair
The growing number of proprietary systems in vehicles also transfers more power to original equipment manufacturers and the technology companies that work directly with them. “That’s key to original equipment manufacturers’ strategy,” Giangrande says. They’re essentially forcing consumers to return to the manufacturer to maintain or repair their cars.
ACDelco, a General Motors brand, represents the overlap that occurs in distribution channels for aftermarket auto parts. While it’s made by an original equipment manufacturer, the brand is offered by aftermarket retailers and online marketplaces.
This is prompting concern, as seen in the growing number of “right to repair” bills. These bills would give independent repair shops access to the parts, tools, and information they need to repair electronic equipment, including equipment increasingly embedded in vehicles. As of early 2018, 17 states had introduced “right to repair” legislation.
Data privacy and system security are additional concerns. For instance, if a car owner is found to have postponed replacing their brake pad and then is in an accident, can the car’s maintenance record be used against them? Or, could a criminal remotely program a car so that, say, its brakes no longer work? The industry and regulators will need to address these concerns.
The changes occurring in the aftermarket auto parts supply chain show no sign of stopping. Indeed, they’ll likely accelerate.
One reason is the growing popularity of ride-sharing apps like Uber and Lyft. As more consumers rely on them, it’s possible fewer people will own cars. Instead, they’ll simply call on fleets or car clubs managed by companies when they need transportation.
Similarly, autonomous vehicles, while likely even further out in the future, also may lead to more fleets of cars. The aftermarket supply chain will have to transition away from serving a range of consumers with DIY products and toward working with a smaller universe of fleet managers.
Up Ahead: Electric Cars
U.S. consumers are expected to spend approximately $11 billion on performance products—including transmission and internal engine parts—for their vehicles in 2019, according to SEMA.
Another shift is the growth of the electric vehicle market. By 2025, electric and hybrid electric vehicles will account for about 30% of vehicle sales, JP Morgan forecasts.
While fossil fuel vehicles aren’t likely to go away any time soon, they’ll account for a smaller share of the market. This shift promises to heighten the challenges now seen in the aftermarket supply chain. Cars will become even more complex, and parts proliferation will become even more of a challenge as electric and hybrid cars share the road with vehicles powered by internal combustion engines.
The changes occurring in the aftermarket auto parts supply chain offer both challenges and opportunities. Predictive repair capabilities may enable service providers and retailers to provide a more satisfying customer experience while saving on inventory costs. And businesses that can execute a strong omnichannel strategy—say, using the internet to connect with customers while also offering top-notch repair services—stand to gain. “Those that succeed will be those that embrace new opportunities,” Neal says.
The automotive specialty equipment market faces many of the same challenges as the rest of the aftermarket auto parts supply chain. E-commerce is changing how consumers shop, says Gigi Ho, data co-op director of operations with the Specialty Equipment Market Association (SEMA).
“Shoppers start online,” she says, even when they ultimately finish their purchases in a brick-and-mortar store.
That makes digitizing product information even more important. “It has exponentially brought product information to the forefront,” Ho says. Without rich, robust product data that consumers can easily access, manufacturers risk losing market share. In addition, e-commerce is putting pressure on all manufacturers and distributors to continually cut delivery times.
While the major automotive manufacturers tend to turn to SEMA’s members as “leading edge,” and will share some information so these manufacturers can develop products for their cars, they’re also holding the technology in some systems, such as lane departure sensors, as proprietary.
The conversation about what’s proprietary is in its infancy. “I hope it will grab the spotlight in the next few years,” says Ho.