The Nuts & Bolts of the Automotive Aftermarket Supply Chain
Whether it’s time for a tune-up, a vehicle won’t start, or a teenager just wants to pimp his ride, auto aftermarket supply chains are geared up to deliver the parts and accessories that keep drivers on the road.
From the bulb you pop in to fix a brake light, to the new transmission that costs hundreds to install, the automotive aftermarket encompasses a staggering variety of products—small and large, simple and complex.
This industry includes any product you might buy for a light-, medium-, or heavy-duty vehicle after the original sale, according to the Automotive Aftermarket Industry Association (AAIA). That includes replacement parts, accessories, lubricants, products to improve appearance, tires, and tools and equipment for making repairs. Together with attendant services, auto aftermarket products represented $307.7 billion in sales in 2012.
The supply chain for auto aftermarket products involves several sales models. Some retailers sell auto parts primarily to consumers who work on their own cars. Others sell mainly to professional service stations. And automotive original equipment manufacturers (OEMs)—the companies that make cars and trucks—have developed networks of their own to distribute their branded parts to dealership service departments.
One recent industry trend partially merges two of those models—the one for selling to do-it-yourselfers (DIY) and the one for selling to service stations.
Fortna, a consulting and engineering firm based in Reading, Pa., serves several companies in the automotive aftermarket, including manufacturers such as Federal Mogul and retailers such as O’Reilly Auto Parts and Advance Auto Parts. O’Reilly has a history of selling to both the DIY and the "do it for me" markets, while other large aftermarket retailers have mainly pursued consumers.
But that picture has been changing. "Retailers are all trying to get a piece of the wholesale professional installer market, because it’s a way of helping them grow their top lines," says John Giangrande, Fortna’s automotive aftermarket industry leader.
More Than a Few SKUs
Another trend is the proliferation of stockkeeping units (SKUs). With more auto models on the market, and new technologies such as gas/electric hybrids driving a need for new kinds of replacement parts, the number of distinct items retailers carry has grown tremendously.
As more retailers sell to professional installers, that SKU proliferation poses a serious supply chain challenge. "Professional installers need a wide array of application hard parts," says Giangrande.
And mechanics who order a part usually need it fast, to keep cars turning over in the repair bays. "If a store is not carrying what they need, the mechanics will call that retailer first only so many times," he adds.
A retailer that sells mainly to consumers might have 60,000 to 90,000 SKUs in its supply chain, while a business serving the commercial market might have more than 125,000. Some of those SKUs turn over fast, while others move only once or twice per year. Keeping the right parts in stock—and getting them to professional customers quickly—is a difficult task.
To better serve the pros, some retail stores expand their back rooms to create stocking locations for local deliveries. Other retailers build hub-and-spoke networks, with a "super-hub" store that stocks slower-moving parts and, on demand, speeds them to nearby customers. To fill demand for the slowest-moving parts, some retailers ship from distribution centers or source directly from the manufacturer, reasoning that competitors can’t get those products to customers any faster than they can.
Serving the Dealers
Service departments within dealerships rely heavily on distribution networks set up by automakers. In the United States, OEM-branded aftermarket parts—made domestically or abroad—flow into regional distribution centers (RDCs) owned and operated by OEMs. The RDCs supply products to a network of parts distribution centers (PDCs), which the automaker usually owns and operates as well.
As dealerships place orders for parts, PDC employees pick the product and prepare it for shipment in conveyances known as cages, sorted by dealers. Then a transportation provider sends route drivers to pick up the parts and deliver them to dealerships throughout the area.
"We deliver those parts in the middle of the night; we have keys to open the dealerships," says Charles Roth, business development director at CEVA Logistics, a third-party logistics provider based in Jacksonville, Fla. "When the dealerships open in the morning, they’ve got their parts."
Dealers must place their orders by an established cutoff time to receive next-day delivery, and they’ve been pressuring OEMs to set those cutoffs later.
"Dealers and OEMs want to ensure they don’t have dissatisfied customers, and that customers are not waiting longer than they need to," says Jim Barnett, CEVA’s vice president of automotive business development. "They’re looking to take every bit of waste out of the replenishment chain, to get parts to customers faster."
OEMs try to accommodate dealers’ needs with fast, easy service to keep them from turning to alternative sources for parts. "A lot of local auto parts companies approach dealers and ask for their business," Barnett says. And if they’re better able to serve, they’ll get that business.
At the same time, OEMs are encouraging dealers to order parts just for their immediate needs, to keep from accumulating stock they might have to return if they don’t use it.
Whether they sell to consumers, dealerships, or independent service stations, aftermarket suppliers come under pressure to reduce costs. That’s prompting some to consider a strategy that hasn’t appealed to them in the past: sharing space with other shippers on trucks or in warehouses.
"In the past, the big automakers would not want their cargo on a truck with another OEM’s products," says Barnett. They’re still hesitant today, but they will at least consider sharing a truck that a 3PL uses to deliver parts to dealerships.
That’s a particularly useful strategy in markets that don’t have a dense collection of dealerships—a place such as Reno, Nev., for example.
"Most shippers have only one-third or one-quarter of a truckload going to Reno," Roth says. "So it becomes expensive to service those dealers." If a 3PL can fill the truck with product from more than one automaker, each shipper gains a cost advantage.
That kind of collaboration works for shipments to auto parts stores, as well. Consider a supplier that needs to deliver to 3,000 NAPA Auto Parts stores and 2,000 O’Reilly stores. "Another company across town is probably delivering to many of those same places, or to many of the places where distribution centers for those retailers are located," says Kevin Hogan, senior manager of the Global Automotive Center at Ernst & Young, a global financial services firm with U.S. headquarters in New York, N.Y.
Parts suppliers wouldn’t have to collaborate with competitors, or even with companies that make different kinds of auto parts. They might share space on trucks with companies in entirely different industries that happen to ship to similar locations.
Collaborate and Save
Hogan and his Ernst & Young colleague Alex Bajorinas presented this idea at the 2013 Vision Conference of the Automotive Aftermarket Suppliers Association in March 2013, noting that this kind of collaboration has caught on among consumer packaged goods manufacturers. "The presentation stimulated a lot of conversation among auto aftermarket suppliers, but few suppliers have embraced the concept," Hogan says.
A quest for savings is also prompting some parts manufacturers to take a collaborative approach to warehousing, according to Mark Kunar, president of automotive, engineering, and manufacturing at Exel Americas, a 3PL based in Westerville, Ohio. Companies used to want whole DCs dedicated to their operations, but today, some ask to share facilities with other Exel customers, allowing them to divide some of the fixed costs.
Finding Ways to Stand Out
In addition to reducing operating costs, many aftermarket parts manufacturers are looking for ways to distinguish themselves in the marketplace. Domestic manufacturers compete with companies in Asia that make inexpensive copies of standard brands. As the quality of those knockoffs improves, U.S. suppliers must give their customers something extra to justify their higher price tags.
Some suppliers meet this challenge with value-added services. One such value-add is category management, which makes the supplier responsible for forecasting demand for its products, maintaining inventory, and pushing supplies to retailers as needed, rather than waiting for retailers to place orders.
"Category management is a value-added service retailers won’t get from knockoff parts suppliers in China or Vietnam," Hogan says. "It requires collaboration and trust, so the retailer knows the supplier has the right data and decision-making processes."
The automotive aftermarket is poised to grow even further. In 2012, sales increased 3.5 percent over 2011, according to the AAIA. And the average age of light vehicles on the road in the United States has been increasing steadily over the past decade, reaching a record high of 11.4 years in 2013, reports Polk, a global automotive intelligence firm based in Southfield, Mich.
As people keep their cars and light trucks longer, demand for aftermarket parts will increase, making it more important than ever for vendors in that market to drive smarter supply chain strategies.
Roush Revs Up
Want to supercharge your Mustang? Need new leather seats for your F-150? Roush Performance has what you need.
Roush Performance is a business unit of engineering, development, and manufacturing services firm Roush Enterprises. It sells aftermarket parts for Ford vehicles, mainly the Mustang, Focus, Taurus, and F-150 models. Roush sells those products through its Web site, and through a network of licensed distributors, including many Ford dealerships.
Roush also sells customized versions of Ford’s classic sports car. “We upfit normal Mustangs with our performance parts, and Ford dealers sell them,” says Ron Poland, executive director of supply chain at Roush Enterprises.
Roush makes some of its aftermarket parts in Livonia, Mich. It also procures parts from other companies in the United States and abroad—sometimes designing them and outsourcing production, sometimes modifying standard components. All those products flow into Roush warehouses in the Livonia area.
When Poland joined the company in 2011, Roush Performance was using UPS’ small-package service to fill its direct-to-customer orders. But for inbound shipments to Livonia, and large outbound shipments to distributors, Roush relied on two third-party logistics (3PL) providers to manage transportation.
“That arrangement didn’t make sense,” Poland says. Spreading its freight across multiple providers denied Roush the chance to achieve economies of scale. “We’re a small-volume niche aftermarket,” he adds.
With just a portion of that modest volume going to each service provider, the company lacked the clout needed to negotiate better pricing.
Dealing with two 3PLs also carried extra administrative costs. For example, each service provider had its own method for tracking freight, and its own way of invoicing. Following two different processes created extra work.
Eventually, Roush decided to give all its logistics business—not just for Roush Performance, but for Roush Enterprises as a whole—to one partner. After considering its options, the company chose UPS as its service provider.
Until they sat down to discuss the possibilities, the Roush team didn’t realize the full range of logistics services—including shipping automobiles, and air and ocean capabilities—its package carrier could provide.
By consolidating all its shipments with UPS, Roush achieved better freight rates than it could get in the past. “We’ve seen double-digit improvements in costs,” Poland says.
Roush also has benefited from OzLINK, a tool created by a UPS partner that helps customer service representatives quote shipping costs and transit times. In particular, OzLINK has helped provide better service to customers in Canada, where Roush is trying to gain market share.
“The tool assists Rousch in providing the landed cost to the customer, so when the product arrives in Canada, it can be delivered without the Canadian customer having to pay duties and taxes at the time of delivery,” says Shannan Newsome, enterprise account manager at UPS.
In addition, the new relationship simplifies administration. In the past, for example, reviewing and paying invoices for shipments with two different 3PLs—coming in and out of 23 locations in Livonia alone—took a great deal of effort. “It’s easier when you can get one detailed invoice from one service provider,” Poland says.
It’s also easier to deal with a single point of contact when problems or questions arise. “That’s a much more efficient process for both tracking down issues and getting quotes,” Poland notes. “It streamlines our business process.”
A Better Box for Glass
What’s so hard about shipping replacement glass for cars and trucks? Picture the front windshields on a Volkswagen Beetle, a Ford Econoline van, and a Camaro. What pallets would you use to load multiples of all three of those products onto a trailer with maximum efficiency, and transport them safely?
That’s the question Safelite Group asked several years ago as it sought ways to get better use from trailers that transported windshields for the company’s retail and wholesale businesses.
Safelite sells replacement glass—primarily front windshields. It makes some of that glass itself, and buys some from suppliers located around the world. In the past, Safelite had suppliers ship directly to its network of warehouses across the United States. But in a drive to become more efficient, the company started directing all inbound shipments to its regional distribution centers in Ontario, Calif., and Brazelton, Ga.
One reason for this change was to gain better control over packaging and truck utilization in the distribution network. “Every supplier we buy from has its own unique packaging,” says Dino Lanno, senior vice president, supply chain at Safelite in Columbus, Ohio. “There’s no consolidation or standardization.”
Even when it took over transportation from the DCs to the warehouses, Safelite was using three different pallet designs to accommodate the vast variety of windshields it shipped. Made of wood, the 24-inch deep pallets were based on designs that dated back to the 1970s. They could hold 15 to 25 windshields, depending on the curvature of the glass in a particular product.
Lanno and his team set out to design a pallet that would let them load more windshields into a truck with less protective filling, and transport that glass safely. They also wanted to make the pallets from steel, so Safelite could use them repeatedly.
The first step in designing a new steel pallet was to study how it needed to fit into the logistics operation. “We started looking at the materials handling equipment—the racking that was in our 93 warehouses and two distribution centers,” Lanno says.
They considered what they needed to fill an ocean container or a 53-foot trailer efficiently, with as little packaging as possible. They also looked for ways to make the new pallet collapsible, to fit as many empties as they could onto a trailer for the return trip to the DC.
The pallet the team designed is 30 inches deep—tall enough to hold as many as 35 windshields. That was as much expansion as Safelite could accomplish without buying new racking systems to accommodate a bigger pallet. Also, a bigger pallet loaded with more glass would have overtaxed the company’s forklifts.
With its new design, Safelite achieved an additional goal: eliminating dunnage—protective filling made of foam or cardboard—inside the pallet.
“A foam sheet between the windshields is the only thing that separates them,” Lanno says. “We’re proud that we eliminated the expandable polystyrene foam—that white coffee cup material—which has the half life of uranium.”
Safelite started rolling out the new pallets in 2012. It will take another two years to entirely replace the old wooden packaging, and for now the company is mixing both types of pallets on its trailers. Even so, Safelite has already improved trailer utilization on backhauls by 10 percent.
The new pallets are also easier to handle in the warehouse, making them popular with workers.
“With the old pallets, we’d have to store bases, sides, and ends strapped together,” Lanno says. They were hard to stack, and hard to inventory.
“Now we have one contained unit,” he says.
Where the Rubber Meets the Road
Although automotive tires are clearly aftermarket products, they are often treated as a separate category, and most auto aftermarket retailers don’t sell them. “Approximately 60 percent of the tire market is served by independent tire dealerships,” says John Giangrande, automotive aftermarket industry leader at consulting firm Fortna, Reading, Pa.
Tires require special accommodations in the supply chain. “They generally have to be handled individually,” says Mark Kunar, president of automotive, engineering, and manufacturing at Exel Americas, a 3PL based in Westerville, Ohio. On delivery, the driver lifts each tire off the floor of the truck and unloads it by hand.
Warehouses store tires in movable racks, stacked four or five high. And because of the product’s size, tire storage demands a great deal of space. “It’s not uncommon for a manufacturer to have multiple 500,000- to one-million-square-foot warehouses around the country,” Kunar says.
To maintain efficiencies, manufacturers or logistics partners such as Exel must carefully match putaway locations to product velocity. “If the product is put in the wrong place in the warehouse, workers have to travel a long time to get it,” he notes.
Putting the right tires in the right place requires careful customer data analysis. “Warehouse managers must consider the most recent demand, and talk to customers about whether it represents expected demand,” Kunar says.
Although some auto aftermarket parts vendors are starting to put product into 3PL warehouses they share with vendors of other commodities, tire storage will probably remain a standalone operation. “Tires don’t mix well with other products,” Kunar says. “They have a particular smell. When you walk into a tire warehouse, you know you’re in a tire warehouse.”