We’ve examined the profound dilemma that North American manufacturers face from low-cost countries (LCC) that are bringing high-quality, low priced products to our shores.
Now let’s consider the ripple effects this invasion is having, and how they are redefining the roles that trading partners have had for nearly 100 years.
Today’s textbook concept of a supply chain considers everything from taking raw materials from the ground, through manufacturing, distribution, consumption, and in some cases, the return to earth in a landfill.
In that context, the way various trading partners interact in the complete process is a strong determinant of the success of the supply chain. For this discussion, let’s consider a simpler aftermarket supply chain.
Historically, the traditional “three steps” of our supply chain consist of products being created and supported by the manufacturer, with the distributor/jobber buying, holding and selling to add value to those products.
It is a supply chain that has provided products to car owners for about a century and has done so pretty damn well. But there is a change in the offing that may well shake the foundation of this time-honored supply chain.
The change has become known as the “Wal-Mart model” where resellers (either retail chains or distribution groups) go to LCCs and source products directly.
The name comes from the buying strategy developed by the retail giant who may not have invented it but has practiced it to near perfection in the last few years. One report said if just Wal-Mart’s Chinese purchases were compared to those of leading countries importing from that nation, they would rank fifth on the list.
The allure of the Wal-Mart model is the substantial increase in gross margins to the reseller. When the Internet threatened the function of resellers, the term “disintermediate” was coined to describe the phenomenon. In this LCC supply chain model, the term may need to morph to become “disoriginate.”
North American manufacturers are being disoriginated from the supply chain by margin-hungry resellers. It’s not difficult to imagine how strong the lure of that extra margin is. It’s little wonder that it is beginning to tempt some of the larger aftermarket resellers.
Do techs take the low-cost bait?
But is the Wal-Mart model directly applicable to the automotive aftermarket? The first consideration must be whether the country where a product is made matters to aftermarket consumers. The aftermarket has two critical consuming constituencies: service technicians and DIYers.
Like any question of this magnitude, the answer won’t be unanimous. But if the attitude of DIYers buying auto parts is anything like the attitude reflected in the behavior of the population at large, the majority of this segment will have little reluctance to buy LCC products. But how about professional service technicians?
To evaluate that aspect, I think one must ask the question, “which parts?” For that analysis, let me crudely lump all auto parts into two categories: “in-front-of-the-counter” parts and “in-back-of-the-counter” parts. While it is a gross oversimplification, up-front parts have characteristics that make them a better “fit” for the model. They are simpler to match to an application and less “data intensive” to specify.
But what about “in-back-of-the-counter” parts — those that require more robust data to match to an application and are typically more critical to the vehicle’s operation? How can and will techs react to those parts made in LCCs?
While there is no public study from which I can quote, the answer is that back-counter parts from LCCs will be accepted by technicians over time. Techs apparently have come to accept that the automotive business is a global business and quality parts can and do come from most anywhere. They will be more cautious than DIYers, but if the products perform, they will use them.
Failure of the Wal-Mart model
So if you accept that the two critical aftermarket constituencies will accept LCC products, does that mean that we are about to see the major retailers and program groups disoriginate their suppliers with their own brands of LCC manufactured products? That’s a little harder to answer.
Clearly, manufacturers provide more than just products. The major traditional North American suppliers offer a host of “wrap-around” to enhance their value.
When a reseller makes the decision to disoriginate their vendor, they essentially are making the decision to provide those services themselves. And this is where I think the Wal-Mart model fails in its application to the aftermarket.
In making the case about back counter parts, I focused on the data required to match them to an application. That data represents a massive amount of “behind the curtain” work that is done by manufacturers to assure the proper mating of part and application.
Consider this: The industry standard data set, ACES, has 56 different vehicle attributes that potentially impact which part fits which application — things like two-wheel vs. four-wheel drive. All these and more can and do impact which specific part fits different makes and models.
While all 56 never apply to a single part, a half dozen or more typically do. The existence of a full, accurate data set about all the SKUs in a replacement parts line is essential to selling that line. Bluntly put, there are only two ways to create such a data set: invest millions of dollars in the staff, research and technology to create it; or take it from someone who has it. And that raises the rather heady subject of intellectual property (IP) and who owns what as it relates to the data required to sell a line.
Is this legal?
There is a long-standing practice in the aftermarket of using the part numbering system of the established, dominant North American supplier, especially for private label lines. At the time that practice started, the manufacturers whose numbering systems were being “borrowed” probably viewed the practice as validating their market dominance and saw it as helping galvanize their leadership position. It must never have occurred to them to “protect” what was theirs.
I don’t pretend to know the actual legal ramifications of the use of someone else’s part numbers, but my own sense of fair play tells me it is an encroachment, if not outright violation, of another’s property. Using the same part numbering system eliminates the need to invest in the product and cataloging research to support the sale of a line. If the behavior goes beyond the use of part numbers to the use of images, technical data and catalogs (electronic or paper), it clearly crosses the line to become outright theft.
Manufacturers will have to make a stand as they are eliminated from selling some or all of their products and their own IP is used against them.
The advent of technology in the aftermarket has brought this whole issue of IP to the forefront, and it’s clear to me that it’s a long way from being resolved.
The confidence behind a brand
Beyond the legal entanglements of IP, there are a host of other services that vendors supply resellers that would be impacted if the Wal-Mart model were adopted: services like return privileges, new product/application coverage, technical support and tech bulletins, warranties, forecasting and stock planning, special orders, expedited order fill and training programs for increasingly complex automotive systems.
And then there are field sales forces that spend the vast majority of their time calling on technicians in support of their resellers. Is it reasonable to assume that resellers can pick up all that slack? You will excuse me if I remain skeptical.
There is also the issue of brand. There are a handful of resellers who have established a reasonably viable brand name, but for the most part the powerful brands are in the hands of the manufacturers.
Brands have the power to give the product’s consumer confidence that what is in the box is quality, regardless of where it is made. Upstart brands, house brands and private labels do not inspire the same confidence and might take years for consumers to accept.
But there is one issue that I think trumps everything I have named to this point: the issue of parts validation. Parts validation is the tedious process of assuring the fit, function, durability and other relevant attributes of a product. It is especially critical when parts are application driven and/or safety related. In the litigious society in which we live, due diligence is an absolute requisite before a product can be put into the marketplace.
I know of no reseller with the engineering or product management skill sets to begin to perform this function.
Time to embrace the new paradigm
What’s interesting about this entire debate is that it underscores how well the aftermarket supply chain functioned to provide both goods and services to the aftermarket repair community.
In the nearly 100 years that vendors and resellers collaborated to service the aftermarket, a symbiotic relationship has developed between them. Resellers provide the repair community with a variety of value-added services, including local availability and expedited delivery. Manufacturers provide products and the many valuable wrap-around services we have discussed herein.
Going forward, this debate about LCC products should be less about if such products will be permeating the aftermarket and more about who will be providing them. The new economic reality makes it pretty clear that the vast majority of manufacturing will move from our shores to those of the developing world. One need only look at other industrial segments — clothing, electronics, tools or hardware — to see that this is a fait accompli.
The new global manufacturing paradigm should be an opportunity for suppliers and resellers to work together to lower costs and improve margins. If we accept that and can keep from scratching at one another’s eyes, we just might be able to develop the opportunity mutually.
