With over 25 years in this industry, I have gathered a reasonable collection of "aftermarket" jokes (only a few of which can be told in these pages). One I use quite often may be more of a business lesson than just a joke, but it helps set the stage for what I want to talk about this month. It goes like this:
A guy walks into a parts store and asks for a water pump for a '92 Chrysler Caravan. The counterman looks it up, retrieves the part and tells the customer, "That'll be $39.45."
"Thirty-nine dollars and forty-five cents, are you out of your mind? There's a place just up the street that sells this same thing for $33.50."
The counter guy looks at him and asks, "Well, why didn't you buy it there?"
"He didn't have it in stock," the customer replies.
"Oh, well when I'm out of it, I sell it for $24.99."
The joke makes the point that there is more to the aftermarket formula than just price. Yet, pricing in the aftermarket and the practices surrounding it are fast becoming some of our biggest problems.
I sometimes feel like a doomsayer because I am always harping about how the OEMs are targeting our replacement parts business and are making substantial inroads. But pricing is another area, like data management, electronic cataloging and technical information, where the OEMs are having their way with us.
OEM prices have historically been substantially higher than aftermarket prices. A new bone-jarring reality? That is just not the case anymore. Last Sunday while firmly settled in my leather recliner for the mandatory weekend allotment of TV man sports, I was greeted with a rather bold Ford commercial. An appropriately attired and competent-looking technician told me that if I thought OEM parts and service cost more than their aftermarket counterparts, I was seriously mistaken. He went on to explain that I could get GENUINE parts, the ones that God intended be on my vehicle, for less money than what he implied were counterfeit parts.
What was particularly interesting was not just the suggestion that consumers should have their cars serviced at the Ford dealership. A significant part of the message was devoted to the parts and the value they represent (low price). And that, to me, is the real harbinger of doom. Heaven help us if the OEMs ever put a full consumer advertising press on selling their parts to our installers.
So why is our pricing situation in such a mess? I continue to think that the root of our pricing problem is in antiquated practices like functional discounts and manufacturer suggested pricing. It is a system that assumes a part should be sold for the same price without regard for local market conditions or the value that a reseller might add. Is it inconceivable to think that a reseller located in a major metropolitan area where taxes, labor and real estate costs are high should have a different price for a part than a reseller in a rural area that enjoys relatively lower operating costs? Should a stripped down "have it our way" supplier charge the same as one who bundles delivery, training, tech support and promotional programs?
The rigidity of these antiquated practices also keeps us from responding more quickly to changing market conditions: most notably these days, fuel prices. At the Aftermarket eForum this summer, Steve Frazier, the VP who has responsibility for automotive products sold at Amazon.com, said his company updates prices, both their own as well as those from their marketplace suppliers, every 15 minutes. Think about that. We can't update pricing in 15 days. It takes us closer to 15 weeks to implement a price update. Before long, the fast will consume those who are slow.
Our pricing problems go beyond those rooted in the functional discount off manufacturer suggested prices. Consider some of these boneheaded practices for which we are known:
- Making bargain fuel filters available for $65,000 luxury cars that are barely out of warranty. How much business do we really think we are losing because we only offer a $14 fuel filter for a Volvo and don't have a $7 alternative? I'm sure the doctor or soccer mom driving that vehicle will be so offended by the additional $7 on their $400 service bill that they will seek an alternative service provider next time. I would argue that simply by offering a low-priced alternative on such a high-end vehicle, the manufacturer and reseller are actually endorsing the use of the value product.
- Not charging the same or even a premium for older, slow-moving parts. For example, a brief survey of brake parts reveals that parts that fit a 1987 Buick Century cost substantially less than equivalent parts for a 2001. It seems to me if one is keeping around slower moving parts, they are entitled to make a little more margin even if that means only charging the same as for a current model. But our unforgiving manufacturer-centric pricing model primarily considers what it costs to make those parts years ago and overlooks the inventory expense of the reseller.
- Not having the flexibility to charge different amounts for a part that fits both an economy Toyota and a luxury Lexus. The OEMs do it all the time, but the rigidity of our pricing and information systems almost requires that we sell at the LOWEST price.
I personally feel the most insidious practice is the tradition of suppliers paying for "inventory devaluation" when they adjust their pricing downward. For those who are unaware, this is a practice whereby resellers expect reimbursement for the difference in the value of inventory they are holding at the time prices move down. Although I have been in the industry for over 25 years, this is one practice I have never been able to understand.
Thinking about it I can only theorize what factors might have contributed to its rise. One possible explanation is that for literally decades, aftermarket prices only went in one direction: up. Each time that occurred, the reseller experienced an inventory "revaluation." On the very rare occasion when prices went down, the shock must have been significant.
Which leads to another theory, one I call the "it never hurts to ask" phenomenon. I was speaking a few weeks ago with Mr. Larry McCurdy, one of the legendary captains of the aftermarket industry (he was the former head of Moog, Echlin, Dana Aftermarket and is the current chairman of Affinia Group). We were talking about a now retired distributor we both had known for many years. Mr. McCurdy smiled broadly at the mention of his name and said, "One thing I always admired about him was that he was never bashful about asking for anything." And he was right. Our mutual friend, along with many traditional distributors, discovered how much leverage they had as they formed program distribution groups in the '70s and '80s. I remember leaving a supplier meeting back then when I was working with one leading program group and watching the bosses slapping high fives (or the '80s equivalent), amazed at the concessions they had won from the vendor.
Regardless of how the devaluation practice started, from my perspective it is unsustainable in the future. The reality is we are in a new global competitive environment. If manufacturers are to adjust and remain competitive by sourcing from or relocating to lower cost countries, there's no way they'll be able to incur those costs and pay their channel partners for the theoretical inventory devaluation.
I say theoretical because that's what my broker tells me when I tell him I was worth more a few months ago than I am today. He says it's just on paper. It isn't money until you sell it. The same applies to inventory holders. Sometimes prices go up, sometimes they go down. Sometimes really old stuff becomes rare. Sometimes categories become hot and retail prices go up. You buy your ticket and you take your chances.
So what can the aftermarket do to address its pricing dilemma? Consider what has been happening in the airline industry in recent months. Since I travel frequently in my business, I see firsthand the progress the airlines are making to bring some semblance of sanity to their pricing. Pressured by increasing costs (especially for fuel), legacy union agreements (can you say Delphi?) and an overtaxed infrastructure trying to adapt to delays caused by new security requirements, the airlines were awash in red ink. I have been impressed with what they have accomplished and the results they have achieved. It causes me to wonder if we in the aftermarket could ever get our act together and do the same thing.
I'm impressed because individually they stopped knee-jerking to competitive pricing moves, grew a backbone and resolved to make much-needed price increases stick. They eliminated the ridiculously low-ball fares, but also dispensed with the outrageous gouging fares. Instead of coach fares ranging from $59 to $1,900 depending on lead time and load, they enforced a more reasonable range of $199 to $699. Their efforts to make pricing more homogenous appealed to those of us who constantly were shaking our heads at fares that seemed to defy any logic or reason. Their commitment and discipline to stay the course with their new pricing scheme has been rewarded. As I write this, two airlines are reporting profits that have eluded them for years at a time when fuel prices are hitting record highs.
So, has the airline industry permanently fixed its convoluted pricing? No. But they have made real progress in the face of adversity. This is something the aftermarket could stand to do. Just like the airlines, the aftermarket's pricing defies logic and is beyond description. Witness the "how fast can we find the bottom" mentality practiced by so many aftermarket companies, both suppliers and resellers.
I am more convinced than ever that we need to create supply chain management work groups under the auspices of one or more of our trade associations. This is not some sort of grand illegal conspiracy to "raise prices." On the contrary, we need to transform many of our processes; pricing is but one. We need to find better and more efficient ways for those in the supply chain to make pricing more responsive to their business strategies. Then allow it to respond to market forces locally, not from a far-off place that is out of touch with market conditions.
The aftermarket is in denial about so many of its problems. I know it is always easier to "keep things the way they are," but the fact is, things that used to work don't work now. Because we have a longer path to market and far less vertical control over the processes we use, unlike our OEM competitors, we need to work together to make those processes as effective as possible. Our pricing methods are at least a half century old. Continuing them will not enable us to remain competitive in the face of aggressive OEM competition. Today, as they have over the last 50 years, independent repair technicians prefer to buy their parts from aftermarket suppliers. But if we don't act soon to improve our pricing and data practices, I fear the flirtation that repair shops are having with OEM dealerships as a parts supplier will turn into a full-blown relationship.
Bob Moore is president of Bob Moore & Partners, a consulting firm that specializes in the automotive aftermarket. Moore can be reached at [email protected].