Supplier analyzes repairer’s letter critical of State Farm parts procurement system

Jan. 1, 2020
Brad Desaulniers, the president of PartCheck Live, a competing bidding platform to Parts Trader, which is powering State Farm’s new parts procurement system, analyzes a collision repairer’s letter.

Brad Desaulniers, the president of PartsCheck Live, a competing bidding platform to Parts Trader, which is powering State Farm’s new parts procurement system, analyzes a collision repairer’s letter that is critical of the State Farm program. He said he wants to provide insight into the “short and long term implications of this industry changing event.”

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“I will make every effort here to provide a balanced point of view providing what insight I can and will do my best to limit references to PartsCheck to instances where it adds value to the discussion,” Desaulniers said. “ My goal here is not to sell my product but to provide an alternative point of view that is not currently being aired in the discussion.”

Desaulniers is at times critical of State Farm, which he says is going “for the pricing jugular.” But he also cautions parts providers about not participating in the program, and says that shops should not “run off to their vendor community drumming up support for a revolt.” He adds in closing, “Figuring out a way to control and manage the bidding process rather than have insurance carriers control it is the big challenge.”

Here is his unabridged response to the letter from the SCRS member about State Farm's bidding platform:

Aaron, I felt it would be valuable to provide some commentary from a different point of view to the article respectfully submitted by your member on the State Farm program. By way of full disclosure, your members will recognise me from my role as President of PartsCheck, a competing bidding platform to Parts Trader.

Given my years on the front line of parts bidding I think I am qualified to provide some insight into the short and long term implications of this industry changing event. I will make every effort here to provide a balanced point of view providing what insight I can and will do my best to limit references to PartsCheck to instances where it adds value to the discussion.

My goal here is not to sell my product but to provide an alternative point of view that is not currently being aired in the discussion.

First, I would like to distill the paper previously published removing redundancies so that I can address the concerns in an organized fashion. In short, the writer identifies 4 general areas of concern:

  1. Time Delays
  2. Quality and Service Inconsistencies
  3. Vendor Push Back
  4. Pricing/Profit

Time Delays:

Your member identifies a number of issues that may impact cycle times in the short term. Some of these are policy issues such as the minimum open bid time of 1 hour. Others are technology issues that I expect to see resolved in the midterm (months) such as re‐writes of estimates. Still others are work flow issues that can be resolved in the very near term by shops revisiting their lean processes and operating procedures to eliminate the natural waste created when any new system is implemented.

Let me address, first of all, the policy related issues that may affect processing time (not necessarily cycle time). Foremost are the twin challenges of waiting for quotes to be returned by vendors and the incumbent re‐write or adjustments that must be made to the estimate.

From direct experience I can share with you that for the first 30‐60 days in a marketplace it’s going to be normal for there to be significant delays in vendor response times. I can also share from direct on the ground experience that these response times shorten up very quickly as vendors come up to speed on how the new system works. Ultimately we see vendor response times in the 5‐15 minute range once a market is running smoothly. Education and experience are the keys here. As vendors become familiar with the communication platform and recognise that response times are fundamental to winning business, their behavior modifies to address the needs of the market. I cannot guarantee that State Farm’s platform will perform the same way as to my knowledge it does not have the instant messenger platform that PartsCheck has that is a key communications component. But I am sure that vendor response times will improve over the short term.

As for the issue of supplementals or re‐writes this is primarily a technology issue that I believe will resolve itself over a period of months in the coming year. The limiter here is that the estimating platforms will need to open their platforms to receive data transfers in CEICA standard profiles that will automatically make adjustments to the estimate. This will eliminate the double keying issue and solve the administrative overhead issue. Finally, shops that have had a good experience with bidding modified their workflow to execute their RFQs either early or late in the day, taking advantage of the relatively short response times to complete other tasks before ordering or giving vendors overnight to respond when dealing with large or complex orders. This is the kind of workflow adjustment that can be made to smooth over the rough edges of bidding and response times.

What is not addressed in this section is the re‐ writes/supplementals associated with OEM price matching. I will address this item later in this paper as it goes to the very core of the need for bidding platforms—the effort to eliminate collusion and price fixing and the commoditization of the parts market.

Parts Quality and Service:

There are two mitigating factors affecting delays and costs associated with parts quality, service, returns etc. It is universally understood that competition is healthy. What is not as often discussed is that healthy competition requires a feedback loop between sellers, the marketplace and buyers. This is the quality / service component that may be absent from the S.F. platform at this time. In the early press releases from S.F. they committed to providing a rating system within their platform. I must admit that I have yet to see this component and I would be very surprised if it is not included. A solid rating system, when packaged together with the shop’s control over vendor selection, becomes a very effective tool for managing price/quality/service and driving innovation in the vendor community. Just look to EBAY for proof on this one. If I was advising S.F., and I am not, I would recommend that a simple policy change that excluded unrated or underrated vendors from the buying equation would go miles towards solving this problem. In the end, however, this is a short term problem that goes away in a few months as vendors work hard to make sure they are rated and rated well on the system—assuming of course that S.F. has included a rating system.

Vendor Push Back:

Your member identifies two areas of vendor push back. First is the simple refusal to participate—“I have been doing business this way for decades and there’s no bloody way I’m going to start bidding for jobs!” would be one of the more polite responses to the introduction of bidding. I can tell you the responses can be much more colorful and abrupt and often are. Second is the area of communication which in turn goes to delays, wrong parts and return issues. Perhaps the best way to frame this discussion is to hearken back to the days of sending out faxes to vendors and waiting to get quotes back.

This generally involved some back and forth between shops and vendors on the telephone. This inefficiency was a driving factor behind the push towards automated and integrated ordering systems based on list pricing. (The unfortunate down side of today’s list price environment is a degradation of competition as evidenced by artificially high OEM pricing (sec: the ability of OEM’s to price match so easily) and the virtual monopoly in the aftermarket who use OEM list pricing to drive artificially high A/M pricing with excessive margin which they use to buy shop business at the expense of the carrier. All of which is good for the vendor and the shop, but ultimately bad for the customer. I can tell you from my direct conversations, the large established parts vendors are mortified by the possibility of a commodity style market and I suspect will pull out as many stops as possible to avoid having to compete).

What I can share from direct experience again is that those vendors who dig in their heels will lose out almost immediately. Every time a vendor digs in we see another high quality vendor jump in with better margins and quality service. Good vendors work hard to maintain relationships. The fastest way to kill that relationship is to not bid. This is what happened without the carrier mandate. I can only imagine what happens with the carrier mandate in place.

It’s worth noting here that we have been seeing an ongoing consolidation in the parts vendor market for some time now. Every day we hear another small stocking dealer is getting out of the business as larger warehouse suppliers with efficient order desks and economies of scale both on pricing and service step in to fill the need more efficiently. We are also seeing more vendor direct participation in the alternative parts market as vendor channels have been swallowed up by LKQ / Keystone. The pricing impact of this phenomenon is great news for shops and the industry as a whole. All of this is being driven by the current muted levels of competition. We expect this process to be accelerated with the introduction of open bidding networks

With regards to communication delays and inaccuracies, unfortunately I cannot speak for S.F.’s platform. What we know is multiple modes of communication are essential to the success of a bidding platform. What works for one person may not for another. So combining imagery, notes, e‐mail, instant messaging and if necessary human intervention in an “all of the above” framework is critical. Admittedly, our success in this area with only 1 incorrect part being shipped in 2011, is part of our secret sauce and will remain there for now.

Pricing & Profit:

Here I will simply state that S.F. has completely stubbed their collective toe by not having the foresight to respect the short and long term costs being imposed on their shop network, many of which your member enumerated in his article. The addition of a discount window at the list price level with the shop discount driven from a reduced list price clearly tips S.F.’s hand as they go for the pricing jugular.

I have shared my point of view on this already with the powers that be at S.F. so I am quite unabashed in sharing it with you here. IN STARK CONTRAST, a well conceived platform will not have a two tiered discounting system. The result is the entire pricing benefit that is generated by vendor bidding falls to the margin and, therefore, the shop. (For independent shops this translates to 30% more margin on average). State Farm’s initial foray is short sighted and harmful to the evolution to an open, free, dynamic and truly competitive marketplace. They should and are being held accountable by their DRP partners. If they take our advice and eliminate the two tiered discount (an easy technology change that should be doable in a matter of a few days), the margin benefit for the average shop will far outweigh the additional short term administrative costs of the new system—this we know from direct customer feedback.

Is it the carrier’s goal to ultimately use these systems to manage parts and material costs?

It’s an excellent and very valid question. The answer from my point of view is “absolutely”, that is part of their job description with their customer.

Mitigate risk. What remains to be seen is will the shop community, by digging in and resisting, exacerbate the already somewhat adversarial relationship driving an even more aggressive surge from the carriers, or choose another path that will allow the shop community to comply with the pricing objectives of the carrier community while maintaining some degree of control.

Time will tell. (If you’d like to hear more about this please contact me directly at [email protected]

I’d like to shift gears and discuss a couple of the more esoteric elements of his submission.

Dealer/Shop purchasing:

I have two competing opinions on this subject. The 1st is that this is a dumb policy issue. If a dealer owns a shop they should be able to buy from themselves. Where this argument falls apart is if they buy from themselves at an artificially high price driving up severity and capturing additional profit. So without some sort of measurement/tracking process, the open market has to take precedence.

Of course the other part of this is if a Dealer/Shop cannot sell to itself at market rates then it probably should not be in the business of selling parts—a realization many stocking dealers have come to themselves in the last number of years and have exited the parts business as a result.

We also need to make policy room for shops buying from a dealer who refers them a specific piece of business. These relationships are essential to the survival of many shops and honoring them needs to be a part of the equation for the foreseeable future.

Vendor resistance to bidding / Divide and conquer:

Your member’s comment “divide and conquer” along with a later comment titled “A Disclaimer” in which he says “No boycotting or collusion allowed” instructs us as to why carriers feel bidding is necessary. This is important if you want to understand the carriers’ motivation. The current market structure fosters exactly those behaviors your member writes about— collusion and price fixing. The result is artificially high pricing and the devolution of competition both in the supply chain and at the shop level (sec: the evolution of consolidators and the increasing challenge for independent shops who are fighting lower margins in support of larger margins for shop consolidators). I cannot imagine any independent shop owner supporting the idea that they get lower margins on their parts than their local consolidator.

Volume purchasing agreements are fair and make sense if the buyer is actually buying in bulk as vendors can spread fixed costs across a single larger order. That’s not what happens in the repair business as shops may commit to exclusive ordering but those orders are still one offs resulting in no increased efficiency for the vendor. The result is that the costs of these exclusive arrangements are born by the smaller buyer in the form of lower margin—so independent shops are supporting their larger competitive brethren financially— paying them to compete! Bidding in a commodity styled marketplace will eliminate or at least mitigate this practice.

So I think it’s worth noting that while the “divide and conquer” perception from your member may have some truth to it, in the end independent shops will benefit the most from the evolution to real competition as the playing field levels out and Fair Market Value pricing takes over.

Moving Forward:

With regards to the comments from your member about the early stage of the S.F. platform and their stated goal to have other carriers join on the same platform I think there is little to be concerned about here.

The folks as S.F. obviously assumed that the overall mandated model from New Zealand could be imported into the United States. I believe from all of my industry conversations that the likelihood of any of the other hundreds of insurance carriers out there joining the State Farm platform is slim enough as to be immaterial. As State Farm is learning, the USA is not New Zealand.

I would caution shops not to rush to judgement here and run off to their vendor community drumming up support for a revolt. Step back. Competition is healthy, we all know this. Change is hard, we all know this too. I can tell you that those vendors who have been effectively locked out by the oligopoly of OEM’s and the virtual monopoly in the Aftermarket are thrilled by the possibility that they will now get a chance to compete. This competition will be good for the independent shop community.

I would argue that the real challenge being faced by SCRS members is not so much one of substance but one of form. It’s that the insurance carrier is driving this and the paranoia (justified or not) about where it leads that is underlying much of the fear and resistance (work flow growing pains aside). If you are a believer that free markets and competition are good and healthy, that they drive innovation and value and that your business would be better off if your vendor relationship were normalized to drive more competition, then you might consider bidding to be healthy in the mid and long term.

Figuring out a way to control and manage the bidding process rather than have insurance carriers control it is the big challenge. To answer your member’s final question about who benefits from this industry shift… well the benefactors will be the players who adapt and the industry as a whole will benefit from the cost control and innovation that comes with competition.

Additional Links on how markets become commoditized and how stake holders can and should react:

Harvard Business School – When your product becomes a Commodity

Surviving Commoditization

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