Logistics & Supply Chain

‘Spares’ to Victory: Cogs-in-the-wheels

of Service Effectiveness

Effective spare parts management is emerging as a key differentiator in the Indian automo-tive industry. The critical need of customers is quick after-sales service turnaround that en-sures high uptime of vehicles on the road. This is achieved to a large extent by the timely availability of genuine spare parts. However, only a few automotive companies in India have managed spares business as a strategic tool to gain superior customer satisfaction, say Siddharth Paradkar, Anirban Majumdar and Monalisa Majumdar of Tata Strategic Man-agement Group.

The discerning Indian automotive customer has evolved from focusing on vehicle price, discounts and brand promo-tions to optimized vehicle cost of ownership, faster service turnaround times and higher uptime of vehicles. These re-quirements stem from the need for stress-free vehicle own-ership.

However, most automotive companies are focused largely on vehicle sales & marketing and manufacturing related improvements, while aftermarket sales & service has been relegated to the fringes of strategic focus. This is in spite of the fact that aftermarket sales and service are generally more profitable than vehicle sales.

Most multinational companies sell OEM branded spare parts in their authorized workshops only (e.g. dealerships, authorized service centres). The figure below illustrates the prevalent distribution model for most OEMs. As is evident, there is a significant part of the market that the OEMs are not servicing today. This is a major gap that OEMs will need to bridge very quickly.

Reach of Indian OEMs in the Automotive Aftermarket Landscape

A recent ACMA study revealed that the share of OEMs in service and repairs is as low as 15 to 25 per cent of their existing car parc. This number is higher for new vehicles but reduces progressively as the vehicles get older. While near-ly 20% of cars on road (~14 million) are more than 15 years old, typical age profiles of cars reporting at dealerships and authorized service centres is less than 7 years. This clearly indicates that a large population of cars prefer to get their

service and spare parts requirements fulfilled outside au-thorized workshops. Original Equipment Suppliers and un-branded spares suppliers primarily dominate this segment. It is an untapped direct market for OEMs and a growing customer segment where genuine spare parts availability is critical. Moreover, success of organized spares retail and service chains (Reliance Autozone, CARPLUS, CarNation etc.) in this market clearly indicates that OEMs are losing out on a significant opportunity in the spare parts retail market.

Another critical segment for the OEMs is the cost conscious taxi and fleet operators. Since 2005, this segment has expe-rienced phenomenal growth from 1.5 lakh units to over 5 lakh units on road currently and is expected to grow further

by 10% every year. Larger organizations (e.g. Meru) have even established their own service facilities to reduce cost of servicing which can now become an in-stitutional channel for OEMs’ spare parts distribution. As companies develop low cost variants specifically for the fleet segment, they need to make directed efforts in spares distribution in order to fulfil requirements of this segment.

While many OEMs have not explored the spares oppor-tunity till date, the changing market dynamics and im-pending regulations may soon force their hands. An important development in the automobile industry in recent times has been the Right to Repair campaign. Indian consumers have recently brought to the notice

of the Competition Commission of India their concerns against multinational OEMs restricting service and spare parts availability to authorized workshops. Based on CCI’s follow up investigations, 17 OEMs were served show cause notice for anti-competitive practices in service and spare parts sale. Any decision by the CCI in favour of customers will make it imperative for OEMs to distribute spare parts over a larger customer base and geography.

If OEMs are to tap the market potential and respond to new regulations effectively, they will not only need to ramp up their geographic coverage but also equip themselves for responding effectively to supply chain issues faced in distri-bution of spares.

Spares availability and service have begun playing a critical role in the purchase decision of new car owners. However, most automotive companies in India falter on timely availa-bility of spare parts, which is the first step for effective after-sales & service.

A recent study conducted by Tata Strategic across multiple

passenger car companies on timely availability of spares revealed that first fill rate of orders at distributors and dealers vary in a wide range from as low as 50% to as high as 95% with lead times over 8 days in some cases. Non availability of spares at the right time increases cus-tomer wait time and affects his service experience ad-versely. Evolved order fulfilment and warehouse manage-ment processes have resulted in high order fill rates for certain OEMs whereas others have significant scope for improvement in these aspects.

Introduction

Current distribution model of spare parts

Spare Parts – Untapped Potential and Opportunities

Supply Chain Challenges in Spares Distribution

Source: Tata Strategic Primary Research and Analysis

The “mother plus regional warehouse” model followed by most OEMs, whereby mother warehouse transfers stock to regional warehouses that service channel partners (dealers, distributors, service centers) in the region, often results in high transportation lead times. Inefficient warehouse man-agement, high time taken for order processing and insuffi-cient support from vendors in timely material supply results in high delivery lead times and logistics costs for both stock and VOR (vehicle off road) orders. This directly affects cus-tomer wait time and satisfaction levels. To avoid this, chan-nel partners need to maintain a high stock level that impacts their profitability adversely.

As OEMs expand their distribution network and customer base, the challenge of sustaining supply chain performance on fill rates, lead time, order fulfilment and warehouse man-agement is likely to get accentuated. OEMs need to adopt a robust approach to address these issues across multiple functional areas.

Procurement: Inconsistent vendor supplies remain a major concern area for most OEMs, with spares requirement often com-peting with OE assembly line requirements for ven-dor capacity. OEMs will need to help vendors de-bottleneck their processes,

start reviewing vendor supply performance for OE and Spares independently and develop new vendors as neces-sary.

Warehouse Operations: OEMs will need to optimize their warehouse operations. Introduction of permanent dispatch plans (PDPs) for efficient distribution and implementation of robust IT support like Warehouse Management Systems can be steps in the right direction. These need to be supported by initiatives like Kaizen to improve and sustain productivity.

Distribution: OEMs will also need to come up with an alter-nate distribution structure to be able to cater to a wider cus-tomer base. An FMCG-like model, with state hubs for distri-bution to independent retailers, garages and service stations and other institutional channels, seems to be the ideal way forward for OEMs. This will improve delivery lead times and service levels significantly. To sustain such a model, stocking strategy based on demand criticality and supply lead time of spare parts will assume paramount importance.

In order to achieve effective customer service, the improve-

ment initiatives need to move beyond OEMs to channel partners which are the actual contact points with cus-tomers. OEMs need to pay considerable attention to improving the service effectiveness of these entities – dealers, distributors and authorized service centres - which will require significant collaboration in terms of effort, commitment and cost.

Many OEMs have already started recognizing and recti-fying these issues in right earnest. In order to reduce the problem of large delivery lead times, a multinational OEM in India services its customers daily, eliminating the time lost in grouping orders. This concept popularly called ‘Sell One Buy One’ additionally helps dealers function on very thin invento-ry (<7 days) which improves their return on investment. This has been a contributing factor in this OEM scoring high on dealer satisfaction surveys. Another large OEM has plans to migrate from a single mother warehouse model to a multiple warehouse model in order to gain proximity to its channel partners. The following case studies illustrate similar initia-tives by OEMs in detail.

There are multiple segments in the aftermarket which are currently outside the service purview of OEMs and they cu-mulatively form a large share of the pie. Retail distribution of spares can help OEMs claim a share of this market and aug-ment revenues significantly. However, success in this will be contingent on how well the OEMs establish an effective and efficient distribution network and address their supply chain challenges across procurement, warehouse operations and distribution. Commitment and sustained efforts by the OEMs and their channel partners will be critical in order to achieve benefits. If explored and managed efficiently, spares can be a major revenue and profitability enhancement lever for OEMs and help sustain growth in an increasingly competitive mar-ket. _____________________________________________________________________________________________________________________________

© Tata Strategic Management Group, 2013. No part of it may be circulated or reproduced for distribution without prior written approval from Tata Strategic Management Group.

Way Forward

Case Study 1 - A large Indian OEM wanted to capture a larger pie of the spares aftermarket by making its branded spares available outside authorized dealerships and service stations. The OEM appointed distributors in each state and decided on an optimum warehousing and distribution network. This distributor segment has been driving growth of the spare parts division and currently contributes nearly 40% of total spare parts sales. The OEM also streamlined its order management processes and incentive structure for channel partners that helped improve fill rates and also save ~10% of overhead costs.

Case Study 2 – A leading construction equipment company was struggling to meet its spare parts demand effectively, with high spares replenishment time and low spares availability at dealer locations. The OEM embarked on a supply chain transformation initiative that aimed to improve customer satisfaction, control inventory and increase spares sales. Improvements were under-taken in the areas of supply network, stocking strategy, supply chain processes and roles and responsibilities. The OEM was able to increase spares sales by 30%, spares parts availability grew from 58% to 90% and replenishment lead times reduced from 70 days to 15 days.

Recent Experiences in Spares Management

Conclusion

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Siddharth Paradkar is Principal, Supply Chain and Logistics practice. He completed his post-graduation in Business Administra-tion from Symbiosis, Pune and has over 10 years of experience in the Logistics space and related industries, working with differ-ent MNC organizations.

Anirban Majumdar is Project Leader, Supply Chain and Logistics practice. With a PGDM from IIM Kozhikode and 9+ years of experience in supply chain consulting across multiple industries, he specializes in operations strategy and performance improve-ment. Monalisa Majumdar is an Associate Consultant. She has a post graduate diploma in Business Administration from IIM Calcutta and has close to 4 years of consulting experience. For further interaction please email at: siddharth.paradkar@tsmg.com

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Logistics & Supply Chain Management