Although most of the headlines tend to go, justifiably, to stories related to emerging technologies and new functional capabilities, particularly those around trading-partner collaboration or leading-edge B2B and/or B2C applications, one of the less visible areas where companies are beginning to achieve some notable success is in the aftermarket. Typically one of the most profitable channels, aftermarket parts sales have historically taken a back seat to what is viewed as the company's primary production activities when it comes to investment in new technology or productivity solutions. Fortunately, that view is changing. Companies are recognizing that not only is the aftermarket profitable, but it also can drive significant competitive advantage as a customer-service differentiator. This column examines two case studies, one with an OEM and one with an aftermarket distributor. Each of these firms has adapted their aftermarket supply-chain processes to achieve superior performance. Ford Motor Co. The Ford Motor Co. has been one of the world's leading automotive companies for most of the past eight decades. Ford automobiles can be found in nearly every country on earth. The Ford logo is one of the most widely recognized in the world and represents a powerful consumer brand. The integrity of the brand is built upon the quality of the customer experience as it applies to every aspect of vehicle ownership: product quality, routine maintenance and dealer support. In the overall customer relationship, parts supply to the dealers has a vital role to play. Parts supply is, by its very nature, an unusually complex subject. Ford supplies over 500,000 unique service parts to more than 10,000 dealerships throughout the world. In reviewing its service-parts supply chain, Ford's goal was simple: Deliver best-in-class performance. One major question that Ford faced was what could be done to improve performance significantly in the short term, while planning for longer-term change on a larger scale took place? Precise targets included reducing inventory levels, improving customer fill rates and reducing customer back-order lines. Ford's plan included a blend of technology, process improvements, new metrics and human skills, and was aimed at finding pragmatic ways to achieve more from existing processes and systems while preparing for the future. These included improvements to distribution resource planning, forecasting and inventory visibility throughout the supply chain. Other tools were developed to measure volatility and streamline inventory flow, thus shortening supply-chain lead times. These systems improvements were performed in parallel with process improvements in the supply base and in the parts depot network. The impact of all of these improvements was significant, including:
- Customer fill rates (lines completely filled on time) were 93% in the U.S. and 93.6% in Europe. After the project, the numbers are 98% in the U.S. and 96.8% in Europe.
- Back-order lines were more than one full day's business in both the U.S. and in Europe. The figures now are less than 15% of a day's business in the U.S. and less than 40% of a day's business in Europe.
- Inventory value was $1,045 million in the U.S. and Europe combined. This has been reduced by more than $200 million.
In terms of speed and efficiency, these are significant achievements. When translated into increased customer satisfaction and improved brand loyalty, the true significance of these improvements becomes clear.
Discount Auto Parts
Discount Auto Parts is a leading auto parts and accessories retailer in the Southeastern region of the United States. The company serves both "do-it-yourself" consumers and professional installers. Discount Auto Parts' management team recognized that improvements were needed to reach key operating targets. Knowing that its current infrastructure and operational strategies would not support its plans for aggressive growth into new geographies, Discount Auto Parts recognized the need to quickly identify and deploy improvement initiatives that would drive supply-chain efficiency. Complications to Discount Auto Parts' growth plans included increased distance between Distribution Center headquarters and new stores, as well as increased store count, SKU count, number of distribution points and transaction volumes. Knowing that improvements would require substantial investment, Discount Auto Parts realized that it needed a fact-based analysis to identify, justify and prioritize improvement opportunities. Discount Auto Parts' information technology barriers included a dated legacy system platform, limited integration between systems and processes and a proliferation of "home-grown" systems. Utilizing an end-to-end methodology for assessment, with a focus on improvement across three key areas -- growth, efficiency and capital management -- Discount Auto Parts developed a prioritized portfolio of improvement initiatives. Each initiative was categorized as tactical or strategic and evaluated based on return on investment and time to value. Inventory management initiatives included implementing an advanced planning and scheduling solution, distribution network optimization and SKU rationalization. These initiatives enabled Discount Auto Parts to improve forecasting and planning accuracy and reduce inventories at all levels within its supply chain. Supply-base management initiatives included strategic sourcing and a program for supplier management and evaluation. This enabled Discount Auto Parts to rationalize supplier relationships and reduce total costs, as well as begin collaborative planning with key suppliers. Distribution management initiatives included launching a new distribution center, implementing improved WMS technology and a cross-docking program. These initiatives enabled Discount Auto Parts to streamline distribution center processing time, reduce costs, increase efficiency and create a network strategy for that would support growth plans. Transportation management initiatives included implementing a "pay for performance" program, utilizing excess private fleet capacity to generate additional revenue, implementing a core carrier program, establishing fleet process improvements and implementing a new TMS. Together, these improvements have enabled Discount Auto Parts to achieve a competitive performance advantage across key industry operating benchmarks, including the following results:
- $56.5 million in reduced working capital.
- $1.52 EPS increase over 3 years.
- $106 million in cost reductions over 4 years.
Collectively, Discount Auto Parts' supply-chain improvements have generated a total savings of $85 million and an ROI of 409%. Other key results include 25% inventory reduction, 3% cost of sales reduction and improved service levels.
Aftermarket As A Competitive Weapon
A key message from both of these case studies is that the aftermarket channel is ignored at one's peril. Ford and Discount Auto Parts have each reduced supply-chain costs and improved performance associated with servicing the aftermarket channel. More importantly, they have each strengthened their brand and improved their competitive position in a short time with focused investments and innovative thinking.
Kevin P. O'Brien is a Cap Gemini Ernst & Young practice leader for supply-chain consulting with high-growth and middle-market companies.