There's Gold Under the Hood!

Feb. 8, 2006
Why automakers like Ford and Volvo are boosting their parts and service operations.

In the automotive industry the biggest source of profits doesn't come from new car sales. It's right under the hood in parts and service.

As revenue and profits from car sales comes under pressure, progressive automakers are investing in technologies that improve their post-sales parts and service relationship with car dealers where lucrative profit streams reside. Consider the following.

The National Automobile Dealers Association's (NADA) industry-analysis division estimates that 48% of automobile dealer profit in 2004 came from the service-and-parts department, compared with 31% from new-car sales.

In addition, a 2004 Accenture study of one of the largest automakers revealed that sales of $9 billion in parts and services contributed $2 billion in profits. While by comparison, car sales of $150 billion produced profits of just $1 billion for the automaker. In fact, some industry experts indicate that spare part sales represents less than 5% of total revenues but more than 30% of profits. Clearly parts and service is big business.

As it stands now, many automotive original equipment manufacturers (OEMs) connect with their dealers via a paper-based, manual system, where service and vehicle updates take weeks to get to dealerships. And in those cases where the OEM does provide electronic data, the job of creating and distributing this information is outsourced to a third party, outside the control of the OEM. This has a negative impact on first-time-fix rates, a key performance indicator (KPI) used by OEMs and dealers to track customer satisfaction and predict warranty costs. It also creates inefficiencies in the service bay where, instead of turning wrenches, technicians spend up to 40% of their time looking for the right parts and service information

However, even with these inefficiencies, the numbers clearly indicate that automakers and dealers make more profit from servicing cars than from selling them. Factor in that more than half of the parts used to repair today's cars come from third party vendors, rather than the OEM, and you can see why leading automakers are aggressively pursuing new strategies to increase their share of the parts and service business.

One important step toward helping automakers generate more revenue from parts and service operations is the implementation of Web-based service information and parts ordering systems. These efforts have resulted in the creation of an integrated service bay that optimizes the technician's workflow and provides them with real-time access to the latest parts, repair and pricing information for the cars and trucks they are fixing. OEMs that implement an integrated service bay deliver benefits to the entire dealer community by helping them realize greater efficiency and consistency in service execution and parts procurement. Such gains bring operational flexibility to service departments, enabling them to pursue more cross-sell/up-sell opportunities and to increase service throughput. This means customers have their cars back on the road faster and the OEMs and dealers realize increased service and parts revenue and improved first-time-fix-rates.

Several automakers are leading the way and taking control of their parts and service operations with this type of innovative aftermarket technology.

In August of 2005, Volvo Cars went live with a worldwide system called Vehicle Information and Diagnostics for Aftersales (VIDA) built with software from Enigma. This system ties together all of the resources technicians rely on everyday, including service manuals, electronic parts catalogs (EPC) and service bulletins. This solution also ties into dealer management systems (DMS) to streamline parts ordering, inventory management and other financial processes.

In the fall of 2005, Ford of Europe also turned to Enigma's software to roll out a browser-based electronic parts catalog -- called "FordEcat" in more than 42 countries in Europe and the Middle East. The "FordEcat" enables technicians to receive up-to-date information on parts and service for 45 different car models. In less than one year, more than 65% of its dealer network in Europe and the Middle East has chosen the "FordEcat" system, solidifying Ford's aftermarket revenue stream and establishing centralized management of service and support content.

And while the deployments at Volvo and Ford are still ramping up, each one represents a significant head start on their automotive competitors. In the past, many companies, including automakers, focused on product-based revenue rather than spare parts and services. But that trend is quickly changing. According to a September 2005 report from the Aberdeen Group one of the main market pressures driving automakers and other OEMs to increase their service-based revenue is the shrinking profit margin of product sales.

Given the current economic environment, the automotive industry is now diversifying its approach to increasing revenue and profits. By implementing new technology, OEMs can improve the financial picture by optimizing the delivery of service and parts for the vehicles they manufacture. In an age when automakers need to enhance post-sales revenues, that's both a competitive differentiator and an opportunity for growth.

John Snow is the vice president of marketing and business development for Enigma ( an aftermarket service and support technology company.

©John Snow, Enigma

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