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Increasing Importance of Aftermarket Parts Authors: G Maheswaran & C. Rakesh Gopal, Miebach Consulting India
Increasing Importance of Aftermarket Parts Authors: G Maheswaran & C. Rakesh Gopal, Miebach Consulting India

Increasing Importance of Aftermarket Parts

Authors: G Maheswaran & C. Rakesh Gopal, Miebach Consulting India Pvt. Ltd.

November 2012

Increasing Importance of Aftermarket Parts Authors: G Maheswaran & C. Rakesh G opal, Miebach Consulting

Increasing Importance of Aftermarket Parts

Authors: G Maheswaran & C. Rakesh Gopal, Miebach Consulting India Pvt. Ltd.

The Indian automobile industry has grown from license raj to a completely free market. Till the eighties, the Indian automobile market was purely supply-driven and dominated by very few players. With very few models to choose from, the buying decision was influenced more by vehicle availability (shorter waiting time) rather than the cost of maintenance and parts availability. The industry was opened up for global players in the eighties and nineties. As a result, the Indian automobile market has been flooded with over fifty Original Equipment Manufacturers (OEMs) offering product portfolios ranging from two wheelers, passenger cars, utility vehicles, commercial vehicles and farm equipments. Such a competitive environment has resulted in changes in the market dynamics. Like in developed markets, even the Indian auto customers have started evaluating products based on serviceability and maintenance cost in addition to product attributes and buying price. Customers expect the OEMs to offer extensive service network, instant availability, and affordability of aftermarket parts.

This change in market dynamics has in turn transformed the outlook of OEMs towards aftermarket parts business. Even the Indian OEMs have started to focus on aftermarket parts and service network in addition to the product features. Moreover, aftermarket parts business is considered as a cash cow due to the very high margins ranging from 30% to 50% depending on the part. OEM’s aftermarket parts business is primarily a trading activity with very low value addition like kitting and repackaging. Since there is no manufacturing and new product designing, the core function of the aftermarket business is SCM, with sales and marketing being support functions. This is evident from the fact that the organizational KPI (Key Performance Index) is First Fill Rate (FFR) which is nothing but the %of order lines available in full at stocking points at any given time. In matured automobile markets, the FFR is monitored closely by top the top management including the board of directors of the company. Global benchmark of FFR is over 90% with a part complexity of over 100,000 part lines where as the same in Indian auto companies averages around 70% with much lower number of parts. Sensing the importance of FFR, few auto majors like M&M have created separate business units for aftermarkets with direct representation at the board of directors.

According to Miebach’s research in 2010, the Indian Aftermarket industry is estimated to be around USD 10 billion or Rs. 47,000 crores. The auto component manufacturer and aftermarket business of OEMs account for 45% and 35% respectively where as the spurious or the fake suppliers account for the remaining 20%.

OEMs account for 45% and 35% respectively where as the spurious or the fake suppliers account

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Parts Complexities

Parts Complexities The products or the SKUs (stock keeping units) in afte rmarkets business are nothing

The products or the SKUs (stock keeping units) in aftermarkets business are nothing but the various components of the automobile. Every new model results in 2,500 – 3,000 parts getting added to the existing master list of aftermarket parts, while the addition of every variant adds another 500 – 1,500 parts. In the past four decades, the number of players in the Indian automobile industry has grown from a mere six to more than fifty, out of which around forty emerged only in the past two decades. This phenomenal growth has been primarily fuelled by the liberalization of the Indian economy and has resulted in more than 300 car models (with double the number of variants) in the Indian market compared to less than 25 models in the 1980s.

Frequent launch of new models also indicates the reducing product life cycle in the automobile industry which has negative implication on the aftermarkets SCM. The implication of shorter lifecycle of automobiles on the aftermarkets business is faster transition of parts from runners to repeaters, from repeaters to strangers and obsolete getting faster than before. The revenue from aftermarket parts of any new model will be very low in the first two years of launch and from the third year the revenue will increase and will stabilize in the fourth year if the automobile model sustains in the market. Unlike other businesses where a product is discontinued if the product is not yielding good revenue, the unfortunate part of aftermarket parts business is that the part needs to be supplied even if the respective model has failed in the market.

even if the respective model has failed in the market. Let us take a simple example

Let us take a simple example of a new auto OEM in the market, introducing one new car model and two variants of the existing model every year. Starting anew in 2010 with just 3,000 parts, in six years time the aftermarket business of this OEM shall have at least ten times, that is 30,000 parts to serve the market in 2015. This explains the relevance of having a robust product life cycle management for the aftermarket business in order to track the movement of parts from the runner stage to the repeater stage to the stranger stage and finally the obsolete stage.

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Also, the OEM needs to define specific service leve l based on the age of

Also, the OEM needs to define specific service level based on the age of the product (model) so that aftermarket business can plan procurement, stocking, and servicing strategies of the various parts handled by the aftermarket unit. In order to avoid such parts complexities growing exponentially, the OEMs in developed countries try and standardize as many components as possible between models. This is possible more with functional parts (gears, clutch, etc.) and less with styling parts (body parts). Naturally, this standardization is possible more in commercial vehicles and farm equipments as compared to two wheelers and cars.

Demand Forecasting and Sourcing complexities

Aftermarket business deals with SKUs in the order of tens of thousands. Naturally, not all the parts can be forecasted. In fact, only 5% of the total parts in the master list can be forecasted with an accuracy of 75% on a monthly basis. It is the responsibility of the demand planner to identify the parts to be forecasted. That leaves the rest 95% (or the 28,500 parts in the example given) to be procured based on replenishment.

The suppliers of the aftermarket business are usually the same as that of OEMs. An OEM has at least 100 suppliers and few of them even more than 1,000. For a supplier, the volume of business from OEM is always much higher and more stable than the same from aftermarket business of the OEM. Moreover, the aftermarkets business needs large variety of parts where as the OEMs need only few parts but large in number. Suppliers find it difficult to supply large number of parts in smaller lot sizes as well as supply parts on sporadic demands. Exceptions to this norm are the parts which are regularly changed in the automobile on usage such as filters or clutch plates. But in these cases, the component manufacturer also supplies to the market through own distribution channel. In aftermarket parts business, the OEMs compete with own suppliers in the market. Naturally, the primary focus of the supplier will be on the OE supplies followed by own aftermarket channels to the service market and finally the aftermarket business units of OEMs.

The Indian OEMs have realized this difficulty of supplies to their aftermarkets business and hence some firms have included the schedule adherence of the supplier to aftermarkets business in the balanced score card with more weightage for the same as compared to the past. OEMs are now realising the importance and complexities of spares business and have initiated measures like part rationalisation (common parts across models) to handle the part proliferation. Additionally, development of specialised vendors for manufacturing slow movers in smaller lot size (“small lot factories”), building “slow movers’ warehouse” etc are other initiatives adopted to manage low-end repeaters, strangers and obsolete parts.

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Inventory and Distribution Network The service levels defined at the end customer level (time between

Inventory and Distribution Network

Inventory and Distribution Network The service levels defined at the end customer level (time between order

The service levels defined at the end customer level (time between order time and deliver to customer) and the costs involved in maintaining stocks at multiple locations defines the distribution centre strategy – in terms of a single distribution point for the entire country or multiple distribution points in proximity to the customers. From the period of one warehouse per state which was driven by CST, aftermarket businesses have moved to single warehouse concept to avoid building up of stocks. But with growing volume, number of parts and increasing service level expectations from the end customers, OEMs are evaluating having multiple distribution centers. Matured automobile markets (in developed countries) with comparable size to India have already moved to concept of having multiple DCs for better service and also mitigating the risk of dependency on one location for service. The number of stocking points is also driven by concentration of suppliers, dealers/stockiest network across the country as well as the service level promised to the end customers.

Unlike other industries where the SKUs are generally classified only in three categories (runners, repeaters and strangers) for inventory planning, aftermarket parts due to the sheer parts complexity needs further classification. Miebach has been successfully using four dimensional classifications for its clients: business contribution (measured by sales), frequency of orders (measured by number of orderliness in a year), expensiveness of the SKU (measured by price) and regularity of demand (all through the year or seasonal or very sporadic).

of the SKU (measured by price) and regularity of demand (all through the year or seasonal

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Service requirements are higher for parts which give more business, more often as well as

Service requirements are higher for parts which give more business, more often as well as regular in demand. If the part is very expensive, the inventory to be maintained has to be low and vice versa if the

to be maintained has to be low and vice versa if the The decision of whether

The decision of whether the inventory is to be housed at the central distribution point (in case of single distribution point strategy) or at the individual nodes (in case of multiple distribution point strategy) needs to be calculated based on the service levels targeted. The inventory gets duplicated in a multiple distribution point strategy, say, for example, the runners and repeaters shall be maintained at all the distribution nodes, while the strangers should be maintained only at one distribution node. Indian firms operate with an average of 55-60 days (in case of 2-wheelers, it is < 30 days due to factors such as economies of scale & greater control over suppliers) of aftermarket parts inventory majority of which is contributed by slow and non-moving parts.

This decision on inventory and distribution centers is based on the trade-off between the response to customer order and the inventory the business can carry. The initial investments in the multiple distribution point strategy are higher vis-à-vis the single distribution point strategy. But this additional investment is expected to give good returns with increase in genuine (OEM’s) parts penetration due to increased service level.

Future of Aftermarket Parts Business in India

The standard of manufacturing and the quality of automobiles in India has improved drastically over last two decades. And this increase in parts quality in automobiles will naturally reduce the consumption of aftermarket parts per vehicle on road. Though there seem to be a threat of reduction in the market size for aftermarket business due to better quality automobiles, this is far from the truth. Considering the fact that the penetration level of automobiles in India is still at a low level – e.g., the penetration level of cars in India is only 0.75%, the base of automobiles will increase in years to come. Moreover, the aftermarket business of the OEMs in India account for only 35% of the total market whereas the rest 65% is still with component suppliers and spurious suppliers. With more sophisticated technology in automobiles, the end customers are expected to service their vehicles only in OEM’s authorized service centers or well established service network.

Large business houses which have sensed the huge potential hidden in this segment are investing capital to capture a significant pie of the after sales service and parts. Some of the potential competitors include A C Deleo (GM subsidiary), Reliance (RCare), Bosch India Service, My TVS / TVS Express, Castrol Car Zone, Carnation, Mahindra First Choice, shops promoted by insurance

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companies etc. These players have the resources to set up sophisticated, state-of-the-art servicing centres, equipped

companies etc. These players have the resources to set up sophisticated, state-of-the-art servicing centres, equipped with latest machineries and trained manpower. These organized multi-brand service networks will compete with OEM’s existing service network comprising of the automobile dealers and authorised service centers. Due to the central procurement of these multi-brand service networks, they would gain economies of scale and command higher bargaining power than existing dealers. Moreover, these service networks can procure directly from the auto component supplier at lower price than from OEMs’ aftermarket parts business. This will result in some price correction by the OEM’s aftermarket business in order to keep the cost of parts and service in own dealer network competitive to the large multi-brand service centers.

Another increasing trend in Indian aftermarket industry is the increase of stockiest or the trade channel. Given the vast geography of our country, the penetration of dealers and authorised service centers is still poor and hence the automobile manufacturers are depending more on the trading

channel for reaching retailers and mechanics in remote corners of the country. This is more relevant

in two wheelers, commercial vehicles, non premium car segment and farm equipments.

Indian automobile industry is definitely undergoing drastic changes in technology, products, new players and distribution channels. With increasing competition in the industry, OEMs are realizing the importance of aftermarket parts business not only from the point of service to the automobile business but also as a source of cash profit which comes handy during downturns. This has resulted in total revamping of the supply chain strategy of aftermarket parts by many OEMs. The days are not very far when the service levels of aftermarket businesses in India are comparable to that of global standards.

Authors:

G

Maheswaran, Market Segment Leader- Aftermarket Parts Industry

C

Rakesh Gopal, Senior Consultant - Strategy

Miebach Consulting India Pvt. Ltd No. 5, 80 Feet Road 4th Block, Koramangala Bangalore – 560034

India

Tel.: +91 80 40445200 Fax: +91 80 25533677 E-Mail: bangalore@miebach.com

www.miebach.com

Bangalore – 560034 India Tel.: +91 80 40445200 Fax: +91 80 25533677 E-Mail: bangalore@miebach.com www.miebach.com 7
Bangalore – 560034 India Tel.: +91 80 40445200 Fax: +91 80 25533677 E-Mail: bangalore@miebach.com www.miebach.com 7

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