‘Spares’ to victory Cogs-in-the-wheels of service effectiveness

Effective spare parts management is emerging as a key differentiator in the Indian automotive industry. The critical need of customers is quick after-sales service turnaround that ensures 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 Management Group.

Introduction

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

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.

Current distribution model of spare parts

Most multinational compani es 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.

Spare parts – untapped potential and opportunities

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 park. This number is higher for new vehicles but reduces progressively as the vehicles get older. While nearly 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 authorized workshops. 

Original Equipment Suppliers and unbranded 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 experienced 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 institutional 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 opportunity till date, the changing market dynamics and impending 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 distribution of spares.

Supply chain challenges in spares distribution

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 availability 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 customer wait time and affects his service experience adversely. Evolved order fulfilment and warehouse management processes have resulted in high order fill rates for certain OEMs whereas others have significant scope for improvement in these aspects.

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 management, high time taken for order processing and insufficient 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 customer wait time and satisfaction levels. To avoid this, channel partners need to maintain a high stock level that impacts their profitability adversely.

The way forward

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 management 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 competing with OE assembly line requirements for vendor 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 necessary.

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 alternate distribution structure to be able to cater to a wider customer base. An FMCG-like model, with state hubs for distribution 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 improvement initiatives need to move beyond OEMs to channel partners which are the actual contact points with customers. 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.

Recent experiences in spares management

Many OEMs have already started recognizing and rectifying 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 inventory (<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 initiatives by OEMs in detail.

Conclusion

There are multiple segments in the aftermarket which are currently outside the service purview of OEMs and they cumulatively form a large share of the pie. Retail distribution of spares can help OEMs claim a share of this market and augment 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 market.