Automobile Original Equipment Manufacturers (OEMs) are committed to ensuring seamless access to spares once a product is sold to a consumer. They know that this is essential to take care of the customers and to protect future vehicle sales of the company.
However, they must meet two competing needs for their spares business to thrive: delivering parts to customers quickly and cost-effectively. This is challenging. Maintaining spare availability is difficult due to the diversity and volume of parts involved (some have to keep up to 150,000 parts) and because many items have infrequent demand. While improving spares availability can increase sales, slow-moving inventory can affect cash flow. So most OEMs struggle to ensure good availability of spares.
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Issues due to poor availability of spares
Customers first experience OEM service, usually at their authorised service centres. But if spare parts are not available, TAT for servicing at service centres increases, and customers become unhappy. When they see that the higher prices they have to pay at these service centres do not result in better service, customers may seek cheaper alternatives, resulting in them leaving the OEM network after the warranty period. This problem is illustrated by the fact that even though 20 per cent of cars on the road are over 15 years old, most cars serviced at dealerships are under seven years old!
To garner the sales thus lost (at least of components), some OEMs sell parts outside their network. However, distributing parts to small businesses and retailers is challenging too. The distributors/wholesalers in the network are often unable to reach far-flung areas effectively. When last-mile availability of original parts of significant brands is affected, this creates ideal conditions for counterfeiters to thrive; eating into the aftersales of the vehicle manufacturer and potentially endangering vehicle drivers.
Why is ensuring availability such a challenge?
The root of this issue can be traced back to 3-month rolling schedules based on sales forecasts that OEMs use. These are often unreliable and can result in some parts being overstocked while others are out of stock in the supply chain. Pushing slow-moving parts to channel partners aggravates the problem. Poor inventory turns due to high and mismatched inventory vis-à-vis demand impact these channel partners earning power, buying power and restocking ability. Caught in the same dilemma of inadequate working capital due to high inventory, distributors in the aftermarket too often service only low-risk retailers, resulting in a reduced availability of spares in the aftermarket.
The best solution to the dilemma would be if parts can be readily available to customers without burdening the supply chain with extra investment (lower inventory for all). The following three steps can enable this:
Step 1: Classify parts: Parts can be classified into fast-moving, erratic, slow, stranger, and out-of-circulation categories based on quantity and frequency of sales. Each of these categories have a particular customer tolerance time for waiting. If parts are available within that time window, there would be no holdup for customer service due to unavailability.
Spare Parts Classification
Step 2: Choose appropriate stocking points for each category: After classifying parts, choose stocking points such that frequently demanded parts are held closer to the consumption point, while less regularly demanded items are held further upstream. To ensure that any part is available within 2 hours (especially for VOR situations), a system of parts sharing can be set up between dealerships in a locality, with each dealer in the cluster carrying a limited but independent set of erratic parts that others can source in the cluster.
In this system, the fact that most inventory will be held back at higher nodes will help reduce inventory at downstream nodes. For instance, the central warehouse can use the power of aggregation to serve many different destinations in the supply chain more efficiently while keeping the lowest possible overall stock in the system. This also enables an increased range of spares to be stocked for the same working capital at each location.
Step 3: Shift from ‘push’ based to ‘pull’ based inventory movement: To ensure and sustain the availability of products throughout the supply chain at the lowest possible inventory, abandon the current “push” system, where inventory is pushed downstream regardless of actual demand and implement a “pull” system, where inventory is replenished only when and as soon as depletion occurs at each node. So, vendors/plants should supply products based on actual consumption from the central warehouse rather than on scheduled forecasts.
For this, a daily communication system (software-based) between the OEM’s warehouse and vendors/plants can indicate current inventory levels against a norm. This will signal proximity to stock out (using a simple colour code) and urgency of replenishment. Such a system will also enable hassle-free daily ordering and reduces supplier/plant capacity loss due to constant order changes. A similar system of consumption based inventory movement should be implemented between the central warehouse, regional warehouses, dealerships/distributors and even retailers. A fast courier service can be engaged for the rapid movement of slow parts from the regional/central warehouse to the point of sales or service.
A new model for spares inventory stocking and movement
The proposed model of managing spares will improve the availability of spare parts in the entire supply chain without increasing inventory, leading to higher sales and better return on investment for OEMs, service dealerships and distributors. Higher ROI can enable distributors to service retailers in their territories with regular beat plans, leading to higher overall sales.
Further, once ordering material based on consumption moves into an auto mode in the supply chain, this will reduce firefighting and stress in the system, allowing the management team to focus on initiatives to increase market share.
A final word
According to ACMA, the Indian aftermarket for “on-road” vehicles is estimated to be worth INR 330 billion, with 25 per cent of the value coming from servicing (i.e., labour charges) and the remaining value coming from components, which is estimated to be around Rs 24,800 crore. However, most original equipment manufacturers (OEMs) need to address this market more effectively, with coverage figures as low as 15-20 per cent. OEMs can tap into this vast untapped opportunity in the aftermarket by expanding their service and distribution network to reach all corners of the country while ensuring good availability of spares at low inventory. This can boost revenues not only through spare sales but also that of the vehicles.