Unlocking the Potential of the Automotive OEM Service Parts Market

Abstract

Aftermarket service parts sales are the most

profitable sales area for automotive and truck

OEMs. As a result, the market for service parts is

highly competitive among OEMs, as well as

wholesale and retail distributors of all sizes. In this

environment, customer service is key and having

the 'right product at the right place at the right

time' trumps price every time—driving superior

profit margins to OEMs and distributors alike. For

the OEM, the aftermarket is as great a challenge as

it is an opportunity. In this paper, we look at the

traditional hurdles OEMs have faced in this area,

and suggest a new approach to unlocking the

potential of the service parts market.

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In 2001, GM's $9 billion

in profits from

aftermarket service

parts sales exceeded the

profits associated with

$150 billion of new

vehicle sales.¹ Likewise,

OEM truck

manufacturers

consistently report that

while aftermarket

service parts sales only

amount to 35% of their

total sales, they

represent 65% of their

profits.

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Conventional Service Parts Initiatives by

Automotive OEMs Meet with Resistance

Financial analysts and automotive industry journals are well

aware of opportunities for OEMs to increase earnings per share

based on increases in aftermarket parts sales. By leveraging

technology and sheer market might, OEMs have continuously

sought new opportunities to increase aftermarket service parts

sales and market share. However, challenges exist. For

example, unlike in some other regions around the world, car

dealerships in the US operate as independent franchises,

responsible for their own profits and losses. This limits the

OEM's leverage over dealerships, to encourage them to

participate in initiatives aimed at increasing the OEM's service

parts revenues. Equally important, OEMs are not the only

potential source for service parts. Large auto parts wholesalers,

retail chains and thousands of 'mom and pop' parts stores are

also keen to supply dealerships with service parts.

Recognizing this competition, OEMs have attempted several

measures to bolster dealership service parts sales. GM, for

example, has attempted to incentivize dealers to increase their

inventory of GM parts. However, these programs have been

received coolly by dealers who complain that the cost

associated with the increased inventory levels, required to

hedge against uncertainty in demand, often exceeds the value

of the GM incentives.² Moreover, here too

OEMs face competition from non-OEM players who offer own

incentive pricing programs and customized delivery programs

and services.

As a result, OEMs are continually seeking programs that clearly

demonstrate value and performance to dealers. As with most

relationships, mutual benefit and trust are the key levers of

success. While it may sound simple for an OEM to simply offer

to buy back what the dealer does not sell, the increased

administrative costs, logistics costs, and opportunities for

revenue leakage ultimately eliminate any perceived or realized

gains. Without significant change in this environment, OEMs

may continue to face major obstacles to unlocking the financial

opportunities that exist within the automotive aftermarket.

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Digital Technologies Create New

Opportunities

One reason for the lackluster results of automakers' attempts

to increase sales of spare parts is the excessively high

inventory levels and costs required to hedge against the high

uncertainty of demand. However, recent advances in digital

technologies can provide new capabilities to sense and

anticipate demand far more accurately, creating new

opportunities to improve service parts inventory management

and supply chain efficiency.

The convergence of the 'Digital Five Forces' (mobility and

pervasive computing, Big Data and analytics, cloud computing,

artificial intelligence and robotics, and social media) with the

'connected car' trend is transforming the supply chain by

enabling more robust data and analytics for improved planning,

forecasting, inventory modeling, and logistics execution.

Consequently, automotive OEMs can now utilize more scientific

and lean supply chain models, similar to how they have already

optimized the supply chain for vehicle assembly operations.

Capabilities in four major categories will result in a dramatically

more efficient service parts supply chain—a supply chain tuned

to marketplace demand:

Big Data Market Insights—Enable near real-time

detection of demand

ConnectedVehicle

Daily Demand Sensing

SocialMedia

Mileage

Usage

Onboard Diagnostics

Distribution Center Data

Other External Data

Suggestions

Likes

Complaints

Dealer Data

Collect Discover Share

Field Discovery Platform

With Salesn Customer Needsn New Offer Insights

With Planningn Update Forecastn Demand Tuning

With Engineeringn Ideasn Issuesn Change Requests

n Big Data Analytics

n Structured and n Unstructured Data

n Discovery of Trends and Insights

Integrated Business Planning— Align the entire

enterprise to demand

Optimized Order Management— Leverage a Distributed

Order Orchestration Hub to dramatically improve order

management efficiencies

Agile Fulfillment and Logistics— Align warehouse and

transportation operations to demand

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IntegratedBusiness Plan

Demand Supply

üüü

ConsistentOptimizedAligned to Demand

CreateCollaborative Forecast

Optimize the Forecast

Determine Optimal Inventory Levels

Ensure Operational and Financial Alignment

• Develop cross-functional enterprise forecast

• Consider unique service parts requirements

• Optimize purchasing and production plans

• Consider impact of operational and financial constraints

Capture

Orchestrate

Fulfill

DMS(Multiple) E-Commerce Technician

Direct OrderEDI Partner

Portal

ERP or LegacyFulfillment

DC #1Inventory

DC #2Inventory

Dealer #1Inventory

Dealer #2Inventory

Web Services

Web Services

GOP Distributed Order Orchestration

Heterogeneous Order Capture

Systems

Centralized….• Fulfillment Rules• Allocation Rules• Order Visibility

Heterogeneous Fulfillment

Systems

Manage Availability

DecomposeOrder

OrchestrateFulfillment

TransformTransactions

Manage Visibility

Manage Exceptions

• Synchronize transportation planning arrival/departure information with warehouse management wave planning and dock scheduling

• Reduce latency through mobile supply chain applications

Inbound OutboundWarehouse Operations

• RMAs• Purchases• Transfers

• RTVs• Orders• Transfers

Receive Inspect Cross-Dock/Put-Away

Ship Pack DirectedPick

RF Support

GlobalVisibility

Transportation Operations/3PL

Transportation Operations/3PL

TailorableRules &

WorkflowProcess

Label

Reple-nish

Move

CountTransfer

WIP Issues

Cost

Assem-ble

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A New OEM-Dealership Collaboration

Paradigm

Based on the large profit margins associated with the

automotive aftermarket, OEMs are increasingly looking to grow

service parts sales as a means to improving overall financial

performance. Next-generation IT application software now

exists to align and optimize the automotive service parts

supply chain to actual market demand, with dramatic

improvements to supply chain efficiency and responsiveness

without increases in inventory.

Utilizing these new technologies, OEMs can confidently offer

dealers delivery windows and guarantees. By reducing delivery

times and increasing delivery frequencies, dealers can lower

inventory levels, thereby reducing inventory carrying costs and

obsolescence risks. For OEMs, the increased availability of

genuine OEM parts will reduce loss of sales to competitors

when OEM parts are out of stock or unavailable. With increased

responsiveness without additional costs, OEMs can

competitively increase their market share and profit

opportunity.

Conclusion

To unlock the treasure chest associated with aftermarket parts,

automotive manufacturers should embark on a small pilot

software implementation program. This project should focus on

a controlled geographic segment containing a community of

willing dealerships. Further, these dealerships should reside

within a defined distance from a service parts distribution

center. The pilot should leverage cloud computing' and

Software-as-a-Service (SaaS) applications and services to

minimize pilot cost and risk. Today, SaaS supply chain

applications and managed services can eliminate most of the

IT, development, and cost constraints of the past. Automotive

OEMs can choose from many software and services solutions

and options.

References[1] Harvard Business Review, Winning in the Aftermarket, May 2016, accessed on August 5,

2016,https://hbr.org/2006/05/winning-in-the-aftermarket

[2] Crain's Detroit Business, GM wants more parts at stores, but dealers object to carrying costly

inventory, April 2013, accessed August 2016,

http://www.crainsdetroit.com/article/20130422/NEWS/130429990/gm-wants-more-parts-at-

stores-but-dealers-object-to-carrying-costly

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and other applicable laws, and could result in criminal or civil penalties. Copyright © 2016 Tata Consultancy Services Limited

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About The Author

Richard J. Sherman

Senior Fellow, Supply Chain

Center of Excellence, Tata

Consultancy Services (TCS)

Rich Sherman is an

internationally recognized

author and thought leader on

trends and issues across supply

chain management.

Michael Ger

Senior Director, Automotive at

Oracle Global Industry

Solutions Group

Mike Ger has 26 years of

experience working in industry

and Information Technology

strategy roles. He has deep

cross-industry knowledge in

product development, supply

chain and customer

relationship management

business processes.

Contact

Visit for more information TCS’ Enterprise Solutions unit page

Email: global.marketing@tcs.com

Blog: Enterprise Insights

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