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.
Logistics & Supply Chain
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 companies 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.
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 CCIs
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
Reach of Indian OEMs in the Automotive Aftermarket Landscape
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
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 parc. 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
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.
ment 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
Source: Tata Strategic Primary Research and Analysis
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.
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 debottleneck 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 improve-
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.
Case Study 1 - A large Indian OEM wanted to capture a larger
pie of the spares aftermarket by making its branded spares
available outside authorized dealerships and service stations.
The OEM appointed distributors in each state and decided on an
optimum warehousing and distribution network. This distributor
segment has been driving growth of the spare parts division and
currently contributes nearly 40% of total spare parts sales. The
OEM also streamlined its order management processes and
incentive structure for channel partners that helped improve fill
rates and also save ~10% of overhead costs.
Case Study 2 A leading construction equipment company was
struggling to meet its spare parts demand effectively, with high
spares replenishment time and low spares availability at dealer
locations. The OEM embarked on a supply chain transformation
initiative that aimed to improve customer satisfaction, control
inventory and increase spares sales. Improvements were undertaken in the areas of supply network, stocking strategy, supply
chain processes and roles and responsibilities. The OEM was able
to increase spares sales by 30%, spares parts availability grew
from 58% to 90% and replenishment lead times reduced from 70
days to 15 days.
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.
_____________________________________________________________________________________________________________________________
Tata Strategic Management Group, 2013. No part of it may be
circulated or reproduced for distribution without prior written approval
from Tata Strategic Management Group.
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Logistics & Supply Chain Management
The Logistics and Supply Chain Management practice in Tata Strategic provides insights to organizations on the health of their supply
chains, identifies improvement potential and designs solutions that take care of both process and people requirements. We have
worked with domestic and international clients across industries and have supported them implement the solutions to ensure that our
recommendations do not remain only on paper but also translate into tangible, measurable benefits for the organizations
Authors
Siddharth Paradkar is Principal, Supply Chain and Logistics practice. He completed his post-graduation in Business Administration from Symbiosis, Pune and has over 10 years of experience in the Logistics space and related industries, working with different MNC organizations.
Anirban Majumdar is Project Leader, Supply Chain and Logistics practice. With a PGDM from IIM Kozhikode and 9+ years of
experience in supply chain consulting across multiple industries, he specializes in operations strategy and performance improvement.
Monalisa Majumdar is an Associate Consultant. She has a post graduate diploma in Business Administration from IIM Calcutta
and has close to 4 years of consulting experience.
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