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Business Management Supply Chain – Product Kits, an ERP Solution to the Automotive Grey Market
An increasing threat to the automotive industry over the past decade has been the growth in the use of non-genuine parts, known as the grey market. The grey market is the third party market in non-genuine parts, clones of the original manufactured components. Distributors deal with the grey market problem and its growth by trying to find ways of providing incentives to use genuine parts. Many have started to use kits which link together key components to provide a complete solution. These kits offer considerable financial, logistical and quality incentives, as well as improved warranties, to dealers and their customers and so remove the need to look to the grey market for replacement parts. This market is growing rapidly, especially within Asia, and includes counterfeit parts, as well as parts that are not intended to be counterfeit but are simply cheaper replacement parts. ERP software solutions, particularly the supply chain software, inventory correctly managed and configured must be capable of
For the customer, the use of non-genuine parts carries considerable financial risk. Grey market parts are almost universally inferior in quality to genuine parts and although cheaper initially, have to be replaced at more frequent intervals. They usually offer very limited warranty and, as these are individual components, each must carry its own warranty whereas a kit of genuine parts provides a more comprehensive warranty from the manufacturer. Another consideration is that the use of non-genuine parts potentially places all warranty at risk. Many distributors issue warranties under the condition that only genuine or approved parts are used.
In addition, the use of non-genuine parts can potentially affect the life span, or quality of a genuine part, particularly in the case where a non-genuine part is a component of multiple parts. If that non-genuine part endures greater and more rapid wear and tear, the rest of the components will suffer similarly. It requires more service, so in the short term, the cost is lower but in the long term, it actually may be a lot higher. A good example of that are components that endure a lot of wear and tear such as brake pads. Brake pads are a common item and non-genuine pads are known to wear at a greater rate, and therefore need to be replaced much more frequently.
The negative effects of the grey market on the manufacturer and distributor are many and varied. For example, a grey market brake pad may last one quarter as long as a genuine pad, and if the owner is unaware that the replacement is not a genuine part, blame may well be attributed to the manufacturer. For the distributor, the grey market cuts into market share. A major point of contention is when qualified service points use non-genuine parts. A vehicle owner may naturally expect that a qualified service point will provide genuine parts replacement. In fact, many distributors believe that their competition is not so much fellow distributors, but the market in grey spares.
Re-conditioned parts are another problem. It may not be well known amongst vehicle owners, but parts are sometimes removed from damaged or written-off vehicles. Instead of using new genuine parts, re-conditioned parts can be used. The longevity of that part is, therefore, not known, however a vehicle owner will expect that a genuine service will provide genuine parts. Although this is not yet prevalent in Australia due to the cost of importing grey parts, it can be the case in Asia as parts fail earlier than expected, leading to customer dissatisfaction and low regard for customer service. And as the cost of these items decreases and the quality improves, the distributor will find it even more difficult to compete. Kitting therefore becomes an integral and critical competitive strategy to counter the grey market.
There are two types of kits: Build Kits and Bill of Material (BOM) Kits. A Build Kit is one in which individual parts are pre-assembled before they are ordered and made available as a packaged unit. This type of kit is traditionally developed around a selection of dependent parts that are constantly used. An example in the automotive industry would be a 20,000km service kit, consisting of the relevant parts which are packaged ready for the service centre to use. It eliminates the requirement to determine and then search for individual components to complete the service. A single part number represents multiple parts.
A Build Kit provides an easy ordering process and eliminates the potential errors which are sometimes introduced when ordering individual parts. Furthermore, service centres may not have all of the required parts to perform a service or to replace faulty components. A Build Kit solves this problem.
A BOM Kit is used in situations where a single part number represents many smaller components. In simple terms, this kit expands into all the individual components and is picked and packaged at the time of order. For example, rather than ordering components individually, a single part number would enable all component parts to be ordered at once, eliminating errors and ensuring an easier, more comprehensive, higher quality ordering process.
Benefits of Kitting and Incentives
To solve the problem of non-genuine parts in the heavy vehicle industry many distributors have service kits for every level of service up to 100,000km. It is simple to find the kit for the model, for the service and order accordingly. Rather than have multiple line items in a purchase order, a single line item is sent to the warehouse that is then packaged and sent. A kit gives the dealer confidence that all components required for a particular job are present. In addition to Service Kits, the truck industry has developed the concept of Smash Kits – front-end, rear-end and specific panels Smash Kits. For example, a front-end kit would normally require two headlights, a grille, radiator, hoses and associated parts. This could be an excellent opportunity for BOM Kits. A dealer can simply type the kit required for the particular model, and then pick which components are required
The trucking companies are often the litmus test. Trends are identified, and because the trucking industry is very competitive, opportunities to provide a customer service or cost advantage are extremely important. However, the automotive passenger vehicle industry is now starting to follow the truck industry in using kits.
Some incentives are being offered, for example, a kit provides a financial incentive as opposed to purchasing individual parts. These incentives vary but, for example, a particular service kit may cost $1,000 if each component is purchased individually, but $750 if purchased in kit form. Additionally, if a single component price is reduced in the marketplace, the overall kit price may still be able to balance the overall cost of the kit, thereby maintaining good profit margins.
There is also a positive effect on quality, and on supply and service times. The service dealer can be assured that all the correct parts are available for the service and that he will not have to search for or re-order forgotten components. Instead of keying the 20 or so components for a particular service, a single key is used that incorporates all of the required components. The kit is then handed to the mechanic who has all that is required to provide that service. Quality is maintained because the parts are genuine and carry appropriate warranties. These benefits provide the dealer’s customer with a guaranteed level of service, ongoing support, and an increased level of satisfaction. Ultimately this may well lead to repeat and referral business for the dealer. The true incentive for the distributor is in limiting the need to go beyond the available stock and access the grey market.
Forecasting and logistics
Kitting also assists in many aspects of the supply chain, particularly inventory management systems and warehouse management. Once a kit has been assembled and the trend for that type of kit has been analysed correctly, it becomes much easier to determine inventory turnover during a defined period. Business management supply chain software can have an automatic replenishment process once a kit level has fallen below a predetermined stock arrangement.
Kits do, however, require some initial adjustment to forecasting practice. For example, if 50 kits are built, quite often it is incorrectly recorded that 50 items have been moved. However, often there is only a requirement to record demand, particularly the demand on individual components that make up a kit. In the early stages of building kits, demand for each component is critical until the appropriate forecast can be determined. Once the correct balance of the number of kits required has been established the stock arrangements can be easily dealt with. One of the dangers of kits, of course, is that there is no point in building 100 kits if only ten are being turned over monthly. With correct forecasting, it is easier to build kits a month in advance, instead of perhaps 12 months and having considerable stock sitting on shelves with a perception of low turnover.
There is no doubt that kits also provide a better level of business intelligence. Many distributors have noticed some dealers increasing their purchasing based on kits and so they can also then forecast more accurately. Without kits, the ability to maintain stock levels can be difficult as there may not be true visibility as to the use of the individual components. Trends are easier to analyse for each dealer, based on a prediction of when the next service will be due. For example, it becomes possible to predict that vehicles that have just had a 20,000km service will probably require a 30,000km service and the appropriate number of kits at a defined future time. Stock levels can then be maintained and more accurate forecasting is possible. For the distributor benefit is gained through forecasting kits, as well as the individual components that make up those kits.
Many distributors use outside logistics companies, and kits provide a much simpler process for logistics because of the way they account for handling and inventory. A common accounting process is to pay per line item. As a kit will represent a single line item, but include considerably more components, the cost of logistics can be reduced. For example, if a kit consists of three line items, payment will be made on a single line as opposed to three lines, resulting in considerable logistics savings.
With the growth and availability of third party spares components, suppliers and distributors are looking to creative ways to maintain market share as well as ensure that the quality of spare parts in the automotive market place is not diluted. Spares kits are a practical solution to this threat. Dealers can easily order kits relative to the work to be performed and be assured that all components are in place at a price that is attractive and significantly reduced from individual parts ordering. Suppliers can be assured that genuine parts are being used, so too customers whose satisfaction is guaranteed. Kits enable business intelligence to be increased with a more predictable and consistent spare parts forecasting process and inventory requirements can be minimised and based on real knowledge of customer behaviour. Kits together with your ERP software solution can enable the supply chain itself to be streamlined to meet dealer delivery expectations.
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