Unprecedented longevity and the rapid model year changeovers of today’s cars are challenging the traditional aftermarket business of the large automakers. In response, as Anthony Smith reports, a recently published white paper by Ricardo Strategic Consulting outlines how new strategies can be developed to protect customer satisfaction, brand loyalty and profits.
There can be no doubt that the vehicles of today are lasting much longer than they used to. In 2014, for example, new vehicle registrations in the US outpaced scrappage by a staggering 42 percent. As a result of this ongoing trend, the average age of all operational light vehicles on the country’s highways now stands at 11.5 years. And it is not just the used car customers who are availing themselves of the benefits of this longevity – over the past ten years the average length of time new car buyers own their vehicles has steadily increased too, now standing at over 6.5 years. Furthermore, the rapidly evolving automotive/transportation landscape – and tighter government regulations – have meant that model year changeovers have been more frequent in recent years than ever before.
At first sight this might appear to offer something of a potential bonanza for the large motor manufacturers. Typically, while they account for a much smaller proportion of automakers’ total revenues, aftermarket sales yield significantly healthier margins than is the case for new vehicle sales. However, this is at least partly attributable to the manufacturers’ traditional production-to-aftermarket strategy of running a final spare parts production run within the manufacturing facility before scrapping the tooling.
With the age of vehicles increasing, it is becoming more and more challenging to predict the required inventory holding for an end-of-production run that will suffice for the remainder of a model’s in-service life. Moreover, while vehicles remain in operational use for much longer, there is no let-up in the demand for new models with increasing technology content, not least to satisfy market and regulatory demands for improved fuel economy and reduced emissions.
In a white paper entitled Production to Aftermarket: Transition Services, published by Ricardo Strategic Consulting, the research team highlights the market forces that challenge automakers’ ability to service customers in the aftermarket. The paper outlines how the aftermarket supply/demand dynamic has been altered from historical norms, and how automakers are now finding that traditional production-to-aftermarket transition strategies may be putting them in a precarious position with regard to aftermarket requirements.
In addition to consumer behaviour shifting towards longer length of vehicle ownership, the growing demand for new vehicles and the new powertrain technologies required to meet increasingly stringent emission standards are resulting in shorter product lifecycles: this in turn puts pressure on automakers’ existing manufacturing capacity to accommodate newer models at an accelerated pace. These factors, coupled with an increasing presence in the powertrain remanufacturing market, have created a scenario where automakers are working to analyse and predict lifetime requirements for service parts in an increasingly complex and challenging environment.
Forecasting errors
Errors in forecasting lifetime demand can often result in significant re-launch investments to remedy critical part shortages. Automakers are forced to redesign, re-source, re-tool and re-validate components for low-volume service parts supply. This leaves both automaker profit and consumer satisfaction at risk. But as Derek Schlonsky, vice president at Ricardo Strategic Consulting, points out, the importance of adequately fulfilling aftermarket demands cannot be understated: “One of the worst experiences negatively impacting on customer satisfaction and brand loyalty is having to wait for powertrain parts while a vehicle is not operational. This makes excellence in aftermarket sales and service an integral part of the automaker’s value proposition – and an attractive growth opportunity.”
The report outlines the new operational and technical challenges that are experienced in transition manufacturing for critical aftermarket parts, including identifying inventory and supply limitations; re-designing components for economical low volume manufacturing; and re-sourcing activities that may include identification of new vendors, manufacturing processes and materials. These operational, engineering and purchasing competencies may be in short supply within the automaker’s organization, and are often focused on new products from a supply chain that produces higher volumes than required for aftermarket needs.
The paper exhibits Ricardo Strategic Consulting’s best-practice approach to production-to-aftermarket transition services. In order to scope the size of the issue, information on all aspects of the problem is analysed, including component inventory, failure rate, existing supply chain and expected service-based ‘demand humps’. Resources should be provided where necessary to redesign or validate replacement components to ensure that legacy designs are the best option for low-volume production, says the white paper.
Cross-functional teams should be used where appropriate, taking in purchasing, engineering, design, quality, and finance to lead the process of designing, sourcing and manufacturing replacement parts. Complex problem solving is likely to be required to manage this process. Securing stocks of replacement components as and when needed is crucial, and mapping of the value stream of servicing assemblies, including both internal and external sources of supply, will be necessary to determine when inventory of each component is likely to become depleted. Finally, in addition to using traditional component suppliers, potential new vendors should be identified who may have facilities and competence within the production volumes required.
Case study
A recent case study is included within the paper. This illustrates how a special support team used a unique combination of skills to successfully put into place best practices for production-to-service transition for transmissions at an automaker, thereby avoiding the looming aftermarket risk. Operations experts audit the inventory situation and identify a solution, and work with technical engineering experts to develop components, taking new designs, materials and manufacturing processes into consideration. Then, low-volume purchasing experts source the necessary materials or suppliers, while operations engineers support the launch of the transition-to-aftermarket production.
“This unique cross-functional team approach to aftermarket transition manufacturing allows us to improve the ability to tailor both design and manufacturing requirements to aftermarket volumes, identify cost-reduction opportunities, and prevent part shortage risks much earlier in the process,” explains Schlonsky. “The goal is to accelerate the resolution of potential inventory problems and safeguard the automaker’s profitability and the happiness of a loyal consumer, maintaining the appropriate inventory for timely repairs when they are needed.”
To obtain a copy of the white paper Production to Aftermarket: Transition Services visit www.ricardo.com/TransitionServices.
This article is an edited version of a feature 'Champions of our air' published in RQ magazine, Q1, 2016 - click on the magazine cover below to go to the magazine version: