Episode 21 Dec 17, 2020

Pressing Questions for Parts Suppliers

Business Solutions Consultant Tim Mohnke returns for a follow-up episode on auto parts/aftermarket manufacturing. 

  • How has the electric car trend changed the game for auto parts suppliers? 
  • How can they navigate tariffs, which are expected to continue for the foreseeable future? 
  • How can suppliers avoid “winner’s remorse” when it comes to negotiating long-term contracts with customers? 

Listen in to get his take on these burning questions and more.

Download our infographic: Avoid These Aftermarket Margin Pitfalls

Tim Mohnke

Tim Mohnke

It's not just on a contract basis, but on a product basis, there are certain products in there that they could probably absorb that volume leakage a lot better than others, just based on the margins of those. It's an area that could have a significant impact on the profitability of an organization. And you don't want to be the company that has winner’s remorse because you've structured your contract incorrectly just to win the business.
- Tim Mohnke

Episode Transcript

Lindsay Duran: Welcome to B2B Reimagined. My name is Lindsay Duran, and I will be your host for [00:01:00] this episode. Joining me today is Tim Mohnke. Tim. Thanks for being here.

Tim Mohnke: Thanks for having me, Lindsay.

Lindsay Duran: So, this is your second appearance on the podcast. And some of our listeners may have missed episode nine where you and I spoke in detail about the spare parts industry.

But why don't you go ahead and introduce yourself for those listeners that may not remember.

Tim Mohnke: Yeah. I have a background, both working at an automotive manufacturer and their service parts operations. I have a background working in aftermarket parts consulting and in pricing now. So, I guess it accumulated going on 20 years in the space of all three of those put together.

Lindsay Duran: Excellent. So today we're going to talk more specifically about auto parts manufacturing and that part of the automotive supply chain. We saw some exciting news come out in the past few days about Tesla [00:02:00] being included in the S&P 500 later this month. Tim, can you talk a little bit about how the shift and focus to more electric and certainly hybrid vehicles is likely to impact the industry, as well as the supply chain itself?

Tim Mohnke: Yeah. It's a very interesting trend and Tesla as an organization really highlights the challenges that have already been overcome. Because the reason why hybrids and electric vehicles aren’t new, obviously. The organizations - the companies that been trying to build them for a long period of time - they're having to put a lot of incentives on the hood in order to get the product out the door. But that's primarily because they really lacked power. If you're used to having a six-cylinder / eight cylinder pickup truck, or you're going to be towing something with, you need to have a certain amount of horsepower and Tesla has overcome that.

And so now you're seeing that a lot more in the industry with that kind of results, then. [00:03:00] It goes back into the supply chain. It goes back into companies that are going to be manufacturing different components. And that's changing the landscape. Delphi is come out with new technology. Other organizations have come up with new technology.

And all of that now is changing the supply chain of the OEMs and therefore also the aftermarket.

Lindsay Duran: Indeed. And I would imagine that there are some new players in the supply chain - supplying to parts manufacturers into the car manufacturers themselves. And I wonder how their commercial processes and decisions and how they structure agreements might - from the legacy suppliers - the same suppliers who've been in the industry since Henry Ford - are thinking about pricing and commercial terms and how they structure their Salesforce. Do you have any insights [00:04:00] into how that landscape overall might be shifting?

Tim Mohnke: Yeah, I think, we may have touched upon this slightly.

I'm not sure how much we got into this on the last podcast. It overlaps as well with the trend that pricing, as a profession, as an industry is, is a newer thing. Maybe not so much newer in saying that, it’s 20 years now, and the pricing is actually going to start to take hold, but new view of an old problem. You've always had companies consolidating, leaders shift within that…no different within the auto manufacturing industry. You'll have to continue consolidation. You'll have new companies coming about. But what you're really talking about there is that, when you're talking about pricing their products, is two things:

One, they have a lot of complexity that they have to deal with. And two, pricing is now a lever that they are focusing a lot more on than what they had done in the past. So those are the pricing being the new part of the old components of [00:05:00] complexity that you've always had to deal with these changing industry landscapes.

Lindsay Duran: And there are quite a few other, I'll say, macro factors that are impacting how these companies price and think about pricing overall. And some things that come to mind specifically are the impact of tariffs, as well as restrictions and regulations imposed by the USMCA, which was signed into law almost a year ago.

Can you expand on how those laws and regulations are making companies in this space think differently about pricing or the challenges that they might have in adjusting their supply chains or commercial practices to accommodate those and comply?

Tim Mohnke: Yeah. Yeah. It goes back to the same pricing problems that organizations have is: Am I able to pass along some of those new costs [00:06:00] onto my customer base?

And what would that be in a list price setting, or whether that be in a negotiated price setting, the decision really comes down to willingness to pay it from the customer, from your downstream. And how you get to that is by properly segmenting. But understanding who can absorb that and who cannot absorb that.

You've got a cost side of the equation there of having to factor in these new costs coming from the tariffs. But then you also have the pass-through side of the equation. And how will that impact my price? And, like I said, in the list price setting, or in negotiated price setting, how is that going to impact being able to get those, redo those contracts and whatever my demand is on the marketplace? Age old problems.

Lindsay Duran: Absolutely. And some of the complexity that comes along with tariffs is that the cost implications aren't necessarily spread evenly across a product, especially as you're looking at a manufacturer. If you take [00:07:00] steel, for example, steel might make up 50%, 60% of a particular item.

And that may vary across all of the products that you're producing and trying to sort through how much of a cost increase that actually is, how much to pass along to each customer for each unique product that you're making, can be really difficult to get a handle on. Especially if companies are using Excel or other more manual means of doing those calculations. Tim, in your experience, how are companies managing that cost pass-through and managing price setting, broadly speaking for in the auto parts manufacturing side of things. Not necessarily on the vehicle manufacturing side?

Tim Mohnke: Yeah. They’ve got a unique situation to where, when you're talking about manufacturing parts, you're doing it to think about the [00:08:00] end consumer at the end of that. They're trying to maintain a vehicle. And so, the cost of this part now is going up. But I've got to bear in mind that, as my vehicle population gets older, I can't have the cost of a part be so high to where it ends up overshadowing the value of the vehicle - keeping the vehicle fixed.

They have to keep in mind: Are they artificially incentivizing, scrapping that vehicle at some point, where if they were to continue to pass along the entire cost? So, they have a lot more restrictions in this and having to factor in whether or not they can continuously pass along the tariffs into the parts manufacturing.

It's a lot more nuanced for them.

Lindsay Duran: Indeed. And there's another set of challenges that come when those tariffs are removed. As an example, you have to undo all of the work that you did to pass those costs through. And how much should you actually lower price as a function of that?

Tim Mohnke: For sure. [00:09:00]

Lindsay Duran: Tim, a lot of the auto part manufacturers have longer-term agreements or contracts with their OEM or distributor customers. Can you talk a little bit about how those contracts are typically structured and where there might be pitfalls in either setting the initial prices for those contracts or maintaining those over time?

Tim Mohnke: Yeah. First of all, they're trying to win the business. And so, they're trying to achieve a price point there that they're going to actually win the contract. And they typically have to put in some assumptions in with that with regards to - and this will come from the customer about what kind of volumes that they expect to be produced and so forth - they have to enter into a three-year long contract. Depending on what it is that they are negotiating, they might be able to have the power to negotiate cost pass-through on that or a certain percentage of the cost pass-through. Or other times they end up having [00:10:00] to secure that contract where it's the exact opposite. They are expected to have cost efficiencies throughout the life cycle of that contract throughout the three-year contract.

So, it all boils down to the assumptions that they put in there and how well they track. And I, frankly, I don't think the industry does a very good job right now of tracking towards those assumptions of the contract. And so, when it comes time to contract renewal, something like volume compliance is not closely looked at to see whether or not customer A versus customer B that I've quoted a price to. Who is better estimating their volumes? And who's better at that committing those volumes? So that's an area where I think a lot of improvement could be had; where they actually can, maybe, rank order the estimation capabilities of the other customers and factor that into the contract renewals.

Lindsay Duran: I’d imagine that's a pretty significant source of margin [00:11:00] leakage, especially if a sales rep or account manager isn't paying attention to or can't tell that the customer is not on track to actually meet those volume commitments, let's say, midway through, or 60% of the way through the contract.

Tim Mohnke: Yeah, for sure. And when you think about it's not just on a contract basis, but on a product basis, there are certain products in there that they could probably absorb that volume leakage a lot better than others, just based on the margins of those. And like you said, it's an area that could have a significant impact on a profitability of an organization. And you don't want to be the company that has winners remorse because you've structured your contract to anchor incorrectly just to win the business.

Lindsay Duran: Absolutely. One other key trend that we see really across all of B2B, but, certainly for our auto parts customers on the [00:12:00] manufacturing and distribution side is an acceleration into digital commerce. And that, in many ways, that was already a moving train. But certainly, with the pandemic, we're seeing an acceleration of that trend.

And it strikes me that for companies that are used to doing a lot of relationship-based sales and handshake sales, that can be a challenging new normal for them to get used to. What trends are you seeing on the eCommerce front and what can companies in this space learn from other industries that may be a bit ahead of them in terms of their digital capabilities?

Tim Mohnke: Yeah. We've seen it. We've seen where organizations have become a little bit more savvy about arming their salespeople through that negotiation process to use some of the sales tools like Zilliant. Right? Being able to actually arm [00:13:00] them with a start, a target, on a floor price, on a line by line, and an overall contract basis.

So, getting into some more sophisticated started scoring rather than just some of the old school ways of purely looking at a revenue goal or a profitability goal. So, you already see a trend moving towards where it’s more science based. And I think, the kind of the next generation of that, is going to be where utilizing some digital platforms, to negotiated selling to happen on a more automated basis.

And again, it's using the data science behind it. You can free up your own sales organization, let the customer try and pinpoint - let them offer a price and you did an automated negotiation. Gives them a rebuttal price - sends back maybe for a different product line, even. So, it ends up getting into to where you can utilize the combination of a digital platform [00:14:00] and the pricing science. And be able to do automated negotiation from Salesforce. I think that will end up enabling the organizations that will give that a try. You're really circumventing the process of trying to get old school salespeople to adopt a new process.

Lindsay Duran: Absolutely. That's really interesting. And we've seen that automated negotiation capability be extremely useful in high volume quote environments, especially when a manufacturer is selling through distribution and they're trying to win the deal. I can certainly see that playing out where a distributor might be trying to win a deal with a national fleet, for example, and needs more favorable pricing from the manufacturer in order to be competitive enough to win that high volume national fleet business. And the ability to not [00:15:00] only instantaneously get a price without necessarily having to talk to a sales rep or wait for someone to manually put a quote together, but to also negotiate in that process. Just the speed in which that distributor can get a response and go out and try to win that national account business is game changing, in many ways.

Lindsay Duran: Tim, what are some practical tips that you can give to any auto parts manufacturing companies that are listening right now on ways that they should think about tackling pricing or other commercial challenges to improve profitability?

Tim Mohnke: I think with the way the complexity continues to increase and the way the industry is shifting and the way the pricing profession is moving, it's amazing that you still have organizations that attempt to do pricing based [00:16:00] in Microsoft office products. They're trying to do it on spreadsheets.

And I think it's just their lack of understanding of how that actually would affect them. Even though you have Microsoft Excel and all that can handle, I think what, is it up to a million rows? But that's still not enough. In the big data world that we're living in, you need to have more powerful tools where you can utilize all that transactional history that you've got. And you can use more sophisticated pricing science to be able to come to an optimized price point. I think this is on companies like ours to educate the markets on the power of that. Because you still have a lot of organizations out there trying the target margin approach. And the target margin has only been determined because historically we thought that's where that product category falls in. But that's a self-fulfilling prophecy.

So, they ended up creating their own reality. So, if I had to boil it down to one thing, it would be [00:17:00] getting the right tools into the hands of your pricing team. Because that's going to be things that will free them up to actually do a little bit more of the newer pricing techniques. And move them into the area that they should be moving into.

Lindsay Duran: Absolutely. And definitely make the company agile to respond to all of the quickly changing dynamics in the industry, whether that be electric cars or government regulation or lack thereof. Tim, thanks so much for joining us for this episode. We appreciate it. And we hope to have you back on the podcast again soon.

Tim Mohnke: Thank you. It's my pleasure, Lindsay.

Lindsay Duran: And thank you to all of our listeners. To learn more about how we can help companies in this space, you can visit us at zilliant.com.

Are you ready to learn how Zilliant can help you overcome your pricing challenges?

Reach out to us today to learn how we can help!