Episode 9 Jul 09, 2020

Pricing Complexities in the Spare Parts Market

Auto and heavy-duty truck parts distributors operate in a “pizza delivery model,” in which the goal is to be the first call on a garage’s list and to be able to deliver in 30 minutes or less. These distributors service many independent garages and must maintain inventory, get parts there fast and continuously build strong relationships to keep getting that first call. Above all, their parts must be priced rationally and consistently. On the manufacturing side, parts supercession creates immense complexity, as companies try to manage the lifecycle and price points of millions of SKUs. Zilliant Business Solutions Consultant Tim Mohnke joins the podcast to talk through these examples and more while offering reimagined pricing solutions. A veteran in both the spare parts and pricing consulting industries, Tim provides a unique perspective that is increasingly valuable in our current recessionary period, which is creating an increased demand for spare parts. Find the link to “Considerations for Automotive & Truck Parts Distributors in a Digital World” mentioned in this episode here.

Tim Mohnke

Tim Mohnke

As companies consolidate and look for pricing tools, another challenge. It's not just going to be, 'How do I price manage my spare parts?' Instead it's, 'This is all one animal. There’s a part here that sometimes goes to production line and sometimes goes to a warehouse, and I need to be able to price in both sides.'
- Tim Mohnke

Episode Transcript

Lindsay Duran: Welcome to B2B Reimagined. Hi, my name is Lindsay Duran. I'm the Chief Marketing Officer at Zilliant and I'll be your host for this episode. Joining me today is [00:01:00] Tim Mohnke, and we're going to be talking about commercial challenges in the spare parts industry. Tim, thanks so much for joining me today. Why don't you start out by telling us a little bit about yourself?

Tim Mohnke: Thanks for having me, Lindsay. Spare parts has been a large part of my background, even my upbringing. My dad was the first generation of my family to move off from the farm and into the manufacturing world, working for Oldsmobile, that was, at the time, a division of General Motors. And he was the one that taught me how to do the brakes on my 1978 Camaro. My brother has been in the automotive industry ever since he graduated college. He helped me get into an internship in General Motors. Through a twist and turn, I landed in General Motors service parts operations, a little internal consulting team there that worked on several projects - everything from acquiring a warehouse to solving an [00:02:00] inventory management system to new product launches - a lot of different experiences on that team for the four years that I was there. I then went into consulting for automotive service parts. And that led me into the pricing world where I’m at today, in which I've spent a fair amount of time expanding upon that experience with various organizations.

Lindsay Duran: Excellent. Tim, given all your background and experience in the automotive world, I'm curious how you see these types of businesses faring given our current recessionary environment?

Tim Mohnke: With the pandemic that's going on right now and the global recession – and the economic downturn that it's caused - it's really no different than any other economic downturn that happens through a normal cyclical economy.

In automotive spare parts, the end-user ends up holding onto the vehicle a lot more. They're not out there purchasing. So, they end up repairing their vehicle more. Usually in [00:03:00] this kind of environment, the spare parts business takes an uptick. But there are some challenges, that is, as that market starts to grow, you start to see new competitors enter. You start to see knockoffs of the OEM. And these are some common challenges that we can talk about here from the pricing perspective. Overall, I think the answer there is that we're seeing an uptick in the spare parts industry and that'll start to recede as the economy starts to rebound.

Lindsay Duran: I'm sure that these companies are facing quite a bit of other competitive threats as well. A few months back, I was giving a presentation at HDAW in Dallas (Texas), and I happened to ask the question, as I started off the presentation, of how many folks in the room were concerned about Amazon encroaching on their business.

And I have to say, I was absolutely shocked that less than a quarter of the [00:04:00] hands went up in the room. Are you surprised to hear that?

Tim Mohnke: I'm very surprised to hear that. My niece is graduating this year. My fiancé’s sons are graduating this year. And these young people that have only been driving for a few years now - when they're out looking to fix a vehicle - the first place they shop at is Amazon.

I think that maybe the organizations haven't realized yet how much of a big gorilla Amazon has become. Even if they're not, I think they're dipping their toe in the water right now, but they're going to make an impact. There's going to be some price competition going on there.

Lindsay Duran: Absolutely. I think it may be the case that some of the aftermarket auto parts distributors are starting to feel that pressure and that competitive threat a bit more than the folks in the heavy-duty aftermarket parts side of the house. But I would imagine that it's really only a matter of time. [00:05:00]

Tim Mohnke: I was just going to expand on that. I think some of that mentality might be the fact that there's a big division. I think in supplies, agriculture, and construction equipment, and any of those, or heavy trucks as well. But I'll use automotive as the example because that's the one I think most people are familiar with.

There's a big distinction there between the OEM and the independent aftermarket. And let me explain that a little bit of this terminology for our listeners. The OEM: You think of your Ford, your Chrysler, your General Motors, your Nissan. They act like the distributor themselves on the spare parts side.

They have their supply chain that has manufactured those parts for the production line, but also made additional parts that they can then hold in their warehouse and push out to their dealers as necessary. The OEMs, Nissan doesn't consider Ford a competitor on the aftermarket side, [00:06:00] because they're not. Ford parts are not going to fit the Nissan vehicle. They consider what's called the independent aftermarket: your AutoZone's, your Advanced Auto Parts, your Napa, your O’Reilly's. Those are the competitors. And I think maybe the concept of not really addressing Amazon yet is because they're so focused on fighting that traditional competitor they've always had. None of them are really waking up yet to what the potential is out there for somebody to take their share.

And that's just a thought that I have on that.

Lindsay Duran: Absolutely. And I think that the likes of AutoZone and Napa and Advance Auto Parts are beginning to see Amazon is more of a threat that may have happened in the previous year, certainly on the consumer side, but also, I would imagine on the B2B side as well.

What other threats are you seeing facing these companies outside of the recession and then some of [00:07:00] the competitive threats from Amazon?

Tim Mohnke: Twenty years ago, the way pricing was done in all these organizations, is essentially that you'd have some kind of a matrix price book. And things were predominantly fixed.

And a lot of this came out of the OEM world where they had a customer segmentation of one. It was their dealer body. That's all they sold to as far as their parts, they sold to their dealer. As things started to evolve, you started to get a lot more focused on selling into fleets.

Then you can think of rental car companies as being one example. United States Postal Services is another example. On a regional basis, you might have an organization that needs some sort of delivery trucks or some light trucks.

This shifts into now having to negotiate prices a little bit more because these fleets would come out, and they'd say “Hey, I don't necessarily need OEM parts for my maintenance.” So, your maintenance items [00:08:00] being friction components: your brakes, your belts, your hoses, your liquids - those things that just keep a vehicle running.

Those weren't necessarily beholden to saying that they absolutely needed OEM quality. So, they would go and work with Auto Zone. They would work with the local warehouses distributor and try to get the best deal possible. And this would create a lot more special price agreements.

We're no longer talking price books. We're talking contractual agreements that this person, or this entity, can get to special pricing. And so that I think starts to create new challenges for a lot of these organizations to start to think differently. It's no longer about publishing a monthly book that would update my price because my costs changed. It's now about having to think about all these different entities that I'm coordinating with out there and trying to beat my competitor who is selling a lower quality product [00:09:00] at a lower price. I think that's definitely still a challenge that's continued to evolve.

And we're still seeing that today.

Lindsay Duran: It sounds like all of that disruption is probably really wreaked havoc on their pricing processes and, at the same time, introduced a lot more complexity. Can you talk a little bit more about the specific types of pricing and or data challenges that the OEM parts manufacturers have, and then perhaps what the OEM parts distributors might face as they're selling more into that end market?

Tim Mohnke: Let's take a distributor as a first example. A personal example here might help describe the situation to our audience:

Last year I had a vehicle that was a little older. The windshield wipers suddenly stopped working. So, I went to a local garage. I didn't want to take it to a dealership. In fact, a fair percentage of [00:10:00] the people that have our vehicles - some studies have shown - don't even trust taking it to the dealership. So, they go to a local garage. I pulled it in there and I said, “take a look at this.”

Obviously, they didn’t know what the problem was. They had to start tearing it apart. I had to sit there and wait. Now, why am I waiting? I'm waiting because they don't have the parts on their shelf. They took the part off and showed it to me and said, “This is a broken motor unit. Would you like us to replace it?”

I said “Of course I would. I don't want to keep this one.” Their next step is that they have to pick up the phone and call the nearby O’Reilly, the nearby Auto Zone, the nearby Advanced Auto Parts shop. And so, on the distributors side, one of their primary challenges is being the first call on that list.

This is a pizza delivery model. This is a ‘we needed to get you there and 30 minutes or less challenge.’ Right? Because that garage that I took it to - which was just a little gas [00:11:00] station with two bays in it - need to turn over those bays as much as possible so that they can keep their services going.

Whoever they call first better have that product on their shelf and better be able to get it to them quickly. This garage might call two of them and say: “Which ever one of you gets it here first is the one I'm going to take. Tough luck.” It depends on what kind of relationship they have and how much buying power they have.

That's the challenge that you have on the distribution side. These guys are servicing a lot of these little independent garages and they need to get that product there fast and they need to be able to maintain the inventory and have a good price point. It's a little bit more unique to the distribution side than on the manufacturing side.

They both share the super session pricing. The engineers at General Motors had parts ABC123, [00:12:00] and they made some changes to it, either for efficiency or because of some regulation or whatever.

And now it's part ABC124. We now have inventory on the initial part. We have to draw down that inventory as much as possible. How do you price these two that is cost of change? Do I keep the price of change the same and maybe eat some margin or do I change the price on it? Super session pricing is always a challenge as well as just responding to cost changes. The biggest thing with both of these, is the fact that you're dealing with hundreds of thousands, if not millions, of skews. That creates a mountain of complexity, especially when you're talking about multiple price points on each one of these things. Whether it's based on the customer type or the dealer type and all of that just creates an enormous amount of complexity.

Lindsay Duran: I think that's a great point, [00:13:00] especially on the super session front. It's hard enough to get the data right on that and have good cross-reference data. And then the need to go in and price that and understand what those potential good / better / best relationships are and where there's incremental value, especially as is parts continue to improve and the quality improves and the engineering improves and so on.

I would imagine that there's also a fair amount of complexity as it relates to core and remanufacturing pricing. Can you talk a little bit about how that typically works and how companies approach pricing?

Tim Mohnke: That's very unique to the manufacturer that has to deal with this because they're the ones that're actually remanufacturing this stuff.

I live in Michigan, and we have bottled deposits, where you pay 10 cents for each bottle or for each can. When you bring it back to the store, you get those 10 cents back. Then, somebody takes that and recycles it and does something with it. [00:14:00] That's what a core charge is on parts that have core charges. You pay for it up front. When you bring the old part back, you'll get the money back. And then that goes back to the manufacturer, and they remanufacture that part. It's cheaper for them to do that than it is to build that part new. But that brings some unique challenges into the pricing aspect.

How I price that core is now part of my costs to my remanufactured parts. I want to price it enough that I'm incentivizing that customer to bring it back. But the more I price it, the more it increases my costs. There are some unique elements in there that they have to think about in those relationships.

You mentioned another relationship that I forgot. You said the good / better / best. Some manufacturers have started to manufacturer some white labels, some off-label, some non-OEM, some lower quality parts that they could sell at a more [00:15:00] competitive price points to compete with the independent aftermarket. Because the distributors already have those good / better / best relationships just by working with multiple third-party manufacturers. If you think about it, General Motors or Nissan, when they developed a part, they had all this upfront cost: putting together the engineering specs and testing it and making sure that it's doing what it needs to do and to fit this vehicle, and certain quality and a certain fit. When enough of those vehicles are on the road, a third-party manufacturer can come along, reverse engineer it at a fraction of the price of development costs and start mass producing them. These things exist out there and our consumer can buy them at an Auto Zone.

These distributors exist out there because these manufacturers were able to tool up. There was enough demand out there. And so now the OEM [00:16:00] has to create a lower quality product line to compete against that. And that, then, establishes the pricing challenge of ‘we've got a good / better / best relationship, and I need to be able to maintain a price relationship between them. And so that’s a little bit more unique to the manufacturer, more so than the distributor, because the distributor is, no matter the quality of the part, is still selling it, regardless. Those price relationships are another challenge that ends up facing both sides.

Lindsay Duran: With the pandemic currently going on and just the pace of change that we're seeing in the industry, it certainly strikes me that the makeup of the sales organizations within both manufacturers and distributors, for that matter, may be changing, or at least the pace at which they're changing is accelerating.

You have a lot of people that may be not only aging out of the workforce, but we're now forced to do [00:17:00] things over the phone and via zoom chat, as opposed to face-to-face meetings where a rep may have stopped into a garage and chatted with his buddy, the parts manager and talked about what he needed to order.

What are you seeing in terms of how the sales landscape is shifting in the face of the pandemic, but even more broadly speaking, as we all become a bit more digital?

Tim Mohnke: There is definitely a shift into a little bit more of the mobile technology. Like I mentioned, as you look into fleet sales, you get into a lot more contractual type situations. Overall, talking about the different kinds of salesperson that's out there, there's your order takers: “I'm an account manager and I'm just there to ask you ‘Okay what do you want to buy from me today?’” versus the more competitive “I'm trying to get your business.”

You're currently buying from this other entity and [00:18:00] I want to take that business from them and bring it over my way. We're seeing a little shift into more of that competitive situation, because again, that heavy concentration onto on the fleet sales and national accounts.

Arming those individuals with more competitive intelligence with more of the artificial intelligence of customers like ‘this also purchased this’ is a lot more necessary now than it was in the past. And I think it will continue to become that way.

The spare parts industry just follows what's going on but the new vehicle industry now is starting to look at things like subscription models, rather than purchasing a vehicle - you can rent it for a day or for a period of time. This just gets into a different form of a rental car. And so, it's another [00:19:00] version of another large fleet that could exist out there. Trend-wise, we're going to continue to see the need for a lot of artificial intelligence, sales intelligence, and mobile capabilities for salespeople, because they're no longer just the order takers. They're now out there trying to capture business that didn't exist before.

Lindsay Duran: Speaking of order taking, it also strikes me that a lot of customers, certainly on the consumer side, but also on the B2B side as well, may prefer to actually place their orders via eCommerce channels, as opposed to going through a sales rep.

Can you talk about any acceleration that you've seen in terms of eCommerce investment among distributors and, frankly, manufacturers?

Tim Mohnke: Everybody's looked at that capability of being able to order and place an order and go through that entire process online and create your own websites for that.

I think some players [00:20:00] are a little bit farther ahead of that than others. I think the distributors, and this goes into the whole Amazon challenge, like the independent aftermarket, those distributors, and the Auto Zones and the Napa, and the O’Reilly’s. I think they're farther ahead on that than the OEMs, because the OEMs are still predominately focused on just serving their dealers. And, they've always had their online portals for their dealers to order from them, but they've always left it to the dealer to then sell to that end customer. I think there's still a large gap there.

Some dealerships have tried to make that simpler, where you can order parts from their website. But when you think about the resources that a local dealership might have versus an AutoZone, they just can't compete on scale. I think the independent aftermarket definitely has a leg up on that side of things.

Lindsay Duran: I can see how that's the case. ECommerce itself seems to [00:21:00] present a whole different set of pricing challenges than what companies might typically face primarily because you are effectively removing the price buffer of the salesperson and presenting prices directly to two customers that corporate likely came up with.

How do you see companies approaching that challenge? It seems for cases where you might be selling 100,000 skews to 10,000 customers or more, would seem a bit insurmountable.

Tim Mohnke: They are also challenged with having to reconcile the prices they put online with what you're going to get in the store.

One large aftermarket distributor that's national has sectioned off their United States into 250 different competitive markets. They price differently in each one of those [00:22:00] markets. Okay? “I'm carrying almost a million parts and I've got to now price them, potentially, 250 different ways for a consumer.” And that's different than for a garage, which would be more of a B2B type sale or to an installer. Some of the ways that they've been able to handle that online is just by entering in your zip code in order for you to get a price. And if you enter in a different zip code, you get a different price. Obviously, they can do that because ties into whatever mailing address you're going to put in and so forth.

I think there are ways, electronically, that you can get the technology to help support that differentiated pricing. Some of them are really on top of and are able to do that.

Lindsay Duran: Talk to me a little bit, Tim, about how you envision companies taking their pricing to the next level, or as I like to say, re-imagining their approach to pricing.

Tim Mohnke: There's this idea out [00:23:00] there, especially in aftermarket parts, that price elasticity doesn't exist. And let me expand upon this a little bit, because I think this is an important thing to think about. For a large portion of parts out there, they're very price inelastic.

Like when I took my car into to get the windshield wiper fixed, I needed a fix. And so whatever price the guy was telling me, unless it was something completely off the wall, I think the part was $200. Honestly, if I shopped around, I could probably I could have gotten it for $100 or something if I did a lot of legwork and was trying to find it and then bring it to them.

For the most part, we're beholden to getting our vehicles repaired and getting out on the road. And that's the same thing if you're a trucking company and you've got those trucks that are there to make you money. A construction company? Same thing.

For large portion of parts, they are very inelastic [00:24:00] in price. Now you can't get ridiculous with that, because if they told me that it was going to be a $1,000, I would have reached my arm around and wipe the rain off my windshield myself without the wiper. But the thing is that, because it's so inelastic, a lot of people out there think that price elasticity doesn't work in service parts. And that's just not true. I can sit there, and I can price a part at zero, and a lot of people are going to buy it. I can price it part at a million dollars and nobody's going to buy it. Price elasticity definitely does exist. It's just a much more inelastic market.

What I think has happened in that space is that, for a long time, people didn't believe in price optimization. They didn't think it was possible in service parts. And that is now starting to come around. People are starting to realize that artificial [00:25:00] intelligence, the pricing science, does actually still work in this space.

Before, the challenges were all about price management. It was about, like I said, you had about 100,000 skews and you got a price on many different price points and that's just a tangled web in and of itself. Now I think that the industry is starting to come around towards that pricing technology can actually help optimize prices. And, that we can use that to help differentiate prices in ways that we didn't think we could before.

I think that's starting to shape up the industry and the people will grasp on to that a little bit sooner than the ones that don't who are going to see a competitive advantage with that.

Lindsay Duran: Indeed. It sounds like that it's most definitely the direction that most companies are headed.

Any other trends that you see as coming in the next [00:26:00] 5- 10 years that you'd like to highlight for the audience?

Tim Mohnke: Yeah. We talked a little bit about negotiating pricing and how technology can support that. Another thing that I've seen happen a little bit more is on the supply chain side of things.

If you think about, again, General Motors, they purchase parts from Adelphi, from BOSH, from these tier-one suppliers or, more appropriately, they'll purchase systems from them, and compile produce agreements together. Behind the BOSH and Adelphi, you have tier-two suppliers and two or three suppliers.

Each of these organizations not only manufacture for that production line, they manufacture for the spare parts industry. In the past, a lot of these organizations have been - we're on their pricing teams and this still might exist in some of the larger ones, like the Delphi and the Bosch - they have a separate [00:27:00] team that will price that part for the production line, because it's an entirely different pricing problem that they have. They're predicting how much production is going to happen. They're predicting costs or they haven't even tooled up their plants yet.

They have to be able to price this to put it on a contract to General Motors. They've had a different pricing team, in that than the spare parts side, who had the benefits of that production team going through that process. And then now they manufactured a bunch of parts and here's 100,000 extra parts that we can go throw in a warehouse. And then your aftermarket pricing team must figure out what the price should be.

You've seen a little bit more now where those two teams are on in the same. The same individual who is pricing the spare parts is the same individual pricing into the production line. And that's an entirely different animal from a pricing perspective, but it's still the same part. This is an area that's [00:28:00] Zilliant‘s specifically has capabilities and can help out on that, which, nobody else has been able to do on that production side for the tier-one supplier or the tier-two supplier or the tier-three supplier. It's a sister industry to the spare parts, but it's a problem that one person on that company faces and as one team, one pricing team faces. I think as companies start to downsize and start to consolidate teams, that'll be another shift that we see from a pricing challenge perspective of that team. As they're looking for pricing tools, it's not just going to be: “How do I price manage my spare parts?” It's “This is all one animal. There’s a part here that sometimes goes to production line and sometimes goes to a warehouse, and I need to be able to price in both sides.”

Lindsay Duran: That makes sense. Tim, I'd like to thank you for joining us today for the podcast, and I hope you'll come back and share more of your expertise in the future. [00:29:00]

Tim Mohnke: It was my pleasure. Thank you for having me.

Lindsay Duran: For all of our listeners out there, take a look at the link in the show notes to an asset that provides more insights called “Considerations for auto and truck parts in a digital world.” We hope you find it interesting. And certainly, if you're interested in connecting with Tim or me, please reach out to us through zilliant.com.

Thank you. I hope you'll join us on the next episode of B2B Reimagined.

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