Market inefficiencies — such as uncertainty about customer demand and pricing that does not consistently reflect full value — play critical roles in automotive aftermarket inventory management problems, according to the Richard DeVos Graduate School of Management at Northwood University. The school is conducting an industrywide study of this issue, and the final report will be available in January 2003.
The study was begun by the Motor & Equipment Manufacturers Association (MEMA), with support from the Automotive Warehouse Distributors Association (AWDA), Automotive Aftermarket Industry Association (AAIA) and Specialty Equipment Market Association (SEMA).
According to Dr Tim Nash, dean of the Richard DeVos school, drivers of market inefficiencies include the uncertainty of customer demand. Most survey respondents focus on movement of products rather than consumption, he said.
Another driver is that pricing is typically driven by competition or gross margin, while overall value to the customer is not captured, he said. “A good example is that the immediate availability of slow-moving parts, which adds value for the customer, is often not figured into the pricing model,” Nash said. “Additionally, most pricing strategies do not take into account costs such as returns or inventory carrying costs.”
Northwood's Dr Bill Busby, the lead researcher in the study, said many excuses for operational inefficiency exist, such as parts proliferation and liberal return policies.
Preliminary results also indicate that the desire for volume has led to a broader rather than narrower customer base focus. While different needs across the segments are recognized, difficulties have arisen in satisfying conflicting needs, and these challenges are often ignored.
“The focus on sales volume rather than economic profit is also a major driver,” Busby said. “Economic profit is typically not measured at the product level, which results in a lack of managing inventory for economic return.”
Northwood did identify preliminary opportunities for improvement. According to Busby, the industry can begin remedying in several ways:
- More sophisticated forecasting models
- More sophisticated pricing models
- More sophisticated information and control systems
- Increased sharing of data across channel
- Greater focus on differentiation.