THE “Crossroads for Distribution” presentation featured a distinguished panel of: John Bzeta, president/CEO of Fleet Brake Parts; Duane Kyrish, president of Longhorn International; and Lee Stockseth, president/COO of FleetPride.
They answered questions from two moderators: Tim Kraus, president/COO of the Heavy Duty Manufacturers Association; and Molly MacKay Zacker, vice-president of operations for MacKay & Company.
Q: It hasn't been such a rosy picture that we've painted today. But at your particular dealer or distributor level, can you provide us with something you see as an encouraging sign as well as something that concerns you?
Kyrish: The real concern we have is the consolidation that's taking place in the marketplace of the trucking companies. What I'm seeing is that this consolidation is leading to a more limited opportunity for us. We do have the opportunity to sell the parts but we don't have the opportunity to influence the sale of the truck, and the consequence of that because we do rely heavily on the captive piece of it. All we have is Navistar. That captive piece goes away if Coca-Cola buys Freightliner. That's the challenge. One of positives that's happening is that the vertical integration of manufacturers should lead to greater parts margin opportunities for us down the road with engines. Cummins engine parts can be bought by anybody at a low margin. It's a great product but there's so much competition for it that it's a limited profit opportunity.
Stockseth: The concerning piece is the regulatory environment and the gridlock. We went to market early lastyear with a nice balance sheet, and it was very difficult to understand where the finance market was going to be at that time. That's difficult for all businesses, big or small. And it's difficult forus to planhealthcare costs, etc. The encouraging thing going forward is that some of consolidation going on at the OE and dealer level is positive. Those folks are focused on more value products and value services. I think that's healthy for the whole industry.
Bzeta: I find it encouraging that the support and focus of the supplier and manufacturing community is focusing on the aftermarket more. Concerning to me is that they let go of control of the value proposition or the sale. They don't take ownership of it anymore. It encourages other people to come into marketplace — the counterfeiters and will-fit people. It makes it more difficult to support your brand. To me, that's very concerning.
Q: Are you seeing greater field support from factories?
Stockseth: No, that's the concerning part, because we're seeing less. The progressive ones are, but in general, what I see is they're relying on their channel partners to do so. To be quite frank, we're happy to do that. For a fleet specialist, I would argue that's what we're good at. You can decide which channel would be better at selling your channel proposition.
Q: Regarding the lifespan of parts and their complexity. Back in 1982, parts typically lasted 20,000 or 30,000 miles. Now they last 300,000. Everything seems to have gone up. How has that impacted your business in terms of a sales reduction that occurs because you don't have a frequent replacement cycle?
Bzeta: When I first got into the business, the SKU count was very low. Today, the complexity is very good for the industry and very good for this group. The harder and more complex they make components and put more technology embedded in it, it's less likely that every joker in the world can sell it at 7-Eleven or wherever. In our business, we like complexity. We like new products. So things last longer. All that means is that we're not selling low-margin products anymore. It's forcing us to look into new opportunities.
Stockseth: I don't disagree that longevity has slowed the pace of revenue. What we've had to do is expand SKU count in stores. I see our warehouses going faster on a square-foot basis. So we've had to either try to get more of that customer or add additional SKUs to offset that. I do agree with John. The healthier this industry — and that starts with truck builds all the way through the health of distributors and fleets — the better for all of us. The more we can invest in technology to reduce the cost per mile at the fleet level, the more we get paid for training those people. I think that's just healthier for all of us.
Q: Talk about availability of some of the new technologies out there. Have you had any difficulty, have any access to that type of equipment, having to do with braking systems or those types of things?
Bzeta: Some of those complex solutions require us to get them out of a jam when they can't get into a dealership or translate or make sense of these new technologies. I think some of manufacturing community focuses on keeping it to the dealer. They get their window and then it's released to the aftermarket. That's all fine and good but the problem is, you're frustrating some of the end-use customers. As these trucks become more complex, the driving community is getting less complex. They need someone like a broker situation to do so. We can always find access because we have to. We all run service facilities and you can't just say, “Oh, I can't get that.” We have to get it somehow, but if there's a trend, we need better access.
Kyrish: I remember in 1982. In those days, we would have an overhaul kit, the little satchel, for Eaton transmission. We stocked a bunch of them. We don't have any of those things anymore. You overhaul a lot of engines. It was 250,000 to 275,000 miles. Today, those engines are typically 800,000, and many will go over a million miles if you maintain them. So it's changed. The thing manufacturers are doing — most of it to comply to government regulations — is they are being forced to change products on a regular basis. The engine we delivered in 2007 is not the same as in 2010, and it's not the same engine today as in 2012. Every iteration has different objectives, different pieces, different software. The complexity has accelerated. The challenge for us at the dealer level is, how do you keep these people trained? We're spending more. Our budget for training today is more in one year than it used to be for five. We can't keep up. Technicians are very tough to hire — particularly in south Texas, where you compete with the oil field. They'll hire your people away and pay more than you can pay. That doubles the problem. I'm not sure that's a bad thing, long term. We're going to raise our labor rates and we'll get a fair return for it and hire a guy, and that guy will make a good living. I don't know that complexity is going away. I think it's going to accelerate.
Q: Talk about inventory levels within dealers and distributors. These have changed a great deal over the last five years.
Bzeta: The greatest change is, at least from my perspective, that we're looking at inventory more now as an investment as opposed to a cost. When I first got into the business, I was taught, “Turn, turn, turn, turn. Build the business on the back of suppliers.” But now I see successful distribution channels that are perhaps not in our marketplace — like the industrial marketplace — and they see it more as an investment, and that's how I'm trying to build my business. Even within its own category, I'm looking at bringing in greater levels because I believe there's a greater need for that in the marketplace. I consider all OEMs and dealerships as huge potential customers. It's getting so complex over there and they're spending all day trying to translate their own actions, and they need our help too. We need the inventory and we need the backing.
Stockseth: I don't think there's any doubt there's been a reduction in inventory levels. We've done a good job technology-wise in managing inventories. There are just better tools inside distribution channels. Certainly there is more visibility into the chain. Our turns improved by half a turn in the last few years. At the end of the day, all surveys that everyone's always done say the same thing: You win with inventory. So that will be our approach starting in 2013.
Kyrish: As a function of the captive engine, our inventories have risen. We have required inventory buys to support the engines, and those are all high-dollar purchases, so that raised our inventory. At the same time, we have a lot of locations, and instead of each location trying to supply itself independently, we are trying to do bulk buys. We have a warehouse now in Austin. We're trying to do some bulk buys and spread it out. And less focus on turns. This is an investment in growth. We can't service our customer if we don't have it when he comes in. He's not going to wait. We've got to be more responsive than the next guy.
Q: How do brands play into your overall value proposition? Are you a house of brands or a house brand as a company?
Stockseth: Let's talk about FleetPride as a brand. The way we think about it is, there's a good, healthy relationship between the dealer channel. FleetPride actually owned a couple of dealers in its history, so we have some experience there. I think people who are thinking about the right truck, how to finance it, how to lease it, how to keep it under warranty, I think that is healthy thing. If we look at our business, we really fit more like an industrial distributor. Our model is there to support a variety of equipment. A lot of people forget that these trucks pull trailers. As we look through our companies, there is a lot of product we support that is outside of what we would think of just on a truck or trailer. We have a very large power business. We build drivelines for all things. The way I think about our business is people coming to us because we're providing that solution for more than just a truck — everything in the fleet to keep it running. We think that our brand or our fit in the market is more of industrial business. As far as branded product, 75% of our sales are national brand product. Of the other 25%, about 64% of that is supplied by national brands, so we prefer to sell national brands, quite frankly. It costs us money to develop our own private brands, so we'd much prefer to be a national brand house. If we could all roll back to 1982 and reset the stage, I think we'd all do things differently. FleetPride is a brand. The brands we stock are those we think our customer will pay us for having it in stock.