Editor’s Note: “Market Analysis” is the monthly examination of the developing trends that will influence the automotive aftermarket in the near and long term by Paul McCarthy, AASA vice president of industry analysis, planning and member services. This column is the second in a three-part series addressing “Aftermarket Outlook 2020 Follow-up – Leveling the Playing Field.” A PDF of the full report can be accessed here.

The automotive aftermarket has seen the traditional sources of manufacturer power erode: brand power, an installed capacity base, product and leverage over fragmented channels. In turn, the playing field has tilted toward sources of channel power, including purchasing scale, private label brands and consumer value drivers like availability, convenience and variety.

While this rise in channel power is not unique to the aftermarket, it has hit aftermarket suppliers hard. In Aftermarket Outlook 2020, Booz & Co. also argued that, compared to other sectors, aftermarket suppliers have not fully addressed this sea change.

So, the question becomes, how do aftermarket suppliers adapt to a changed value chain?

There are lessons that the aftermarket can learn from other industries that have already adjusted to the reality of power shifting downstream.

Initial discussions with aftermarket executives and analysis from AASA have focused on several success models to increase value and halt the deterioration of manufacturer leverage in the value chain.

Three of the most compelling of these models, drawn from successes in other industries, are highlighted here:

1. Customer-centric model: This might be called the “Proctor & Gamble (P&G)” model for shorthand. Essentially, suppliers create and capture more value by better solving channel partners’ problems.
2. The end customer insight model: Sometimes called the Coke® model, this scenario involves knowing the end customer, or value creation through deep market insight.
3. Structural leverage: Probably a necessity in any scenario, the supply base needs to structurally adjust to better reflect the realities and needs of consolidated channels. This is something that has been pursued by many successful manufacturers, including GE in many sectors and Pratt & Whitney in aero engines. It also is arguably what the most successful global original equipment (OE) suppliers have done to counter the last two decades of increasing automaker leverage.

P&G Model: Customer-Centricity

P&G represents a good model of what successful manufacturers can do when the channel is strong. Their model is based on their customers and involves:

• Building capabilities that are valuable to the channels
• Working in partnership with the channel to make improvements
• Focusing on delivering tangible value improvement to customers
•  Providing unique offerings for different channels. Aftermarket customers need to differentiate in the market to capture margin, just as suppliers do – so suppliers help them. This differentiation could come through either products or services
• Diversifying customer bases to grow with the market
• Taking more responsibility for the end-customer, which dovetails nicely with the “Coke” model in the next example

P&G, for example, offers different marketing campaigns, displays and often packaging, sizes, products and brands for Walmart, Target and other major retailers.

They have distinct teams for Walmart and Target. Not just sales people, but marketers, researchers, product development people and sometimes even scientists – embedded at each customer to understand and respond to their distinct needs. The result is that Walmart says that P&G helps them win in the marketplace by understanding their differentiated selling proposition and giving them unique solutions. At the same time, Target says that P&G helps them win in the marketplace by understanding their differentiated selling proposition and giving them unique solutions. That’s consumer-centricity: responding to the needs and importance of consolidated customers.

Overall, a P&G model involves creating more value for customers. It is about being more than just a supplier and offering a truly differentiated value proposition from low-cost country suppliers. P&G faced as much threat from low-cost suppliers in consumer products as aftermarket suppliers have. It is about making “full service suppliers” more than just a slogan for the supply base – it is about making it a value proposition that customers recognize and will pay for.

The good news is that – based on interviews with key channel partners conducted during the AASA Aftermarket Outlook 2020 study – the channels have plenty of “pain points” for manufacturers to address. In other words, there are a lot of opportunities to take the P&G approach to solving customer problems (and defending supplier margins).

Some of the key “pain points” cited by channel partners included:

• Growing SKU complexity (more & more complex parts)
• Weak response to new part needs and a desire for shorter lead times
• Poor fill rates to end-customers. A distributor executive reminded 2011 AASA VisCon attendees that customers need and want a 100 percent fill rate. The 95-96 percent fill-rates that suppliers congratulate themselves on are “garbage” from an end customer’s perspective, according to the speaker. They need the part they need now.
• Difficulty managing multiple brands
• Concern about low-quality, LCC parts
• Limited understanding of different customers’ needs

These are just the issues customers recognize now. A key part of the P&G lesson is staying ahead of the curve, anticipating customer needs as well as solving existing customer problems. That’s not easy, but it’s part of making them an invaluable partner to their channels.

Next Month: A Winning Aftermarket Manufacturer Model

Next month, the third part of the “Market Analysis” series following up “Aftermarket Outlook 2020,” Paul McCarthy, AASA vice president of industry analysis, planning and member services, will address “A Winning Aftermarket Manufacturer Model.” The next column will examine the end customer insight model and the structural leverage model, using case studies from Coke and GE. The final installment in the series will identify action items to create new value for both suppliers and channel partners, and take the concept of a full-service supplier to the next level.

The full article, “Market Analysis: Aftermarket Outlook 2020 Follow-up – Leveling the Playing Field,” is available for free download as a PDF at the AASA member-only site (login required) by clicking here.

For more information, contact Paul McCarthy.