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Increasing Importance of Aftermarket

Parts
Authors: G Maheswaran & C. Rakesh Gopal, Miebach Consulting India
Pvt. Ltd.
November 2012


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Increasing Importance of
Aftermarket Parts
Authors: G Maheswaran & C. Rakesh Gopal, Miebach Consulting India Pvt. Ltd.
The Indian automobile industry has grown from license raj to a completely free market. Till the
eighties, the Indian automobile market was purely supply-driven and dominated by very few players.
With very few models to choose from, the buying decision was influenced more by vehicle availability
(shorter waiting time) rather than the cost of maintenance and parts availability. The industry was
opened up for global players in the eighties and nineties. As a result, the Indian automobile market
has been flooded with over fifty Original Equipment Manufacturers (OEMs) offering product portfolios
ranging from two wheelers, passenger cars, utility vehicles, commercial vehicles and farm
equipments. Such a competitive environment has resulted in changes in the market dynamics. Like in
developed markets, even the Indian auto customers have started evaluating products based on
serviceability and maintenance cost in addition to product attributes and buying price. Customers
expect the OEMs to offer extensive service network, instant availability, and affordability of
aftermarket parts.
This change in market dynamics has in turn transformed the outlook of OEMs towards aftermarket
parts business. Even the Indian OEMs have started to focus on aftermarket parts and service network
in addition to the product features. Moreover, aftermarket parts business is considered as a cash cow
due to the very high margins ranging from 30% to 50% depending on the part. OEM’s aftermarket
parts business is primarily a trading activity with very low value addition like kitting and repackaging.
Since there is no manufacturing and new product designing, the core function of the aftermarket
business is SCM, with sales and marketing being support functions. This is evident from the fact that
the organizational KPI (Key Performance Index) is First Fill Rate (FFR) which is nothing but the %of
order lines available in full at stocking points at any given time. In matured automobile markets, the
FFR is monitored closely by top the top management including the board of directors of the company.
Global benchmark of FFR is over 90% with a part complexity of over 100,000 part lines where as the
same in Indian auto companies averages around 70%
with much lower number of parts. Sensing the
importance of FFR, few auto majors like M&M have
created separate business units for aftermarkets with
direct representation at the board of directors.
According to Miebach’s research in 2010, the Indian
Aftermarket industry is estimated to be around USD
10 billion or Rs. 47,000 crores. The auto component
manufacturer and aftermarket business of OEMs
account for 45% and 35% respectively where as the
spurious or the fake suppliers account for the
remaining 20%.


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Parts Complexities
The products or the SKUs (stock keeping units) in aftermarkets business are nothing but the various
components of the automobile. Every new model results in 2,500 – 3,000 parts getting added to the
existing master list of aftermarket parts, while the addition of every variant adds another 500 – 1,500
parts. In the past four decades, the number of players in the Indian automobile industry has grown
from a mere six to more than fifty, out of which around forty emerged only in the past two decades.
This phenomenal growth has been primarily fuelled by the liberalization of the Indian economy and
has resulted in more than 300 car models (with double the number of variants) in the Indian market
compared to less than 25 models in the 1980s.
Frequent launch of new models also indicates the
reducing product life cycle in the automobile industry
which has negative implication on the aftermarkets
SCM. The implication of shorter lifecycle of automobiles
on the aftermarkets business is faster transition of parts
from runners to repeaters, from repeaters to strangers
and obsolete getting faster than before. The revenue
from aftermarket parts of any new model will be very low
in the first two years of launch and from the third year
the revenue will increase and will stabilize in the fourth
year if the automobile model sustains in the market.
Unlike other businesses where a product is discontinued
if the product is not yielding good revenue, the
unfortunate part of aftermarket parts business is that the
part needs to be supplied even if the respective model
has failed in the market.
Let us take a simple example of a new auto OEM in the market, introducing one new car model and
two variants of the existing model every year. Starting anew in 2010 with just 3,000 parts, in six years
time the aftermarket business of this OEM shall have at least ten times, that is 30,000 parts to serve
the market in 2015. This explains the relevance of having a robust product life cycle management for
the aftermarket business in order to track the movement of parts from the runner stage to the repeater
stage to the stranger stage and finally the obsolete stage.

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Also, the OEM needs to define specific service level based on the age of the product (model) so that
aftermarket business can plan procurement, stocking, and servicing strategies of the various parts
handled by the aftermarket unit. In order to avoid such parts complexities growing exponentially, the
OEMs in developed countries try and standardize as many components as possible between models.
This is possible more with functional parts (gears, clutch, etc.) and less with styling parts (body parts).
Naturally, this standardization is possible more in commercial vehicles and farm equipments as
compared to two wheelers and cars.
Demand Forecasting and Sourcing complexities
Aftermarket business deals with SKUs in the order of tens of thousands. Naturally, not all the parts
can be forecasted. In fact, only 5% of the total parts in the master list can be forecasted with an
accuracy of 75% on a monthly basis. It is the responsibility of the demand planner to identify the parts
to be forecasted. That leaves the rest 95% (or the 28,500 parts in the example given) to be procured
based on replenishment.
The suppliers of the aftermarket business are usually the same as that of OEMs. An OEM has at least
100 suppliers and few of them even more than 1,000. For a supplier, the volume of business from
OEM is always much higher and more stable than the same from aftermarket business of the OEM.
Moreover, the aftermarkets business needs large variety of parts where as the OEMs need only few
parts but large in number. Suppliers find it difficult to supply large number of parts in smaller lot sizes
as well as supply parts on sporadic demands. Exceptions to this norm are the parts which are
regularly changed in the automobile on usage such as filters or clutch plates. But in these cases, the
component manufacturer also supplies to the market through own distribution channel. In aftermarket
parts business, the OEMs compete with own suppliers in the market. Naturally, the primary focus of
the supplier will be on the OE supplies followed by own aftermarket channels to the service market
and finally the aftermarket business units of OEMs.
The Indian OEMs have realized this difficulty of supplies to their aftermarkets business and hence
some firms have included the schedule adherence of the supplier to aftermarkets business in the
balanced score card with more weightage for the same as compared to the past. OEMs are now
realising the importance and complexities of spares business and have initiated measures like part
rationalisation (common parts across models) to handle the part proliferation. Additionally,
development of specialised vendors for manufacturing slow movers in smaller lot size (“small lot
factories”), building “slow movers’ warehouse” etc are other initiatives adopted to manage low-end
repeaters, strangers and obsolete parts.


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Inventory and Distribution Network

The service levels defined at the end
customer level (time between order time
and deliver to customer) and the costs
involved in maintaining stocks at multiple
locations defines the distribution centre
strategy – in terms of a single distribution
point for the entire country or multiple
distribution points in proximity to the
customers. From the period of one
warehouse per state which was driven by
CST, aftermarket businesses have moved
to single warehouse concept to avoid
building up of stocks. But with growing
volume, number of parts and increasing
service level expectations from the end
customers, OEMs are evaluating having multiple distribution centers. Matured automobile markets (in
developed countries) with comparable size to India have already moved to concept of having multiple
DCs for better service and also mitigating the risk of dependency on one location for service. The
number of stocking points is also driven by concentration of suppliers, dealers/stockiest network
across the country as well as the service level promised to the end customers.
Unlike other industries where the
SKUs are generally classified only in
three categories (runners, repeaters
and strangers) for inventory
planning, aftermarket parts due to
the sheer parts complexity needs
further classification. Miebach has
been successfully using four
dimensional classifications for its
clients: business contribution
(measured by sales), frequency of
orders (measured by number of
orderliness in a year),
expensiveness of the SKU
(measured by price) and regularity
of demand (all through the year or
seasonal or very sporadic).



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Service requirements are
higher for parts which give
more business, more often as
well as regular in demand. If
the part is very expensive, the
inventory to be maintained has
to be low and vice versa if the
The decision of whether the
inventory is to be housed at
the central distribution point (in
case of single distribution
point strategy) or at the
individual nodes (in case of
multiple distribution point
strategy) needs to be
calculated based on the service levels targeted. The inventory gets duplicated in a multiple
distribution point strategy, say, for example, the runners and repeaters shall be maintained at all the
distribution nodes, while the strangers should be maintained only at one distribution node. Indian
firms operate with an average of 55-60 days (in case of 2-wheelers, it is < 30 days due to factors such
as economies of scale & greater control over suppliers) of aftermarket parts inventory majority of
which is contributed by slow and non-moving parts.
This decision on inventory and distribution centers is based on the trade-off between the response to
customer order and the inventory the business can carry. The initial investments in the multiple
distribution point strategy are higher vis-à-vis the single distribution point strategy. But this additional
investment is expected to give good returns with increase in genuine (OEM’s) parts penetration due
to increased service level.

Future of Aftermarket Parts Business in India
The standard of manufacturing and the quality of automobiles in India has improved drastically over
last two decades. And this increase in parts quality in automobiles will naturally reduce the
consumption of aftermarket parts per vehicle on road. Though there seem to be a threat of reduction
in the market size for aftermarket business due to better quality automobiles, this is far from the truth.
Considering the fact that the penetration level of automobiles in India is still at a low level – e.g., the
penetration level of cars in India is only 0.75%, the base of automobiles will increase in years to
come. Moreover, the aftermarket business of the OEMs in India account for only 35% of the total
market whereas the rest 65% is still with component suppliers and spurious suppliers. With more
sophisticated technology in automobiles, the end customers are expected to service their vehicles
only in OEM’s authorized service centers or well established service network.
Large business houses which have sensed the huge potential hidden in this segment are investing
capital to capture a significant pie of the after sales service and parts. Some of the potential
competitors include A C Deleo (GM subsidiary), Reliance (RCare), Bosch India Service, My TVS /
TVS Express, Castrol Car Zone, Carnation, Mahindra First Choice, shops promoted by insurance

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companies etc. These players have the resources to set up sophisticated, state-of-the-art servicing
centres, equipped with latest machineries and trained manpower. These organized multi-brand
service networks will compete with OEM’s existing service network comprising of the automobile
dealers and authorised service centers. Due to the central procurement of these multi-brand service
networks, they would gain economies of scale and command higher bargaining power than existing
dealers. Moreover, these service networks can procure directly from the auto component supplier at
lower price than from OEMs’ aftermarket parts business. This will result in some price correction by
the OEM’s aftermarket business in order to keep the cost of parts and service in own dealer network
competitive to the large multi-brand service centers.
Another increasing trend in Indian aftermarket industry is the increase of stockiest or the trade
channel. Given the vast geography of our country, the penetration of dealers and authorised service
centers is still poor and hence the automobile manufacturers are depending more on the trading
channel for reaching retailers and mechanics in remote corners of the country. This is more relevant
in two wheelers, commercial vehicles, non premium car segment and farm equipments.
Indian automobile industry is definitely undergoing drastic changes in technology, products, new
players and distribution channels. With increasing competition in the industry, OEMs are realizing the
importance of aftermarket parts business not only from the point of service to the automobile business
but also as a source of cash profit which comes handy during downturns. This has resulted in total
revamping of the supply chain strategy of aftermarket parts by many OEMs. The days are not very far
when the service levels of aftermarket businesses in India are comparable to that of global standards.
Authors:
G Maheswaran, Market Segment Leader- Aftermarket Parts Industry


C Rakesh Gopal, Senior Consultant - Strategy

Miebach Consulting India Pvt. Ltd
No. 5, 80 Feet Road
4th Block, Koramangala
Bangalore – 560034
India
Tel.: +91 80 40445200
Fax: +91 80 25533677
E-Mail: bangalore@miebach.com
www.miebach.com