Vertical integration putting strain on independent component dealers

News Lucas Deal May 9, 2013

When you’re in the business of selling products, it’s never good to hear something you sell is being discontinued, or no longer will be available.

How do you make up that revenue? What do you tell your customers?

Those aren’t easy questions to answer, especially when there’s nothing you can do to alter the decision.

Unfortunately, this experience is all too common in the aftermarket, and is the result of vertical integration. Defined as the merging of departments and/or phases of a supply chain under a common owner, North American truck OEMs have employed vertical integration for many years.

The system doesn’t make things easy for the independent aftermarket.

Due to vertical integration, parts distributors have sold for decades are no longer available through regular aftermarket channels. Single components are integrated into OEM-designed units sold only through dealer networks. Other components are improved and re-engineered to levels that make replacement versions unnecessary.

It slowly erodes the independent aftermarket share. In times like these, your business has to evolve.

Vertical integration may not be affecting your bottom line today, but you never know when a top-selling component could vanish from your shelf.

Four ways to remain successful in the face of vertical integration are to stay informed about OEM integration processes, maintain a strong line of communication with your vendors, be proactive in looking for alternative product options and just say yes to your customers.

Staying informed

As it relates to the aftermarket, vertical integration is a simple process to understand. In an effort to minimize production costs and control aftermarket share, heavy-duty OEMs integrate areas of their supply chain into their business and manufacturing processes.

This is commonly done two ways in the heavy-duty marketplace.

One is by an OEM taking a part formerly provided by a component supplier and manufacturing it for its own use. Another is to purchase components from a supplier and install them into an OEM-built system module, and then only release the module unit to its dealer network.

The first case allows an OEM to limit its production costs by producing its own component; while the second is a clear opportunity to control aftermarket share.

Both situations make it harder for an independent aftermarket distributor to do business, because they capture the distribution of parts that were once available from third-party suppliers.

To create plans for dealing with these issues in your operation, you have to regularly follow what OEMs are doing, says Bill Wade at Wade & Partners. You have to be aware of how supply chain integration changes the future outlook of the aftermarket, and be willing to devise new strategies to maintain your market share.

You will lose a portion of your business if you don’t, he says.

“When something is broken, somebody has got to fix it,” Wade says. “You want your customers to keep coming back to you when they need that part.”

The good thing is you have some time.

When a component is vertically integrated into an OEM supply chain, it takes several years to reach the independent aftermarket. It must first be designed, engineered, tested and then installed in the newest line of trucks. When it finally hits the road, it’s still under warranty and doesn’t immediately reach your facility. It takes a while.

If you’ve followed what OEMs have been doing, you should know these changes are coming.

Communicate with your vendors

You also should follow what your vendors are doing, as OEM vertical integration impacts them as well.

When an OEM starts producing its own components to spec’ into a new truck, it may be against the will of its component supplier. No supplier wants to find out its products are no longer needed during the factory installation of a truck, especially if they’ve been part of a truck’s design for many years. That hurts their business immediately.

If you have a strong relationship with those vendors, you can find out about that news quickly, sometimes even faster than an OEM will release it. That gives you more time to look for an aftermarket alternative.

“We continuously work with our vendor base and providers of those non-vertically integrated parts and push them to help us in the areas where they can,” says Don Reimondo, president and CEO at HDA Truck Pride.

Depending on the engineering design changes of an OEM-built product, some vendors will still produce aftermarket replacement parts. In cases where they can’t — design changes are too dramatic — they can occasionally provide information about how the component has changed. That way you know what parts you are losing, and what you need to look for in replacement vendors.

Communicating with vendors also helps notify you about OEM spec’ changes that alter the way a component is used.

A formerly stand-alone component being integrated into an OEM-built system unit will affect that component’s value in the aftermarket. You might still want to stock it to serve trucks that are already on the road, but if you know more aren’t on the way you can cut down your order numbers.

Strong vendor communication provides that information.

And remember, when you hear news that’s going to affect your business, it’s also going to affect your customer base. Forwarding any information you have to your customers can help build trust.

“Our business model is ultimately all about the customer and his satisfaction,” says Marc Karon, president at Total Truck Parts. “He wants to buy [parts] where he wants to buy them.”

Being forced to buy from one aftermarket outlet will not please him, he says. “If [an OEM] tries to send him somewhere else he’s not going to be happy.”

Those situations also offer you an opportunity to proactively reassure customers you are aware of their needs, and are willing to do what it takes to help them out.

Commonly that means adding new vendors.

Finding alternative products

Vertical integration isn’t a great deal for the independent aftermarket, but if there is one area where independents have a clear advantage it’s in the use of alternative or former dealer-only parts.

These are components that are introduced into the aftermarket as a direct result of OEM vertical integration to provide more accessible and affordable aftermarket parts than the captive products created by the OEM.

Scott Donnelly, director of sales at Dorman HD Solutions, says his company started creating these products as a result of industry demands. Dorman had been reverse-engineering captive dealer-only parts on the automotive side for more than a decade, but only recently entered the heavy-duty market in response to requests from heavy-duty technicians.

“We were getting calls from customers and technicians who said they had bought our products for their own cars and trucks, and they wanted to know if we ever considered providing the same types of products to the heavy-duty market,” Donnelly says. “They said they were being forced to buy all of those [vertically integrated] components from their OE dealer, and said if we could make them at a more affordable price they would buy them from us.”

Spurred by these requests, Donnelly says Dorman spent more than a year researching the heavy-duty market for areas where it could provide useful components. A list of products was eventually created, and at HDAW 2012 Dorman officially launched its heavy-duty business with more than 200 former dealer-only parts available to the aftermarket.

Donnelly says that number continues to expand in 2013, and by the end of the year Dorman hopes to introduce another 100 to 150 former dealer-only part numbers to the aftermarket.

In most of these cases, he says Dorman’s products sell for 50 percent or less of an equivalent part from an OE dealer. And because they are reverse engineered from the first OE product, improvements can be made to the parts by the time they reach the aftermarket.

That allows distributors and service providers to collect a solid margin and still sell the products for less than the OE dealer, adds Wade.

It makes the independent business competitive again, says Dave Scheer, president at Inland Truck Parts. When a part is captive an OE can charge a higher rate because there’s no other option. The alternative independent part levels the playing field again, he says.

Karon says his customers have quickly come to appreciate the service these alternative vendors provide. Buying captive parts from OE dealers was an exhaustive process for his business and his customers.

“There are a lot of places where there isn’t a dealer close by,” he says. “If we needed to get a Ford part, we had to drive to Fort Lauderdale or Orlando and those places are both more than an hour away.”

Driving halfway across a state to get a part for a customer who needs his truck the next day puts a lot of strain on a distributor and technician. It’s not fun for the customer, either.

“There aren’t enough dealer locations to be able to take care of all the vehicles out there,” Karon says, “and you can’t tow a truck 100 miles. The independent distributor exists because he fills in the niche that can’t be covered by the dealer. He can maintain the inventory, carry all makes parts and provide excellent customer service.”

John Minor, executive vice president and COO at Midwest Wheel, says OEMs know that, and some are now promoting separate aftermarket brands within their organization.

He says that adds to the credibility of the private label third-party component.

Scheer says Inland will still go to a dealer if a customer requests it, but first it makes sure to inform the customer of the aftermarket alternatives. He says most customers will take advantage of that option if they trust the distributor providing the products.

He says Inland has worked hard to build that trust with its customer base, and says all its aftermarket products go through stringent quality-control processes before being released.

“Most of [our customers] don’t know that, they just know the part is in an Inland box and that’s enough for them,” Scheer says. “We’ve earned the reputation that it is going to be a quality product. But that’s not a given anymore in the marketplace. You have to earn it.”

Just Say Yes

Another excellent way to earn a customer’s trust, and combat vertical integration, is to “just say yes,” adds Wade.

“The answer always has to be yes; it doesn’t matter what the question is,” he says. Whether a customer needs a part that you’ve never heard of or the box sitting on the shelf behind you, he says you have to be willing and able to get it for them.

“If you don’t know what it is, figure it out once [the customer] is out of your shop,” Wade says. “A customer comes to you because he relies on you. He expects you to be able to help. [Distributors] can’t let a customer think they don’t know what to do.”

This is where the other steps to battling vertical integration come in. If you’ve followed the news from OEMs and maintained a strong relationship with your vendors, you should usually have a good idea about what aftermarket parts are becoming captive. You should know how much they cost from a dealer, and if you can get them somewhere else in the aftermarket.

Dorman’s product offering comes directly from aftermarket demand, Donnelly says, so if you are getting a lot of requests for a captive, vertically integrated component, you’re undoubtedly not alone.

“More and more of those captive products are becoming available in the aftermarket. Things are opening,” says Minor. “It’s pretty unbelievable. There’s so much demand.”

Karon believes OEMs are aware of that risk. He says it’s a byproduct of doing business.

“If you sell a part for too much, you offer someone a chance to enter the market and make it for cheaper,” he says. “They know that’s a possibility.”

By stocking those high-quality alternative parts and still going to back to a dealer when necessary, there’s no reason for you to ever say no, Wade says.

It’s not always easy, but there’s always something you can do to service your customer, he says.

“The really smart distributor never says no. If you have go to a dealer, who cares?” says Wade. “You have to service that customer to death. They came to you first.”

Adds Karon: “When a customer wants a part, we’ll buy it from the OE and sell it at cost to help the customer out. The key to our business is to keep the customer coming back here.”

This is the first of a two-part series on vertical integration’s impact on the aftermarket. The next piece, set to publish next week, will cover the impact of ‘Right to Repair’ legislation.  

 

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