A variety of market inefficiencies - such as uncertainty around customer demand and pricing that does not consistently reflect full value - play critical roles in the automotive aftermarket industry's inventory management problems, according to the Richard DeVos Graduate School of Management at Northwood University, which is conducting a comprehensive, industry-wide study looking at this on-going industry challenge.

Preliminary findings of the study on inventory management were revealed at the Automotive Aftermarket Products Expo (AAPEX). The final report of the study will be available to the industry in January 2003.

The study was initiated and is being facilitated by the Motor & Equipment Manufacturers Association (MEMA), with strong support from the Automotive Warehouse Distributors Association (AWDA), the Automotive Aftermarket Industry Association (AAIA) and the Specialty Equipment Market Association (SEMA). The program is complementary to AAIA's category management and enhanced line review programs, but focuses exclusively on application parts.

According to school dean Dr. Tim Nash, there are numerous drivers of market inefficiencies including the uncertainty of customer demand. Most survey respondents focus on movement of products rather than consumption, he said.

"There are relatively unsophisticated forecasting methodologies in place today," Nash said. "For example, other industries such as prescription drugs have shown a significant decrease in inventory levels using more sophisticated forecasting methods."

Another driver, he added, is that pricing is typically driven by competition or gross margin, while overall value to the customer is not captured. "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 added.

"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, added that many excuses for operational inefficiency exist, such as parts proliferation and liberal return policies.

"Companies have been able to succeed with less than state-of-the-art logistic systems, for example," he said. "Processes to remove items from inventory are often not well defined. However, recent pressures have generated substantial activity to improve operating efficiencies at many companies."

The 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 various segments are recognised, there are difficulties 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 added. "Economic profit is typically not measured at the product level, which results in a lack of managing inventory for economic return."

Although the challenges the industry faces to solve the excess inventory problem are many, Northwood did identify preliminary opportunities for improving the inventory dilemma. According to Busby, the industry can begin the solution process in several ways:

· More sophisticated forecasting models;
· More sophisticated pricing models;
· More sophisticated information and control systems;
· Increased sharing of data across channel; and
· Greater focus on differentiation.

"The winners and losers in this important industry issue may be those companies that focus on improved operating efficiencies," Busby said. "However, ultimate success usually goes to those who can differentiate their products and services."

"We believe this study will uncover the key economic and behavioural drivers that have contributed to the serious symptoms of excess inventory that many companies in the automotive aftermarket are experiencing, including depressed margins and high product return rates," said Chris Bates, president and CEO of MEMA.

Over the past nine months, Northwood has interviewed manufacturers, retailers, program groups and WDs to clarify the key drivers of inventory challenges, identify root causes and best practices to address the problem, and to define practical obstacles to implementation of best practices.

Said Busby: "While individual company perspectives seem to suggest that their inventory level is appropriate, the industry in aggregate views inventory levels as excessive."

Supporting Busby's view is that many companies in the survey are themselves working on or considering their own enhanced inventory management systems, increasingly in collaboration with key upstream and downstream trading partners.

The fact that so many companies recognise the need for improvements in this area reinforces the overall value of a comprehensive study of this nature.

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