Published on February 4, 2008
Doug Loughran – background info: Doug Loughran – background info President and CEO of: Reliable Parts Ltd Reliable Parts Inc Columbia Distributors Ltd Past President of: Appliance Parts Distributors Association National Appliance Parts Suppliers Association Canadian Appliance Parts Suppliers Association Appliance Service Association Founder & Chairman Major Appliance Service Coalition Appliance Consumer Service Task Force Overview of today's discussion: Overview of today's discussion Brief outline of Reliable Parts Outline of the Appliance Industry in terms of size and market share The changing dynamics of competition, foreign and domestic Changing consumer preferences Market Changes – Parts Distributors Market Changes – Service Companies Market Changes – Warranty Handling Allowances Market Changes – Genuine VS Non-OEM Parts Trans-shipping – Appliance Parts Trans-shipping – Commercial Cooking Then if there is time: More info about Reliable Parts and our quality process engineering Reliable Parts Ltd.: Reliable Parts Ltd. Canadian Head Office & DC United States Head Office & DC Reliable Parts Ltd, has evolved over the years from a small Vancouver company in 1933 servicing and selling washing machines, to become the second largest major appliance parts distributor in North America. Target Market: Target Market Canadian Locations:: Canadian Locations: 4 customer call centers located in British Columbia, Ontario, Quebec, & Nova Scotia (32 total/50% research) 28 locations coast to coast supported by: 2 Distribution centers: 30,000 ft²in Coquitlam BC (Vancouver) 25,000 ft² in Mississauga ON (Toronto) Field Sales & Area Managers Products are warehoused and sold through: Slide6: 3 customer call centers: Seattle, Spokane and Portland (24 sales/ 50% research) 10 locations in the West/Central US supported by: 2 Distribution centers: 30,000 ft²in Tukwila (Seattle WA) 25,000 ft² in Sacramento (California) Field Sales & Area Managers U.S.A. Locations: Products are warehoused and sold through: North American Sales Channels: North American Sales Channels Reliable sells to both the wholesale and retail sectors through the following primary sales channels: - 38 wholesale and retail stores - eCommerce at our website www.reliableparts.com - 7 customer sales and support call centers - Our 800 Club Sales Partnership program In this industry parts distributors are required to supply parts both in and out of warranty, to sell at retail to consumers, and are prohibited from being in the in-the-home service business. - The Partlinx network of distributors - Owning our customer’s parts department eCommerce Sales Channels: eCommerce Sales Channels Slide9: Reliable is authorized by all of the leading appliance and accessory manufacturers: Slide10: In the last decade U.S. unit shipments have increased by 61%. Slide11: The appliance industry represents the second largest OEM market in the world for basic materials, components, equipment and services—an 851 million unit market in the U.S. alone, and an estimated 2.03-billion unit market worldwide. Imports from Korea and China are taking market share from domestic OEMs. This is why the acquisition of Maytag by Whirlpool was approved. Slide12: Market Changes: OEM Consolidation of Players: $2.6 billion acquisition of Maytag by Whirlpool (May-pool or Whirl-tag?) The combined entity now has a greater than 70 percent share of the domestic laundry market and about half of the dishwasher business. Entrance of Foreign Competition: LG and Samsung quickly became major white goods players in the United States after they were embraced by Best Buy, The Home Depot, Lowe's, and Sears LG from Korea is a great copier and not an innovator—Whirlpool has 18 patent infringement lawsuits pending against them. Haier from China also continues to expand its assortment and market presence by entering new white-goods categories. These high end European, Korean, and Chinese appliance manufacturers like Bosch, Miele, Asko,, Bertazzoni and Aristan, LG, and Haier are taking market share from the domestic OEMs especially the smaller ones like SubZero, Wolf, Dacor, Danby, and Viking. Market Changes: Consumers: Market Changes: Consumers Enormous shifts in channel preference from self servicing dealers to big box stores. In 1991 there were 27,000 independent appliance dealers. Today there are less than 5300. Consumers are also changing is the way they buy appliances. Shoppers have been abandoning enclosed shopping malls for strip malls and freestanding formats. That fact hasn't been lost on Lowe's, $4 billion in sales, Home Depot, with $3.6 billion in white-goods sales last year. Both have been building out their store base at a breakneck pace, chipping away at Sears' market share lead in the process. Strong demand for high-priced, fully-featured “trophy” white goods (Commercial looking ranges, high end refrigeration, wine cellars, front load laundry, etc.) Consumers are now replacing their appliances with newer models that have better features and looks. Once these trophy appliances are out of warranty consumers are not about to discard them when they need repair parts. OEM Authorized Parts Distributors:: OEM Authorized Parts Distributors: General Electric 53 Parts Distributors (GE has Factory Service) Whirlpool 46 Sold Factory Service to A&E 3 years ago and Sold Branches to parts distributors (Canada in transition) Electrolux 36 Parts Distributors (Closed Factory Branches 15 years ago) Maytag 31 Reduced # PDs from 61 four years ago started all brand Factory Service and branches three years ago SubZero/Wolf 18 8 are Parts Distributors Bosch 12 Parts Distributors Dacor 7 Parts Distributors Haier 6 Parts Distributors (Partlinx) Viking 5 Product Distributors Asko 4 Parts Distributors & Service Co Direct Bertazzoni 2 Parts Distributors Ariston 1 Parts Distributor Miele 0 Direct Factory Service LG 0 Ships direct to Service Companies Market Changes: Parts Distributors: Market Changes: Parts Distributors In 1980 the Appliance Parts Distributors Association had 86 Members, and the National Appliance Parts Suppliers Association had 148 members. Today the APDA has 46, and NAPSA has 0. Surviving Distributors have participated in industry consolidation, and have installed state of the art computer software. In order to improve productivity distributors have installed Internet sites that operate 24/7 to lower transaction costs. Double edge in that dealers and consumers can shop the world for the best price, however fill rates and quality of service still prevail. 6 Sigma and quality process improvement projects are necessary to lower operational costs and improve customer service. Those distributors who do not continually improve are the ones that are selling out to consolidators. Market Changes: Service Companies: Market Changes: Service Companies The number of appliance service companies has decreased by 30% in the last 20 years, due mainly to the lack of profitability, business failure, lack of interest by the next generation, and an inability to sell their company, The number of qualified experienced technicians is declining due to the reduced number appliance repair courses at technical training schools. Although OEMs have substantially increased the number of technical training seminars held locally and opened them up to non authorized servicers. This industry is not attracting enough employee prospects as are other industries like automotive, electrical, electronics, computers, plumbing, etc. The average age of a qualified appliance technician is now over 56. OEMs are demanding an increase in first call completes and a reduction in cycle times, while not wanting to embrace the one-pay system or to bring the warranty labor rates up to compete with COD rates. Most service companies are forced to “Strategically Schedule” service calls, meaning that the more profitable COD calls are completed first, leaving the lower paying warranty calls to be treated as fill-ins. Many fully qualified service companies are having to cut back on warranty service in order to keep the percentage of warranty calls they can take to below 50% of total revenue. I HEAR THAT…..: I HEAR THAT….. Delivering high quality service to a restaurant is like Making love to a gorilla…… You don’t stop when you're satisfied, You stop when the gorilla is satisfied!! OEM stocking programs:: OEM stocking programs: All major OEMs have required warranty parts stocking lists Whirlpool 1330, Electrolux 900, Maytag 1100 etc PDs required to carry minimum of 90% One year buyback if no activity + 15% Also automatically ship warranty parts in advance of new product One year buyback if no activity +15% Emergency order programs on functional parts daily Will drop ship directly to dealers Annual dead stock programs to % of purchases Advertising Allowances Hidden damage allowances 90 day no fault return policy Market Changes: Genuine VS Non-OEM: Market Changes: Genuine VS Non-OEM I have also been informed that this is a major concern for you as it was for us Prior to 1970 Non-OEM, or non-Genuine aftermarket replacement parts amounted to 75% of the appliance parts market Many appliance designs had remained unchanged for 25 years, creating a huge aftermarket for universal replacement parts Today that total has been reduced to 5% OEMs are now constantly re-designing appliances thereby shortening the market size of any individual component part OEMs have also become competitive in the commodity parts market These changes have left Non-OEM manufacturers with a limited market for any individual part and a tight margin on commodity parts with which to work Parts distributors are prohibited from selling Non-OEM replacement parts Service companies are also prohibited from installing Non-OEM parts The largest supplier of Non Genuine parts, Gemline, Westward went bankrupt The National Appliance Parts Suppliers Association ceased operations Many of the former Non-Genuine distributors became customers or branches Market Changes: Warranty Handling: Market Changes: Warranty Handling Parts Distributors finally getting some relief from zero margin on warranty (as a result of the work taking place in the MASC and the ACSTF) Whirlpool from zero WHA to maximum of 12% markup (Canada 0%) Maytag from 6% markup to ????? Electrolux 18% markup (Canada One-Pay) GE no WHA, (Factory Service) SubZero from 15% to One-Pay Warranty transactions can amount to 25% to 60% or more of gross sales in an OEM line Some relief coming after January 2007 with shorter product warranty terms Appliance Manufacturers have reduced new product warranty from two, five, and ten years, to one year, and replacement parts to 6 months. Service companies receive zero margin on warranty parts and must comply with the complicated two pay system. (Once a claim is filed electronically the OEM pays the labor directly, and later the parts credit comes from their parts supplier) Most OEMs are demanding discounts from the COD rates of up to 50% while offering zero margin on handling warranty parts. The USA, PSA, and NARDA are also lobbying the OEMs for improvements in WHA and labor Warranty Handling – Other Companies: Warranty Handling – Other Companies AYP & MTD (Outdoor Yard Products) credit dealer at list price Tecumseh credit Standard dealer at cost + 20%, and Premier at list price Kohler credit dealer at list price plus freight Sunbeam credit at parts cost + 50% + freight John Deere credit dealer at 40% margin Ford credits at cost plus 40% Honda credits at cost plus 40% Acura credits at cost plus 40% General Motors credits at cost plus 40% Porsche credits at cost plus 35% Saab credits at cost plus 60% Mercedes credits at cost plus 30% on major components and 40% on small Volkswagen credits at cost plus 40% Shop and field labor rates are paid at an average of 90% of retail or COD rates Trans-shipping – Appliance Parts: Trans-shipping – Appliance Parts Prior to 1990 trans-shipping was one of the ways that an appliance parts distributor could loose their sales agreement. OEMs regularly shopped non-authorized PDs for parts that had been trans-shipped to them With eCommerce and Ebay, as well as legal challenges, this practice, and “tied selling”, were relaxed. Some smaller OEMs still do restrict distribution Appliance parts now an open market – once you take title to the parts you can sell anywhere, but the OEM may not ship to a non-authorized branch Appliance parts distributors also do not need to qualify their customers as to certification or competency or authorization. (exceptions are sealed system parts and refrigerant to licensed technicians only) OEMs do not set the terms of resale, or the price at which they can be sold A major incentive for a distributor to trans-ship are the sales incentive programs including rebates and trips when a sales quota is met or exceeded. Many distributors load up to meet these goals then have to dump the parts when the program is over. The practice of trans-shipping to a non-authorized parts distributor is still a problem for authorized distributors The practice of trans-shipping also artificially increases the percentage of warranty to out of warranty parts sales for the affected distributor resulting in reducing the average gross margin for that line Because our industry is now an open market you are seeing more appliance parts being sold on eBay and commodity items like fridge filters are no longer revenue generators like they used to be Trans-shipping – Commercial Cooking: Trans-shipping – Commercial Cooking The Commercial Cooking industry is close to being a closed industry, in that there is a real need to qualify a customer (a component sale to a service competitor) as to competency and certification VS an unqualified servicer or a casual consumer like a home owner In a closed industry OEMs can restrict reselling (other than price) to certain types of customers and can specify the territory that the components can be sold into. They can also keep certain customers for themselves, like national accounts The US Supreme Court upheld the Sharp Copier case in Texas where Sharp canceled a non full service distributor who was a competitor of a full service distributor This ruling applies only where the 3Ps are present: Pre-Sale qualification of the customer Point-of-Sale installation and training by a technician or sales representative Post-Sale maintenance and ongoing support Another condition for an industry being closed is when Internet sites are for information only and not for selling directly to the public Failure to meet these tests indicates that an industry may not be closed and cannot be restricted in its business practices by its suppliers Additionally there are increasingly more examples of product that is crossing the boundaries between domestic appliances and commercial appliances Nonetheless given the demands commercial OEMs place on their service/distributors to perform technically, and in a tight & timely manner, perhaps they should regulate and specify territorial boundaries of sale. Sometimes you get what you wish for……….. Slide28: We are continually improving our business processes, so that we can maintain our competitive edge without compromising our high level of customer service. We achieved the Silver Level award from The Quality Council of BC. Many awards for service excellence have been received over the years, from the major appliance manufacturers we represent. One of our proudest achievements, was to be twice recognized as one of "Canada’s Fifty Best Managed Private Companies". Reliable Parts has always been an innovative leader in computer programming, and merchandising initiatives for our dealers: - Pass & EPass-Lite Service Dealer Software - IBS ASW, InfoManager, eCommerce Innovation Changes in Distribution: TQ Initiatives – the Process: TQ Initiatives – the Process Each department regularly conducts TQ audits in order to identify and correct inefficiencies and redundancies During each audit, the teams are coached on utilizing the TQ process as they work to uncover and map flowcharts of each business process Redundancies and bottlenecks are identified, as are hurdles and stumbling blocks that slow down processes As these are identified, work around solutions are identified, tested and enacted to streamline processes and procedures The desired outcome of a TQM initiative is to improve efficiency and reduce the workload for everyone which translates ultimately into improved customer service The efficiencies gained through our TQ process improvements have allowed us to increase our sales without having to increase staff Call Centre Management: Call Centre Management With 4 customer call centers located in Coquitlam, Ottawa, Montreal and Dartmouth, we had to find ways to improve performance and reduce costs In conjunction with Telus, our systems were integrated and improved for call load balancing which enabled us to balance calls between all English speaking call centre staff across 4 time zones This extended our call centers availability to customers from 8 to 12 hours a day and allows customers in the west to call in and order earlier while our eastern customers can now call in the early evening to place orders for the next day This resulting increase in productivity also reduced overtime costs by shifting calls to the next time zone and improving customer service All call activity is tracked and monitored, resulting in substantial reductions in the average speed to answer, as well as a sharp decrease in the number of abandoned calls while on hold. In conjunction with Telus we were able to introduce a Voip system where telephone and data are transmitted over the internet resulting in significant cost savings over long distance telephone and frame relay lines. NEW EFFICIENT OFFICE CHAIR: NEW EFFICIENT OFFICE CHAIR This new all in one chair resulted in a 38% increase in the number of inbound calls to our telemarketers, however there was a corresponding number of complaints about background noise Inventory Management: Inventory Management We initiated a project in 2003 to reduce overstock and surplus inventory in all of our locations Stock that had global sales but no local branch sales, were “clawed-back” to our distribution centers. Stock that was obsolete and had no global sales were scrapped or returned to our suppliers The number of suppliers was reduced from 216 to 104 This exercise took a year to complete and reduced total inventory investment by over $1M without any impact on customer services levels The resulting reduction of warehouse space allowed us to relocate some branches to a smaller size as rental agreements were renewed. We now have significant annual saving in rent, electricity, heating, property taxes, etc for every location downsized, as well as having the interest on $1M The current project calls for removing un-occupied air from the shelving and parts bins. This can only be done with a warehouse locations system that identifies the exact location of a part versus an area or even a shelf Warehouse Management: Warehouse Management The TQ process has substantially improved our productivity by streamlining: Receiving – all incoming shipments are processed for put-away the same day with emergency orders to fill customer back-orders shipped out the same day Replenishment – each warehouse staff member “owns” his own isle and is responsible for put-aways as well as ensuring that parts are labeled and ready to pick for incoming orders. Regular Cycle Counting ensures an accurate inventory All customer shipments are picked, packed & shipped the same day as received, right up to 4.45pm. Warehouse Locations – the high volume pick activity is located in the isles closest to the shipping bench (to cut travel time in the warehouse), with slow moving items placed in the highest or furthest away locations. Picking carts have skate boards to speed up movement and reduce fatigue while making work fun for the young staff. Slide34: In order to improve customer service, improve efficiency, lower working capital requirements and improve financial performance, the Quality Process Engineering that we have implemented so far have produced substantial operational and financial gains in these areas: Call Centre Management Telecommunications & IT streamlining Purchasing and supplier consolidations Inventory & Supply Chain Management Receiving & Warehousing Process Improvements Financial Reporting & A/R + A/P Process Improvements. ANY QUESTIONS/COMMENTS?: ANY QUESTIONS/ COMMENTS? I would like to thank the Board Of Directors of the Commercial Food Equipment Service Association for extending this opportunity to me to address your association today. Additionally I would especially like to thank those of your members and suppliers who took the time to brief me on the industry issues and concerns that are the challenges you are facing. In many respects these same issues and concerns are those ones that are being discussed and resolved by our parts distributors and our service associations. It is encouraging to see that you have such a forum as CFESA to meet and find solutions to your issues.
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