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OE Direct: Friend or Foe?

OED discounts OE parts, making them more appealing to the insurance industry and benefiting the repairer, who might have otherwise had to use aftermarket. But the forced vendor relationships, erosion of parts profits and possible insurer involvement are raising repairer eyebrows and concerns.

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No one can fault any entity for wanting to cut costs to increase their bottom line; nobody savors anything about aftermarket/imitation crash parts beyond their cheap initial cost.

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And if we were able to come up with a “better mouse trap” – one that would seemingly satisfy insurers cost-cutting penchant, shops need to produce top-quality repairs and consumers right to have their vehicle repaired correctly – most of us would join us.

This is the impetus behind the creation of OE Direct Parts (www.oedirect.net).

Within the past year, insurer-generated estimates began arriving at our shop with 5 percent deducted from most of the OEM parts listed. The brief explanation found on the last page of one read, “Reconditioned LT fender, part # OED60261S0XA90Z.” The list price was 5 percent below dealer-suggested list and was available from a dealer in a neighboring state – the nearest border to my shop being 200 miles away.

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Corresponding with others across the nation proved that OE Direct Parts is a company with which all shops may soon be dealing. The question is, does their existence help or hinder us?

Who OE Direct Isn’t
First, it needs to be noted that OE Direct (hereafter referred to as “OED”) is not related to OE Connection and isn’t in competition with them. The two companies offer somewhat the same services but with different approaches.

Interestingly, in the more than 15 phone calls I made to OED dealerships and a similar number of phone calls and e-mails with shops across the country, confusing OED with OE Connection is a fairly common problem.

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Claims Made by OED

  • OEM parts have been losing market share to imitation and used parts for years.

  • DRP relationships have been pushing imitation and used parts strictly on the basis of reduced costs for insurers, leaving the shop with lost part profit, poor fit and the like.

  • OED believes that though there may be a place for imitation parts, they shouldn’t be installed on newer vehicles.

  • OED’s program allows the insurer to get a break on OE parts costs and the repairer to use OE parts in the repair.

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  • With imitation/aftermarket parts being notoriously hit-or-miss in terms of availability, shops benefit from the existing availability, reliability and quality of OEM parts.

    What OED Costs Repairers
    The cost to us? Typically 5 percent of our parts profit margin (sometimes more). But, says OED President Mike Noirot (past ASA National Collision Division v.p.): “The shop will never have more than a 5 percent reduction in their gross profit percentage when buying parts from an OED dealer. And if they’re buying from an OED-Plus dealer, the actual reduction in their GP% is around 2 percent, since the dealer is absorbing the majority of the price reduction.”

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    However, shops will likely have to purchase these parts from an OEM dealer they aren’t familiar with, at least for the time being.

    “OED is adding new dealers each month,” says Noirot. “If a shop has a certain dealer they prefer to use, OED will be happy to add this dealer to the OED network.”

    What OED Gains Repairers
    Presently, there’s no cost to shops to access OED dealers (other than what may be required by the estimating system company). But what about what shops lose in parts discounts?

    It’s not really a loss, says Noirot: “While the shop may recognize a slight reduction in their GP%, they’ll gain in actual gross profit dollars.” He goes on to give the following example:

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    Using an OEM part example:

    OEM Part List Price: $100.

    OED Selling Price: $95.

    Cost (30% discount): $70

    Gross Profit $: $25 ($95 minus $70)

    Using a comparable aftermarket part example:

    A/M Part Selling Price: $65.

    Cost (30% discount) $45.50.

    Gross Profit $: $19.50.

    Says Noiret: “In this example, the shop made a slightly lower GP% on the OED part; however, the shop made $5.50 more GP$, which equates to more money in the bank.”

    According to my wife Bobbi (and my numbers-cruncher), Noirot’s positive-GP$ figure for shops may be true, depending on the cost difference between the suggested OEM list price and its imitation counterpart list price. When comparing these two figures in this way, the wider thecost difference between the two parts (OEM and imitation), the higher the GP$ for the shop.

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    But keep in mind that Noirot, in the example listed here, is comparing a reduced list OEM part price to an assumed list price for an imitation counterpart. Most shops, however, are comparing the OED reduced list price of the part to the normal OEM suggested list price they’d normally receive from their OE dealer. Looking at it this way, it comes out a financial loss for the shop over the profit they would’ve made on the part had they been able to purchase the OE part without OED in the mix.

    It is, however, worth noting that these OED parts aren’t factory defects, “seconds” or “blemished.” And the factory part warranties remain the same.

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    With somewhere in the range of 40-50,000 OEM part applications available and Keystone offering approximately half that number as imitations, OED’s niche is in providing a more cost-conscious approach to the OE parts that are being imitated – making the use of OE more attractive to insurers.

    Though it was stressed to me that “wholesale franchise parts dealers, not insurers, are OED’s customer,” some in the collision industry remain wary.

    And even OED itself admits that they’re simply providing cost-effective choices, alternatives for both shops and insurers.

    But again, they emphasize that “OED believes in a free marketplace in which products compete on a basis of quality and value” and stress that they “… aren’t interested in restricting trade or pandering to insurers.” Rather, they “… deal with large wholesale OE parts dealers, those that have outside salesmen to promote them and who want a more effective means of competing with imitation parts.”

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    OED’s catalog of parts consists of every OEM part that competes with an aftermarket part (plus things such as A/C and cooling items, lamps, aluminum wheels and bumper covers). The “FAQ” section on OED’s Web site makes a compelling argument for their services.

    What It Costs Dealerships to Join OED
    OED has two levels of participation for dealers, one called “OED-Plus” and the other simply “OED.”

    Noirot clarifies: “We only sell the OED-Plus program now. OED-Plus dealers agree to provide their wholesale parts discount to the reduced list price. In the example [I used earlier], if the shop were to buy the $100 part from an OED-Plus dealer, the part would have cost the shop $66.50 instead of $70.”

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    To be an OED dealer, it costs dealers roughly $6-$15 per day, depending on the car manufacturer and the size of the delivery area. And dealers are free to negotiate better rates with shops.

    “OED earns their income from the dealerships; these are our customers,” says Noirot. “We’re an advocate to the wholesaler of OEM parts and to the shop, as our system has allowed them to use an OEM part. Plus, in many cases, the shop will receive alternate parts usage credit for using the better OEM part.”

    What Repairers Think of OED
    Repairers reactions to OED run the gamut from loving it to being suspicious of it to being resentful of it. Here’s a summary of what I heard, from most optimistic to most pessimistic:

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    • It’s a win/win/win situation – Says one Southwest shop owner: “OED works well for us. We haven’t seen any downside to it. It’s helped us reach our goals, which includes using as many OEM parts as possible, as well as meeting insurers’ goals. … We look at OED as better for the shop, the customer and the insurer.”

    • OED helps direct-repair shops meet their “alternative parts quotas” – “We’re a DRP for five insurers, some of which mandate we use a certain percentage of alternative parts,” says one West Coast shop manager.

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  • We’re forced to use vendors we wouldn’t otherwise use and to take business away from long-time vendors – “The downside for shops is that they may have to purchase OE parts from a dealer they wouldn’t otherwise patronize,” says a West Coast shop manager. “When we receive a sheet with OED parts on it, we normally call our usual dealers, who are good at matching the OED price.”

    Says one Upper-Midwest shop owner: “Though I hate aftermarket parts, I have concerns about OED’s hand in this. What happens to the relationships I’ve established with my preferred vendors? … My interim solution has been to get the same pricing from my established dealers.”

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    Says a Mid-America shop owner: “Shops choice of OE vendors is based on each party having earned the other’s respect through volume buying, low return rate and prompt payment, for which we receive a 30 percent parts discount. And as we all know, our profit on parts is often our only profit. The insurer-sheet-recommended parts manager agreed to meet my present 30 percent only if I purchased all my GM parts from him!”

  • One vendor shouldn’t be setting parts prices – “Since when has one single vendor set the part pricing for any carmaker in our area?” asks one Mid-America shop owner. “Competitive prices are supposed to reflect the price structures of all local competitors, not just one single business.”

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  • It’s not going to work – “The one insurer in our area that was pushing these parts has backed off some,” says one West Coast shop owner. “Their general consensus seems to be that this present system is more work than it’s worth. Perhaps we helped convince them by charging several of our customers the difference we would have lost in normal parts markup. At least one of these, a lawyer, got his money back from the insurer.”

  • This might only be the beginning of something much worse – “What’s next?” asks one Upper-Midwest shop owner. “One nationwide, specific supplier for all insurance company OEM parts? Will we be ordering all parts from insurers in the future?”

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    Says one mid-America shop owner: “This is just another way for insurers and database providers to force parts discounts upon us, again. … Will such abuses create dealership price wars? This could very well be the first step toward profitless, insurer-purchasing of all parts directly from the OEMs.”

  • It’s the beginning of the end for the collision repair industry – “The main marketing thrust of OED is to DRP shops,” says one Southwest shop owner. “But DRP shops have already been skinned to the bone by insurer bean-counters, and any further attempt might kill the goose that’s laying their golden eggs. I’ve been warning DRP shop owners for years that direct purchasing of parts by insurers is just around the corner, and an OED-type approach may be a prelude to that end. … All repairers realize that without the ability to sell and profit from parts sales, we’ll go the way of the do-do bird. Try to run a shop with $250,000 of equipment on $40 an hour without decent profits on parts sales.”

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    OED Dealer Views On OED
    Of the 15 or so OED dealers I randomly called from OED’s Web site list, a handful were optimistic, a couple enthusiastic and a few pessimistic in describing the program. Those who were optimistic viewed their participation in OED as doing the collision industry a favor, as one stated, “… in providing a channel to divert insurers’ insistence on imitation parts, instead, into sales of OEM parts.”

    Again, what follows is a summary of what I heard, from most optimistic to most pessimistic:

    • It’s a win/win/win situation – “The competition among dealers in our area is stiff, and we realize that shops are naturally wary of the very idea of such a system,” says one West Coast parts manager. “The way they look at it, it’s like the insurer is benefiting from ill-begotten gain, again. So to gain shops’ confidence, we’ve bumped their parts profit percentage so they don’t lose any parts profit. … We’ve picked up several shops we hadn’t previously dealt with because of OED. We look at it as a win-win situation for everyone involved.”

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    Says a Southwest parts manager: “Our dealership reduces the list price to create a new adjusted list price, from which we discount the part. This way, the shop loses no money in the transaction, DRP shops get alternative parts credit, the insurer gets top-quality parts installed, and we, as a dealership, make more profit than we would have because we’re reclaiming losses to alternatives. Keep in mind that sometimes 30 percent or more of the insurer-sheet parts are alternative, which can be turned into OE.”

  • Shops are wary of OED – “OED works OK for us, but it would work better if we could convince more shops to use it more often,” says one parts manager. “Many shops still believe it to be another ‘fly by night’ outfit, so they’re reluctant to try it. We’ve found that the shops that do use it, like it.”

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    Says a Nissan parts manager: “We can’t seem to get any shops to go with it. … We’re part of a multi-line dealership, and our bosses will review OED after a certain number of months trial and decide whether to keep it or not.”

  • Dealers need to realize that they shouldn’t cut shop profits – “Unfortunately for OED, there are dealers that don’t ding shops the 5 percent,” says one Southwest parts manager. “Most OED dealers can’t get it through their heads that it will only hurt them if they cut repairers’ profits – the profit that shops need to stay in business. The average dealership is working off of somewhere near a 17 percent parts profit margin, which is pretty tight. But there is more money for the dealer to make with OED through reclaiming losses to alternative parts.”

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  • We’re barely hanging in there – Says a Mid-America parts manager: “We’ve received one call on it over the past seven months, and that one was by insurer insistence. We were going to drop the program, but they’re floating us until the end of this year for free to try it with CCC-Pathways. The program to date is too cumbersome for shops.”

  • OED has become too insurer-friendly – “OED started out being a good thing but is evolving into a nightmare,” says one parts manager. “We got off OED program the minute they got into bed with insurers. … OED began as what we felt was a positive for the repair and OEM parts industries. … At that time, insurers weren’t in the mix. Then, without dealer-participant approval, OED decided to work with the insurance industry – State Farm being one of the first. We got out of it for several reasons. First, we didn’t want to be viewed by shops as ‘being in bed with insurers.’ … Also, we’ve always had a strong interest in the collision industry, our bread and butter, and didn’t want to do anything that would further insurance-industry involvement and control of the repair industry.”

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  • It’s not cost-effective – “So far, it’s not cost-effective for us, and there seems to be a lot of confusion on how to use the system,” says one upper-Midwest parts manager. “I’ve heard CCC-Pathways may make it more user-friendly.”

    Says another parts manager: “It wasn’t cost-effective, so we got out. We had 12 months of no sales. We’re a large dealership, and with our multiple locations, it was costing us $6,000 a year. After we quit, they did offer to give us an additional six-month free trial. From a business standpoint, I’d like to see it work.”

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  • It’s not working – “We’re getting out of it,” says one parts manager. “What they told us to expect isn’t what we got. Both shops and we must have misunderstood it.”

    A Q&A with OED President Mike Noirot
    Does OED’s 48-hour guaranteed delivery cover hard-to-find parts? Noirot: “The 48-hour guarantee is for standard, in-stock parts. The 48-hour delivery clause is in our agreement so our customers don’t try to add a service area that they cannot properly serve.”

    Who pays the initial costs of delivery and costs of return-delivery for parts refused by the shop or for damaged parts? Noirot: “This would be no different than any other relationship a shop has with a dealership, in that the dealerships are in the shop’s area [presently not necessarily so], so there should be no cost of delivery. Each dealer has different return policies, but these are matters that the dealership and shop would have to agree on.”

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    Does the OED dealership location and number pop up on every insurer-generated estimate from insurers with which OED has a relationship? I ask this because one shop owner told me that on a 2004 vehicle (for which no imitation parts are available yet), the OED reference popped up for its OEM parts. If this happens, it would appear that the idea is to discount all OEM parts, even those for which only OEM is available. Noirot: “OED information will pop up only if the same circumstances that caused A/M parts to come up exist. Parts for a 2004 model would indeed be available if, for instance, the same part number were also installed in 2002 and 2003 model years. That being said, OED parts would only pop up for a 2004 car if the shop profile/insurance profile were set by the shop to pop for A/M in the current model year. Most profiles are set to exclude the current model year or cars with less than 20,000 miles.”

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    Does the OED-partnered dealership information show up on estimates only when CAPA-certified imitations are available (i.e.: Is it flagged even when “non-certified” imitation parts are available from dealers such Keystone? Noirot: “OED information will show if a certified or non-certified part is available in the aftermarket. The only exception is if the shop chooses to see only CAPA-certified parts in their estimating system profile.”

    Does the OED program apply to all insurer-generated estimates from participating insurers, even when there’s a huge difference between OEM and imitation parts’ list costs? For example, if an OEM hood lists for $400 and its imitation counterpart lists for $100? Noirot: “OED cannot tell the insurer to use a more expensive part instead of a cheaper imitation part. That would be the insurer’s decision. However, the OED option will still appear on the estimate.”

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    What’s to prevent the present OED program from evolving into including discounts on all OEM parts, and deeper discounts? Noirot: “Our customers, the dealers, would never allow this to happen. If we were to add all OEM parts to our Competitive Parts Program (CPP), we’d lose customers. Additionally, there’s no incentive for OEM parts wholesalers to offer discounts on parts that have no competitive item in the aftermarket.”

    I was told in one interview that a certain insurer that wasn’t on OED’s program was referencing OED-friendly dealerships on their estimates to gain discounts. Is this true, and if so, will anything be done to stop it? Noirot: “Our relationship with all carriers is at ‘arms-length.’ We do not sell our product to insurers. If an insurer chooses to recommend using OED to a shop, they may do so. OED’s mission is to allow our customer, the wholesale dealer, a better opportunity to compete for business they’ve lost to the aftermarket. Additionally, if the insurer is recommending that the shop buy from an OED dealer, that’s good for the shop because it gets to use an OE part instead of an imitation.”

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    Some people using the system claim that OED is in bed with insurers. How do you respond to this accusation?

    Noirot: “OED doesn’t sell any products or services to the insurance industry. OED simply removes the old barrier that the dealer faced – the aftermarket parts programs that have existed in the estimating systems for the past 10 years or so. Our customer is the wholesale parts dealer. And they have the same rights that an aftermarket parts company has to compete for business by discounting their prices.”

    So Where Does That Leave Us?
    In spite of every assurance OED representatives made to the contrary, my main concern – after 30 years of dealing with insurers – is that OED could easily be manipulated by insurers to squeeze further parts profit from shops and/or dealers profit on which shops depend for their livelihood. (Noirot denies it, but some shops and dealers believe it to be true.)

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    A sustained level of parts profit is essential to all shops’ survival, and OE parts dealers are in no better position than repairers to give further discounts.

    It’s fairly common knowledge in the collision industry that insurer near-future goals include eliminating all profit on parts, and possibly even insurer-purchasing and insurer-distribution of all parts.

    Though I’ve tried to present as balanced an article on OED as I can (given the information I received), I’m not convinced that OED’s seemingly good points outweigh the potential for insurer abuse.

    Writer Dick Strom and wife Bobbi own and operate Modern Collision Rebuild, a 10,000-square-foot shop in Bainbridge Island, Wash. Strom can be reached at [email protected]

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    Comments? E-mail them to BSB Editor Georgina K. Carson at [email protected]

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