Today, with the news of insurers becoming more involved in the parts purchasing process, shops are concerned about change more than ever. The relationship any business has with its vendors is more than simply its face-value financial position. Good discounts alone have little chance of turning into value for the end customer if there’s no system to make these discounts flow all the way through the business.
For example, a great parts discount isn’t great if the parts are junk, or if it takes three tries to get them to your door undamaged. The discount is wasted on all the additional costs you incur processing bad parts, let alone all the other work you didn’t accomplish. A business that makes the leap in creating process-centered systems, or attempts to create “flow of work” all the way through its organization, always expresses great initial concern when realizing that “why” it operates the way it does is based on external conditions like vendor performance. For example, “We have a large area over there to store our cardboard boxes until the job is done, so we can easily return wrong parts without penalty.”
The most common conversations go something like this: “I can see how wasteful (costly) it is to store all this extra material, but our vendor can only deliver to us once a week,” or “It would be more efficient (less costly) if our parts vendor sent us all of the parts we need for a job in one shot, but they give us what they have and send the rest as it shows up.” Both sound like reasonable statements and are some of the actual reasons why shops suffer from E.D. (economic dysfunction). So when we talk about change in an organization, external vendors and their performance become critical factors in turning our own results around. Clearly, new agreements and understandings must be reached in order to make gains in our own business’s performance.
The Vendor Effect
What is it about your vendors’ performance that affects your own? What are the critical elements required to achieve a better result? It’s clearly not just discount or cost but also things like delivery or speed. One important element is the vendor’s ability to get you what you need quickly. What about quality? Isn’t it also important to get good, usable parts and materials? That means the right stuff…and sometimes the right stuff is different from what you ordered. A good vendor makes sure that you didn’t make a mistake in the order. What about service? Is it not critical to your performance to get not just the right parts quickly, but to get them in the way you need them? For example, some businesses may need parts delivered to a certain area of the shop or at certain times of the day. All of these elements combined should be what you use to determine a vendor’s performance. In a nutshell, that’s speed, service, cost and quality. When all are aligned, the value can flow through to the end customer. (Remember, value can only be determined by the final customer. For us, that’s the guy who dropped the car off to be fixed. The only value in that part he’s buying is what he paid for it and the job it does for his car.)
So how do you go about changing an external business’s performance, let alone your own? It’s a scenario that every single business has to face if it’s going to improve, and comes down to a basic understanding that “we’re all connected in some way.” Our success is directly tied to our vendors’ success. Toyota, as it set out to improve its own performance, realized that the existing system of supplier contracting and negotiating might work in the short term. Over time, however, if the requirements for performance from its vendors were too great, it would only strangle its vendors.
For the manufacturer, the system went like this: I contract with you to make a specific part at a specific quality and price with specific delivery requirements. Then, I start beating you down into submission for an even better price and performance once I know you can’t survive without me. Strangling a vendor like this for some may seem attractive, but the realization is that these vendors are our lifeblood. They’re an artery to our business, and crushing them will eventually crush us. This tier one supplier system was broken and a different approach was required.
So what did Toyota do? It did the opposite. Instead of demanding better outcomes (price, quality, service) from its vendors, it said this: “Let’s demand the things that lead to these better outcomes. That’s running better businesses, better internal performance of the suppliers’ own companies and being more efficient at how they operate. We’ll do this by teaching them how we’ve done it.” The deal at Toyota became, if you want to be a vendor to us, we need complete access to your company’s financial performance and results. What we’ll ask for is that you improve your own financial performance by reducing your operating costs by, say, 30 percent. Once achieved, we will split the difference. You keep 15 percent of the improvement, we get the other 15 percent in the form of lower prices and we’ll show you exactly how this is done. We’ll work with you, side by side, until we achieve it together.
Now there’s a radically different way to do things. The truth is that this is how all of us have come to understand Toyota’s production system. For years, it was held tightly as a trade secret until it realized that its own performance was now going to be limited and it had to help others to achieve its own success. Even this article you’re reading today is all part of Toyota’s vision to help others improve for its own benefit.
Passing Along Improvement
Can you also pass along these concepts of improvement to your vendors? Do you need to see the local Chevy dealer’s D.O.C. sheet in order to purchase parts? Well, no, of course not today. But there are many things you can do to create this “win-win” situation.
For example, examine the previous scenario about keeping all the boxes so you can return wrong parts without penalty. Where’s the cost to you? Does this situation make you less efficient? If you were building a process-centered business and were working to remove your own waste, you would clearly be looking here and saying, “This isn’t a good thing.” So break it down. What’s the cost of the square footage under your roof needed to store this stuff? It’s probably the same space you could place a productive technician. What does it cost to heat that space, secure it, clean it, insure it and light it? What does it cost to have a person in charge of those boxes? Someone needs to know what’s what.
What do you pay him or her per week, how about insurance and other benefits? How about the technician? What’s the cost of his or her downtime spent dealing with these “need to return” parts? And it’s not just the few minutes spent actually talking about or moving these “need to return” parts. Think about the time it takes from the moment of recognition to the moment work begins again. Maybe it’s on a brand new job. If you take the time to examine the situation, you can see that what you once thought was an accepted reality of your business is really an expensive and unnecessary step that must be eliminated if you’re going to compete.
So you now “see” the waste here. Do your vendors see it? Can you teach them how to “see” it? Let’s break down their side of the equation. Do you think there’s an effect on the vendor side from these returns? You bet there is. Number one, every part you order and return costs them twice the amount to process as the ones you kept. They do everything twice, it’s just an order in reverse when it comes back. But they do the whole thing without any revenue. Dealers will tell you that most shops run at about a 15 percent return rate on parts, which translates to 30 percent increased operating costs for a dealer.
All the same cost rules apply to both of us: what does it cost to heat the space, insure the space and pay the employee? What about the fuel costs for delivery? On top of that, most dealers pay a severe penalty back to the manufacturer for returns over a certain percentage. Many times these returns just get thrown out. Is there not a “win-win” here if both the vendor and shop could reduce the parts return percentages? Could these returns be eliminated? Is this not an opportunity to create a better relationship?
Where to Begin?
Where should you start with your vendors? Like anything else in life, you have a much better chance of accomplishing change when those needing to change can see the value in it. It’s got to start by showing the vendors their win. In this scenario, that’s showing how rethinking the parts procurement process can have a great benefit to both of you. If together you examined the situation, could you rebuild the parts procurement process to everyone’s benefit?
So lay this one out. What causes these parts returns? It’s not the fault of just one of us. Many parties have an effect. For example, some shops usually just order a lot of things in the general vicinity of the damage so that “just in case it’s damaged,” they can keep working on the job. Sometimes it’s a bad database that’s either unclear about the part or just wrong. Sometimes it’s a bad estimator who just clicks on anything to move the job through and lets the technician deal with it. Sometimes it’s a bad counterperson who just does the same thing. Sometimes it’s an insurer or re-inspector who demands you try to use a known “bad” part and document its performance before getting the right one. So how do you fix all this stuff together? To me, you must create a process that has the following elements:
- Exact damage to the vehicle is known up front before a single part is ordered.
- There’s no hidden damage; everything, 100 percent, is seen. If you can only write what you can see, then see everything. That must be your guiding rule.
- There are no ties or open items. It’s either getting replaced or it’s getting repaired. If you’re not sure, then try to repair it right now before you go any further.
- Once these parts needed are understood, the vendor must verify that they’re the correct ones for the vehicle and are available.
- Once all these things are understood, a single order must be placed for the parts. Don’t go through the steps three times to place one order, just do it once, exactly right, and it will take less effort for everyone.
- Process this order in one piece. Don’t break it up – it’s an all or nothing situation. That means, “We both know it’s right, so get it all. I can’t finish the job without all the parts, so I won’t start it without all the parts. Only deliver the parts to me at once…all together.” This way you (the vendor) are more efficient with things like fuel costs and paper-work/administrative processing, and I (the shop) will spend fewer resources (the things we discussed above)
processing parts and paperwork multiple times.
So what happens if you together can create this? Well, vendor returns go down to almost zero. Their internal operating costs (on your orders) are reduced by twice the percentage of returns eliminated. Maybe they even begin to help others understand the problems and get some improvement from them as well. Your operating costs are now reduced. Your productivity is also increased as you now have all the correct parts on every job and no one needs to stop working for this reason. Your administrative costs are reduced as the associated paperwork is reduced and so on. Your cycle time is greatly reduced as parts and supplement delays are a thing of the past. What happens if you try to create it alone? Probably nothing but a lot of frustration and criticism from your vendors and, ultimately, little or no improvement.
Here’s the point: Don’t let relationships with external forces hamper your improvement efforts. Instead, make relationships enhance them. The reasons we’re inefficient often are the same reasons our supply chain is inefficient. Even insurers are included in the mix. They’re inefficient in many things they do because we’re inefficient…and we are because they are. We’re all connected. The key is to not accept the status quo and to begin to build bridges across the entire value stream so that the end user is better served…and that’s the guy who pulls that car into the driveway each night. No one in this value stream has to feel a negative effect for
others to win if we can together
So start identifying your own waste and, when it points to others’ activities, sit down with them and show them how helping you can help them. The industry is quickly being divided into those who do something about all the rotten stuff we have to deal with and those who just complain about it. Seriously, who do you think is going to come out on top? Let’s start discussing more solutions that address all parts and parties in our value stream and stop trying to further isolate ourselves. We’re all in it together.
Contributing editor John Sweigart is a principal partner in The Body Shop @ (www.thebodyshop-at.com). Along with his business partner, Brad Sullivan, they own and operate collision repair shops inside new car dealerships, as well as consult to the industry. Sweigart has spent 21 years in the collision repair industry and has done everything from being an independent shop owner to a dealership shop manager to a store, regional and, ultimately, national director of operations for Sterling Collision Centers. Both Sweigart and Sullivan have worked closely with former manufacturing executives from Federal-Mogul, Morton Thiokol and Pratt & Whitney in understanding and implementing the principles of the Toyota Production System. You can e-mail Sweigart at [email protected].