An automotive independent remanufacturer is one who remanufactures and sells auto parts outside of the original equipment manufacturer (OEM), and original equipment supplier (OES) distribution channels. In a simplified view, the independent distribution channel is broken down into two groups: warehouse distributors and retail outlets that service the independent repair facility, the do-it-yourselfer (DIY), and in some cases the OE dealership.
Independent remanufacturers have been around for a long time and have found an important niche in the service of aftermarket parts to the driving public. Their value propositions have long been price, position, and coverage. They price their product so that after all the distribution markups, the final price to the installer is 20-50% less than the price of the new part. Through the vast distribution network they position their product as close to the customer as physically possible and have stock on hand to deliver to the customer most parts the same day. They then offer an “all-makes, all-models” program so that they become the one-stop-shop for the end user. These advantages have proven to be tough competition for the OE dealer.

Two ingredients are necessary for an independent remanufacturer to be successful in the automotive aftermarket: cores and specification data. In the past, most remanufacturers relied on the OEM using proven parts in many different vehicles and for many years. The law of economies of scale worked out for all involved. The OEM paid less for each part and the remanufacturer was able to amortize the reverse engineering development work over a large quantity of units. The ROI for the remanufacturer was relatively easy. Then it happened, the Japanese attacked. No, it was not as embolden and quick hitting as Pearl Harbor, but it had a similar long term effect on the independent aftermarket (I apologies to all my Japanese readers for bringing up a historically sensitive issue. I’m very sarcastically thankful for our relationship now, for without it, my personal comfort would be much greater without the constant nagging from my son to buy him Yugioh, Dragon Ball Z, or Pokémon cards. Oh, and don’t even get me started on Bakugan fighting arenas… OK, maybe the sci-fi geek in me was a bit more into it than I should have been for my age…) Enough about anime… what the Japanese brought to the American manufacturing machine was the idea of continuous improvement both on the product side and on the supply chain side. Eliminate waste at all cost and if it isn’t broken, break it and make it better. Change was good.

Another major change in the industry starting around the early to mid 80’s was the introduction and widening acceptance of electronics targeted to control emissions. This humble beginning burgeoned into a technological revolution of what and how things are controlled on the vehicle. Electronics drove change and innovation at an exponential rate.

The independent remanufacturer began to see many more model year changes in parts as well as specialized parts for specific models. This changed the game completely and is still affecting how independents approach new part number introduction. These factors along with the OEM and OES desire to capture more of their aftermarket sales has lead to a paradigm shift in the role and future of the independent remanufacturer. For most independent remanufacturers, CASH IS KING! Therefore, any factors that disturb the delicate balance of cash flow that remanufacturers manage could have a catastrophic affect on their future viability.

Parts Proliferation:
As discussed earlier, parts proliferation due to continuous improvement or technology advancement is here to stay and must be managed within the independents new part introduction process and justification. Small variations need to be dealt with; an extra mounting boss, mounting ear, higher rated component, and even software changes. In fact, before the advent of Flash Reprogramming, most OEMs would change the part number any time they made a software change. Those who program for a living know that with any robust system, those changes happen frequently.
Reverse engineering activities can be very pricey even within a product category that an independent already has deep coverage in. Even small variations need to be accounted for and therefore every characteristic needs to be measured and documented. New replacement parts need to be measured, drawn, sourced, inventoried, and scheduled. When you’re doing 30 part numbers for 50,000+ total sales per year, this is no big deal, but when you’re now doing 100 parts for 9,000-10,000 total sales per year, the cost become significant. Add to that the disassembly, cleaning, fixturing, component repair, and testing processes that have to be validated or developed, and it can grind new part introduction processes to a slow crawl. Independents have attempted to deal with this issue by “family-izing” part numbers. This way they are only dealing with the small variation changes within a group of parts. Despite this adaptation, coverage gaps are appearing in many of the “full-line, full-coverage” companies.

Technical Complexity:
It goes without saying that the world is getting more complicated, and therefore, the same is true with every durable good produced. For independent remanufacturers, it’s a blessing and a curse. The blessing is that it limits competition; the curse is that it significantly stretches their technical capabilities. Products that once were purely mechanical in nature now have electronic controls in what has been termed as mechatronic parts (power steering replaced by electrically assisted rack & pinion, integral ABS replacing master cylinder, electric water pump) and the list goes on and on. Most of this technical complexity is driving up the cost/price of the part which helps any ROI activity, however, it costs an extraordinary amount more to develop the processes to remanufacture them. Again, with less volume due to higher parts proliferation, this cost, in many cases, can kill a business case and ultimately cause a remanufacturer to decide not to cover those applications, leaving a coverage gap.

Core Availability:
Parts proliferation as well as increased competition has had an effect on core availability for the independent, however, the most significant factor that is limiting core availability is the awakening of the OEM/OES community to the importance of core ownership to market share retention. On a increasing scale the OEM and OES are understanding the timeless reman adage, “He who owns the core, owns the market”. The OEM/OES have the best chance to capture the core since they can put a core deposit on every part sold from SOP (start of production). The only way for the independent to get a hold of those core parts is to either buy surplus new, surplus core from the OEM, offer the OE dealer more for the part than the OEM core deposit, or wait for them to reach the scrap yard [See my Cores, Cores, Cores blog, July 2010, for more info on the core market and core seeding approaches]. Heavy duty OEMs have been doing this for years as evidenced by the fact that many of the independent remanufacturers have had to resort to tooling up parts to seed their core. High complexity parts, however, are well controlled by the OEM in these markets.

The Implications:
Many of the large independent remanufacturers that are attempting to maintain the “all-makes, all-models” approach to their market have resorted to different strategies to accomplish their goals. One of these strategies is to catalog every part number in existence and, for those parts that they cannot get enough cores to launch a stocking program, they code it as an R&R (repair and return) only part. Some are even using this process to gauge demand on late model parts to know what parts are the up-and-coming gems that need a full stocking program. Customers are directed to send in their part and wait, in some cases, up to a week to get their part back repaired. The cost and lead time for this program is significantly more than the usual stocking programs and can really undermine the value proposition of the independent – lower cost and faster part delivery than the OEM.

Another implication of the increase of technology and parts proliferation is the growth of niche remanufacturers. These remanufacturers specialize in certain makes, models, and commodities that are, in many cases, underserved by the larger independent remanufacturers. Most of the “Make & Model” applications are in the import and more specifically, German OEMs. A simple internet search returns a large quantity of Mercedes Benz, BMW, and VW specialists. Also, while the larger independents are focused on just keeping up with their coverages for their current core commodities, new commodities are being left for others to enter the market with.

A solution to the problem would be for the independent remanufacturer to attempt to do business with an OEM/OES as a third-party supplier so that technical information is provided to lower the cost associated with the reverse engineering process. Unfortunately for the independent, the OEM/OES community is sensitive to giving any information to the independent channel for fear that they could lose market share when that independent uses the information to service their independent customers. Most OEM/OES will only work with OEM/OES-only suppliers or buy/start their own remanufacturing operations so that they can keep their information in-house and out of the independent channels hands. OEM/OES-only suppliers are those remanufacturing companies that do not do business in the independent channel and only service OEM/OES customers. In fact, many OEM/OES’s are mandating that their remanufacturing suppliers have no affiliations to the independent aftermarket or they will not be able to continue servicing their business.

Is all lost for the independent? Certainly not! If I know anything of the independent market, it’s that they are survivors. Their will to succeed rivals none. In earlier blogs I wrote that anything is remanufacturable with enough time, money, and desire. Well, the independents have desire. They’ve learned to prosper when all hope was against them, and they’ve learned to succeed when most said that they could not. They will find a way, this I know for sure. It will just have to be in different ways than they are operating now.