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.

No meaningful conversation can be had concerning remanufacturing without delving into the treacherous and confusing subject of cores.  Ah, just the word, CORE, illicits the full gamut of emotions depending on the audience.  “They’re dirty,” “It’s a crooked industry,” “They’re killing my balance sheet,” “I can’t get enough,” “I have too many,” “How do I value them?”  I think many of these ideas about core arise because there is a lack of a holistic understanding of why cores are important and how they should be dealt with and perceived.  The need and use of cores creates a unique business model for the remanufacturing industry and causes remanufacturers to analyze their businesses in terms of supply-loops and not chains.  This is one of the many areas where remanufacturing diverges from traditional manufacturing.  We’ll leave a discussion on “Remanufacturing and Lean” for another post.  Let’s take a look at some terminology before we begin a more thorough discussion of cores.

Core:

Over the years I’ve heard a variety to sophisticated and elaborate definitions of what a core is, but I prefer the simplistic approach to defining a core, which is simply, a used part of any kind.  Most of the time this part is not referred to as a core until it has been separated from its original-use application.  This vague definition heightens the confusion on the need, use, and value of a core.  It is why cores have such a wide spectrum of worth and value.  The same terminology is used for a part that has only been in an application for 1 hour and the exact same part that has been in an application for 5+ years.  A part that was removed due to failure is considered the same as a part that was disassembled from that same application due to obsolescence.  The term core covers a broad spectrum of appearance, functionality, and completeness and therefore can create a high level of anxiety to the unsuspecting and unwary receiver.

Peddler:

Peddlers are those individuals that go into the salvage yards and pull the parts off the.  Armed with shopping carts, wrenches, and wire snips they search for parts that they can sell directly to core brokers.

Core Broker:

Core brokers have long provided a valuable service to the remanufacturing industry supply chain here in the US.  Core brokers serve as a consolidation center for cores.  Brokers work with peddlers to purchase cores from crashed vehicles, OEM/OES surplus, and dismantlers and consolidate, sort, and in many cases link to customer part numbers.  In the early years, cores were purchased by type and make, but as remanufacturers became more sophisticated and more discerning, they began “cherry picking” for certain part numbers.  This approach put a lot of the risk on the core broker who was forced to guess on what part numbers their customers would want in the future.  Since they were adding more value, cores purchased this way became more valuable, and therefore more expensive.  Remanufacturers send the core brokers a bid list of the part numbers and quantities that they want and the core broker will submit a price quote for these cores.  After some negotiation, cores are purchased and shipped to the remanufacturer.

[List of core brokers:  http://buyreman.com/results.php?search_type=keyword&term=core+supplier&category=&heading=]

Core Deposit/Core Charge:

Core deposit and core charge will be interchanged in this discussion.  The core deposit is the “bounty” placed on the core when the part is sold for aftermarket purposes.  The intent of the core deposit is to ensure that when the aftermarket part is sold, the failed part (core) is returned to the remanufacturer.  For those that live in states with bottle deposits, the principle is the same.  The end-user purchases the beverage and pays a bottle deposit up front.  When the beverage is consumed and the bottle is returned, the deposit value is returned/credited back.  Similarly, when a remanufactured part is sold, the customer also pays for the core deposit up front and is credited for that cost once the core is returned.  The amount of the deposit is predicated on a variety of factors which include but are not limited to; part value, part price, availability of core, market competition, price of a new part, etc.  

Core Book Value:

Core book value has nothing to do with core deposit value, unless you are in the distribution channel of the part and then the book value is the deposit value.  As with any asset in your business, the core book value is the price you paid for that asset, in this case the core.  This particular issue becomes tricky when you have different purchase prices for the same part.

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Now that we have established some common ground in terms of terminology, let’s discuss cores relative to the remanufacturer.  A whole other discussion could be had concerning the distribution channel partners, but we are going to focus on the remanufacturers for this discussion.

Core as a commodity

A core can be categorized in a similar manner to precious metals, natural gas, or oil as its value is based on supply and demand principles.  Core brokers and remanufacturers engage in the bartering process, each with the goal of maximizing their profitability and minimizing their risk.  Hard to find, in demand cores are sold at a premium, while common, low demand cores are much less expensive.  The entire process is won or lost on the grounds of information.  The party with the most accurate, up-to-date information will almost always win.  Knowing how high the demand will be at what time in the life cycle is a critical piece of information.  Those who develop life cycle charts from historical data, current data like VIO (vehicles in operation), can more accurately determine what a particular cores value is at any time in the aftermarket life cycle of that part.  Cores may be a dirty business, however, the principles employed to succeed in obtaining the most valuable resource to a remanufacturer can be a sophisticated as any precious metal or energy resource intensive company.

How should cores be valued?

The IRS has determined that cores can either be valued by their costs or market value, with enough extra “accountantese” to choke an adult white rhino.  Reference the IRS Core Valuation Method (http://www.irs.gov/newsroom/article/0,,id=106087,00.html) for a detailed legal approach to core valuation.

Once you understand your cost, cores can be treated as any other asset.  The issue arises when, during the same calendar year, your cost are different for the same part number core.  I have found that the best way to deal with this is to keep accurate part number data on all cores purchased and take the weighted average of all purchases to determine the annualized weighted cost of the core.  If done on an annual basis, this cost can be used to value your core as well as expensed in your Cost of Goods Produced through your MRP system.

Example:

 The weighted average can then be calculated as follows:

WA = (($15*100)+($20*50)+($13*100)+($17*75))/(100+50+100+75)

WA = (1500+1250+1300+1275)/325

PART A VALUE: $16.38

Multiply this value by the quantity you have in inventory and you get your core inventory value. If you receive free cores for some “must be livin right” reason, these cores will lower the weighted average by that quantity multiplied by zero.  If you view your financials on a monthly basis, I would suggest an MS Excel program to create a rolling 12 analysis.

In future posts we will discuss the differences between the independent remanufacturer and the OEM/OES, however, you can clearly see the significant advantage of the OEM/OES, where much of their seed core is sitting on the vehicle that leaves the manufacturing plant.  Each time an aftermarket part is sold a core is returned at no purchase price, or zero value. Hugh advantage…

Core Amounts (too much, too little)

There are several trains of thought when it comes to the question of how much core is enough.  Some feel you can never have enough core, others feel that the less the better.  I think there is a happy medium between the two.

The life cycle charts developed in the commodity section of this post is a good place to start to begin the process of managing core needs.  Cores can be broken down into categories depending on where they fall on the life cycle curve.   The following chart is one way to categorize cores so that better decisions can be made by the corporation.

 Smart core buyers with good life cycle charts and a good gut feeling for their industry would purchase as many CODE A as needed to properly seed the program and then manage the core deposit values through the life cycle so that by the time the core moves from C to D, the deposit value is lowered to keep the formula at (Core Return = Sales).  By time sales are zero, core returns should be zero.  Of course, anyone who does this for a living knows that this is the “holy grail” of core management, but should be the goal.  Since I like to live in the realm of reality, let’s talk about the two scenarios that arise when cores cannot be managed so well.

Not Enough Core

This can be a very frustrating and expensive problem.  When there’s not enough core to meet your customer’s demand, there are finite amount of profitable remedies.  I’ve listed them in order of typical cost from lowest to highest.  You may find examples where some of the remedy costs are switched but this is a good guide to begin your analysis.

Salvage – In this scenario, you’d better be salvaging every core that you own.  In many cases you may have to tool particular parts so that you can drive your salvage percentage well above 95%.

Conversions – Look for similar core that you may have excess of and convert that core to what you need.  You may have to tool up some parts and do extensive validation testing, but it will, in most cases, still be less expensive that the following options.

Buy New – Buying a new part seems counterintuitive to a remanufacturer, but this method can be very successful.  You’re buying new to seed the core you need with the expectation that when you sell that part, you will get a core back to remanufacture.  If you can “turn” that core several times in a fiscal year, you may be able to break even on the purchase, and then it’s profit from there on in.  There are now some opportunities to purchase “new” parts from overseas, but buyers beware.  Proper validation is needed or you will tick off some of your best customers.

Tool-up – This is usually the last resort for a remanufacturer.  It is costly, difficult, and sometimes prohibited by patented technology.   This process includes reverse engineering, drawing, tooling, manufacturing every component of the part and then assembling, testing, and shipping.  There is a great amount of engineering know-how needed to choose correct material specification and well as validate each and every part.

Too Much Core

This scenario can be just as bad as too little core because every core you have left over at the end of it’s life-cycle will need to be written off your balance sheet unless you find other avenues for it.  As discussed earlier, the best scenario is to manage the deposit value throughout the lifecycle to minimize your risk at the end.  For those parts that slip through the cracks there are only a few remedies outside of a right-down after scrap value.

Conversions – We discussed earlier the option of converting one core part number for another with greater demand.

Secondary Uses – This is a bit of a stretch, but desperate times call for desperate measures.  Window lift motors can make an attractive automatic commercial trawler fishing line retriever.  You get the point.  If we remanufacturers are anything, it’s creative.  It’ll be a fun project for someone.

The key is to try to avoid these problems in the first place and be sure to have enough core at launch of the program to supply your customers shelves and then manage the core deposit to be sure you are getting back to amount you want to satisfy present orders, once dropout is factored in.

Core Ownership

Finally, I leave you with the most basic question in this whole discussion, “Should I own the core?”  I will answer that with the truest truism in all of reman, “He who owns the core owns the market.”  There were programs where I owned 95%+ of the core and I could control every aspect of the market.  Then there were programs where my customer owned the core; moved the program to another reman and I was powerless to do anything about it.  If you can’t own the core, have some aspects of the process that only you can do and know how to do.  This will protect you somewhat, but only for a while until your competition figures it out.

Happy core purchasing and management!

Reman folks are a different bunch. Just put us together at a trade show or industry event and we act like Trekkies at a Star Trek convention. We have our own language, our own style (we wear jeans because we are in a dirty business, and we like it), and our own approach to life. I for one have never seen myself as one of those guys in a sexy industry or that what I do can have a lasting improvement to all of humanity. I’m ok with making a living on others junk. I love what I do, and have no desire to do anything else. I don’t want to design new electronic modules; I just want to fix old, broken ones. If we are anything in this industry, we are a proud people because most of us have been told time and time again that what we are doing “can’t be done,” and we do it every day.

Ah, pride and reman – a dangerous elixir. On the one hand, why shouldn’t we take pride in what we do and have done as individuals and as an industry? We’ve done things maybe we didn’t even think we could do at the start, but with enough time, money, and most importantly desire, we accomplished the impossible. We’ve all been taught that many will say things can’t be done, but we’ve learned to ignore that and forge ahead to the goal. We’ve been taught to think differently. We’ve been taught that failure is not an option. We’ve been taught that if it was easy, everyone would do it. If it wasn’t for these founding fathers/teachers of reman, most of us wouldn’t be here.

On the other hand, pride can lead to bad decision making. For most remanufacturers, cash is king. As much as technical failure is not an option, project failure is also not an option as there is only a precious amount of that limited resource call cash. As a young reman engineer, whenever I questioned why we were doing something, I was told, “We went to the moon didn’t we? Anything can be done.” Over the years I realized that statement was not an answer to my question. I was beginning to think about the business implications and not just how much fun of an engineering project it would be. Sure we went to the moon, but why? I was born that year, 1969, so I can’t say that I completely understand the geopolitical happenings of the day, but from what I can deduce from textbooks, we went to the moon simply to beat the Russians there. We were a focused nation; money was no object, resources were no object. The objective was clear. With limited time, but unlimited money and desire, we did it. We beat the Russians. As someone from the next generation, I again ask, “why?” Pretty expensive rock collection mission, although I was very thankful as a kid for Tang.

As a budding business thinker I forged destined to make sound decisions no matter how much pride I had to swallow. Now, as a much older, wiser reman lifer I was reminded that we are all susceptible to the trappings of wanting to prove we can do something nobody think is possible. Several years ago I was confronted with one of those defining reman moments. Those of you that have been in the industry from some time will know what I’m talking about. My division was small but growing quickly and I was riding the wave, when it happened. I was on a phone conference with an engineer and he said it. He said it with such flair, such conviction, such arrogance that the reman hairs on the back of my neck literally stood up. The “IT”? “Russ, what you are suggesting is impossible – it can’t be done and furthermore, I forbid you to even attempt to reman our part. You could face a lawsuit if you continue with this train of thought.” Wow! I can honestly say that I have never heard that before. The “it can’t be done” sure, the “it’s illegal to reman our part” absolutely, but never a forbiddance. I was speechless, and for those who know me – not an easy thing to do. What did I do? I weighed the business parameters? I analyzed the data to see if this was the right thing to do? I pulled my direct report staff together to illicit feedback on the prudent response and approach? Nope! I did what any blue blooded American reman professionally would do. As soon as the phone conference was over, I called in my direct report staff and gave clear specific direction. “You are all to drop every project that you are working on and work on this product. Money is not a constraint, resources are not a constraint. I want weekly updates. Failure is not an option.” I wasn’t just fighting for my reputation; I was going to battle for all remanufacturers globally. No one “phones” into our house and tells us what we can or can’t work on.

Several months later after a textbook development and implementation process where we exceeded all my expectations for volume and profit, one of my direct reports quietly and respectfully asked to talk to me in private. He had one question regarding the previous project, “Why? Why would we risk so much on this project. If we couldn’t solve the technical problems or the replacement parts put us upside down on the financials, it could have crippled our business. We may have even needed to do some layoffs, so I just want to understand what you saw that none of us did.” I sat there quietly thinking of all the good leadership things I could say, or how I could have promulgated my legend by telling him that business is a mix of gut and data and that my gut is pretty good when it comes to these things. I knew the truth though. I knew down deep inside I let pride get in the way of good sound decision making. I had become what I determined not to be. So I did what I would have wanted from my leader. I looked him straight in the eye and told him, “I blew it! I was wrong to let my pride and arrogance get in the way of good business decision making.” I told him the circumstances that led up to me calling them together and giving that ridiculous direction. In hindsight, we may have made the same decision to move the project forward, but under better constraints so that if, at a certain time, it exceeded a constraint, we would re-evaluate and potentially kill it.

It ended up being a great conversation and he and I had many more discussions since on decision making with limited information. Don’t get me wrong, as leaders, many times we have to make difficult decision with limited data, but our motives should be business-pure. The moment pride and ego creeps in, we run the risk of hurting our division or more critically, hurting those we have been given charge over to develop and nurture. I got lucky. My mistake did not have disastrous consequences for me, my people, or my company. I hope through this experience, I have become a better leader and a better remanufacturing professional. I also hope other young reman leaders can learn from my errors. I do know that I don’t like the taste of pride when swallowed.

The Remanufacturing Paradox

 Please submit your paradox, as funny or ironic as they may be.   I’ll add it to the list and republish every so often.