3 Key Points in this Article:
1. The race to the bottom hurts everyone.
2. The purchase price is not the most important metric.
3. Learn about the best way to create more profit for your business.
You want the best price possible for the heavy-duty parts you purchase. Your parts distributor wants to make as much money as possible on the heavy-duty parts they sell you.
You need each other but your needs are diametrically opposed, and it seems like it is an intractable problem.
Don’t have time to read the entire article.
That’s okay, listen to episode 3 of The Heavy-Duty Parts Report.
The Race to the Bottom
First, I need to talk to you about something parts distributors commonly call “the race to the bottom” because on the surface it looks like it is good for the fleets and repair shops that are buying the parts but in actuality, it is just plain bad for everyone.
That is because of “the race to the bottom” and I’ll explain how it works.
As our economy has expanded over the years more and more distributors started selling heavy-duty parts. As the number of distributors increased the supply chain outpaced the demand.
When I started in the heavy-duty parts industry there was a clear line between dealers who sold new OEM parts at a premium price and aftermarket distributors who only sold remanufactured parts at a discount.
Enter the impact of globalization and North America got a flood of cheap aftermarket heavy-duty parts manufactured by unknown factories overseas and these parts were distributed by anyone who had enough money to buy a container load of knock-off parts.
Quality was all over the map, but the purchase price was so low that too many they just couldn’t ignore the gap between OEM parts and these aftermarket knockoffs. In those early years, many people paid a heavy price with unscheduled downtime and fines for using parts that didn’t meet safety standards or OEM specifications.
In time the product quality of what was now called “offshore aftermarket parts” improved and many remanufacturers were put out of business being replaced by independent distributors who formed buying groups that started to rival the buying power of truck dealer networks.
Once the aftermarket buying groups started taking significant market share from the dealers the dealer networks responded by going to the same offshore manufacturers and buying parts under something called “white label programs” where the products were shipped to the dealers with their own unique brands and labels. The dealers still promoted their OEM parts but now offered a second line of parts that were approved by the dealers and “met or exceeded OEM specifications.”
All this competition was initially very good for the fleets and repair shops who purchased these parts, but it sparked what is called “the race to the bottom.”
This is how the race to the bottom works:
The distributor whom you like the best and provides you with great service get most of your business and they put a 30% markup on all the parts they sell you. So, if it costs them $100, they sell it to you for $130.
You buy from the other distributor when you need to, but they only get 10% of your business and because they get so little business from you, they don’t discount any of their prices except for the odd special.
Rates have been strong, and you’ve been so busy you don’t have time to check prices anyway. You just phone and order the parts from your preferred distributor.
A new distributor comes to town and they really want your business so they decide that they will buy your business with some fantastic initial pricing and once you start doing business with them, they fully plan on raising your prices.
On Monday morning, the new distributor’s salesperson comes to your office with a box of donuts and a flyer. The salesperson spends about 15-minutes talking to two of your mechanics about the weather and what they did on the weekend and your annoyed because they are supposed to be working.
You walk over and the salesperson introduces themselves and hands you a credit application and a flyer. Boldly featured on the front of the flyer is a price on brakes that makes your jaw drop.
You play it cool and tell the salesperson you will think about it.
The salesperson leaves and genuinely thinks that they have done a great job and will proudly put on their sales report that you are a prospect that will be signing up for a new account and making a brake purchase tomorrow.
On Tuesday, the distributor that you don’t buy a lot from comes in with a box of muffins (because they think that it differentiates them from all the other salespeople who drop off donuts), wastes two of your mechanics time for 15-minutes and finally makes their way to your office.
You get your revenge by asking them to quote you on brakes and although you don’t mention the new distributor the flyer is on your desk. Most salespeople learn to read upside down so the salesperson is aware of the distributor, product and the price.
This salesperson puts in their sales report that the new distributor in town is mudding up the water for everyone but hopes that you are genuine about looking at a new brake supplier and they submit a quote at a slightly cheaper price.
Now up to this point, no one has talked about exactly what they are trying to sell you. They may say things like, “these brakes are 23K LB PREMIUM BRAKES and they MEET OR EXCEED OEM SPECIFICATIONS.” But you don’t get a lot more information than that.
On Wednesday, your preferred distributor comes in for their weekly visit, they have the donuts you really like, and they even make sure there is a few extra of your favorite type of donut in the box. They are so thoughtful. They talk to everyone but that is okay, “how else are they going to serve you if they don’t know what is going on in the place?”
You ask them what they have been charging you for brakes and their complexion goes a little pale. They tell you and you show them your two quotes at significantly cheaper prices. Now one of two things happens next.
They just match the price. If this happens when they leave, they call their sales manager and complain about those darn competitors who only sell on price, and the sales manager and the salesperson agree that you’re a valuable customer and so it is just the cost of doing business. Besides, these competitors won’t be around for long if they continue to sell at such small margins.
The other way it may go is the salesperson will talk about quality and remind you of the time you bought those “offshore valves” back in 1998 and will scare you into staying with what you know. They will say something like “I’ll talk to my sales manager and see if I can help you out a bit.” You’re happy with that and in the end, you get a 10% discount on the brakes you’ve been buying all along.
Once the other distributors find out that they are not going to get your brake business they decided to try another product and another product and another product.
The cycle continues and slowly the prices go down on everything.
So far you might be thinking, “that sounds great for me!”
As with most things in the world you rarely get more than you pay for.
Then something happens to the economy and rates plummet and things aren’t so busy anymore. This gives you more time to price and shop and you find yourself playing the price game every day.
As the profit margins for these distributors you deal with are driven down (that is where the expression “race to the bottom” comes from, as in which distributor will drop their prices to below cost first) the distributors must make tough choices.
Initially, they will accept the lower margins and try to sell a wider range of products to their existing customers and/or increase the number of customers they deal with to increase their volume making up for lost profit.
But this has a negative impact on you. They won’t have enough profit to invest in increased infrastructure so they will just try to do more with less. The inevitable result is they will be less focused on you and your needs because they flat out don’t have the resources to give you the attention you deserve.
Eventually, they will decide to do something that up until now they have avoided. They will source lower priced products to sell to you to try and restore their margins. This means your preferred distributor will start selling you lower quality parts. Inevitably something goes wrong and you find yourself increasingly frustrated with your once favorite supplier.
In your frustration, you decide that you need to keep everyone honest and so you spread your business around to the various parts distributors in your area. This has an unintended consequence though that you may not have thought about. By reducing the amount, you spend with anyone distributor, you dilute your buying power and you are downgraded from an A+ customer to a B or even C customer.
This means that you get reduced service levels and anything that you buy that isn’t a featured part on sale you will pay a higher price than if you consolidated your purchases and weren’t so focused on price.
Purchase Price vs. Cost-per-Mile
The solution is counterintuitive.
Pay more for your parts.
How can paying higher prices be better?
It all comes down to the idea that “you rarely get more than you pay for.”
All things being equal, higher prices are an indication of higher quality.
I know sometimes it feels like distributors are price gouging but in the aftermarket that is rarely the case. It is simple, most distributors have tens of thousands of parts in their inventory. They don’t have the time to price each part, so they use formulas.
Most distributors have five levels of pricing:
Level 5 – Over the counter prices for walk-in customers. Think a truck driver who owns one truck and is paying with a credit card.
Level 4 – This is the first level of discounted prices. This level of pricing is for small repair shops and fleets that purchase a few thousand dollars a year and often pay with a credit card.
Level 3 – This is the price that most fleets and repair shops with a credit account are given. It is approximately 20% – 25% above the distributors cost across the board. If you buy between $10k and $100k this is the price you are probably getting.
Level 2 – This is a price that requires the local branch manager or sales manager to authorize. It is the go-to price level that a salesperson will quote when there is price pressure from competitors. It will be around 15% above cost. They will try to only use this level of pricing on select high moving products like brakes, drums, some lighting, and other high-volume part numbers. You might also get this price if you purchase between $100k and $500k.
Level 1 – This is the ultimate price; it is reserved for large national accounts and key accounts that purchase $500k or more a year. It can be from 7% to 10% above cost.
Now, every distributor calls these price levels something different and the parameters around who qualifies for each price level can differ from one distributor to another, but this is a good general rule of thumb.
My point is simply that if your price is higher it is because the part cost the distributor more, and the reason it cost the distributor more is that something about the manufacturing process drove the cost up. Typically, the things that drive up manufacturing costs are higher quality materials, longer lasting service intervals and/or better technology and overall performance.
Therefore, I recommend that you pay higher prices for your parts.
Let’s go back to the example of buying brakes. We are going to get into a detailed discussion about brakes in episode 4 but for the purpose of our discussion today I want to explain something to you about brakes.
When you manufacture brakes, the labor accounts for only 20% of the total cost and since brakes are manufactured in South America or Asia the cost of labor is consistent. The cost of producing the table and web is also consistent as well as the cost of shipping the product to North America.
That means that as much as 60% to 80% of the cost of brakes is in the brake block. If you are presented with a brake that is 50% of the cost of the brakes you’ve been buying it means that the place that they saved money is in the brake block itself.
The brake block is what makes a brake work well or poorly, last for multiple years or burn up in 6-months, be easy on drums or chew them up, provide good braking performance at the bottom of a large hill or fade after being heated up.
You rarely get more than you pay for and if you buy cheap parts you are going to get cheap performance driving up downtime and driving down profit.
Conversely, if you buy high-quality parts you will get higher performance out of the parts which will drive down things like downtime and your total cost of operation and driving up your profit.
Here is the strategy that I recommend you use with your preferred parts distributor.
Step 1 – Invite the salesperson to have a 30-minute meeting with you and schedule a time that you can talk and not be interrupted.
Step 2 – Explain that you value the distributor and that you want to work more closely together to improve the performance of your equipment and reduce the total cost of operations.
Step 3 – Ask the salesperson to help you calculate the cost-per-mile of high wear or high dollar parts. I recommend that you start with your brake shoes, drums, spring brakes, oil, filters, fuel, and tires.
Step 4 – Once you have baseline metrics you can then leverage the distributor’s relationships with manufacturers to recommend ways to improve your performance.
Step 5 – Don’t be complacent and don’t be satisfied. Keep testing and keep expanding the parts you are measuring. Include compressors, valves, fan clutches, water pumps, lights, alternators, starters, airbags, shocks, driveline, transmission, gear, and other parts.
Step 6 – Although I recommend that you protect your buying power by consolidating your purchases with as few suppliers as possible I also believe it is in your best interest to put a Request for Quote process in place and when required send out those RFQ’s with the specifications that you require.
Step 7 – Over time your distributors may become complacent themselves. Key people get career advancement opportunities or retire, and service levels may decline. I recommend that you get your preferred distributors to work with you to develop a simple way to track their performance. Get them involved in establishing the metrics that you will evaluate their service and then hold them to it.
This is a lot of work to set up but you can get your suppliers to do most of the heavy lifting and trust me they will be tripping over themselves to help you since I imagine that this will be the first and only time in their career that a customer will ask them to get involved at this level.
By leveraging the resources that these distributors and manufacturers have at their disposal you will make your business more profitable and this will empower you to compete with competitors that are putting price pressure on you.
I hope that I have given you something to think about and that you will seriously consider the cost-per-mile and the total cost of operation instead of just the purchase price.
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The Heavy-Duty Parts Report is an industry leading podcast where Jamie Irvine and his guests provide industry news and expert advice about the heavy-duty parts you need to keep your trucks and trailers rolling, lower your cost-per-mile, and keep you informed about what’s happening in the industry.
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