Parts Sourcing in Today’s Service Industry
Parts Sourcing in Today’s Service Industry

When a customer files a claim for a repair, they start the ball rolling in a dynamic process involving a number of potential parties; the repair shop, the Vehicle Service Contract (VSC) provider, an inspector and likely a third party parts supplier. If a dealership’s service department handles the repair, their relationship with the warranty company also comes into play. In the middle of all this is the customer. P&A Magazine spoke with claims managers and parts suppliers to gain a better understanding of how parts can most efficiently and effectively be supplied for VSC claims - where they are best sourced and the optimal process involved in getting them from the supplier to a repair shop and into a vehicle.

The customer typically has no idea how many wheels are turning in this process and is unaware of the relationships involved. If the warranty company has to obtain a part through a third party parts supplier, the customer probably only learns of this if there is a delay or a problem with the part. They view the service, promptness and the quality of the parts as a direct reflection of their warranty company – not the parts supplier.

The warranty companies we spoke with typically offer the repair shop an opportunity to quote and provide parts before seeking parts elsewhere. The repair shop may not have the necessary parts or their price may not align with the warranty company’s pricing data. In a case where a repair shop’s offer is denied, the shop can be more critical when they receive parts supplied by a third party supplier and convey to the customer that the packaging or part is not in the best condition. A dissatisfied customer, of course, does not bode well for the warranty company.

When it comes to mom and pop shops, there is a lot of variance in their ability to supply parts. A number of the providers we spoke with said small shops often do not have as many resources and don’t want to take the time to shop. In these situations, the warranty company can assist them in obtaining the needed parts, saving time and money on the cost of the parts. This is a win-win scenario for everyone.

George Krnich vice president of claims at AAGI says that getting a part delivered in professional packaging has a big impact on how it is received by a repair shop. If a part arrives that is poorly packaged, there will be no confidence in the repair shop or tech and there may already be some ill will present because they aren’t getting the part themselves. Krnich says that this dictates which vendors they use. “If they don’t send a presentable quality part, I won’t use them. I ask for the repair shop to send a photograph using their smart phone if they call because a part they received is poor quality. I log the information and the parts company in a spreadsheet. I will give them another chance but three strikes and they are out.”

When a customer makes a claim, all decisions about the type of part to use for the repair are made on a case-by-case basis, regardless of the providers we spoke with. Rhonda Chaplin, claims manager for NWAN says, “VSC policies dictate what type of parts to use - and there are many types of VSCs. Certain ones say to only use one type of part or to use remanufactured if the vehicle is over a certain mileage. Some VSCs may say replacement parts will be at least in the same quality of the part it is replacing – or if the vehicle mileage is over 60,000, parts will be rebuilt or remanufactured in many cases.”

“Our guidelines for ordering a used part is what we to refer to as a ‘like, kind and quality’ part,” explains Rob Davis, vice president of claims, Old Republic Insured Automotive Services, Inc. (ORIAS), “Put simply, if someone has a ’06 model car with 100,000 miles on the odometer, we’re hoping to locate a 06’ model engine that just has 70,000 or so miles on it. Or, if a newer model engine is the same as the 06,’ that’s okay too but we’re not going to put in an older engine with more than 100,000 miles on the odometer. We’re trying to either do better or as close to the same as what the customer had, which is what we mean by ‘like, kind and quality.’”

According to providers, factors that weigh in on the decision of what type of parts to use are:

  • Terms of the VSC
  • Age and mileage of the vehicle today and at the time of purchase
  • How long since the VSC was written and when it will expire
  • Parts availability
  • Cost
  • Dealer input

Krnich noted that in some cases, dealers may pay a little extra premium for VSCs and never want anything but remanufactured or brand new parts. He summed up the types of parts that are available:

  • Used /Recycled– a used part is taken out of a car from salvage and sold as-is
  • Rebuilt - for example: an alternator – it is made up of 150 different parts that all work together as an assembly. If one or two of those were bad, they would be replaced and the rest of the alternator would be left as-is.
  • Remanufactured – this means everything inside the case or housing of that part is replaced. Everything inside will be brand new- the only thing reused is the case or the housing itself.
  • New - brand new off the shelf – may or may not be new from OEM.

The type of part used in a repair is not necessarily determined by the type or price of a vehicle either. Chaplain says there is no set correlation between a high price vehicle and the decision to use new parts, which they always try to use when possible. “Often it is amazing how little difference in cost there is between a new and remanufactured part. You always want to have cost in mind, but you also want to provide the best part possible to the customer.”

With engines and transmissions – which are typically most expensive parts on a car - the price difference in a used or a remanufactured engine is sometimes $500 to $700. The difference between used and new can be thousands of dollars. “Brand new engines and transmissions are just ridiculously expensive,” explained Krnich, “which is why they have remanufactured parts to begin with - because by using the block or the housing of a transmission, you save all kinds of money.”

Along the same line of thought, Chaplin added, “A higher mileage vehicle can get a remanufactured transmission with a three year, 100,000 mile warranty. If you look at the difference between that and a used one - for a few hundred dollars less, you could get a used one with only a 12/12 warranty. Obviously you would go with the better one in that instance.”

AUL’s niche market is high-mileage vehicles. Repairing a vehicle while staying within the limits of the VSC, in order to save the customer money also plays an important role in satisfying customers, according to AUL’s claims manager, Frank Pfister. “We always try to work within the coverage level and aggregate to keep the customer from paying out of pocket. We also want to repair the vehicle and provide the customer assistance on any future claims that might come up.”

Parts and Pricing

Parts suppliers primarily obtain parts from salvage but some also get them direct from fleet customers. George Laurie, national account sales manager for LKQ Corporation explained that once they obtain the parts, they inventory and price them. “It’s a pretty simple process. The price we offer parts for is based on supply and demand - how many of that part-type we have in inventory by location and the turnover of that type - in other words, how long it takes to sell that particular type. Our system has an algorithm built into it to adjust the price. On the recycled side, prices are always changing.”

Krnich pointed out that since many car guys grew up when there were junkyards housing old, wrecked cars sitting in puddles of oil, they still imagine this is where salvaged parts come from. “They aren’t like that anymore at all. I have been on tours and they are completely professional. They get vehicles that have damaged fenders and doors but the insides look new. The first thing they do at salvage yards is drain the fluids from vehicles and scan VIN tags. They track all parts and know which vehicle they came from. The parts are removed and stored in climate-controlled warehouses. If a customer wants the mileage and VIN for a part, we can always provide it.”

Davis pointed out that the type of part – and where they get it - would be based on availability in the location where the car has broken down. “For instance, if a dealer sells a used car and the customer brings it back to them for repairs, the selling dealer wouldn’t stock parts for other manufactures. So, they’re going to have to find parts from another dealer or an aftermarket parts store. When we’re covering a repair on a car that’s seven to eight years old, there may not be a new part from the dealership available. … If you have a Ford, Chevrolet or Dodge truck that may have used the same part for three or four years, such as an air conditioner or starter, then pretty much everyone is going to have that part available. As soon as a car has gone out of production, the part’s inventory is going to start drying up and the prices are bound to go up.”

Pfister says that when it comes to parts, the warranty matters. They require a 12 month 12,000 mile part and labor warranty on all parts they use. This practice seems to be standard among providers.

Typically, used parts are not even considered in smaller repairs. “Nobody ever puts a used starter or used water pump in because you are only saving $20 and its just not worth it,” says Krnich, “I am not going to upset a customer, contract holder or a dealer just to save small amounts of money. You’ve heard the saying; ‘I won’t let a dollar slip out of my shirt pocket just to pick up a nickel.’ I’ve got a dealer selling hundreds of my contracts for thousands of dollars a month. Am I really going to upset one of his customers over a $50 or even a $100 savings? No way.”

Kevin Peltzer, senior account executive with Meridian, a company specializing in small parts, says they do not sell used parts at all and only 10% of the parts they sell are remanufactured. “It doesn’t fit in our business model to put our name with a part that is used. You are shooting in the dark not knowing what you are sending. All the remanufactured parts go through extreme quality control to ensure they are up to OEM standard. Some of the third party rebuilders or remanufactured are even authorized for the big three - Chrysler, GM and Ford.” He also mentioned that OEMs, such as Bosch, remanufacture parts.

Challenges – so many companies, so many parts!

Peltzer says their biggest hurdle as a supplier is core allocation. “If we have a certain product line – steering rack and pinion, for example – and we send out a pallet of 150 to one rebuilder, 75 to another and 100 to another, not all of those parts are re-buildable. So at that point, we would have to venture out to source cores elsewhere and find the right core. Then we send it through our network to be rebuilt and put back on the shelves. On a scale of 300 parts - depending on the product line – the number of ‘bad cores’ would probably be under 5%.”

In layman’s terms, Peltzer described the core as the failed part that is being replaced with a remanufactured part. “Typically if remanufactured part A cost $100, there could be a $50 core deposit. If the faulty part is then sent to the parts company, they will deduct the core deposit from the cost of the remanufactured part they supplied. If the faulty core is not returned, then the repair facility would have to pay for the cost of the core deposit since they were responsible for returning it. Nine out of ten times, this is done with remanufactured parts. It is a common industry standard.”

Managing the process when a parts supplier is regularly dealing with 45 to over 100 warranty companies can prove challenging. To be successful, they must take into account the unique expectations and process of each company. Laurie, whose company assigns a single parts sales specialist to each company, says that the first thing they do with a new customer is to get a clear understanding of their requirements. “In the old days, a customer would look for the nearest LKQ location to where the vehicle was going to be repaired and they would get one of who-knows-how-many parts sales specialists each time they called for a price quote or to place an order. We found that having only one person for the customer to talk with helps with the consistency in meeting that customer’s expectations. We produce a profile of their requirements and provide that to the designated parts sales specialist. We provide a ‘one call does all,’ regardless of where the vehicle is going to be repaired. The customer only needs to call one phone number and he will be talking to one of our parts sales specialist dedicated specifically to his account.” Laurie pointed out that it is a lot easier to get one person to follow the client’s requirements than it is to get a hundred people to do that. It also establishes a good rapport and that has been their MO since they started. Each specialist is matched up to a customer and the number of clients each specialist has depends on the workload. On average, each deals with only five or six companies.

Mitch Rand, president, C&K Auto Parts, meets the challenge of working with so many administrators by spending a lot of time in airports, traveling across the country to meet with clients and better understand how they want to do business. He then feeds that information to his employees. He has a number of warehouse locations across the US in order to ship parts more quickly to different parts of the country.

“I meet with their claims management and adjustors,” says Rand, “and try to understand what we have done well and what we have come up short on during the previous six months. I look at any new programs they are putting out there, learn anything new they are doing and keep them updated on anything new we are doing; I’m also trying like heck to get them to integrate their computer system with ours so we become more efficient working as a team.”

Rand makes his employees aware of things such as knowing that when “company A” calls, they don’t even want to know about used parts - they are only interested in new or remanufactured parts because of their investment in a dealership program. Another company might be very cost conscious and only interested in the least expensive part, even if it is a used part.

Peltzer described their biggest challenge in working with so many administrators, is knowing each one’s process in adjudicating claims and aligning his company’s values with theirs. “Some deny a lot of claims and others authorize everything. …With so many parties involved, the end goal is keeping all parties satisfied.”

“Our biggest challenges when procuring parts is the timeline,” says Pfister, “When a claim is delayed due to shipment, it can add frustration to the customer. AUL will weigh out all options before committing to shipping in a part. AUL may elect to pay more for a part, rather than save a buck only to pay out in rental, mark up, etc.”

Davis pointed out that the process for getting parts from third party suppliers has become more efficient over the last decade. “Overall, the changes we’ve seen in the last 10 years or longer are that most of the manufacturers have established regional supply centers or part distribution warehouses. Dealers may not have to stock as many parts as in the past because they can get parts in a day or two. For example, a dealer in Oklahoma can get parts from Dallas or Kansas City the next day. This has helped in the availability of parts. Way back in the day, if a part was unavailable locally and the order was coming from very far away, it would seem to take forever -or they’d have to try to find it at another dealership. Someone had to locate a part from the parts department, pull it, pack and ship it or whatever. That was a lot clumsier than it is for them to call the regional parts center. In other words, they’re more efficient this way. The regional parts center will have an inventory that meets their everyday demand because every dealer in the area doesn’t have every part they need sitting on their shelves. So, that’s probably helped the parts availability compared to five or ten years ago. You can easily put in a part number today on the computer and find a price versus the days of when people looked parts up in catalogues. Dealers used to have their own catalogues from the manufacturers, which weren’t open to the public. So, if you needed a price on a part, you had to call the dealer to get a quote. Now, you can find comparisons for most parts online or via different subscriptions. We use several on line web based systems, which provide both parts and labor pricing.”

Improving the Process

When we asked warranty companies and parts suppliers what they would like to see more of – or if there was some part of the process that could improve, everyone had suggestions to offer. From the adjustors’ skills to electronic interfaces and real time availability of parts and their arrival time, each party shared something that they felt could improve the process of working together.

Laurie says the one thing he would like to see more of from warranty companies is automation – more electronic interface between customers and suppliers for parts procurement. “We have a few customers who are headed in that direction. For others, that has not been a pressing issue yet in their organization …Eventually, I think most of them will be looking to an electronic interface for parts procurement where they can locate the part, order it and have it shipped all electronically.”

Having adjustors who are all experienced, obviously makes everything go more smoothly. Sometimes, due to a company’s rapid growth, new adjustors with less experience are in the position of dealing with claims, according to some of the suppliers we spoke with. Laurie says he would like to see more training on the mechanical side for those entering the field as adjustors. If all adjustors better know what they need, they will be able to effectively and accurately communicate that to a parts sales specialist, making the process faster and smoother. “What can - and does happen occasionally,” says Laurie, “is an adjustor will tell us he needs a certain engine for a particular car, but there may be three different engines or applications for that particular model. We have to know which one.”

So what do they do in a situation like this? “First,” says Laurie, “they have to give us the VIN and our system has a VIN decode program. We have to find out the production date of the vehicle but the VIN doesn’t always tell us. In a particular year there may have been a change, where the manufacturer has come out with a different variation of an engine type. This determines which engine we send to the repair shop.”

Rand, however has a different take on the skill sets that best serve adjustors. He says finding a really technical, mechanical person who is really good on the phone and has really good computer skills is a “tough nut to crack.” “You gotta pick and choose your poison. If you want someone who really knows a car inside and out, you may have to give up some computer skills and typing – and you have to consider communication skills over the phone. We get the most out of a service writer type of adjustor who is very good over the phone and is able to translate a certain amount of technical knowledge. We need someone who has really good communication skills.”

If they send a part and the repair shop calls back saying it doesn’t work, Rand says that even the most technical person in the world being able to tell the shop exactly where they are going wrong and how to remedy the situation, wouldn’t be enough to iron out the problem. “The bottom line is that they would get really upset that a company like ours is trying to tell them how to do business. So we may win the battle, but we lose the war. Its almost better for us to say, ‘Hey, I ‘m really sorry that you are going through this problem. If your technician says he needs another transmission, I will send you another transmission. It is better to just make the problem go away [even if the part is not really the problem] and keep the dealership happy. The dealership in turn has a relationship with our customer and we keep them happy.”

Krnich would like for parts suppliers to provide a tracking and shipping number that he could then pass on to the repair shop. This would help the repair shop to better schedule the repair and they could pass that information on to the customer. Currently, he says this information is only given if there is there is a problem.

Real time availability in data - knowing the availability of a particular component at anytime – is the thing Chaplin would most like to see happen. “We never know how many of a particular item is available or when the count might change. If we get a quote, it would be very helpful to receive notification if that part is no longer available. Real time updates letting us know when the part is boxed and shipped, when it is in transit and when the part has arrived would also be helpful.”

In closing, Pfister offers advice to strengthen the relationship between warranty companies and parts suppliers, “Set a true expectation on when a part will arrive and stand behind your product. Honor the warranty provided. This will provide trust and create sales.”

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