<h5>Spare parts: A critical component for success </h5>In the competitive automotive industry, after-sales service plays a crucial role in determining a brand's success. Central to this service is the availability of genuine spare parts. As the landscape evolves, Original Equipment Manufacturers (OEMs) face an increasing challenge in managing a proliferating array of spare parts, driven by several factors.  1. Expanding product portfoliosAs competition intensifies, OEMs are expanding their product lines to attract and retain customers. Over the last five decades, the number of players in the two-wheeler and passenger car segments has surged dramatically. In the 1970s, there were only 3 two-wheeler and 3 passenger car companies. By the 2010s, this number had increased to over 15 two-wheeler and 25 passenger car companies, including new tech-based entrants [1]. This strategy, while beneficial for sales, leads to a proliferation of spare parts that need to be managed throughout the vehicle lifecycle. Simultaneously, the number of passenger car models offered by OEMs has increased significantly. In the 1990s, each OEM offered 3-5 models. By the 2000s, this number had grown to 10-15 models per OEM, including various body types and segments. In the 2020s, each OEM offers over 25 models, including multiple variants and electric vehicles [2]. This expansion results in a complex array of spare parts to manage. 2. Regulatory and environmental pressuresThe regulatory landscape is also becoming more stringent. For example, the transition to BS-VI standards in India required significant upgrades to engine components, exhaust systems, and after-treatment devices. This shift necessitated stocking both BS-IV and BS-VI compliant parts, increasing inventory complexity and costs. According to our research, OEM spare parts inventory in the supply chain, both for aftermarket and production, as a percentage of annual turnover has risen to about 7-15% [3] post-migration to BS-VI. As BS-IV parts become obsolete, efficient phasing out while maintaining adequate stocks of BS-VI parts is essential. 3. Unpredictable demandOEMs face the challenge of managing a ‘long tail’ of infrequently demanded parts. To prevent stockouts and respond promptly to Vehicle-Off-Road (VOR) situations, companies maintain an average of 30-90 days' worth of spare parts inventory [4] in their distribution channels. Studies have shown that a substantial portion of these parts consists of infrequently demanded items [5], which complicates accurate demand forecasting. <figure class="image"><img style="aspect-ratio:6358/3250;" src="https://web-assets.vectorconsulting.in/storage/editor_uploads//4sep-1725513897_1777273541.jpg" width="6358" height="3250"></figure> 4. Unreliable supplySupply chains involving multiple tiers of suppliers across regions are susceptible to disruptions. Events such as the COVID-19 pandemic, geopolitical tensions, and natural disasters have repeatedly disrupted the Indian auto supply chain. For instance, the COVID-19 pandemic alone caused a 16% decline in automotive production due to supply chain disruptions [6]. Other significant events include the 2021 chip shortage, which resulted in a production shortfall of millions of vehicles globally [7].  <h5>Net impact on companies</h5>1. Supply chain conflict Balancing the need for high availability of parts with the costs of holding inventory is a persistent challenge. Excess inventory leads to increased holding costs, while insufficient inventory results in stockouts, lost sales, VOR situations, service delays, and customer dissatisfaction.  2. Distribution challengesMany OEMs distribute auto components through dealerships and a network of distributors and small retailers.  <ul style="list-style-type:square;"><li>Dealership issues: Dealerships maintain significant inventory to ensure prompt service, but availability against job cards often averages between 78%-80% [8], with urgent VOR orders incurring high air freight costs. This impacts customer retention, leading to leakages from the dealer network. Research indicates that urgent air freight costs can be 4 to 5 times higher [9] than standard freight costs in such circumstances.  </li><li>Aftermarket distributors’ pain: Distributors, often small businessmen, face challenges in maintaining inventory levels due to capital constraints and slow-moving stock. This affects their ROI and ability to restock, impacting the last-mile availability of components. Studies show that distributors' stock rotation speed deteriorates due to the inherently slow-moving nature of many auto components <a href="#_edn3">[10]</a>, affecting their working capital and business sustainability.</li></ul> <h5>Moving forward: Transitioning to a consumption-based inventory system</h5>Shifting from forecast-based monthly planning (S&OP) to a consumption-based system with small, frequent inventory movements can significantly address these challenges, benefiting all supply chain stakeholders—from vendors and companies to distribution partners. This strategy leverages strategic buffers at key locations to build a high availability with low inventory supply chain. The process involves three key steps: 1. Establish buffersTo mitigate variability in the supply chain, including both demand and supply fluctuations for all the numerous parts, it is crucial to set up buffers at carefully chosen points, such as central warehouses (CWHs) and supplier nodes, based on frequency and quantity of off-take. These buffers allow for inventory replenishment based on actual consumption rather than rigid forecasts. By adopting a pull-based approach, suppliers can respond to daily inventory depletions, ensuring a more responsive and adaptable supply chain.  2. Implement an execution-based priority systemManaging demand and capacity fluctuations effectively requires an execution-based priority system. This system sets target inventory levels and uses, for example, a colour-coded priority scheme (e.g., red for high priority, yellow for medium priority, and green for low priority) to signal production and dispatch priorities. This enables swift and efficient responses to changing demand patterns, minimising the risk of overreacting to fluctuations.  3. Adapt buffer norms with market insightsContinuously adapting buffer norms based on sales rates and other intelligent insights is crucial. The same colour-based system can be used to adjust inventory norms—raising them when sales exceed supply and preparing for anticipated sales changes. This method, supported by comprehensive IT infrastructure, enhances transparency by tracking priority zones and dynamically adjusting buffer norms based on real-time demand data.  BenefitsThe advantage of adopting this approach is that inventory in the supply chain adapts dynamically to economic cycles, seasonal changes, and other demand and supply variabilities. The benefits include higher availability at central warehouses (95%-99%), reduced inventory levels (25%-30%), and lower warehousing and logistics costs (10%-15%) [11].  Shifting to such a system can also solve issues for both dealerships and distributors by ensuring high availability (95%-99%) at reduced inventory levels (25%) and significantly increasing spare parts sales (20%) [12] for them.  See case studies [13] [14] [15] from leading OEMs, which show how adopting pull-based systems not only enhances part availability but also reduces lead times and improves overall supply chain efficiency.

Key Takeaways

Discover how OEMs can streamline spare parts management in the automotive industry. Our platform offers solutions to tackle inventory complexity, high holding costs, and ensure high availability, reducing costs and enhancing customer satisfaction.

Solving OEMs’ chronic spare parts management puzzle

<h5>Spare parts: A critical component for success </h5>In the competitive automotive industry, after-sales service plays a crucial role in determining a brand's success. Central to this service is the availability of genuine spare parts. As the landscape evolves, Original Equipment Manufacturers (OEMs) face an increasing challenge in managing a proliferating array of spare parts, driven by several factors.  1. Expanding product portfoliosAs competition intensifies, OEMs are expanding their product lines to attract and retain customers. Over the last five decades, the number of players in the two-wheeler and passenger car segments has surged dramatically. In the 1970s, there were only 3 two-wheeler and 3 passenger car companies. By the 2010s, this number had increased to over 15 two-wheeler and 25 passenger car companies, including new tech-based entrants [1]. This strategy, while beneficial for sales, leads to a proliferation of spare parts that need to be managed throughout the vehicle lifecycle. Simultaneously, the number of passenger car models offered by OEMs has increased significantly. In the 1990s, each OEM offered 3-5 models. By the 2000s, this number had grown to 10-15 models per OEM, including various body types and segments. In the 2020s, each OEM offers over 25 models, including multiple variants and electric vehicles [2]. This expansion results in a complex array of spare parts to manage. 2. Regulatory and environmental pressuresThe regulatory landscape is also becoming more stringent. For example, the transition to BS-VI standards in India required significant upgrades to engine components, exhaust systems, and after-treatment devices. This shift necessitated stocking both BS-IV and BS-VI compliant parts, increasing inventory complexity and costs. According to our research, OEM spare parts inventory in the supply chain, both for aftermarket and production, as a percentage of annual turnover has risen to about 7-15% [3] post-migration to BS-VI. As BS-IV parts become obsolete, efficient phasing out while maintaining adequate stocks of BS-VI parts is essential. 3. Unpredictable demandOEMs face the challenge of managing a ‘long tail’ of infrequently demanded parts. To prevent stockouts and respond promptly to Vehicle-Off-Road (VOR) situations, companies maintain an average of 30-90 days' worth of spare parts inventory [4] in their distribution channels. Studies have shown that a substantial portion of these parts consists of infrequently demanded items [5], which complicates accurate demand forecasting. <figure class="image"><img style="aspect-ratio:6358/3250;" src="https://web-assets.vectorconsulting.in/storage/editor_uploads//4sep-1725513897_1777273532.jpg" width="6358" height="3250"></figure> 4. Unreliable supplySupply chains involving multiple tiers of suppliers across regions are susceptible to disruptions. Events such as the COVID-19 pandemic, geopolitical tensions, and natural disasters have repeatedly disrupted the Indian auto supply chain. For instance, the COVID-19 pandemic alone caused a 16% decline in automotive production due to supply chain disruptions [6]. Other significant events include the 2021 chip shortage, which resulted in a production shortfall of millions of vehicles globally [7].  <h5>Net impact on companies</h5>1. Supply chain conflict Balancing the need for high availability of parts with the costs of holding inventory is a persistent challenge. Excess inventory leads to increased holding costs, while insufficient inventory results in stockouts, lost sales, VOR situations, service delays, and customer dissatisfaction.  2. Distribution challengesMany OEMs distribute auto components through dealerships and a network of distributors and small retailers.  <ul style="list-style-type:square;"><li>Dealership issues: Dealerships maintain significant inventory to ensure prompt service, but availability against job cards often averages between 78%-80% [8], with urgent VOR orders incurring high air freight costs. This impacts customer retention, leading to leakages from the dealer network. Research indicates that urgent air freight costs can be 4 to 5 times higher [9] than standard freight costs in such circumstances.  </li><li>Aftermarket distributors’ pain: Distributors, often small businessmen, face challenges in maintaining inventory levels due to capital constraints and slow-moving stock. This affects their ROI and ability to restock, impacting the last-mile availability of components. Studies show that distributors' stock rotation speed deteriorates due to the inherently slow-moving nature of many auto components <a href="#_edn3">[10]</a>, affecting their working capital and business sustainability.</li></ul> <h5>Moving forward: Transitioning to a consumption-based inventory system</h5>Shifting from forecast-based monthly planning (S&OP) to a consumption-based system with small, frequent inventory movements can significantly address these challenges, benefiting all supply chain stakeholders—from vendors and companies to distribution partners. This strategy leverages strategic buffers at key locations to build a high availability with low inventory supply chain. The process involves three key steps: 1. Establish buffersTo mitigate variability in the supply chain, including both demand and supply fluctuations for all the numerous parts, it is crucial to set up buffers at carefully chosen points, such as central warehouses (CWHs) and supplier nodes, based on frequency and quantity of off-take. These buffers allow for inventory replenishment based on actual consumption rather than rigid forecasts. By adopting a pull-based approach, suppliers can respond to daily inventory depletions, ensuring a more responsive and adaptable supply chain.  2. Implement an execution-based priority systemManaging demand and capacity fluctuations effectively requires an execution-based priority system. This system sets target inventory levels and uses, for example, a colour-coded priority scheme (e.g., red for high priority, yellow for medium priority, and green for low priority) to signal production and dispatch priorities. This enables swift and efficient responses to changing demand patterns, minimising the risk of overreacting to fluctuations.  3. Adapt buffer norms with market insightsContinuously adapting buffer norms based on sales rates and other intelligent insights is crucial. The same colour-based system can be used to adjust inventory norms—raising them when sales exceed supply and preparing for anticipated sales changes. This method, supported by comprehensive IT infrastructure, enhances transparency by tracking priority zones and dynamically adjusting buffer norms based on real-time demand data.  BenefitsThe advantage of adopting this approach is that inventory in the supply chain adapts dynamically to economic cycles, seasonal changes, and other demand and supply variabilities. The benefits include higher availability at central warehouses (95%-99%), reduced inventory levels (25%-30%), and lower warehousing and logistics costs (10%-15%) [11].  Shifting to such a system can also solve issues for both dealerships and distributors by ensuring high availability (95%-99%) at reduced inventory levels (25%) and significantly increasing spare parts sales (20%) [12] for them.  See case studies [13] [14] [15] from leading OEMs, which show how adopting pull-based systems not only enhances part availability but also reduces lead times and improves overall supply chain efficiency.

Solve the chronic spare parts management challenge for auto OEMs. Insights & strategies from Vector Consulting Group. Read the blog here.