The High Cost of Low Quality Parts

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Contents

Introduction ............................................................................................................................................... 3

Defining Low Quality ............................................................................................................................... 4

Retailers: Here's How Low Quality Parts Impact Your Profitability ............................................ 5

The Cost Of Processing Returns Is Hidden ......................................................................................... 7

Key Takeaways For Retailers ................................................................................................................ 8

Jobbers/Installers: How Low Quality Parts Kill Profitability ........................................................ 9

Key Takeaways for Jobbers and Installers ....................................................................................... 11

Part Distributors and Wholesalers: How Low Quality Parts Hamper Growth ......................... 12

Key Takeaways For Distributors and Wholesalers ........................................................................ 13

Executive Summary ............................................................................................................................... 14

The High Cost of Low Quality Parts

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Introduction

uto parts are manufactured in a wide range of quality levels. At or near the top of the quality range, we have "OEM grade" parts, which are manufactured to exacting quality as a result of rigorous contract requirements. At the bottom of

the range, we have "standard grade" auto parts which - while still relatively good quality compared to similar parts from 20 years ago - may fail 10 times as often as OEM grade parts.

Between these two quality extremes, we have auto parts consumers. Many consumers expect to buy OEM grade auto parts at a standard grade auto part price. This consumer expectation often leads distributors, installers, and retailers to offer standard grade parts alongside (or in place of) OEM quality parts.

While there will always be a place for low cost, standard grade auto parts, it's important to understand the "hidden" costs that are associated with them. Offering low quality auto parts impacts overall profitability in ways that aren't always obvious. The goal of this white paper is to help distributors, retailers, and installers recognize the relatively high cost of offering low quality parts.

A

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Defining Low Quality

While the meaning of the phrase "low quality" might seem obvious, it's important to flesh out the definition here so we can fully understand the impact that low quality parts can have on part distributors, retailers, and installers.

Consumers tend to define low quality parts in three ways:

1. The part fails much sooner than expected

2. The part does not perform its "job" at an acceptable level

3. The part looks or feels cheap or substandard

These metrics - imprecise as they may be - are vital to identifying the hidden costs of offering low quality parts. Industry metrics such as PPM, FIT, MTBF, and ELFR are useful regarding the first two consumer concerns, but they don't address the last point.

NOTE: It's important to note that a perfectly good part can be viewed as "low quality" merely because it looks or feels cheap. This concept is particularly important for retailers, which we'll cover deeper in this report.

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Retailers: Here's How Low Quality Parts Impact Your Profitability

Let's imagine a retailer selling an OEM grade auto part to a consumer. Let's assume that this part is returned for quality reasons 1 time in 100 sales (a return rate of 1%). Let's also imagine the part retails for $100, and that the part has a 10% gross margin.

If our OEM parts retailer sells 100 parts, they'll earn $1,000 in gross profit on $10,000 in sales, and they'll process 1 return.

Now, let's imagine a different retailer selling standard grade auto parts. Let's assume that these parts are returned for quality reasons 3 times as often (a 3% return rate), but that they offer more profit at a lower price point. Instead of offering a 10% margin at a $100 price point, let's say they offer a 15% margin at an $80 price point.

So, if our standard grade auto parts retailer sells 100 parts, they'll earn $1,200 in gross profit on $8,000 in sales, and they'll process 3 returns.

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Many retailers would argue that the marginal increase in returns is a worthwhile trade for a higher gross profit and a better overall ROI. The higher cost of processing 3 returns instead of 1 return is offset by an additional $200 in profits.

Or is it?

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The Cost Of Processing Returns Is Hidden

While it's difficult to determine the exact cost of processing a return, there are three costs to consider.

1. The labor costs of processing returned parts. The labor involved in returning a part can be substantial. Depending on the return process, time can be spent filling out forms, making calls, testing parts, etc. There's also the time spent boxing up a return, making sure it goes where it needs to go, and following up on the return to make sure a credit is issued.

2. Returns use up customer service time, too. What does a consumer do when they have a part they believe might be defective? Many will call, email, or chat with a customer service rep, and ask for help diagnosing their part problem. If the part is confirmed to be defective, the consumer will call, email, or chat again to request return authorization.

3. Part quality problems lead to bad reviews. Most consumers understand that part defects occur from time to time, but that doesn't stop them from giving a retailer a bad review when they have a quality issue. The cost of bad reviews can be extraordinary.*

*It's been estimated that a single bad review can discourage 30 people from a purchase. It's also been estimated that a person with a bad experience will tell 16 people in their circle of friends and family.

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Key Takeaways For Retailers

Summing up, retailers need to be aware of the hidden costs of part returns.

1. When someone buys a defective part, that creates work for the customer service and support team.

2. The part return process eats up labor time as well, as returns have to be processed, shipped, and credited.

3. Consumers who have a bad experience with a low quality part may leave a bad review for the retailer.

Bringing this back to dollars, it's not unreasonable to assume one hour of labor will go into a processing a single return. If the effective labor rate is $50 (including taxes, benefits, etc.), and we reference our examples from above, half the additional profit made selling low quality parts goes towards processing additional returns...to say nothing about the cost of any bad reviews from consumers.

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Jobbers/Installers: How Low Quality Parts Kill Profitability

Most people in the business of repairing or modifying vehicles are intimately familiar with the high cost of low quality parts. A recent survey conducted by the Automotive Service Association (ASA) found that nearly all technicians wanted to use the highest quality parts available.

For jobbers and installers, low quality parts cause all sorts of problems:

1. Labor costs are not always fully reimbursed. According to the previously mentioned ASA survey, installers that have to pull a defective part can't always recover their full labor costs. This means that either technicians lose out on compensation, or shop owners sacrifice profit every time a bad part needs to be replaced.

2. Additional costs in the interest of 'customer satisfaction.' Sometimes, a part defect leads to an upset customer who will demand a courtesy vehicle, a free car wash, and/or ask to have their vehicle picked up for repairs. While this is viewed as a "cost of doing business" by many in the auto service industry, it's important to understand that these costs are increased when low quality parts are used.

3. The cost of providing an immediate, unscheduled repair. If a shop is busy, an unscheduled repair can have a very high cost:

• Unscheduled repairs reduce technician availability, which can lead to reduced revenue from walk-in customers hoping for a quick maintenance visit (or accessory install).

• Unscheduled repairs can "bump" scheduled work, potentially upsetting other customers and leading to additional customer service issues.

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4. Part defects lead to bad shop reviews. Consumers often confuse part quality with quality of service. Many repair and installation shops have been given poor reviews by consumers who had a part quality issue. These bad reviews can add up to thousands of dollars in lost revenue.

The cost of a bad review is hard to quantify. Still, we know a few things about bad reviews (via Inc Magazine):

• It takes 10-12 good reviews to outweigh 1 bad review

• 80% of consumers put significant trust in online reviews, to the point where they will not go to a business with bad reviews

• Customers who leave a bad review almost never return for future service

It's easy to see how installing a poor quality part can lead to a bad customer experience and a 1 star online review. It's also easy to see how that single review can hamper a shop's growth.

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Key Takeaways for Jobbers and Installers

• Low quality parts have direct costs that are relatively easy to measure. A quick review of the shop's books can help determine how many hours of labor were lost because of bad parts.

• Installing a low quality part can easily lead to a negative online review. Negative online reviews can cost thousands of dollars in lost revenue.

Perhaps because they have the closest contact with consumers, jobbers and installers surveyed by the ASA almost universally demand the highest quality parts available. This reduces comebacks and - for lack of a better word - headaches.

Jobbers and installers are uniquely positioned to explain the benefits of part quality to consumers, and to help "sell" consumers of the benefits of spending a few more dollars on an OEM grade part. Therefore, it's in every shop's best interest to offer high quality parts and to discourage the use of low quality parts at every opportunity.

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Part Distributors and Wholesalers: How Low Quality Parts Hamper Growth

Many part distributors and wholesalers have become adept at processing returns, largely out of necessity. It's been estimated in a recent Automotive Service Association (ASA) survey that roughly 4% of all parts are returned for one reason or another (on average). This is a significant volume of products coming back, and processing these returns is one of the keys to success in the wholesale parts business. As a result, the costs of processing returns aren't usually "hidden" at the wholesaler/distributor level.

However, wholesalers and distributors aren't always aware of the problems that low quality parts are causing their customers. As outlined in this whitepaper, low quality parts cause two big problems for installers/jobbers and retailers:

• Retailers and installers often lose money when parts are defective, in terms of both lost time and direct financial costs

• Low quality parts hurt the reputation of both part retailers and installers, reducing their revenue and limiting their growth

Part distributors and wholesalers are not isolated from these problems.

1. A part retailer or installer that has a bad year is going to buy fewer parts

2. A retailer or installer may seek out a new distributor or wholesale supplier in an effort to cut costs

On the other hand, jobbers/installers and retailers who are growing and profitable often come to depend on existing wholesalers and distributors. Because these retailers are dealing with fewer issues, they're also willing to pay slightly more to distributors who provide "extras" like online ordering and expedited fulfillment. These extras are often the key to profits.

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Key Takeaways For Distributors and Wholesalers

While part distributors and wholesalers are often forced to offer low quality auto parts, it's important to understand that these parts cause all sorts of problems for retailers and jobbers/installers.

• Distributors can use data about the quality of various parts to build a relationship with their installers and retailers. Retailers and installers want to know which parts have the lowest return rates and which parts have the highest.

• Distributors and wholesalers must understand that their business depends on the success of their customers...the more profitable the retailer or installer, the more opportunity for the distributor.

By educating installers/jobbers and retailers about part quality - and talking about hidden costs - distributors and wholesalers can help their customers and themselves.

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Executive Summary

Low quality auto parts have a lot of problems. One of the biggest is that low quality parts have a higher return rate than OEM quality parts. This higher rate of return hurts profits at every level of the auto parts supply chain:

• For retailers, low quality parts take time away from customer service and support staff, increasing overhead for what is often a marginal increase in profit

• For jobbers and installers, low quality parts disrupt operations and lead to bad online reviews that diminish long-term revenue

• For wholesalers and distributors, low quality parts limit business growth

OEM grade parts have a lower failure and return rate than standard grade parts. This lower rate of failure leads to lower operating costs and higher customer satisfaction. While standard grade parts may seem like a "better deal" than OEM grade parts, they often eat away at profits and limit business growth.

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© 2017 GMB North America Inc. All rights reserved. Any advice, recommendation, information, assistance or services given within this ebook is general information, and your individual vehicle, budget, and needs should be taken into account before choosing or installing auto parts. The information contained within the ebook is given in good faith and is believed to be accurate, appropriate and reliable at the time it is given, but is provided without any warranty of accuracy, appropriateness or reliability. GMB North America Inc. does not accept any liability or responsibility for any loss or damage suffered from the reader’s use of the advice, recommendation, information, assistance or service, to the extent available by law. www.gmb.net