Auto Service World
Feature   December 1, 2007   by J.D. Ney and Andrew Ross

Remanufacturing The Remanufacturing Process

Rethinking the Core Charge

How would you like to get most of the cost of cores off your books in five years? An alternative remanufacturing core charge handling method might be a way to do that.

Used-up parts, or cores, have fed the remanufacturing industry since its inception. And so have those core charges that keep the used parts coming back to the system.

The fact is, however, that those core charges have become a liability that many jobbers have become increasingly unhappy with.

For this, and other reasons, remanufacturing has been under fire for some time. While it continues to be a vital part of the industry due to the cost-effective way it can bring products into the aftermarket, many remanufacturers have made the transition to newly manufactured products in at least some of their lines; in some cases up to 50% of a remanufacturer’s offerings are, in fact, new.

There is no disputing that core charges tie up funds. They are a paper liability for everyone up and down the aftermarket remanufacturing distribution chain. For jobbers, it is an investment that sits on your books without profit; your bank manager probably doesn’t understand the intricacies of the system–you can’t exactly show him your inventory of core credits or charges.

Essentially the same applies to warehouses. Credits owed also sit on the books of remanufacturers as a liability.

Most jobbers know that their investment in cores is a “phantom” inventory, but regard it as a necessary part of the business.

Reid Ferguson, general manager of the Modern Sales buying group, didn’t see it that way.

When he was evaluating the group’s business model, and in particular the way in which his company and its jobbers handled the critical remanufactured segment, he boldly declared that his company would get out of cores one way or the other. Enter the core buyback program.

While the project is now two years into its implementation, the plan and its champions remain shrouded in controversy and misconception. Though it was dismissed out of hand by some around the industry and labelled as dangerous by others, the brass at Modern Sales and some of its suppliers insist that the shift is both possible and profitable. As Ferguson himself notes, “We put a man on the moon; we can redesign a core system.”

In fact, it is not about getting out of cores; it is about getting out of core charges. And it is certainly a sensitive subject. There are literally tens of millions of dollars in core charges and credits flowing up and down the distribution chain. Breaking out of this system is no easy task, regardless of where you sit.

Until now, even Ferguson himself was not prepared to go on record about the group’s core buyback program.

Although often mislabelled as a “coreless” system–cores still exist, and must be tracked, shipped, etc.–what Modern Sales has done is work with its key suppliers to convert to a unique buyback program.

Ferguson revealed in a candid meeting at the group’s Barrie, Ont., headquarters that the program is focused on improving the jobber’s return on investment (ROI) by eliminating the exchange of dollars up and down the supply chain for core charges and credits. Details of how this works follow, but briefly, the jobber still charges for the core on his sale to the trade or consumer, but doesn’t pay core charges on the products he buys.

It is, says Ferguson, an innovative method that took some heated discussions to hammer out. Eventually, some suppliers of remanufactured parts agreed, although even now not all have moved to the new system.

“But we found guys who are willing to do it,” says Ferguson. “Whatever caused them to react, they reacted. We did it the proper way. We dragged our feet, allowed them time to react.”

Over and over again Ferguson stresses the importance of a smooth, lengthy transition.

“It needs to be done over time. It is an industry-changing idea. I think this is a real solution to an age-old industry problem, but it has to happen slowly.”

His recommendation, he says, was to make the transition in about 10% of purchases going forward; obviously this is a long-term proposition.

The first company to join Modern Sales in its new core vision was Dixie Electric, located in Concord, Ont.

Bob Sinclair, corporate sales and marketing manager, says the new idea is really an “outright program.”

Sinclair says Modern Sales jobbers buy their remanufactured products outright, but of course are then given the opportunity to sell the cores back to Dixie directly.

While the change may seem just a matter of semantics, both Ferguson and Sinclair insist that the differences are significant. “In essence, [Modern Sales] was looking to lower its shelf investment in cores for its members,” he says. “In terms of finalizing the plan, we worked on it collaboratively for over a year. They told us what they wanted to accomplish, and the proposals went back and forth before [we] mutually [agreed] on a solution.”

The collaborative nature of the project was something Ferguson mentions as being vital, due to the interwoven nature of the aftermarket.

“Jobbers want a blended program, and they want to be able to patch the gaps in their new parts availability with remanufactured ones,” he says. The bottom line is that despite wanting his company “out of cores,” he certainly wanted to keep Modern Sales decidedly in remanufacturing, as both he and his clients understand the important role it plays in the overall business.

Ferguson believes that it is a very real help to the remanufacturing sector by removing one of the financial burdens that many jobbers have been increasingly unhappy with, all in the face of increasingly competitive new, as opposed to remanufactured, options.

By improving the lot of the jobber by making remanufactured parts generate better returns–in examples, Ferguson states ROI increases of 23% on electrical parts, and more than 50% on CV shafts, were the program to be fully implemented–the new idea saves remanufacturing jobs, he says.

“The result is also that the remanufacturer has that [core credit] liability go away. His bill of materials is his bill of materials. Both of us get freed up from this burden.”

When a major distribution group makes a decision to fundamentally alter the way it and its members will pay for remanufactured parts, it can have major business implications on the rest of the supply chain.

According to Sinclair, the process began with some tenuous negotiations and some uncertain financial implications.

“It was costly for us initially, because we had to subsidize the cost of Modern Sales going from its traditional remanufacturing model to the outright model,” says Sinclair.

The difficulty, and potentially massive cost, associated with getting out of the core credit game is one that was certainly not lost on Ferguson, and he was adamant that the proper messaging get across in terms of managing the transition. “This process eventually helps the remanufacturer as much as it helps the jobber and the WD,” he says. “But it is a significant change, and that change has to be managed, because the remanufacturing sector has to survive.”

Getting yourself high enough up the supply chain can usually mitigate some of the potential fall-out from a decision gone awry. A company like Dixie obviously took on considerable financial risk. Jobbers too stepped into some unfamiliar territory, and to this day many of them still walk a tightrope with some suppliers, who are decidedly not amused with being removed from the traditional core-charge standard operating procedure.

One Modern Sales jobber, who respectfully asked to have his name withheld, presumably for similar reasons, was nonetheless optimistic and very positive when it came to the program, less positive when it came to the program’s detractors, and unfazed when it comes to his customers.

“There has been zero impact on our customers,” he says. “In fact, most of them really have no idea that anything has chan
ged, because the difference is in the business relationship between us and our suppliers, not our customers.

“We’re an old industry that doesn’t like change, and the guys that are resisting this change are the same guys that don’t ever calculate their own numbers,” he says. “There is a challenge in that we have to deal with some of the education and training aspects, but it’s really no more than something like changing a product line. There is a little fuss, but six months down the road, everyone gets used to it and you move on.”

However, despite being optimistic, this jobber was also insistent that any major change has to be administered with caution, understanding, and delicacy.

“We have to be careful how we implement the system,” he says. “Remanufacturers have to understand that we’re not out to sink anybody, and in fact, we want to be part of the solution that makes this work for everyone. It has to be a phased transition over many years, and we’re being very careful to help the remanufacturers in that transition. The bottom line is that we’re not forcing anything. Well, we’re forcing the concept down people’s throats, but we’re not forcing the financial bite.”

According to both Sinclair and Ferguson, the mitigation of undue financial hardship is absolutely possible, and absolutely ideal. As both state emphatically, a measured transition period, as opposed to all jobbers demanding their credits at once, is vital to the success of the conversion.

Similar to the banking sector, if all jobbers simultaneously demanded their core credits, the system would invariably crash, and that’s exactly what everyone spoken to desperately wants to avoid.

Even more than two years into the process, the program inspires considerable nervousness on the part of remanufacturers. The topic prompts much discussion, but few agree to be quoted. Other than Ferguson and Sinclair, nobody–not remanufacturers who are participating, or have participated in it, nor jobbers using the system–would comment on the record.

However, off-the-record comments by remanufacturers confirm their understanding of the benefits to the jobber in terms of ROI and bookkeeping.

Perhaps the most pointed comment from a remanufacturer indicates that while it was certainly not that complex, and the benefits accruing to the jobber clear, fellow remanufacturers struggle with the concept because it is new, and the change is significant.

The cores still need to be handled and shipped, but the cost of the core is now part of the price and is closer to the real acquisition cost of the core, not a return deposit incentive-based charge.

As another remanufacturing executive reports–also not for attribution–despite its positive effect on the books of a jobber, it is not a lifeline for a business in trouble.

This program, nor any other single program, will not save you if your business fundamentals are poor, he says.

And, he adds, it should be remembered that the core charges a jobber operation holds on its books only accrue a carrying cost of that investment and should not be an additional burden if the margins and pricing are sufficient to cover it. “There is more than one way to skin a cat,” he says. “Pricing must shift to accommodate this program. There is only so much money in the system.” In the interplay between core charges on your books, margins, discounts, etc., the net result, he says, is the same. “It comes down to what feels better for you.”

Ferguson is certainly a realist. While some lines have already made the transition, others may never fully reach the goal of eliminating the core charge, he says.

Perhaps the core buyback program is the way of the future, destined for wider acceptance over time; perhaps it will always be limited to a single group and restricted to a few remanufacturers looking to build their business with Modern Sales members.

At the core of the issue, if you pardon the expression, is the need for all businesses to look at new approaches in a changing market.

If nothing else, this new concept is evidence of some creative thinking, and a willingness to step beyond the traditional methods the aftermarket uses to conduct business.

Core Programs Compared

The basic goal of the core buyback program championed by Modern Sales is to get core charges and credits off the books of the buying group’s members.

It is to be an ongoing process over several years, and probably will never be accomplished on every reman line.

But it is an interesting concept, and what it does to a jobber’s return on investment is significant when a supplied example is studied.

The accompanying table supplied by Modern Sales takes a single real part number–though precisely which one is kept confidential–and works through the traditional process, and the core buyback method.

Column A represents the revamped process (the buyback or outright program) and column B represents the traditional core charge system.

What should be initially noted are the many similarities between the two, i.e. the same selling price, the same core return charges to the service provider, and the same total charge to the service provider customer.

The fundamental change is in the relationship between the jobber and the remanufacturer. This change is most clearly evident in the acquisition cost of the example part. While two dollars and change are more expensive under plan A, it should be noted that the core charge is closer to the real price of the core and incorporated into the overall price, as opposed to a pass-through charge designed to ensure the core’s return.

Under plan A, the core buyback program, the jobber has purchased the part and that’s it. End of transaction. He no longer has an obligation to the remanufacturer, though certainly he will be looking to sell that core back to the remanufacturer (at a price of $6.03 in the example).

What this eventually translates into is a substantial increase in return on investment or ROI.