Arvin Industries Inc. straddles the markets for original equipment and replacement parts.
The Columbus, Ind.-based supplier - which makes exhaust systems, shock absorbers and coil-strut assemblies - is expanding aggressively with acquisitions and joint ventures.
CEO Bill Hunt, 54, is pushing the company to double last year's sales of $2.5 billion and profits of $78 million by 2003. Doubling the profits, he hastens to add, will be the tricky part. He recently discussed the outlook for Arvin with Staff Reporter John Couretas. Edited excerpts follow.
The aftermarket has always been a very different market compared with the original-equipment business. Now you have Ford getting into the repair and parts aftermarket with its Kwik-Fit acquisition. Are the lines blurring?
It's not just Ford that has gotten into the aftermarket with Kwik-Fit. The service parts organizations of virtually all car companies are looking now at providing the full range of replacement parts, not just parts with their brand names. That strategy is widespread both in North America and Europe. Auto companies want to be involved in the entire life of the vehicle from the time it rolls off the assembly line until, in Ford's case, it's put to rest in the scrapyard. It makes sense.
Who manages that customer relationship, the car companies or the aftermarket parts and service companies?
I think the car companies are in the best position to manage this life-long relationship because they start the relationship. The replacement and service business is theirs to lose.
But doesn't Arvin need to track all that consumer data?
I think each company manages its own database. We have to make sure that we have the maximum coverage of cars on the road, for parts availability. And we need to do that so we're only producing a product once, in one location around the world. What we can do for the original-equipment service parts organizations is to say that we can service you anywhere in the world. They're globalizing their businesses.
How, for instance, are you expanding your presence in the aftermarket?
We got into the replacement and original-equipment oil filter business with the acquisition of Purolator. You replace the filter many times during the life of the vehicle. That's probably the product where we have the greatest opportunity to continue this relationship. We want to sell the filter or the shock absorber or the exhaust system at each point in the life cycle of the vehicle. We want to be the supplier throughout the life of the vehicle.
When you hear automakers talk about speeding up the vehicle order-to-delivery cycle, doesn't that mean more inventory stockpiling for suppliers?
That would be my biggest concern. Simply the inventory and logistics issues. This is a big country and the supply base is fairly distant. You do have disruptions in that system. I remember the snowstorm in Kentucky a few years ago that had Toyota down for almost a week. The whole supply system was down. If you've got a supply base spread from Tennessee to Michigan, you have to have some buffer in the system. It's going to take some changes in the infrastructure.
And you're still managing two separate manufacturing operations, replacement and original equipment?
This is actually an area of synergy between the replacement market and the original-equipment market. We run our replacement business on a build-to-order basis.
We do not build the product to inventory. We're accustomed to very short cycle times in that business. The greatest flexibility we have is in the replacement business. In one plant, we make replacement shock absorbers for the entire North American market and a substantial amount of export. In that plant, you're going to have a huge number of combinations and colors.
On the original-equipment side of things, are you expanding your module business? Do you compete on the corners, for example?
What we're focused on really is becoming the upper-corner specialist. This is really the shock or strut and the coil spring and the rubber-to-metal parts that connect the chassis with the body, the upper mount.
Today we only make the shock and strut, but we manage the value chain for the upper corner. In some cases we might be the designated Tier 2 by the auto company because they want our shock or strut. In other cases, we could be Tier 2 to a Tier 1 integrator that is actually calling the shots on the supply base.
We have to have good relations with the module integrators as well as the car companies.
Doesn't it make more sense to own as much of the value chain as possible? Then you take more cost out.
That's the real challenge. You have to determine your ability to manage the value chain without owning it. You first look at the available supply base and determine if it's capable of meeting the cost reduction targets you have. Whether it meets the technical challenges.
It's really a case-by-case basis to decide whether you're going to buy that company or work with it as an independent supplier. Typically, we would not want to be dependent on a Tier 2 or Tier 3 supplier that is in need of a lot of help from us.