STAUNTON , VA – This week we hear from Larry Pavey, senior advisor, Federated Auto Parts. Pavey is a 30 year aftermarket veteran who began his career at Walker Manufacturing. He worked for Echlin and Dana Corporation for 20 years at the Brake Parts Inc. division where he served as president for 13 years, building the business to one of the largest manufacturers in the industry. After retiring from Dana, he worked with ARI and as a consultant for Global Parts Solutions. Pavey has been an active industry participant, serving on the Board of Directors for ASIA, APAA, AAIA, ASE, MEMA and the Manufacturers Advisory Council for AWDA. He has participated in numerous industry committees and initiatives.

Join us as Pavey shares how his previous experiences in manufacturing and direct sourcing give him a unique perspective in his new role in programmed distribution.

On Oct. 10, it will be one year since you joined the Federated management team as corporate advisor. What kinds of projects have you been working on over the past year and how does your background in manufacturing help a group like Federated?

After more than 25 years as a manufacturer, it is great to be able to experience the customer side. In the past year I have had the opportunity to work with Federated on a number of projects including working to enhance supplier partnerships, talking with prospects and reviewing new product lines and strategies. I must admit that moving from working as a manufacturer with a focus on one major line to seeing the challenges that distributors face dealing with more than a hundred lines is a humbling experience. The biggest benefit of having a background in manufacturing is having insight into the issues faced by suppliers and how to work together with them to achieve win-win scenarios. I have gained a better understanding and appreciation of the challenges faced by distributors and jobbers along with the complexities of moving goods through the channel, and I have learned that Federated has a remarkable focus on these issues and its members are some of the best at finding solutions.

Prior to joining Federated in 2006, you did some consulting work that involved China . Considering that some distributors and program groups are looking to source direct from China , what kind of advice would you give those companies? Is it a smart move?

The economic realities of manufacturing goods in China are having a major impact on the world today and will continue to do so. I worked with some manufacturers in China to install and improve quality processes and to help them understand the market. While China has lost some of their currency advantage recently and government subsidies are being reduced, it is still a low-cost manufacturing base with rapidly improving infrastructure and significant on-going investment in manufacturing. China, like the United States, has some very good plants and some that are not so good. I believe we will continue to see China emphasize the manufacturing of automotive components because there is a large export market and a growing domestic market.

Recently we have seen a lot of companies outsourcing p rod uction of their products without proper quality control including tires, dog food and toys. In each case, a reasonable amount of independent or internal quality auditing would have found the problem and allowed it to be rectified. A plant or process can p rod uce poor quality no matter where it is located. Processes must be in place to insure quality in raw materials, component suppliers, production activities and final assembly. This involves managing many different types of processes and having proper checkpoints every step of the way.

In our country, customers have come to rely on their suppliers to make sure that quality controls are in place. They are protected by liability insurance, the reputations of the brands and suppliers and the judicial system. However, products produced by companies outside the U.S. may not have the same environmental controls, are not insurable and are largely isolated from our judicial system. This means ‘buyer beware’ if there is a problem.

My advice would be to make sure that quality is being monitored and tested on an ongoing basis on any product supplied by a manufacturer that does not stand behind its product in every way, including product liability, environmental compliance and manufacturing defects. When a company imports and deals directly with an offshore manufacturer, it must understand that it will be completely responsible if something goes wrong, as the companies recently making headlines have learned.

Your prior assignment with Dana included the management of some very strong brands. With the proliferation of program group private label brands in the aftermarket, what, in your opinion, does the future hold for national, manufacturer-owned brands? What role does each play within Federated and how do you see this changing?

Federated continues to be a strong supporter of national brands and I do not see any indication of a change in that strategy. Certainly others have focused on marketing their own brands and both strategies have been successful in the past. We are seeing a combination of private brand efforts today with the traditional ‘brand is the same as the location’ and the use of private brands as supplemental lines or as category drivers. With all this activity, one could certainly make a case that national aftermarket brands have been weakened. However, at the same time, we hear that professionals are going to the car dealer for some categories of parts and are seeing the rise of the OE and OES brands that have a heritage with the car manufacturers.

Since at my age, expertise is more in looking back than projecting the future, I would say that it is still about satisfying customers no matter the brand strategy employed. In the aftermarket, there are many parties to satisfy: WDs, jobbers, service providers and consumers in a number of different areas. If you do a good job, then your brand increases in value and vice versa. Today some brands are doing better than others — some are rising while others decline. Some companies are investing in developing value while others are harvesting value. This doesn’t seem to change. Many of the same aftermarket brands I sold as a teenager in the parts store are still strong brands today. It takes a lot of time and money to build and maintain a strong brand. Federated’s approach of providing enhanced service and support while partnering with companies who have brands that customers trust has served them well.

As you look at the program group landscape, certainly you and others at Federated see the increasing consolidation of membership. Why has consolidation been virtually non-existent within Federated?

There will always be some consolidation as owners of companies without succession plans make exit decisions. Federated has been fortunate to have had a minimal amount of consolidation. Federated is a group made up of primarily independent family-owned businesses with ownership very involved in the business. The typical Federated member tends to be more successful than average and is probably more financially stable. Federated does a good job providing tools for members to be successful and feel confident about their ability to remain successful in the future. With that confidence, I believe that Federated members have an incredible amount of next generation management being groomed and that bodes well for the future and creates stability. Within the Federated membership, there are tremendous investments in new facilities, new stores and new systems that will continue to create future growth and success. All in all, there is an environment of stability and, while there will always be some loss, it should remain minimal.

Along those same lines, as the number of WD members gets smaller, what is the future of programmed distribution? Will it end up as three or four groups, each with one or two members?

As you look at the landscape today, it seems likely that at least two program groups will end up with one or two members and, along with the retailers, seem to have their long-term marketing strategies in place. At the same time, we have recently seen the largest member of one group branch out on their own and develop a new marketing program, reversing the trend of consolidation. There are some groups with multiple marketing ‘brands’ while others focus on limited market segments. There will likely be continued consolidation as distributors that are winning in their markets migrate to groups that offer the best programs for the future. However, there will always be geographic limitations and other factors that create opportunity.

While the consolidation of groups is likely, it creates much more complexity and challenges the ability of a group to form meaningful partnerships that can be given proper support. Suppliers with strong brands have to decide where they can get support for their overall value equation versus just their parts. The ability for groups and suppliers to form long-term, stable, strategic partnerships becomes more and more valuable. There will likely always be a group or two that are largely made up of independent owners who have found ways to be successful and are looking for ways to fight national chains in their local markets. As long as groups like Federated provide the tools and programs for their members to compete with the retailers and large private label suppliers, there will be a strong independent factor.

How does all of this impact the industry? Manufacturers? Customers? AAPEX? AWDA?

I am not smart enough to answer that question as the impact will be complex and will be different in many cases. Recently I looked through an ASIA directory that was more than 20 years old and was amazed that some of the major players in both the WD and manufacturer segments are no longer in business. Things change and markets migrate to meet customer needs and wants. Consolidation may breed new competition and value creation in manufacturing and distribution and if not the major players will continue to eliminate the weaker ones.

The great thing about this industry is that it seems to reinvent itself every 30 years or so. When I started, most cars were maintained and repaired in service stations, most jobbers sold wholesale only and every market had a bunch of distributors fighting for the business of the independent jobber line by line. In a short period of time, every part of the channel has changed dramatically.

I believe that the future will be affected more by globalization of manufacturing, the Internet, longer lasting vehicles, a more technical repair environment, language and cultural differences, global vehicle standards, heightened environmental awareness, alternate energy sources, warranty competition and extreme inventory proliferation. If the solutions to these challenges come from the major players that are participating today, we will see further consolidation in all areas and, if not, then innovation and creativity will create major change…again.

As an example of the speed of change, 25 years ago a WD complained bitterly that he wasn’t allowed to join AWDA and only a few years later he was man of the year. Associations tend to adapt to the needs of their members and the market, and I expect that will continue. This is an industry that is constantly in motion at all levels and good leadership will react to whatever changes come along.

Now that you’ve worked on both sides of the industry, manufacturing and distribution, which is the more difficult side to manage? Which is more fun for you personally and professionally?

Both! I learned a long time ago that, even if you weren’t the smartest guy, if you surrounded yourself with good people, together you could find ways to be successful.

Manufacturing has changed a lot and will continue to change. Making things was fun when I started and involved lots of talented people. We learned from the Japanese about the incredible power of empowering people to be part of the process and work as a team. We innovated – products and processes, improved performance and quality – while developing and training people and serving customers. It was rewarding. We treated suppliers as partners and customers like the most important people in the world. I remember when human assets were a good thing. I saw a cartoon once that said the factory of the future will only have machines, one man and a dog. The dog is there to keep the man from touching the machines and the man is there to feed the dog. As manufacturers work to eliminate people, many will find that they also eliminate the creativity and innovation that made them great.

The distribution side is still, in my opinion, a people business. When I sit with members of Federated, they talk about the value of good people, the need for training and development, and the great growth potential they have if they can find or develop the right personnel. They can’t outsource or ‘cost cut’ their way to success. They have to provide customers with quality products and services and still find ways to make customers want to do business with them.

Our industry is still a people business, from the shop and technician the consumer trusts to the favorite counterperson that the tech can count on. There are still incentive trips, clinics and sales calls. This is all very familiar to me as it was a major part of the manufacturing business and sometimes still is. But the distribution business continues to be all about people and I see the desire of the members of Federated to work together to be better and help their customers become more successful. That is what I believe is the most rewarding part of business and I think that it will be a big part of the distribution side for a long time.