AM Equipment- a marketing case study
The distributor agreements were in place and new suppliers were shipping the first production lots of wiper components from Asia. This was to be the bold new future for AM Equipment, manufacturer and supplier to the little guy, with better quality and accurate delivery. The divorce from the automotive supplier, who gave no attention or support to the smaller distributors, was in full swing. All the other United Technology (UT) distributors had agreed to place future orders through AM Equipment, and so its future was secure. That was the plan, at least, until the other distributors reneged on their deal.
AME history…
AM Equipment began in 1953 as a small engine and auto electric repair shop. Most of their work was focused on repairing electrical systems, namely magnetos. The company was named Albany Magneto Equipment because it was located in the small agricultural town of Albany, Oregon.
To make ends meet they started to sell mowers and other small gasoline engine yard care tools. Business picked up slowly, so they started supplying other truck and tractor electrical parts to round out their product offerings. In 1972 an intelligent college graduate from Illinois followed his wife out to Albany, and took a job fixing engines and sharpening lawn mower blades. Just four years later the owner of the business offered to sell to this young buck.
When Eddie Johnson purchased Albany Magneto Equipment he had little understanding of where it would take him. Unfortunately, the economy was on the decline and business was hard. His family was growing but his business was struggling. He needed a growth strategy and worked hard to win the distributorship for United Technologies (UT) a huge automotive supplier that also made service parts for almost every truck or tractor ever made. With this step of maturity he no longer depended on the sales of one small store in the Oregon, but about a hundred parts stores in Oregon, Washington and Idaho that purchase all UT products through Albany Magneto Equipment.
In 1987 Eddie sold the service and repair portion of the business to one of his employees and only retained the distributorship through UT. He moved his operation to a different facility and changed the name to AM Equipment since he no longer had anything to do with magnetos.
Albany Magneto had focused on the individual farmers in and around Albany, while AM Equipment was selling mostly to other businesses. When the service portion was removed, a new focus on original equipment manufacturers (OEM’s) was sought. Now AM Equipment was looking at selling directly to OEM’s and the parts houses that supplied repair facilities. There were two different customer segments that required conflicting types of attention. OEM’s needed someone to be in each week and take care of any problems as well as provide support for production personnel. The only thing the parts houses needed was fast delivery of parts and a wide selection.
Problems with suppliers:
Eddie Johnson slammed the phone down tired and frustrated that his supplier had failed him again. Each week was a gamble as to what his supplier had short shipped. One week he would get 23 motors when he ordered 750. The next week he would only get half of the wiper arms needed to support his customers, who were already near production shutdown. Eddie was the owner of AM Equipment, the largest original equipment manufacturer distributer for UT, a tier one automotive electrical supplier. He was one of five located throughout the United States.
AM Equipment had been a distributer for UT since 1978 and from the start had seen a decline in support. UT was a huge conglomerate of companies ranging from jet engines to elevators to windshield wiper systems (2008, UTC.com). As profits declined UT saw their distributors as a declining source of income with ever increasing product diversity. A strategic decision was made at UT to allow their distributors to keep selling but provide as little support as possible.
Most of the distributors had a similar business plan; sell wiper systems to OEM’s and warehouse parts for the parts guys. With declining support of UT each distributor was receiving orders only partially filled. When outages occurred, they tried to purchase from each other to make their customers happy. Eventually, the only solution was to increase inventory to smooth out the poor support of UT. It got to ridiculous levels when many distributors were carrying inventories valued at more than half of the year’s sales.
Relationships with the other distributors became filled with complaints and frustration. Some hostility was born from overcharging each other when times were tough, just to make profits better. Other issues involved suspicions of bribing UT and hording of high volume parts. These parts would then be sold to the other distributors, with a markup. Lastly, there were several boundary disputes where two distributors would be trying to service the same company.
AM Equipment’s OEM customers in particular, were plagued with UT quality problems. Motors used in wiper systems were so noisy that they could be heard from one end of a 100,000 square foot manufacturing facility, to the other. It seemed like the components given to the distributors were the reject from the automotive line. This made it almost impossible for customers to gain confidence in the product let alone be happy with AM Equipment, the face of UT.
The Plan Forward:
After an especially frustrating conversation with UT, Eddie called around to the other suppliers to see if they had the extra parts that he needed. Each conversation ended with a rant on both sides of the phone about how horrible UT was to work for. This started Eddie thinking about other possibilities. Why couldn’t he contract someone else to build the parts for him? It was perfect timing for Eddie because the Asian Currency Crisis had just begun and it was becoming increasingly simple to import product from Korea.
He considered that possibility for awhile and when it looked like it may work, he started to share his idea with the other distributors. Once he described what he wanted to do, they were all on board and had contractual agreements signed. Not only would his suppliers send him all of the product he needed on time, but he would make small changes to the design of the products to eliminate the known failures of the UT product. All the components would be interchangeable with the UT parts, have higher quality and cost less. For the distributors this was a no-brainer; AM Equipment would be their new supplier as soon as the product was available.
The business plan was simple; replace all of UT product with direct copies. The advantages of controlled quality, improved functionality, design control, reduced cost and reduced inventory levels were a significant draw. The conversion of hundreds of thousands of dollars from dead parts on the shelf to cash was a huge benefit.
Now AM Equipment was to start contracting the manufacture of products to sell to distributors, as well as continue to supply OEM’s wiper systems. With the separation from UT it would be impossible to continue supplying the parts houses. There was not enough capital to reproduce all of UT’s offerings, but the focus for OEM’s and AM Equipment was now windshield wiper systems. The complexity of becoming a contractor was more than it appeared on the surface and it took longer than anticipated to get the products ready for market. The attention required to become a successful contract manufacturer, took many resources away from the OEM supply segment.
Changing market conditions:
Success finally seemed eminent. After several delays and revisions of the AM Equipment brand wiper system components, the production parts were finally arriving. Pallet quantities of every part needed to become the new supplier were in stock. Eddie picked up the phone and started calling the distributors one by one to let them know that he was ready to supply them. After he finished his final call, he had a sinking feeling; they all had excuses why there orders were to be delayed or why it would take longer to change over than they had planned.
Eddie had heard some rumblings about UT selling their motor production, but amid the challenges of the new avenue of manufacturing he failed to grasp the consequences. Johnson Electric, a manufacturing firm in China, had purchased all motor manufacturing from the ailing UT (Johnsonelectric.com, 2008). Eddie assumed that having a supplier even more removed would only increase the problems he and the other distributors were having. What he didn’t know is that Johnson Electric promised the other distributors price decreases and improved delivery. The anticipation of higher profit margin was too much for them to ignore. They were willing to give it a try, so they waited and lead AM Equipment on in hopes of having a backup plan if Johnson Electric failed to deliver.
After talking with Eddie, another distributor in South Carolina thought he could be successful doing the same thing. His plan was a little different though; go direct to China and get exact replicas of UT parts (without making improvements) and offer these parts directly to OEM’s at rock bottom prices. Wexco Industries was born and the old distribution channels were abandoned for a direct marketing approach with penetration pricing strategy. This distributor was extremely aggressive and finally purchased Johnson’s wiper products division in 2005 (wexco.com, 2008).
Not only was the original plan of selling through distributors failing, the market got soft with the OEM sales. This weakness was caused mostly by internal factors. Most of the internal cash had been drained from the company in the form of investment in the manufacture of products and then in the inventory to support its customers. Many of the products that were stocked had extremely high minimum order quantities, which forced the inventory levels high. Staff was cut to minimum levels and quality suffered.
Diversification:
AM Equipment historically did one thing well, serve customers and give them custom solutions for their unique problems. Now that resources were short and were pulled in many directions, customer service was a struggle. Having products manufactured to specifications was one thing. It was a whole different story trying to control the quality of those parts and assemblies. It was critical to make sure that the parts coming in were made correctly which meant adding quality control, also known as overhead.
Now that AM Equipment had access to inexpensive automotive style electric motors, the search for more customers and new markets began. Initially current customers were targeted. Eddie would visit them in person and snoop around looking for things that needed to be powered. Constantly talking about the new products that would be able to revolutionize the customer’s equipment, Eddie would plant the thought everywhere he went.
While visiting a customer in the recreational vehicle (RV) market looking for a place to sell these new motors, he was mesmerized by a new product; the flat panel plasma TV. For the RV market the game had always been about adding more cutting edge technology. The nature of RV’s was that they are small but their owners want all the conveniences of home. That meant that tucking luxuries into small spaces is what set them apart. Since the flat panel was narrow, it could easily be stored in a multitude of places. The challenge was moving it from storage to usable positioning. Eddie loved a challenge.
The RV market was not nearly large enough; these TV’s would soon be affordable for general consumers who would want to hide them beneath table tops and counters. This could be an incredible toy for impressing your friends. You walk into a room and press a button and up pops a fancy new plasma TV. This idea was developed and a patent was taken out. About 18 months later AM Equipment took their new consumer product to several furniture trade shows, only to be severely disappointed. Not a single customer was interested.
Then there was a ray of hope; a man approached Eddie about making this product into a space saving device for schools. The idea was that a computer monitor could be stored inside a desk and turn a computer lab into a useable classroom. In a poor economy it made sense that the government would have more money than consumers. Selling a product that reduced the need to build more classrooms made the product a shoe in. More time, money and testing was thrown into developing the desk. When it was brought to market, huge cuts were being made to school budgets and in the end it was more cost effective to bring in a modular building than purchasing special desks. The issue that was overlooked was that if there was a class using the room no one else could use the computers. This problem would force school districts to purchase a computer for every student as well as a desk to hold it. On top of that was the installation cost of wiring each class with needed power.
After two failed attempts to sell to consumers or institutions, the focus was changed back to OEM wiper systems. However, word got out that AM Equipment could supply motors at incredibly low prices for the amount of power they could output. Kwikee Products, a company about 50 miles south of AM Equipment, wanted to replace the motor they were using, an old UT power window motor. The volume for this opportunity would more than double the number of units sold by AM Equipment. A vendor was identified for the high volume motors and the business was won. The new business took Eddie’s company from $1.9 million in sales to $4.5 million (CMM, 2002).
A New Set of Challenges: Contract Manufacturing
With the huge gain in business Eddie looked at other parts that may be manufactured for Kwikee. Several projects were offered and proposals were made to build several assemblies. If AM Equipment thought that it was difficult to control quality for their own wiper components, contract manufacturing was even worse. Now AM Equipment was responsible to ensure products met specifications set out by their customer and had the job of communicating and resolving any problems.
As soon as the first project was completed, more business was offered…if the price was right. This huge sales potential tempted Eddie Johnson to look for cheaper prices. With his network of Asian suppliers he branched out into China and found low level vendors who thought that they could meet the requirements. Samples proved acceptable and production began. With the new products sales were up to $4.2 million from Kwikee alone (CMM, 2003).
After several months of successful production, quality problems started to arise at AM Equipment’s customer. The symptoms were evident, but the true cause of the problem was difficult to pin down. Only after weeks of research and testing were the causes discovered. Typically there were several small defects, each by itself harmless, but when combined, caused significant problems. Any error in production at Kwikee was immediately blamed on AM Equipment until it was resolved or shown to be a flaw in design or the manufacturing process.
Learning how to control quality became a time consuming endeavor that robbed AM Equipment of efforts made toward new products. Eddie devoted a full 30% of his time to Kwikee and a full 60% of his engineering resources to solving problems. That time should have been devoted to creating new products for the wiper market, AM Equipment’s true strength. Because of the constant distraction of Kwikee only one new project was released in 5 years, compared with 2 projects each year prior (CMM, 1999-2004).
Refocus:
With all these trials it was time for Eddie to sit down and rethink what his company was doing. Once again it was apparent that AM Equipment’s one strength was its ability to solve problems with custom solutions. The contract manufacturing had given some education, experience and a wider understanding of processes that could be useful in customer problem solving. However, it was decided that building things for other companies was not profitable, especially as the third party. Any new projects would be based on AM Equipments own design and specification.
If Eddie Johnson was to move his business to one of problem solving and customer service for windshield wiper systems, he needed to change the resources available to solve those problems. He started by hiring more engineers and increasing his direct marketing staff, doubling both departments. The company also looked at the markets they were focusing on and looked for opportunities. The domestic market was pretty well tapped by the efforts of the last 20 years, but global markets seemed ripe for the picking. In January of 2006 an internal sales rep was hired to focus on the markets south of the boarder (CMM, 2006).
Engineering Based Company:
Eddie was an incredibly creative person, and was constantly having new ideas about what customers needed. A simple comment by a customer would be transformed into a mandate to create the solution conceived in a matter of minutes. Often times the customer would not be consulted again for additional input until the product was ready for market. Then if the customer was unhappy with the final result, it became the job of marketing to convince the customer of what they really wanted, AM Equipment products.
Since product development is a time consuming endeavor, it is hard to support an entire company on new products. This was not any different for AM Equipment. The main problem was that nearly all the wiper products that they sold were commodities and had been in the market for several decades. The only way to continue development was to sell what they had anywhere it would fit. Not only were the marketing folks asked to sell the product anywhere, but each market segment had to have the same pricing. These efforts resulted in poor profits in some markets because the standard pricing was a skimming price structure, while in others it was at penetration pricing levels. After the initial sale, many of these “force fit” customers were unhappy with the products, because they did not accurately meet the customers’ needs. The failure of the product to meet customer needs tarnished the brand of AM Equipment for any future endeavors. Some customers now viewed Eddies company as having poor quality, because most customers base their valuation of a product (and company) on how well their own needs were met.
Eddie spoke with his management team and asked the question, “who do we want to market to?” The first reaction of each manager was to look where we had been successful historically and how much service effort that market segment had taken. One of the most successful had been the luxury vehicle/vessel market, with small OEM’s and low expectations. Next they evaluated market segments that looked promising for future growth. The future state of the economy and consumer preferences were taken into account, as well as customer size. Because of the “job shop” type DNA, AM Equipment was not a good fit for high volume production. The electric vehicle market and the international commercial bus industries were selected as growth markets. Now it was critical that they made huge efforts to understand their target customers.
After considerable online market research and specialty reports from the U.S. Commerce department about specific foreign markets, AM Equipment decided that it could meet 80% of the market’s needs. The last 20% would take more development. Specifically, many applications required a larger motor and wiper arm than were currently unavailable. AM Equipment engineers went to work to create a new series of motors and arms for that market. Because of lessons learned earlier, customer input was of highest importance and it was solicited regularly. Engineers made on site trips to customers as well as suppliers. They spoke weekly, if not daily, to the marketing staff about progress and continually asked for criticism about designs from the customer’s perspective.
Analysis:
Quality Problems
Many times in the life of AM Equipment, there had been problems with products. Some of the issues stemmed from poor supplier management, others were design problems but many were not flaws with the product, but the application the product was being used on. Unfortunately, for many years these problems were the only “voice of the customer” that Eddie Johnson heard. Product development was driven by the complaints of a few people. Sometimes this strategy was effective in generating products that entire market segments wanted, however several times the products generated were too costly for the intended customer.
AM Equipment has since moved toward better communication with focus customers. Before the design is started, requirements from the customer’s perspective are drafted. Second, manufacturing requirements are put in place. The next step is to select one or two specific customers to present the requirements to and ask for any that were missed. Once engineering receives this validation about requirements the design is started. At every point along the way, engineers compare their design with the requirements. Then on a weekly basis, the marketing department also reviews the progress and makes any suggestions that may make it easier to sell or simpler to use. Once a design is in final stages, it is presented to the focus customer for final input. The next time the customer will see this product is at the testing phase, where production intent samples are shown and the virtues of them presented to the customer.
Knowing the market before having a product…
This customer focused communication has been a huge improvement on the marketing side. Sales and marketing staff are able to be confident of the product that they are selling to a specific customer or market segment. Having first hand knowledge that the customer’s feedback was taken into account throughout the design, creates value to customers. This knowledge makes them more readily order product.
What is the role of marketing…
Within AM Equipment, marketing has many areas of responsibility; market segment identification, market research, be the “voice of the customer”, asking the development team for the correct project priorities as well as helping direct the future sales distribution channels.
Market segment identification was simpler on the national level, because information was readily available via personal connections and the internet. When marketing began looking internationally, personal resources were limited. The U.S. commerce department offers a “gold key matching” service where they will work with commerce departments of nearly any foreign country to establish potential business opportunities. This service also sorts out any illegal or problem customers and can even set up contacts and coordinate meetings.
Market research is the daily observation of trends in the world and patterns specific to each market segment. Somewhat related to this is transferring direct customer feedback into the business, whether improvements are needed in production or quality problems arise. Marketing must fight the customer’s battles internally.
Part of the customer feedback is identifying what the market will want next. What will solve their problems in the next two years, and what opportunities does AM Equipment have to provide more value to their customers. Additionally, what are the most efficient methods of getting their products to customers today and next year? They must identify any changing market conditions that may influence how the business operates.
What Can Be Learned?
Know your customer and give them what they want
When investing in products for your company’s future, it is critical that you take the time and analyze what the customer wants. Typically new product development takes a significant investment of time, capitol and other resources. One of the most critical investments is your opportunity to pursue the alternative project. Projects are always in competition with other projects, so it is critical to select the best project to be working on for the targeted market segments.
Gathering the information is at times a huge challenge. The most profitable method is spending time with the customer, at their facility or where the product will be used. Watching people use the product can also be helpful, especially if they have very little knowledge about it. Most products need to be simple to use and that alone can make it a marketing wonder or a bust. Apple is a great example of a company who has succeeded because of the simplicity of its products. Many insightful observations can be made in the field that may have been missed by designers who are too deep in the project to see some of the most obvious flaws.
Once a basic list of requirements has been established, it is critical to get feedback from the customer. To miss something obvious at this stage could spell disaster when the project is complete. Spending the extra time in clarifying the customers’ requirements may save your firm hundreds of hours of rework if that missed requirement were brought to light after the design was nearing completion. For Project Management there is a rule of 1:10:100 (Kemp, 2004). If an error is discovered in the planning stage and fixed the extra money and time will be well worth the effort. If that same problem is discovered in testing it will cost ten times as much to fix. However if it makes it all the way to production the cost will be 100 times more in time and money to resolve it.
If these steps are followed it is almost impossible to fail once the product is ready to sell. Very few circumstances can offer resistance to a product that was co-developed with your customer. It would have to be a technological breakthrough that virtually made your product obsolete.
The importance of stakeholder relations
Stakeholder relations are the most critical relationships of any firm. The stakeholder includes suppliers, employees, customers and owners. Employees are the most important asset a company has, they generate the innovation that moves companies forward and keeps them ahead of their competition. Employees are the people who know your business best and can suggest improvements or sabotage it. Respecting them and making sure they feel valued, by listening to them and helping them grow professionally, is a great way to improve employee relationships.
The second most important relationship is your suppliers. It is nearly impossible for a company to know every technological advance that may change how some piece of their product is made. That is why supplier relations are so important. Suppliers know about the sub processes and keep track of potentially money saving technology, because it is profitable for them. Any efficiency that a supplier can gain, means more net profits from the sale of their goods. When working with suppliers it may be possible to share the efficiency with the supplier and transfer any knowledge gained to other suppliers who may in turn reduce your costs as well.
We have already spoken about the benefits of close customer relationships. Obviously, giving the customer what they need and want will grant favor with customers and improve future continued relationships. Owners are often the most cared for stakeholder, but their interests tend to be short term. When a firm can look at the importance of long term prosperity, it will develop strong relationships with suppliers, employees and customers which will mean long term benefits for owners.
Understanding competitors is critical for long term success
Competition is the name of almost any business. Each company must have something that they do better than those they are competing with. Sometimes the firm needs only to be better in one aspect of what they do to set themselves apart. Some customers value different aspects of service and therefore will pay a premium if their expectations are met. Most importantly though, is knowing what your competitor does well and where they are weak. Exploiting their weakness may give your firm an opportunity to gain market share. This can work both ways though, know your competitors strength and your own weakness better.
Study Questions:
1)Do customers always know exactly what they want? Or is it up to manufacturers to tell customers what they need?
2)For an OEM, what is the most important selection factor when faced with a downturned economy?
3)Can a price driven company transform itself into a quality driven company? What would be involved (advertising, product changes, pricing strategy, etc)
4)In an environment of poor decision making, how can middle managers present their case to show potential problems with current accepted practices?
5)When customer’s needs are as broad as AM Equipments, how do you provide the best quality at the lowest price, to everyone? If you can’t, is it possible to segment the customers or the product to accomplish this? How?
6)Can a firm be too focused on the future to be seeing the problems that are immediately ahead of them? If so, what are some practical methods for supporting future growth, while mitigating the chances that the present will eat you alive?
7)How can supplier problems be mitigated? Are there steps that can be taken once a supplier is identified as bad? What are they?
Integration Consideration:
1)The ethics of micromanagement and servant leadership for setting marketing plans:
Micromanagement and servant leadership are juxtaposed when it comes to being a great leader. One place that is especially unforgiving to micromanage is the marketing side of any business. When a micromanager is able to fully understand the dynamics of the whole market, his leadership strategy may work. However, a person would have to devote all their time to understanding marketing. Most micromanagers tend to have their hands in any and all aspects of the business, which in effect requires that they divide their time. Because of the divided attention, little nuances are missed and large mistakes can be made.
As believers we may at some point be placed underneath a micromanager, and we must have the patience, self control and grace to submit to the authority that God has placed over us. We are called to pray for those in authority over us and support them until it becomes unethical or sinful. Those are some pretty tough marching orders at times.
2)Forcing bad-fit products, into the wrong markets:
Is it unethical to force products into markets where they will not be successful? Where should the line be drawn for selling the good qualities and ignoring the negative? Should marketing and sales people share just as boldly about the negative aspects of their products?
Let’s look at some of the simplest marketing possible…eBay. When people are selling products on ebay.com, they make special note of any defects. This is mainly to avoid any liability of someone getting something that they didn’t want, then have to go through the motion of making it right again. Is that any different than marketing products? Biblically, we are asked to do what we say we will do. It is a matter of our testimony for Christ. If we need to hide some part of our product, maybe that should be changed. It is definitely not worth tarnishing the reputation of our Savior to make an extra buck!
References:
AMEquipment.com (2008). Company History. AM Equipment. Retrieved Oct. 22, 2008 from: http://www.amequipment.com/02_company_history.html
CCM (1996-2008). Corporate Meeting Minutes. AM Equipment. Notes stored internally as reference documents.
Hartley, R. (2006). Marketing mistakes & successes, e10. John Wiley & Sons, Inc. ,Hoboken, NJ.
Hill, C. (2008). International Business: competing in the global marketplace, e7. New York: McGraw-Hill Irwin.
Johnsonelectric.com (2008). The Johnson Electric Story. Johnson Electric Corperation. Retrieved Oct 22, 2008 from: http://www.johnsonelectric.com/The-Johnson-Electric-Story.108.1.html
Kemp, S. (2004). Project management demystified: A self teaching guide. New York: McGraw-Hill.
Kolter, P. (2004). Ten deadly marketing sins: Signs and solutions. John Wiley & Sons, Inc. ,Hoboken, NJ.
UTC.com (2008). History. United Technologies Company. Retrieved Nov. 2, 2008 from: http://www.utc.com/utc/About_UTC/History.html
wexco.com (2008). About us. Wexco Industries. Retrieved Nov. 14, 2008 form: http://www.windshieldwipers.com/aboutus.cfm
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