At least two large insurance companies have introduced procurement programs designed to streamline the vehicle repair process by establishing a mandatory auto parts ordering service organized by the insurer. And more may be coming, with some collision repair representatives reporting that other companies are lining up to test the market.
Intact Financial Corporation and State Farm Insurance have both recently ramped up their programs, which involve hundreds of repair shops in North America. Intact’s parts procurement initiative, which applies to its Rely network of certified repair facilities, was introduced in 2006, but has since expanded to Alberta, Ontario, Quebec and Atlantic Canada.
“We launched this program to facilitate parts selection and ordering,” says Wendy Hillier, vice president of supply chain and procurement at Intact Financial Corporation in Toronto. “Our approach has been to develop an integrated, single portal which provides parts availability and pricing.”
Hillier reports that the 400 repair shops participating in the program “make a decision on what part is most suitable to complete the repair based on three considerations — fit and quality, availability and cost.”
State Farm began a pilot project through its electronic PartsTrader program in the spring of 2012 and now operates in five markets in the United States: Birmingham, Alabama; Charlotte, North Carolina; Chicago, Illinois; Grand Rapids, Michigan; and Tucson, Arizona. PartsTrader — a web-based, collision part sourcing, quoting and ordering system — currently involves 600 of State Farm’s Select Service repair shops.
“State Farm is focused on pursuing initiatives that promote a competitive marketplace and improve repair efficiencies to benefit our customers,” says George Avery, a property and casualty claims consultant for the company. “State Farm repair programs, including electronic parts ordering, are designed to improve value and enhance the customer experience,” Avery says.
State Farm representatives did not comment directly on expansion plans for PartsTrader to the Canadian market. However, John Norris, executive director of Hamilton, Ontario-based Collision Industry Information Assistance (CIIA), an association that shares information on the repair industry, reports that “State Farm Insurance has already sent a letter on PartsTrader parts procurement to our shops. Other insurers have told our shops that they are waiting for the current parts procurement program to mature before jumping into a program.”
These procurement programs have generated negative feedback from several collision shops and auto repair associations. In the U.S., for example, the Auto Body Association of Connecticut released a position statement that notes the following: “The (PartsTrader) endeavour is a wolf in sheep’s clothing. It is bad for repairers, part manufacturers, and most importantly, consumers. The only two enterprises in place to profit — and profit handsomely — are State Farm Insurance and PartsTrader.”
Specifically, repairers argue that the programs reduce profitability, create unnecessary delays and wrest control away from shop owners.
The Automotive Service Association (ASA), the largest trade group representing repair professionals in the U.S., has asked State Farm to provide accurate data to demonstrate how the PartsTrader program benefits collision repairers. Its areas of concern regarding the pilot — as expressed by collision repairers — include efficiency issues, additional administration costs, reductions in shop profits, potential compromises to local repairer-to-supplier relationships, and increasing insurer involvement in the repair process, notes an ASA statement.
In Canada, collision industry representatives say the procurement projects are a bad deal not just for repairers, but for consumers as well.
“Good, efficient collision repair facilities, who already have electronic ordering, now must have duplicate systems, and lose their local vendors as anti-competitiveness weakens their margin,” Norris comments. “Even though those suppliers can sell to the shop for the same price, and sometimes cheaper, the facility on a parts procurement program must order from often more remote suppliers and at lower margins and lower profits only because the insurer is receiving a special fee from the insurance-approved parts supplier,” he adds.
FASTER PRICING, FEWER RETURNS
Insurance companies maintain that the point behind the procurement programs is to get customers’ vehicles back in shape as quickly as possible. And having a centralized ordering process is crucial to achieving this goal, Hillier says.
Intact’s program provides part pricing and availability in less than 30 minutes, she says. That compares to previous processes that generally took as long as eight hours and, in some cases, multiple days to complete.
But it is about more than faster pricing. Hillier also says centralized ordering has reduced the rate of returned parts because of incorrect part selection or quality to less than 10%.
“The program replaces the traditional process of calling multiple parts suppliers with a portal that is integrated with a shop’s estimating system,” notes Hillier. “Thus, this process means that shops can start repairs sooner and return the vehicle back to customers in an efficient and timely manner,” she adds.
When asked about efficiency measurements and cost savings, State Farm’s Avery responds the company is “focused on gathering feedback from repairers and working with PartsTrader to continuously improve the electronic parts ordering process, while repairers maintain their focus on quality, efficiency and price in servicing our shared customers.”
For Norris, one big bone of contention with these programs is that they represent a “simple transfer of parts profit dollars from shops to insurers. We fear that with restricted labour door rates and an eventual 10% handling fee on parts rather than regular profit, shops will regrettably be closing and cannot afford equipment, training nor technician retention in the future,” he says.
Norris points to the experience in other countries, where procurement programs have existed for several years. “As we have seen in other countries, insurance company parts procurement means less professional shops, more shop ‘bottom-feeders,’ less profitability and labour impacts in not attracting technicians/apprentices or failing to retain qualified staff,” he says.
New Zealand is often cited as an example of the parts procurement trend. “We have seen, through the seven years that New Zealand was on this program, a massive reduction in profits as prices lowered (more used and more non-OEM parts) with reduced margins,” Norris reports.
When it comes to claims of efficiency and time-savings for these programs, Norris says he is very skeptical. “The shops that the insurers want on this program already have streamlined ordering programs in place. They already have electronic parts ordering systems and already control returns. The insurer is now on a parts procurement program, set to remove that shop efficiency and replace it with a new level of insurer-contracted ‘efficiency,’” he observes.
From his perspective, there is only one major beneficiary to the new procurement programs. “The only thing streamlined is the money gets to the insurer faster as they get a cut on the parts ordering and take a percentage off the cheque to the shop for their completed repair work,” Norris charges.
In response to this criticism, Intact’s Hillier states: “Our program improves workflows and efficiencies of participating shops and through regular discussions, we work closely with shops in our network to continuously improve our program.”
Some industry watchers have observed that structural auto parts procurement may be just a first step by insurance companies, who are constantly monitoring costs of the supply chain and seeking improved efficiency. Additional avenues could involve paint, among other things.
“Our intent is to focus on structural auto repair parts,” Hillier notes. “However, our platform design has the capability to expand our program to other components that have the potential to drive value and benefits, all while delivering a superior and highly efficient repair service to customers,” she adds.
Norris predicts that insurers will aggressively target other areas of the repair process. “Despite a parts revenue stream shifting from shop owners to insurance companies, none of us expect the revenues to dramatically reduce industry premiums for the average motorist,” he says. “In fact, we expect insurers to look at paint procurement profits next.”
Norris notes this should raise red flags for others involved in the supply chain, and for those expecting that major cost savings will be passed along to consumers. “Eventually this issue becomes a public policy question — if we allow parts procurement programs, should this new income for insurers from shops and from special fees from suppliers be used to reduce Ontario’s vehicle insurance premiums or should it offset their ‘acquisition costs’ of purchasing other companies and brokers?” he asks.
The controversy around parts procurement will likely continue to swirl in North America and create polarized viewpoints among repair professionals and insurance companies. It seems clear, however, that programs, in which insurers have invested significant dollars, are here to stay.