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In Pursuit of Quality: Tom Vecchi, Engine Supply, Inc. incoming PERA president

By Dave Wooldridge

Tom Vecchi, president of Engine Supply, Inc., Phoenix, AZ, and incoming president of the Production Engine Remanufacturers Association (PERA) hasn't spent his entire business life in the engine rebuilding market. However, since acquiring Engine Supply in 1988 with his brother-in-law, Len Joy, who is chairman of the board, he's learned enough to know that rebuilding engines is not an easy way to make a living.

Back in 1988, Vecchi received a call from Joy, who was working in strategic planning and acquisitions for the U.S. Gypsum Co. "He told me he had seen a "for sale" ad in the Wall Street Journal for this engine rebuilding company in Phoenix, and would I like to go there and take a look at it with him," related Vecchi. "After meeting with then Engine Supply president, John Martin, and touring the facility, I just felt we could do it."

Vecchi, who had been working for the Arizona Public Service as an engineer in the state's electric utility's industrial marketing division, brought a strong background in heavy engineering to his new job. But he admits that his only real experience in the automotive field was as a young man who raced go karts and performed service work on his own car. "I had never heard of a remanufactured engine before we purchased the company," said Vecchi.

What Vecchi quickly learned was just how complex engine remanufacturing actually was. And he has learned that complexity in the midst of a marketplace that has experienced a whirlwind of consolidations and competitive pressures almost since the first day he assumed responsibilities as president.

Engine Supply today is a far cry from what it was when Vecchi and Joy purchased the business in 1988. Back then, the company had grown from its initial roots as a small automotive service repair business into a combined production engine remanufacturer (PER) and parts distribution operation.

About 60% of annual sales were generated from rebuilt engines and 40% from engine parts. The company owned three distribution facilities in Albuquerque, NM; Las Vegas, NV; and Tucson, AZ, along with a small industrial machine shop, also located in Tucson, which was engaged primarily in large diesel engine work.

Initially, the two new investors tried to expand along existing business lines by opening a new warehouse in San Diego, CA. However, after a nearly two-year struggle to generate enough sales to pay the overhead, Engine Supply closed the warehouse.

Following the closing of the West Coast warehouse, the company downsized its three remaining warehouse operations by selling the facilities and then becoming a leasing tenant. The company held about 120 remanufactured engines and $30-$50,000 in parts inventory in each of the warehouses, but saved significant money by occupying only about 2,000 sq. ft. of the original 10,000-12,000 sq.ft. in each of the warehouse locations.

Continuing profit margin pressures and a decision to refocus the strategic direction of the company resulted in Engine Supply closing all three warehouse locations, along with the industrial machine shop in Tucson by 1993.

"We were really operating two different businesses at that time," explained Vecchi. "We had sales and distribution of engine parts and we had rebuilding and sales of engines. We decided to get out of the parts business and focus on being a remanufacturer of engines. Today, less than 5% of our $18-$20 million in annual sales are engine parts. The majority is in our rebuilt Spartan engines."

Earlier this year, the company also sold its headquarters space in Phoenix for more than $4.3 million and leased back more than 75% of the space on a long term basis.

The company's present day customer base has also transitioned from largely traditional jobber and WD outlets to primarily sales to large retailers within 1,000 miles of Phoenix. AutoZone, Pep Boys, CSK Auto, Inc. and Western Auto, comprise the lion's share of Engine Supply's sales, along with selected NAPA stores and a few other independent distributors.

Vecchi explained that the company's move into retail sales was more of a defensive strategy, at least at first, than anything else. "AutoZone got into the rebuilt engine sales business around 1984-'85," said Vecchi. "It didn't take them long to acquire a significant share of engine sales in our markets and it was continuing to grow. Since they were buying their engines back East, we viewed becoming their supplier as somewhat of a defensive strategy. Today, more than 80% of our engine sales are to retailers."

Although he acknowledges that profit margins are not very high selling engines to retailers, Vecchi points out that his company no longer has the very expensive distribution and inventory costs it had when it was supporting three to four warehouse locations and selling to nearly 2,000 jobbers.

He also points out that, in general, retail engine sales have been good over the past year. And he says that several of the retailers that are now pushing into the commercial, professional service side of the market could offer additional engine sales for Engine Supply over the long term.

It's common knowledge in the marketplace that becoming a supplier of rebuilt engines to a few large retailers can be a lot like dancing with an elephant. Cash flow can be squeezed quickly when disagreements arise over such issues as core credits and warranty coverage from large volume buyers.

While acknowledging that the cost of building an engine can be doubled by the cost of a return, Vecchi says that to remain a supplier to retailers you must build a high quality product. "The retail accounts we sell to are repeat buyers," said Vecchi. "They buy over and over again and, consequently, we have to provide continuous quality to keep them satisfied."

Vecchi also notes that in many instances it is becoming harder to tell the difference between a retailer and a traditional WD. In many cases, both are selling more direct, have reduced their inventory levels, have lowered their operating costs, and are providing the end user a friendlier environment to do business in.

"Overall, retailers are more sophisticated today," explained Vecchi. "For example, many have realized that extended warranties are not necessarily in their best interest. Many of them do not want to be married to an engine for that long. In its own case, 60% of all Engine Supply's rebuilt engines are sold with a 1 year/12,000 mile warranty, 30% with an 18 month/18,000 mile warranty and just 3% with an optional 3 year/36,000 mile warranty.

"In general, I think they (retailers) treat us better than they did in the past, said Vecchi. "But it still isn't easy. In today's consolidating market we often find ourselves squeezed by both big company suppliers as well as big company customers. And in the pursuit of building a quality engine, some retailers just don't understand everything we've undertaken to ensure consistent quality."

Like many companies today, Engine Supply has implemented extensive charting and statistical process control parameters in an effort to achieve consistently and efficiently produced quality rebuilt engines.

"We began implementing a statistical process control (SPC) Timer Saver software program six or seven years ago," said Vecchi. "We used to drive all of our quality decisions and production changes based on analysis of our returns. However, today it's based on extensive and daily charting.

Vecchi says that the company is about half-way through the process of implementing the program on all aspects of engine rebuilding. Already, it is in place for such procedures as rod and main journal grinding and polishing, valve face and seat runout, and cylinder boring and honing.

Vecchi says that the pursuit of quality today is one that requires both remanufacturer and component part supplier meet critical quality targets. "We used to have pistons, for example, moving down the line with an engine, explained Vecchi. "We'd mike the pistons and then hone accordingly. But we don't do it that way anymore.

"Now there is a standard deviation that each cylinder hole must be within, and there is a specific spec that the piston manufacturer must also meet so that when assembly takes place proper clearances are achieved. We both must do quality charting to ensure that our products meet those specifications."

Although there are still parts that are returned to a supplier for good reason, for the most part, Vecchi says that most engines that come back as a warranty claim are not the fault of bad parts.

"I'd say that 98-99% of our engine warranties are due to our own workmanship, not the materials we are using," said Vecchi. "Occasionally, the OEM makes a mistake, but with the type of quality control most of them have implemented, it's really rare that they provide parts that are out of spec.

"For the most part, there is way too much blaming the customer or the parts supplier when an engine comes back," said Vecchi.

What Vecchi says most PERs today must do is to focus on their own quality control documentation processes.

Quality control charting and checklists have been created for all aspects of the remanufacturing process at Engine Supply. Vecchi says that in "the old days" an employee would be given some training on a piece of equipment and expected to deliver good parts. Now that employee is provided with the measurement tools and performance specifications to ensure that every part meets proper specs. Those tools and charting also enable him to track his consistency in reaching those quality parameters on a daily, weekly, monthly or even "lifetime" basis.

Engine Supply is now using the upgraded SPC Synergy Gold software to eventually provide each of its 150-160 engine rebuilding employees with a weekly as well as lifetime "CPK average." A CPK average is actually a performance capability ratio for each employee. It shows their ability to produce parts consistently within established specs.

Vecchi notes that providing such information to employees motivates them to work towards targeted quality goals. "Our crankshaft grinders, for example, are able to see their CPK average for keeping every crank that they grind within the established journal deviation specification," explained Vecchi. "A CPK of 1.33 indicates that for every 1 million parts produced 63 would have been outside of spec.

In addition to eliminating the "excuse of the day," such charting, says Vecchi, provides real-time information on the remanufacturing process. With the quality expectations held by today's customers, it is a necessity.

"Four years ago we were in a situation where we were trying to build too many engines for one of our customers without the benefits of SPC," said Vecchi. The ensuing warranty returns made him understand the requirements for implementing better quality procedures.

"You can't successfully remanufacture engines today with a long feedback loop in understanding quality issues," said Vecchi. You have to know today if your cylinder hole is too big or too small."

The established specifications and procedures used in various departments also involved a lot of long term failure analysis. In fact, Vecchi was able to produce data which detailed claims by code description, for example, valve seals, wrong, leaking or missing, the number of claims in each of those areas, and the average cost per claim.

"I've kept track of every warranty for the past 10 years," explained Vecchi. "It took me five years to realize just how complicated engine remanufacturing actually is. The theme that I've chosen for my year as PERA president is, ëRemanufacturing is manufacturing.' Just like a manufacturer, we start with our raw materials to produce a finished product. But our business is really much more complex than a lot of new parts manufacturing."

Vecchi says that he has identified more than 200 different failure codes that can result in a warranty claim. And behind each of those failure codes can be a list of as many as 40 different root causes for a failure.

"When you consider that on a day when we rebuild 77 engines there may be 20-30 different types of motors being produced, you can see how problem areas can be magnified," said Vecchi. "You can see how there needs to be a relentless pursuit of quality." Vecchi adds that he continuously looks at the last 30 days of warranty claims to see where the trends are and to make any necessary adjustments in remanufacturing specifications or procedures.

"We are spending a lot of money to make engines run without any problems," said Vecchi. I believe that in 1992 we were building a pretty good motor. But in 1998 we are building a great motor."

Like every engine rebuilder, however, Vecchi realizes that quality must be an end goal that is reached with production efficiency. "Over the next three years we will be working hard to get our productivity where it needs to be," said Vecchi. "In today's marketplace the companies that are more efficient will survive and those that are less efficient will not."

But Vecchi admits that reaching quality and efficiency goals is far from easy in today's competitive and demanding marketplace. "Buyers rather than sellers are the arbitrators of price in today's market," said Vecchi. "My reality is that I cannot produce 350 engines and sell them for $800 per unit. What our customers and the ultimate consumer get today is really an unbelievable value."