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Lane Parts Co.: Many Rebuilders Are In A State Of Transition

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It seems that many rebuilders
are in a state of transition. Whether it’s due to changing ownership,
technology, products or markets, almost all machine shops and
engine rebuilders are facing increasing competition in an increasingly
consolidated market.

Lane Parts Co., Eugene,
OR, Automotive
Rebuilder’s

1996 Machine
Shop of the
Year,
is no exception. This Northwest heavy duty machine shop began
life in the early ’50s supplying machine services and parts primarily
to the timber industry. But a lot has changed since then.

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Today Lane Parts caters
to the needs of the industrial, agricultural, marine, trucking,
construction and automotive markets, in addition to the logging
industry. New company president, Mike Jeffries, who purchased
the firm along with his wife Niki a little more than a year ago,
has some specific ideas on what Lane Parts needs to do in order
to grow the business. Primarily, Jeffries says the company must
focus on cultivating business with sales and service organizations
that can help expand the reach of Lane Parts’ products into a
broader geographic area.

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"Eugene is a small
market town of just 300,000 people," said Jeffries. "If
we’re going to grow, we’ll have to expand by developing relationships
with distribution businesses, as well as with our local dealer
business." And by distribution businesses Jeffries means
independent and OEM forklift, industrial, agricultural and other
sales and service dealers who handle accounts in their own specific
markets.

One of Lane Parts’ largest
accounts of this type is Hyster Sales, Co., Coburg, OR, which
services the forklift business from Alaska to Southern California.
Where once Hyster Sales only serviced OEM Hyster products, it
now is independently owned, having expanded sales and service
into other OEM forklift engines, including Yale, Toyota, Cat and
others.

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On the OEM heavy duty
engine dealer side of the ledger, Jeffries sees similar types
of trends occurring as those impacting some of the forklift sales
and service businesses. "I think some of these OEM dealerships
are beginning to see that they can get better quality products
from us and at a lower cost," said Jeffries. "Take such
things as cylinder head machine work or crack repair. We can provide
better quality, good turnaround and a better price than they often
can get directly from the OEM dealer.

"Although we’re
looking primarily to sales and service organizations that sell
new equipment, but also provide parts and service, to grow our
business, it’s all part of a business philosophy which asks, ‘Where
is the business concentrated and how do I use my expertise to
service it?’ "

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That’s a question which
is often easier to ask than it is to answer. And even when you
know who your customers should be, there’s the problem of finding
and implementing a business and marketing strategy on everything
from production to products to pricing to make it all work.

Lane Parts presently
has a target customer base of sales and service accounts to which
it supplies complete engines, primarily smaller industrial engine
applications. It’s second major customer base consists of local
dealer business, e.g., fleet accounts, truck repair outlets, agricultural
dealers, etc., to which it provides primarily machine work and
parts.

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As a fully integrated
machine shop, in a small-market town, Lane Parts can’t afford
to be a specialist in just one or two markets or product line
segments, it must become a generalist specializing in multiple
customers, markets and product line offerings. To do that, Jeffries
says that Lane Parts has to work closer with its customers to
provide the service and products they require.

"Our focus is to
know the business of our local dealers and our sales and service
organization accounts," said Jeffries. "We have to understand
their markets and where the trends lie. A competitive marketplace
is forcing us to look at each of our customers individually, and
then to develop products and services that meet their needs."

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For example, Jeffries
says that his company has undertaken surveys of some of the largest
service and fleet operators in his market to inventory the equipment
they are using and when it will come out of warranty. Then it
is up to Lane Parts to determine what specific engines and services
will be in demand and to provide those products and services when
needed. It is also an opportunity to sell that expertise to other
customers.

"We run close, cooperative
stocking arrangements with our sales and service organization
accounts," said Jeffries. "We analyze the turns on specific
engines and determine how many they should stock, how many we
should stock, and any other customer concerns that they might
have."

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Those concerns, says
Jeffries, range from labeling, to packaging to the preparation
of parts. "Many customers are very specific about how they
want the product prepped, packaged and delivered," he said.
"Consequently, we have to tailor our product and services
and continually professionalize our procedures if we want to keep
or obtain their business."

To accomplish that goal,
Lane Parts has begun what Jeffries calls "visioning"
exercises, where employees sit down together to define the processes
they currently follow and to look at better procedures or methods
to get the job done. "It’s a method for transferring responsibility
and ownership (of the work that we do) from me to our employees,"
said Jeffries. "The bottom line is that if we are going to
compete with the specialists out there, we are going to have to
have a better cost structure and/or provide higher value."

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Jeffries smiles when
he notes that not everyone is always in agreement about the direction
the company should move in, the equipment that should be purchased,
or the procedures that should be implemented.

"People in our shop
sometimes have different ideas of what direction the company should
go," explained Jeffries. "One of the biggest discussions
now is how much light industrial versus heavy duty truck, how
much complete engine rebuilding versus machine work we should
be doing. But we’re not dealing with problems here that nobody
else is dealing with. We’re becoming better at understanding what
the real issues are and attacking them."

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There are very few markets
that are not extremely competitive today. But Jeffries’ business
background has helped him to realize that there has to be sound
planning for not only the customers, products and services chosen
by a machine shop, but also the pricing of those products and
services to specific customers.

"You really need
to know what the value of your products are to your customer and
to your customer’s customers," said Jeffries. "You can’t
just put any price on it and throw it out in the market. Your
pricing has to be based on your costs, the quality and the value
that your products provide the customer."

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For example, Jeffries
says that shortly after purchasing the business he undertook a
profit analysis comparison on the two primary divisions of Lane
Parts, i.e., complete engine rebuilds versus machine work and
parts sales. The analysis looked at all of the costs – overhead,
labor, etc., in order to establish what the break-even points
and variable margins were for complete engines versus machine
work and parts sales.

What Jeffries discovered
was that net return on sales of complete engines was 3% versus
11% for machine work and parts sales. To some, including several
employees within Lane Parts, that was information enough to signal
it was time to reduce or exit the complete engine rebuild business.
However, to Jeffries it signified there was a need to change policy
regarding the pricing and marketing of complete engines.

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"Our fastest growing
segment of the business is actually our least profitable,"
explained Jeffries. "So the question is, how do we manage
that? If we are to continue to be in it we have to be more selective
on pricing policies to specific customers. That may mean selling
at higher prices to smaller volume customers who can still compete
for an engine sale because they have lower overheads, sales costs,
etc. than our higher volume customers."

It may also mean tailoring
service and warranty policies based on the volume levels and price
points that specific customers buy at. "We have to be able
to understand the profitability of each of the products we sell
on a cost basis," said Jeffries. "We have to keep looking
for where our inefficiencies are and keep driving them out. The
high profit companies find a way to do this."

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In fact, Jeffries says that one of
the biggest disappointments he has experienced in the rebuilding
business is the lack of cost-based, activities-based software
available to machine shops and engine and small parts rebuilders.
"It’s really just not available," said Jeffries. "It
is difficult for most shop owners to understand where they are
spending most of their time on a job, and how much it is actually
costing them to do a job."

Jeffries is the first to admit that
operating a business in the machine shop/rebuilding market has
presented continuing challenges for him. Prior to purchasing Lane
Parts, Jeffries took his BA degree in chemistry and his MBA in
business administration and cultivated a 21-year career with Exxon
Chemical. The last 15 years with Exxon was spent in new business
development. So he understands markets and economics and the importance
of proper alignment of all the factors that contribute to a business’
success.

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Jeffries said he wasn’t at Lane Parts
long before he realized two very important characteristics of
the machine shop/rebuilding industry. "Two things amazed
me," explained Jeffries. "The difficulty and complexity
of remanufacturing versus new manufacturing, and second, the detail
and skill levels required to do it right. It didn’t take me long
to understand that it’s the people, experience and skill level
that separates one rebuilder from another.

"Every time there is a problem
or a customer has a complaint, we essentially have a training
session," he continued. "Keeping up with the evolution
of products and technology today is a lot like succession planning.
You have to continue to implement systems and procedures to address
it."

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Fortunately, Jeffries can depend on
19-year veteran Tom O’Callahan, operations manager for Lane Parts,
to oversee continuing improvements in customer contact, shop scheduling,
training and a variety of other related shop issues. Along with
general manager Bud Cummins, who has been with Lane Parts for
more than 37 years, and handles outside customer training, service
and engine sales, the two men are helping to implement procedures
and policies designed to improve both profit margins and quality.

Jeffries says that Lane Parts has targeted
three business "systems" that need to be improved in
order to achieve long range production and marketing targets.
These are: 1) Find the right people for the job; 2) Locate the
correct engine rebuilding specifications and then add and keep
track of specific customer machining requirements; 3) Distribute
the rebuilding knowledge base across a broader spectrum of employees.

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"Development of our employees
in terms of their skill level and turnaround times are critically
important," said Jeffries. "We’re working towards cross-training
employees in three skill areas with the goal of having three employees
qualified at every skill position in the shop." Jeffries
says the idea is not to generate "skill level redundancies"
but rather to ensure job completion dates are never missed and
quality levels are maintained.

A variety of procedures and policies
have been implemented in an effort to improve turnaround times
and customer satisfaction. Meeting customer expectations is harder
today than it has ever been. The same issues that make rebuilding
increasingly difficult for machine shops, e.g., evolving product
line and vehicle systems technology, part number proliferation,
etc., also make it difficult for the service garage and fleet
mechanic.

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"Our customers in many instances
are less knowledgeable yet more demanding when it comes to a problem
with a rebuilt engine installation," explained Jeffries.
"Because of such things as electronic ignition, computer
controls, etc., often times our customers have a difficult time
figuring out where the problems actually lie."

So providing customer satisfaction
becomes a two-pronged approach where in-the-field diagnostic expertise
is combined with internal systems designed to keep quality and
efficiency levels high. The internal systems are also designed
to convey information to employees concerning the cost of mistakes,
as well as to provide documentation of employee productivity.

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Much of this is accomplished through
monthly shop adjustment and productivity performance records which
are posted for all employees to see. The shop adjustment sheets
provide detailed information on monthly warranty returns. The
specific engine and problem which occurred are described, who
was responsible for the work, what needs to be done to keep the
problem from occurring again, and the total dollars lost as a
result of the mistakes. Employees have been educated to realize
that warranty work results in lower net dollars earned per hour
worked, says Jeffries.

The productivity performance sheets
record billing dollars produced by each employee in eight company
departments. The results are provided monthly and also include
total company production for the month, shop adjustments made,
net production earned, as well as the target earnings established
for each month. Employees look at it closely. It’s definitely
a motivating tool, says Jeffries.

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In order to achieve improvements in
all of the above areas, Jeffries says that he and his employees
have targeted three priorities for the business. First, to research
and match equipment purchases to the type of work being done.
For example, Lane Parts plans to eventually purchase a smaller
crankshaft grinder to accommodate quicker setup times on the increasing
number of smaller industrial engines being done. A new three-angle
valve seat machine was recently purchased to improve speed and
quality levels.

Second, to continue to update and implement
employee policies designed to improve quality and enhance efficiency.
And third, to construct a new facility designed to accommodate
better material flow, and increased production. For that to happen
the company has established profitability and efficiency goals
which must first be met. However, Jeffries is optimistic that
Lane Parts will begin building new facilities towards the end
of this year or early in 1997.

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In the meantime, Lane Parts, under
Jeffries’ guidance, is making noticeable progress. The company
does twice the business today that it did seven to eight years
ago, generating nearly $2 million in annual sales from its present
11,000 sq. ft. facility.

With 28 total employees, 20 of whom
are directly involved in the shop and parts operations, 40 to
50 engines are produced monthly in addition to $50,000 to $60,000
in monthly parts sales.

"This is definitely a company
in transition," said Jeffries. But it is a company making
that transition under capable leadership which is working a solid
business plan designed to maximize profits and customer satisfaction.

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