It’s pretty obvious that in order to be successful selling tires, you need to be able to buy tires. Over the last few years, buying tires has been more difficult than it should be for tire dealers.

Low fill rates – in some cases record lows – have been the primary reason. Dealers simply could not get the items they needed when those tires were needed.

Fill rate to most dealers (retail or commercial) is the “initial” fill rate – the number of tires received compared to the number ordered as they are delivered on the initial shipment.

If I ordered 100 tires and I get 75, that’s a 75% fill rate. To some manufacturers and suppliers, that isn’t the way it is calculated. They might use line item count or SKU count instead of total number of pieces. They might give themselves 30 days to fill the order and if they fill all 100 tires within 30 days, they figure that to be a 100% fill rate.

That’s exactly the situation I was in just a few years ago with a major manufacturer. We complained to our account rep that the fill rate was poor and his office produced numbers that were significantly higher than ours. His numbers were in the “acceptable” range of 80%, while ours were closer to 55%. They were giving themselves 30 days to fill the order, but for a retail dealer, a tire not shipped on the initial order is a tire not available to sell.

Ours was a clear case of poor communication between supplier and customer and it shows that not all that long ago, fill rates not only were bad, they were not clearly defined.

Retailers and commercial dealers are at the end of the supply chain, installing at the point of use, on the customer’s car or truck. Because of this, dealers are inclined to feel that fill rate issues develop from further back up the chain. In reality, fill rate performance is controlled by both ends of the chain.

For a variety of reasons, fill rates and maybe even the communication between suppliers and end-users hasn’t changed significantly over the last several years. Fill rates are better from some manufacturers in some segments, but by anyone’s measure they are not where they need to be on an overall basis.

So why are fill rates so low, what is being done about it and what can tire dealers do to help themselves through the challenges posed by low fill rates?

The growing number of sizes, types, service indexes and brands certainly means more part numbers are needed to meet your customers’ tire needs. Gone are the days of tire retailers having “something for everyone” in stock and ready to install. Gone are “product screens” that could be hand-written on a single side of a single piece of paper.

But there are many other reasons – varied and complex – for poor fill rates besides the proliferation of brands and SKUs.

Globalization. Spikes and variation in demand. The auto industry downturn in 2009. The OEM factor. Poor forecasting. Intentional supply reductions to improve the bottom line. Raw material shortages. Economic peaks and valleys. Natural disasters. Strikes or other unplanned work stoppages. Line changeovers. Technology shifts. And on and on, a virtual cornucopia of reasons why a round and black object just can’t seem to make it from Plant A to Dealer B.

I will add two more: lack of good data analysis and supply chain management. More on those later.

As you go through these reasons – and others – the complexity of the causes becomes more apparent. I don’t want to give up the conclusions too quickly, but as most of us wouldn’t be surprised to hear, it doesn’t look like anything big is going to happen anytime soon to fix the low fill rate problem.

Fill rates haven’t been great for years, so what is going to change in order to improve them? For many, the most important question is what those of you at the “point of demand” can actually do about it.

The Causes
The paperback “Tire Guide” that many tire retailers have under the sales counter has a list of tire sizes in the first few pages under Load and Inf­lation Tables. The 2012 edition shows 283 P-metric sizes. In the 1994 edition there were 159 listed. That’s just raw sizes and doesn’t include the varieties of load ratings, speed ratings, Euro-metric, ST, and XL options that exist within these sizes, or the list of new LT-metric sizes and SKUs.

I was not able to even determine how many actual models (size, service description, type) exist, but it is more than double the number compared to a decade ago. The 10 most popular OE P-metric sizes now include five 17-inch and two 18-inch sizes. The result is that tiremakers have potentially three times as many product descriptions to make in various product lines. That means well over 1,000 SKUs that a tiremaker has to supply.

Problem No. 1: The huge increase in the number of part numbers to make.
Making tires requires a large capital expense and significant lead time. Doubling or tripling the number of product codes in the manufacturing process increases the supply chain challenges exponentially. Boosting capacity and production rates is great if the other parts of the supply chain are equally expanded. That might be old news, but a challenge that tiremakers have had to address, and must continue doing so moving forward.

Problem No. 2: Globalization.
Globalization means that manufacturers must potentially supply anything to anyone anywhere in the world. Tires are produced all over the world, both to meet market demands and to make the most efficient use of production facilities. Even within specific model lines, a manufacturer might have production on different continents.

The global market demands mean that tire manufacturers must plan not only where to make, but where to sell their products. Chris Tolbert, regional director at Nexen Tire America Inc., explains that for his South Korea-based employer, “North America is a small percentage of our overall sales.”

China, Russia and India are strong emerging markets and more tires will be needed in those areas. “Exchange rates can also cause tires to be directed to other global markets,” added Tol­bert. The exact same tire might fetch a better price and higher margin for the producer in Russia vs. the U.S. So guess where that tire is heading.

Just the communication within a tiremaker’s organization can be a challenge. Kumho Tire USA vice president of marketing Rick Brennan mentioned in a Tire Review interview in February that, “When you have so many factories to coordinate with, that communication can be a challenge. Sometimes you have to negotiate in order to get supply sent to you, rather than to another region.”  

Problem No. 3: Balancing OE and replacement.
Bill Caldwell, vice president of sales and marketing for Continental Tire the Americas, says that the supply chain has many complexities, but the primary causes of low fill rates are the 2009 auto industry downturn and the faster than expected recovery.

“We didn’t want to build items that people don’t want to buy,” says Caldwell. “Manufacturers curtailed production or closed plants.” Everything recovered much quicker than expected. “The replacement market took a dip for only a few months and the OE business recovered much faster than expected and is back to 2007 levels. Adding back capacity is much harder and slower than curtailing it, and many manufacturers also used the opportunity to add capacity back at more efficient sites.”

Providing OE products complicates supply of replacement tires. Continental has a much heavier OE mix than most other tiremakers. The ideal mix is considered to be approximately one-third OE and two-thirds replacement, but Continental is closer to 50/50. Original equipment contracts are 4-to-6-year commitments, making the tiremaker’s supply chain less agile than it needs to be in order to be efficient.

There are some unique aspects to the tire industry that make supplying tires a challenge, as well.

The tire industry is unique in that “all plants are running at 100%,” says Caldwell. “Other industries can add a shift if demand increases.”

Continental is addressing the low fill rate problem by increasing capacity. It is adding four million units of capacity at its Mt. Vernon, Ill., plant and doubling the capacity at its plant in Brazil to gain another four million annual units. Its new plant in South Carolina is scheduled to start producing tires in early 2014. Plus, CTA says it has not taken on any new customers in the last two years. Add it all up, and CTA seems determined to improve supply to existing customers.

Problem No. 4: Distributors trying to bridge gaps.
Caldwell says that distributors are playing a critical role by serving as a buffer, and their value-added proposition is being able to fill orders to the dealer that a direct relationship with a manufacturer won’t provide.

CTA has had success working with distributors that can provide good forecasting. Still, in Caldwell’s opinion, manufacturers will be more successful by supplying tires to fewer customers, especially if those customers are able to forecast better and for a longer range.

Randy Groh, vice president of product marketing at USAutoforce, agrees. As a large tire distributor, USAutoforce sees itself as the bridge in the supply chain gaps caused by poor fill rates. The distributor has dramatically increased inventory levels so that it can better service its accounts. 

Groh says, “Our units are up even though our customers are telling us that business is really bad.” RMA numbers confirm that replacement business is down, so the increase in inventory is working for USAutoforce. Eighty percent of its business is done online and Groh is seeing that retailers are searching two, three or four competitors at a time to source tires. Luckily, USAutoforce has the tires, so it’s getting the sale.

Terry’s Tire Town, a major regional distributor with 11 warehouses from central Ohio to the northeast, also has been forced to increase inventory levels in order to be able to service its accounts. Like many other large distributors, Terry’s Tire has taken a very active and analytical approach to add­ressing inventory needs and overall supply chain issues.

Problem No. 5: The high cost in dollars and time.
Low fill rate performance by the tire manufacturers increases the need for this approach. Jon Garrity, vice president of supply chain for Terry’s Tire Town, came to Terry’s Tire as a supply chain expert, but was new to the tire industry. Coming from outside the tire industry and having now worked in it for just 18 months, he has a unique perspective.

In Garrity’s opinion, the primary factors causing low fill rates are the significant capital expenses required in manufacturing and long lead times (compared to other industries) needed to plan, build and supply tires. This makes it very difficult for manufacturers to deal with the spikes in demand.

Continental’s Caldwell adds that tire manufacturing is extremely capital-heavy, and “making the best use of assets to be cost effective means a lack of flexibility.”

Problem No. 6: Demand spikes.
Another reason is that manufacturers have different types of customers, namely OE and replacement. And regardless of whether it is for consumer vehicles, commercial trucks or industrial equipment, the OE side comes with lots of spikes in demand. As vehicle demand goes, so goes OE tire requirements. And, in very simple terms, tiremakers would rather tick off Mr. and Mrs. Brownsworth with a late batch of fresh P-metric rubber than bring production to a screeching halt at the Ford plant.

From the wholesale side, tires are a “push” industry, as opposed to a pull-through one as with retail or commercial dealers. Wholesale sales are partially subsidized by the manufacturers through incentives and sales programs. Tiremakers influence what will be sold – and when. This can create false demand signals, complicating the supply chain process, according to Garrity.

In any other industry, the tire industry’s “good” 75% fill rate would be a disaster. Other industries expect better than 98%. While there are unique as­pects to the industry, Garrity says that manufacturers are “missing domestic sales” because of fill rate issues.

Terry’s Tire Town is doing what many other large distributors are doing by investing heavily in supply chain systems and training. The company has implemented software to help with ordering, inventory control and re­sponding better to demand shifts. This project has been rolled out in a majority of company warehouses and its full benefit will be seen once all warehouses are online, Garrity says.

Over the last six months, Terry’s has engaged in manufacturer and supply chain collaboration with the goal of helping with production scheduling. “The tire industry is ripe for process improvement,” says Garrity. “Some manufacturers are investing in supply chain, but it is in its infancy.” So the problem may not be as quickly fixed as anyone might like.

Another Set of Eyes
Going totally outside the tire industry for insight on fill rates, Michelle DeJonge is vice president of global supply chain for Johnson & Johnson’s massive Medical Devices and Diagnostics unit. MD&D is Johnson & Johnson’s largest business unit, generating $25 billion in sales last year.

The point in contacting her was to apply her knowledge of supply chain, specifically fill rates, to the tire industry to see how we are doing and maybe gain some insight on how we could improve. When I mentioned that fill rates had been hovering at less than 80% for years, she was not impressed, echoing Garrity’s comment that other industries, like medical devices, expect closer to 98% fill rates.

According to DeJonge, in order to improve fill rates you must be able to identify the “perfect order” – what the sales order looks like at the point-of-sale for a great customer experience. Manufacturers need transparency to that point of final sale. “Supply planning must be done at the point of use,” says DeJonge. For tires, that is the retail sales counter or the commercial tire customer’s desk. A common planning mistake is looking only as far as the point that manufacturers distribute to: a wholesaler or retail chain.

According to DeJonge, 10 years ago it was more about “build-to-forecast” and today it is “build-to-demand.” In tire terms, we are still talking about the absence of good front-end forecasting. Data collected at the point of use needs to be converted into supply chain data to make decisions. Companies that plan with a true planning process will succeed, she insists.

“You must know what the point of sale is telling you,” says DeJonge. Manufacturers need to know what is needed where. As Garrity mentioned – and many others know – the tire industry is “in its infancy” as far as processes to accomplish that.

DeJonge also mentioned that fill rates will be better under a “point of use replenishment scenario” vs. our current “push” inventory.

If there are legitimate comparisons to other industries, then what can we conclude?

The process of getting tires from the plant to the dealer carries some unique supply chain issues, but it appears the key to vast fill rate improvements lies with better forecasting, data collection and analysis, and looking at the entire process from raw materials to the sales counter. Adding capacity is a tool that can be deployed here, but it is not the only solution.

Tire companies should look externally to get the entire view – from raw materials to the final point of demand – if they are going to be successful supplying what is needed, where it is needed and when it is needed.

What Can You Do?
If you are a tire dealer, you might be saying, “Yeah, whatever, I’ve heard about most of these problems and how everyone promises to get better and build new plants and increase production. I just need to sell tires! We have been giving forecasts for years and still can’t get the tires that we need for our customers.”

Well, here is what our sources said a dealer can do:

• Develop equivalents: Christie Stock of Associated/Plains Tire says, “Make needed changes to your product screens.” You might have to use multiple brands to fill a line, but there are lots of equivalent product codes. Research various tires to create a lineup of tires you can easily source. Creating your own go-to line or OPP line or UHP line from various available brands will work great. It will just take a little work.

• Be flexible: When supply of a size or type is interrupted, find another one. Many dealers are adding additional brands to their line-up to cover the demand.

• Increase your inventory: Eric Lauck, director of purchasing for Terry’s Tire Town, suggests, “This is contrary to what many people say, but retailers should stock more tires, more core items.” Plains Tire in Wyoming rents warehouse space in order to stock more tires. “Even with daily deliveries, we needed access to more tires,” says Stock.

• Train your staff to sell what you have: Pat Logue, director of retail operations at Dunn Tire, says, “Know what you have and sell what you have.” That doesn’t mean selling the wrong tire. It means looking for alternatives that fit the application and the customer’s need. This might require some training – and customer education. We all have had counterpeople that sell only what they like to sell. That doesn’t work well anymore.

• Develop a good relationship with a distributor: Dealers of all sizes are doing this. Chains with five to 500 stores are buying from multiple independent distributors. As Nexen’s Tolbert told a distributor: “Your job is to be one of the five tabs on the retail screen.” Many dealers are buying from multiple sources, even dealers who buy direct. Your primary one is not going to have everything.

• Collaborate with key suppliers, distributors and manufacturers: Garrity says, “Look for a wholesaler that is investing in inventory planning.” There are others that are investing to better respond to pure demand. “A good wholesaler can help buffer the poor fill rates. Collaborate with your distributors and suppliers, and give them all the information that you can. They need to know demand at the SKU level and can help protect supply for retailers.”

Long Time Coming
So the bad news is that low fill rates are not going to be fixed quickly. They have been bad for such a long time – longer than we even knew they were that bad – and change will be slow to come.

It is probably no surprise to anyone in the tire business that manufacturers are not on the cutting edge when it comes to supply chain processes and efficiencies. According to most people we interviewed, overall fill rates have not improved significantly in years. There have been some good results at various manufacturers and improvements in portions of various lines, but any improvement has been slow to come.

The good news is that tiremakers are investing to develop supply chain systems that are more modern and efficient. And the industry has recognized the need for better planning/forecasting and use of analytics to help with supply planning. Enhanced supply chain processes – software and people – are being put in place.

The typical dealer has little influence on supply chain performance, but by taking charge of the situation in their own company and taking advantage of the multitude of available products and large number of suppliers, dealers can find ways to succeed in the interim.

Just think: Once fill rates get back to where they should be, everyone will just be that much better at planning, making and moving tires.