How AutoZone can become more efficient as a automobile parts manufactuer

. Evaluate key elements of the selected production or service organization\\\\\\\'s operational efficiency with its operational strategy. Determine three tasks that do not align with the operational strategy. Determine the weaknesses that are evident in each task.

The success of the United States economy is predicated on the wellbeing of the service sector. As of 2019, services account for roughly 68% of GDP. This has been roughly in line with prior percentages ranging from 65% to upwards of 70%. As services are such a large element within the economy, it is imperative to have them operating a peak operation efficiency. The unique quality of services in general is that they do not need to be price competitive. Other aspects such as commodities, or labor are almost always looking for the low-cost producer. Service providers, however, can mitigate pricing pressure through increase efficiencies, higher value add, and more. Operation efficiency is the most effective method as it allows the company to maintain a standard of service while simultaneously lowering costs. This ultimately improves margins and overall profitability. Operation efficiency is particular important in the service industry as barriers to entry are often lower than other industries. Due primarily to technology, it is relatively easy to start a service with little to no capital. Bloating cost structures for example can invite leaner competitors offering the same service at a much cheaper price. As switching costs are low, consumers often elect to choose the low-cost producer, unless the service provider has a value proposition that is compelling. For example, consumers tend to pay more for high quality tax preparation as they often will get back a higher refund or avoid paying out additional taxes. A low-cost tax preparing that doesn’t provide comparable value cannot properly compete as its value position is not compelling enough relative to peers. This distinction is important when it relates to operation strategy and efficiency (See, 1984).

For this topic, I will be reviewing AutoZone, which is an auto parts supplier within the United States, Mexico and Brazil. This company is particularly warranted as it relies heavily on service and operations efficiency to derive its profits. First, the company is auto parts supplier primarily based in the United States. Roughly 6000 of its 6500 stores are located throughout the U.S. Within the U.S. its locations are primarily located in high growth areas such as Texas, Florida, California, and New York. The company primary target market are individuals within the “Do-it-Yourself” category (Keenan, 1996). Here, the company targets individuals who are looking to do minor repairs and maintenance on there vehicles without paying large fees to dealerships. Consumers are therefore looking for easy and accessible solutions that they can quickly and efficiently implement. Task such as changing windshield wipers, charging a battery, changing a battery, changing spark plugs, purchasing oil, are all aspects the company looks to help consumers with. This requires a high degree of operations efficiency due to the sheer volume of cars on the market today. According to the company’s latest financial report, the average age of a vehicle on the road today is roughly 11 years (Hill, 2007). This is above the historical average of roughly 8 years. The increase in the age of cars in due to multiple factors such as consumers deferring purchases due to lower incomes from the COVID-19 pandemic, higher quality cars, better maintenance of cars, and less miles driven due to improvements in transportation infrastructure in some states. As such, the company must maintain operations discipline as cars are now much older, thus requiring more repairs, and the variety of the overall cars on the market have increased.

The key elements to determining operational efficiency are related to first, the return on tangible assets over the course of its operations, the ability to deliver goods quickly from fulfillment centers to stores, and the ability to expand services and capabilities to ancillary product categories. To begin, AutoZone is publicly traded. As such, we have insights into the firm’s operational efficiency relative to its publicly traded peers. When reviewing the firm’s annual report, we see that the company has consistently high return on assets ranging form 12.8% in 2010 to roughly 14% in 2020. This compares to a 9.4% return on assets for the retail industry. Chart 1 below details the operational efficiency of AutoZone take directly for the company’s annual report (Form 10-K)

Chart 1

Year

2012

2013

2014

2015

2016

2017

2018

2019

2020

AutoZone ROA

12.8%

12.6%

12%

12.5%

13.1%

13.5%

14.6%

14.7%

14.1%

Source: AutoZone 2020 Annual Report

Although impressive when compared to the overall retail industry AutoZone’s operational efficient lags behinds its peers. O’Reilly Autoparts and Advance Autoparts are both publicly traded. When reviewing their annual reports their returns on assets are slightly higher than AutoZone. This is primarily due to three tasks that AutoZone is using that undermine efficiency.

First the company is transitioning to a smaller store format which is lowering efficiency. As indicated by major news outlets, the United States is over retailed. There is more square footage of retail in the United States than anywhere else in the world. As the COVI-19 pandemic spread throughout the world, the U.S. retail weakness was shown. As a result, many, high profile bankruptcies occurred. This bankruptcies included JC Penny, Neiman Marcus, GNC, True Religion, and others. In response, the overall autoparts industry has consolidated and moved to a smaller store format. This, in theory, would lower lease expenses, SG&A expenses, real estates taxes, insurances, and so forth. If the company then transitioned into online, channels, then the company could increase ROA and operations efficiency.

The exact opposite has occurred which is undermining the efficiency of the business. First, AutoZone occupies a niched that cannot be dislodged by online channels at the moment. Consumers use the company’s products on an as-needed basis and can therefore not wait a day or more for delivery. Consumers heavily depend on their cars, and therefore, when a malfunction occurs, they require an immediate fix. For example, if a battery needs replacement, consumers often need the battery immediately to get to work or to a particular destination. Therefore, the company should focus on larger stores, with more SKUs, and combine it with the ability to service customer vehicles. The combination of on demand products and a staff willing to help consumers will be a strong competitive advantage for the company. This will ultimately improve operations efficiency and alleviate the threats of online changes as it relates to efficiency.

The second task that doesn’t align with operation efficiency is the company’s distribution policy. As it currently stands, the distribution is currently inefficient. The company should invest in warehouses and just-in-time inventory practices to better compete with online channels. This is crucial as the timeliness and availability of products ultimately improves operational efficiency. The market that AutoZone occupies often need immediate service and don’t have a strong mechanical background as it relates to cars. Therefore, by having products when then need them, and a knowledgeable service staff able to assist customers as they demand, creates operational efficiencies.

Third, the company must enhance operational efficiencies from the first two weaknesses and expand the product category for distribution. Currently the company only relies on retail consumers. A logical expansion would be to body shops, repair shops, auto dealerships, and other commercial firms. Here operational efficiencies can be enhanced as the company now has more consumers and clients to service. Through this initiative the company can better much more aware of what products are in high demand, what products commonly break, and be able to properly service their locations accordingly.

2. Formulate a new operations strategy for the selected organization based on the four competitive priorities (i.e., cost, quality, time, and flexibility).

The operational strategy was noted above and will be reiterated here in more detail.

Cost – From a cost perspective, the company should first look to enlarge the store format in high growth areas as oppose to shrinking. The company occupies a unique niche within the retail market and should thus not shrink like many other traditional retailers. Instead the company should expand the store format, add more SKUs and services, and thus lower costs. This will lower costs through economies of scale. Through higher fixed costs, the company can lower input costs on a per unit basis by having more SKUs on site. The company can also lower transit costs, as consumers often purchase auto repair parts on an as needed basis. Many small “Mom and Pop” repair shops also purchase on an as needed basis. By having all the products already instore, the company can lower transit costs, while improving operation efficiency. Here the strategy will be to build out larger “Mega-hubs” that service both consumers and commercial clients (Similar in size to Costco or Walmart). The hub should house many of the common SKUs that need repair. The training staff should be knowledgeable enough to assist client with routine automotive needs.

Quality – Quality for AutoZone is not an issue as it relates to products. However, the quality of service can be enhanced through employee training programs. This too will improve operation efficiency as employees can fix common car problems for consumers. These value-added services not only create brand loyalty, but it also mitigates the impact on online channels. For example, online channels cannot install a new battery for a consumer. The internet can not install new spark plugs or windshield wipers. These services, although small enhance the quality of service, which ultimately enhances operation efficiency.