“R-Parts” Explained
by Jesse Herrera

Following our NAGS presentation at the 2004 National Auto Glass Conference, Scott Owens of Excel Auto Glass in Lake Katrine, N.Y. led off the question-and-answer period with a great question. He wanted to know why there are more than 2,000 parts on each of the ‘Net Price’ addendums for the leading glass manufacturers if there are only 1,350 R-parts in our recent publication?

No ‘R’ in Addendum

I thought this was such a great question because it highlights a critical issue facing most, if not all, glass retailers—the variability of retail profit potential from job to job. While there are several factors that contribute to this challenge, R-parts and ‘Net Price’ addendum parts are certainly part of the story. Per our estimates, R-parts and addendum parts combined can represent as much as 20-30 percent of a typical retailers sales volume.

I responded to Scott’s question by pointing out that R-parts and addendum parts, while related, are not one and the same. NAGS creates and publishes R-parts, but addendums are created and controlled by glass manufacturers. This answer, however, didn’t fully satisfy Scott and I didn’t have the data at my fingertips to offer a more complete response. Therefore, I decided to dedicate this article to offering a more thorough explanation of the relationship between R-parts and addendum parts.

Numbers are Our Friends
In order to understand the relationship better, we compiled a mini-database of NAGS designated R-parts and the addendum part lists from two leading manufacturers—PPG and Pilkington (these two manufacturers were chosen solely because they publish the most widely referenced addendum price lists in the market). The list of R-parts was taken from the September 2004 NAGS publication (this data is accessible to anyone who licenses our print or database products). The addendum part lists used in the analysis were downloaded from the PPG and Pilkington public websites as of September 15, 2004.

The combined parts list breaks down as follows [see FIGURE 1]:
• 1,350 NAGS designated R-parts in the September, 2004 publication;
• 2,488 parts listed on the PPG addendum;
• 2,402 parts listed on the Pilkington addendum;
• 6,240 total combined parts (R-Parts + PPG addendum + Pilkington addendum) and
• 3,895 total combined unique parts (this figure excludes overlap among the three sources).

So, in terms of the total number of unique parts on the three combined lists, R-parts represent 35 percent (1,350/3,895) of the total parts [see FIGURE 2]. Conversely, 65 percent of the total unique parts are specific to the addendums and have no connection to R-parts in this case.

This is an important point. I think there is a commonly-held misconception that addendum parts are the result of R-parts. However, if nearly two thirds of the parts in this analysis are not R-parts, then manufacturers must have other reasons for deciding not to sell these parts under their standard trading terms. For instance, there may be competitive factors (quality, patents, brand, etc.), inventory/supply constraints and manufacturing cost considerations, among other reasons.

To understand the impact of this practice on retailers even further, we analyzed the data with consideration to the frequency that each part is sold by a typical retailer. In other words, we weighted the parts by the typical retailer sales mix. (This analysis would yield a different result for every individual retailer as every retailer has a unique sales mix. However, we believe it provides a reasonable representation for a typical retail mix.)

Cause and Effect
The results of the weighted sales mix analysis are even more interesting. Based on our data, more than 90 percent of the sales volume from the 3,895 unique parts was related to the 2,545 non-R-parts [see FIGURE 2]. Conversely, the 1,350 R-parts represented less than 10 percent of the sales for this set of parts.

So, what does this mean to retailers? By definition, retailers purchase addendum parts under different terms than their standard agreements. Since insurance carriers normally don’t differentiate between addendum and non-addendum parts in their trading agreements, retailers get caught in the middle and often experience less attractive margins on addendum parts relative to non-addendum parts.

Retailers have responded to this issue in a variety of ways. Some actively shop around to find alternate suppliers of a given part to ensure that they are getting the best possible price, particularly on addendum parts. However, for certain proprietary parts, this is not always possible. Others have attempted to modify their agreements with insurance customers to allow for different pricing terms on R-parts and/or addendum parts. There has been limited, if any, success with this strategy thus far. Lastly, some retailers have called on NAGS to eliminate R-parts and manufacturers to eliminate addendum parts.

NAGS would very much like to eliminate R-parts. This has been one of the driving forces behind our rebalancing efforts all along. Rebalancing the NAGS benchmark price will eliminate the need for the secondary R-part formula and allow us to remove R-parts from our publications once and for all. (See related article, page 22).

So, how will eliminating R-parts influence addendum parts? NAGS is not in a position to say. We don’t publish or control ‘Net Price’ addendums; manufacturers do. Only the manufacturers themselves can determine the future of Addendum parts. As a third party publisher, it would be irresponsible for us to promise to change something we don’t control. That said, we hope that eliminating R-parts will help to reduce the number of parts on addendums, especially those directly associated with R-parts. n

Jesse Herrera is the general manager of National Auto Glass Specifications (NAGS) in San Diego.