April 2004 | Commentary | IT Matters

Creating Competitive Advantage With Service Parts Logistics

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After-sale customer service operations are a strategic part of every business. Not only is service a key differentiator, the difference between revenue contribution of service operations and total revenue can be as large as 40 to 60 percent. Many companies today are even willing to pay more for high levels of service.

While most companies do provide their customers with high levels of customer service, the current productivity gap (what is being done vs. what is possible) leaves room for significant value generation. It is also common for many companies to view re-engineering efforts dealing with the service part of the supply chain as risky.

Although this is understandable given the impact of failure in customer service, the vast productivity potential and increased pressure from Wall Street is forcing companies to look at this previously under-studied area.

Service parts logistics poses a unique set of problems for a company's supply chain. Managing service parts involves some distinctive processes, including testing for design flaws, refurbishment and repair. It also requires coordination among trading partners and third-party technicians. Forecasting demand for service parts is also significantly more difficult than for traditional lines in the business.

These issues are compounded by a patchwork of systems—some that are designed specifically for the services supply chain, and some that are borrowed from the main business, with little customization available for service-specific needs.

These challenges result in a services supply chain that protects service levels by storing a large amount of expensive inventory in a central location.

Virtual inventory pooling offers a way to dramatically cut inventory holdings across the service chain. Inventory pooling works by reducing inventories downstream and holding inventories in shared pools upstream. These shared pools can be quickly dispatched to any downstream location that faces a risk of stockout.

Inventory pooling calls for planned expedited logistics, which is much more expensive than normal logistics. The drop in inventory level at downstream locations, however, is so balanced that expedited logistics applies only to a small number of shipments and is easily overshadowed by large savings in inventories.

Anyone familiar with the service chain environment knows that companies can make significant improvements only through empowering planners. Planners walk a thin line between low inventory levels and the consequences of stockouts. Lack of upstream visibility forces planners to over-order and hold excess inventories. Current systems for updating planners with the status of their inbound orders are unreliable.

Increased upstream visibility attacks the root of this problem. Planners who have full access to the status of their orders can better align their inventory positions. To do this effectively, planners must have detailed visibility of order status. They must receive alerts to possible stockouts based on the status of their orders with suppliers.

Most companies' IT systems do not have the ability to collect such information non-intrusively from their suppliers. Therefore, the best planners actively build their own mental model of upstream order and inventory positions.

Supply Chain Visibility and Event Management (SCEM) provides planners with a single, unified view of upstream events. With good event management capabilities, any potential delay to inbound spare supply will be detected early enough to seek smoother remedies. Planners with SCEM capabilities can confidently operate with lower inventory levels. SCEM also provides the ability to track events on an aggregate basis to reveal process improvement opportunities.

Reduced inventory, reduced freight, reduced handling and storage costs—on both sides of the relationship—are all the results of visibility-enabled service parts logistics. Visibility-enabled event management is a critical component of the new service chain value and can have a significant positive impact on the bottom line.

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