Getting Service Parts Logistics Up To Speed

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"What's the difference between a drug store and a fire station?" That's not a trick question, but a way to understand the service parts supply chain.

"You expect to see goods moving rapidly through a drug store or retail chain," explains Dr. Morris Cohen, Panasonic professor of manufacturing and logistics and co-director of the Fishman-Davidson Center for Service and Operations Management at the University of Pennsylvania.

"You expect high turn rates, high employee utilization, customers streaming in and out, many transactions taking place. It would be inefficient for the store staff to sit around watching TV, or cleaning the shelves.

"But if you go to a fire station, that's exactly what you see," he adds. "Firefighters don't put out fires every few minutes. They sit around waiting for something to happen. That fire station is a lot like the service parts supply chain."

The fundamental nature of service parts logistics—with its intermittent, unpredictable, random demand combined with high customer service requirements—makes this business tremendously difficult to manage.

The findings of a recent Aberdeen Group study bear this out:

  • More than 80 percent of study respondents rate creating accurate plans and forecasts for spare parts consumption as challenging or extremely challenging.
  • Similarly, 80 percent of respondents describe the activity of planning spare parts inventories as challenging or greater.
  • Nearly 70 percent of respondents say they are more than challenged with curbing excess spare parts inventories, and maintaining performance levels agreed to in their service contracts.
  • More than 60 percent of companies say avoiding stockouts is a greater-than-average challenge.

Feelings of Inadequacy

Companies with inadequate service parts management processes and procedures often experience service chain delays, operational inefficiencies, customer dissatisfaction, missed service level agreements (SLAs), performance glitches, and excess costs.

In the face of these challenges, experts are changing the way they think about managing service parts operations.

The purpose of service in the after-sales environment is to enable the customer who acquired the product to generate value from its use.

"If the product is equipment on the factory floor, it needs to be producing widgets. If it's a car, customers need to drive it when they want to," says Cohen. "These products are mission-critical, and their proper functioning is essential to the user. When they work, they create tremendous value; when they don't work, there's a high cost."

Intel, for example, requires the equipment suppliers in its semiconductor foundries (also called fabs) to respond to a failure within 15 minutes. A fab costs $3 billion to build, and Intel loses $1 million a day if a line is down.

To support products in the field, companies need resources—parts, people, repair depots, logistics systems—and they want them available when and where they need them.

"As with the fire station, where the fire house, equipment, and firefighters are positioned in advance of when and where they will be used in a fire, service parts resources are positioned in locations that make the most sense to reach customers effectively," Cohen notes.

But making these decisions is frequently difficult. To run a factory, companies predict demand and act accordingly. Elaborate processes, such as enterprise resource planning and manufacturing control systems, ensure sufficient material when and where needed to feed the production line in order to avoid delays.

This demand-forecasting process is well understood and comparatively predictable to manage.

It's Hard to Predict

Not so in the service environment, where intermittent demand is difficult to predict. If a part hasn't failed for the last five years, how do you forecast its demand?

"If you need to fix machines within 15 minutes, you could store every replacement part beside every machine for every customer. But that would put you out of business," Cohen says.

The issue in service parts is risk management, with inventory and resources representing the company's concrete exposure, and customer satisfaction being the intangible risk factor. Suppose it takes $1 million in parts to support an Intel fab.

Companies in Intel's service supply chain have to decide where to stock those parts, and how many to stock. They also need to decide whether to locate right next to the fab and serve it exclusively, or locate 25 miles away and serve multiple clients. Managing trade-offs in this risk scenario is what the service supply chain is all about.

"The decisions are highly interconnected," Cohen observes. "If a company decides to locate a part in one place, that affects what other parts they put at that location. These issues have to be solved in a systemic way."

A company might have several hundred thousand part numbers, 10,000 locations, and one million customers with different service contracts. How do you create an optimized service parts network to provide the best service at the lowest cost?

"You do it with decision-support systems, which can access real-time transaction-driven data and solve these big, complicated problems quickly," Cohen says. "With these systems, you can reduce your service parts inventory investment by as much as 40 percent to 50 percent."

It's no secret that the service parts/support business can be highly profitable for companies.

"HP's biggest source of profit is printer cartridges. Gillette gives away the razor and makes its money on blades," Cohen notes. "In many cases, companies have a strong incentive to sell as many parts and perform as much service as possible. This isn't necessarily good for the user, however, because it means the product is broken or out of service."

That's where performance-based logistics (PBL) comes in. Under PBL, the customer pays the equipment provider when its product works—for up-time. In the aircraft engine industry, this is known as "power by the hour," a term Rolls Royce coined some 40 years ago.

The U.S. Department of Defense (DoD) has mandated that its major weapon systems and equipment suppliers adopt PBL programs. The DoD defines PBL as "the purchase of support as an integrated, affordable, performance package designed to optimize system readiness and meet performance goals for a weapon system through long-term support arrangements with clear lines of authority and responsibility.

"The essence of performance-based logistics is buying performance outcomes, not the individual parts and repair actions.

Instead of buying set levels of spares, repairs, tools, and data, the new focus is on buying a predetermined level of availability to meet the warfighter's objectives."

"The idea," Cohen explains, "is that the supplier and customer share the same incentive—both get paid when the product works. More and more companies today are saying, 'You're the supplier, you figure that out. We don't want to own the fire station.'

"In Boeing's contracts with the U.S. Air Force and Navy, a major part of its compensation is determined by aircraft availability," Cohen adds. "The Air Force and Navy are buying flying hours—not just aircraft. Performance is very precise and very public. Either the plane is flying or it's not.

"PBL environments have the potential to dramatically change the dynamics of supplier/customer relationships," he concludes. "In essence, PBL turns a product into a service, and that service produces value. The more you use the product, the more value you get from it. Consumption of value is important."

Better Forecasting, Less Inventory

With this as a backdrop, what practices are companies putting to work to better manage their service parts logistics? Here are a few examples.

Tellabs, based in Naperville, Ill., provides optical networking, managed access, carrier-class data, voice-quality enhancement, and cable telephony solutions to major telecom service providers such as Sprint and Verizon. C

ompanies in almost 100 countries count on Tellabs not only to supply the equipment they need, but also to provide the critical spare parts required to keep their networks running. In some cases, this means delivering replacement parts to the customer site in as little as four hours.

Tellabs formerly handled its service business by simply provisioning initial spares to customers with the equipment sale, and selling parts from a central distribution center. Its customers managed the planning and stocking of spare parts themselves.

Telecom service providers, however, could not afford periods of network downtime, and began to demand a broader range of service options, including same-day service contracts.

Providing this expanded service offering meant creating a network of strategic parts centers around the world to ensure the right parts are always available. It also meant developing the logistics infrastructure necessary to deliver parts to customers in short time frames.

Tellabs had to determine where to stock spare parts so they would be available to customers quickly. The company worked with DHL and software developer MCA Solutions to create a service supply network able to supply spare parts to customers.

Within two months, Tellabs had a working service network in place, and could offer customers premium service that included delivery of spare parts in four hours or less.

DHL handles the warehousing, transportation, and logistics of Tellabs' service business through a network of 350 parts depots worldwide. MCA hosts the Service Planning and Optimization software suite, which supplies inventory forecasts based on customers' installed base, provides contract coverage analysis, and determines where to position spare parts most effectively to meet customer requirements.

By providing precise information on the optimum stocking levels and locations for spare parts, MCA's solution enabled Tellabs to cut inventory levels by more than 60 percent. Tellabs now carries $5 million less in spare parts inventory.

A New Network

Dallas-based Alliance Systems delivers open standards-based server solutions to original equipment manufacturers, independent software vendors, and service providers throughout the world.

Through strategic partnerships with Intel, Microsoft, Cisco, and HP, the company provides products and services specifically designed to meet mission-critical communications applications.

The company, with annual sales of $100 million, was founded in 1992 primarily as a communications components distributor.

"Our customers, who bought products such as PC cards, started asking whether we could integrate the cards into computers and sell the complete unit," says Robert Sheriff, Alliance's vice president, global support services. "Gradually, our business evolved into designing, building, shipping, and supporting these products."

Today, Alliance designs equipment with its customers, manages a controlled bill of material so products have long life on a stable platform, builds the equipment, and performs all the necessary integration and testing.

The company grew out of the communications market, where servers are big and expensive. In the past, it offered a two-year warranty with return-to-depot service.

But these mission-critical systems cannot usually be taken out of service. Alliance was looking for a way to provide competitive, highly responsive repair services without investing in the overhead and infrastructure required to do so.

That's where FedEx came in, asking Alliance to be a beta test participant in its new critical parts program. Alliance agreed, and participated in the pilot for 18 months.

FedEx officially launched its Critical Inventory Logistics service in June. "The acquisition of Kinko's provided a network of physical locations connected to our Memphis hub, all controlled by FedEx," explains Craig Simon, president-Americas, FedEx Global Supply Chain Services.

These physical locations serve as the launch pad for forward deployment of critical service parts. FedEx currently has 52 Kinko's locations operational—reconfigured to handle critical parts stocks. The company's goal is to build a critical parts network that can reach 95 percent of business addresses within four hours delivery time.

Alliance currently works with seven FedEx Kinko's facilities in major U.S. metropolitan areas—and will soon be in 12. The high-tech company offers a service package to its customers with options ranging from overnight on-site replacement part delivery without a technician, to four-hour part replacement with an on-site technician.

"We sell contracts for these uplifted services tied to specific equipment," Sheriff explains. "We have in-house algorithms that determine our exposure in terms of potential and expected product failure and repair rates. Using those assumptions, together with the product location information, we determine what parts inventory to keep where.

"In the past," Sheriff continues, "Alliance couldn't compete with companies such as HP on service."

The FedEx critical parts program changes all that. "It allows Alliance to compete equally on service with Dell, HP, and IBM, and win bigger deals as a result," he says. "Not every customer needs four-hour service, and FedEx can help determine which level of service makes the most sense for a customer from a price and delivery standpoint."

Alliance's new service capabilities have made a big difference to the company.

"We win business from bigger companies now because of our support capabilities," Sheriff reports. "Our sales people often start their presentations to potential clients with information about our service and support capabilities because that is our differentiator. We can now offer custom support on servers as well as on components."

Dynamic Tracking

Unipart, one of Europe's largest logistics service providers, recently began tracking Jaguar car parts in real-time while they're transported in cargo containers from the United Kingdom to the United States. Under the Jaguar Tradelane Project, the containers are tracked by SaviTrak, a radio frequency identification (RFID)-based information service provided by Savi Networks, Sunnyvale, Calif.

The Jaguar Tradelane Project tracks RFID-tagged containers filled with automobile parts from inland warehouse and distribution centers to the United Kingdom's Port of Felixstowe. The containers are tracked when they arrive in the United States at two destination ports: the Port of New York/New Jersey, and the Port of Oakland, Calif.

The shipments are further monitored as they enter distribution centers in northern California and New Jersey.

The SaviTrak information service generates real-time reports and exception-based alerts, including routes, missed shipments, or environmental conditions. This kind of tracking capability, enables companies to do something that traditionally has been tough to accomplish—dynamic merge in transit.

"Companies usually receive shipment data at the stage in the shipment's movement when it is too late to take action," says Lani Fritts, chief operating officer, Savi Networks. "RFID and other real-time technologies enable companies to dynamically divert freight based on changes in demand that occur downstream after a shipment has left the origin dock.

"Auto manufacturers have never been able to execute direct customer delivery because demand forecasting doesn't give them enough comfort in their transit cycle to hit estimated arrival times with any certainty," he adds.

Instead, companies have to bring inventory into a downstream market and stock it at regional distribution centers in order to fulfill customer requirements.

In an ideal situation, the minute a container enters a port, a company would complete a reallocation against its outstanding purchase orders and divert goods accordingly.

This way, it wouldn't have to touch the goods twice—offloading them to a distribution center, and again when it receives a customer order. The most efficient method for companies is to have only one freight move, Fritts explains.

"RFID technology helps companies reduce variability, days in transit, and safety stock requirements," he says.

While it is too early in the Jaguar program to report results, tracking containers with RFID typically "brings an opportunity to reduce existing inventory in the pipeline and on hand by 10 percent," Fritts says.

Delivering Customer Value

Using specialized software applications and logistics solutions such as these, companies can manage their service parts supply chains more effectively. Plenty of room for improvement still exists, however.

"The concept of companies receiving more value from products and product suppliers is pervasive today," explains Cohen. "The technology is available to improve the way we manage this aspect of business. We just have to realize that efficient service parts logistics offers a way to be competitive."

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