October 2004 | Commentary | 3PL Line

Service Parts & Logistics: Should You In-source or Outsource?

Tags: 3PL

When the silicon wafer fabrication machine breaks down and computer chip manufacturers face costly losses, how long will it take until those machines are running again?

In today's lean business environment it may seem that only those companies with boundless resources can maximize the up-time of their critical business equipment. Thanks to innovations in the Service Parts & Logistics (SP&L) arena, this is no longer the case.

As with reverse logistics, more companies are realizing the full value of implementing an optimized service parts network. But multiple approaches exist and choosing the right solution for your business can be complicated.

Key questions for service department managers include:

  • Should we outsource?
  • Can we afford to manage the operations in our own network?
  • Should we pursue a blended outsourced/in-house model?
  • Will we need new technology?
  • Will our customers get value from same-day delivery of parts?

No wonder so many organizations are still developing strategies for their SP&L operations. While many companies have tackled and streamlined inbound transportation and outbound distribution operations, they have historically neglected their service parts operations, mostly for these reasons:

  • Spare parts are considered a necessary evil, not part of the overall value offered to customers.
  • Service parts operations are typically controlled within specific operating units, which makes centralized efficiency-focused programs challenging.
  • IT organizations may lack knowledge of new technologies that support the visibility and enhanced event management needs of their service operations.

Nevertheless, the enormity—the spend for spare parts is estimated at more than $500 billion within the United States alone—and potential income impact of effective SP&L management has many manufacturers and distributors focusing on this side of their business.

Moreover, the sale and installation of these parts can be highly profitable for manufacturers and distributors. Indeed, service-related parts operations typically achieve 40- to 50-percent operating margins, reports Boston-based consulting firm AMR Research. From a competitive standpoint, companies that excel in SP&L management achieve higher customer satisfaction and repeat business levels vs. other players in their sector.

Many companies turn to outsourcing their SP&L operations for the cost advantages it offers. For example, outsourcers can spread the administrative costs associated with maintaining multiple parts-stocking facilities and managing expedited courier services over multiple accounts.

Additionally, large third-party logistics providers (3PLs) have the extra advantage of tapping their own fleet of vans, trucks, and aircraft.

A manufacturer or distributor that outsources its SP&L operations will likely utilize a tiered inventory stocking program that places parts at the 3PL's central, regional, and forward stocking locations based on service level agreements in place with customers.

Reducing On-Hand Inventory

By pre-positioning stock to a central facility at a 3PL's hub, service parts orders can be placed up until moments before an aircraft's or truck's scheduled departure, allowing for early-morning delivery to a repair site. This method helps companies reduce on-hand inventory, which is appealing when the cost of inventory is too high for a decentralized model.

Where less-than-four-hour service levels are the norm, a 3PL will place critical parts and components in regional and forward-stocking locations that provide courier delivery or enable a field tech to pick up parts on the way to a repair site.

Other advantages to outsourcing SP&L operations include:

  • Full management of all network operations, including the courier base required for pickup and delivery across a wide geography.
  • The ability to co-locate returns activities, which are often closely tied to the success of a service parts solution.
  • Management of invoicing and auditing for transportation services.

Choosing the Right 3PL

Increased attention on SP&L has spurred the growth of focused service offerings from 3PLs, including global integrators, traditional courier operations, and warehousing-focused 3PLs.

Each brings its own set of competencies to the table, so consider the following key criteria when evaluating the right player for your business:

People. Does your outsourcer have the right skill-set at every level to make you successful? Be confident that their management will balance your customers' interests with their need to achieve efficiencies.

Transportation network sophistication. Leading 3PLs access and incorporate current transportation network data into their routing programs.

Quality of drivers and field technicians. Having a reputable courier driver and field technician is crucial to your company's image. Get a feel for the 3PL's resources across your markets.

Comprehensive systems. An integrated solution comprised of visibility functionality plus order, transportation, and inventory management is key to the seamless operation of a SP&L program.

The 3PL's solution should allow for receipt of service orders directly from your customer, your Customer Relationship Management system, or service management program.

Other important components of comprehensive systems include: sourcing from the optimal stocking location; selecting and routing a cost-effective transportation provider that meets the service-level promise; and order-status visibility for both customers and field techs.

While the case for outsourcing can certainly be compelling, it is not for everyone. In-sourcing SP&L operations can offer advantages to your company under executive sponsorship that understands the workings of its supply chain.

Proper demand planning and pre-positioning of the appropriate critical spare parts will allow your business to successfully meet service-level commitments to customers if your distribution network footprint already covers your primary target zones. To do this, you will need the right skill-set to manage fulfillment operations and the placement of your inventory.

For example, one Asian automotive manufacturer with a sizeable distribution footprint in North America offers a next-day service commitment for large repair parts utilizing its existing distribution network. With proper forecasting, the company can also keep next-day "cross-DC" shipments to a minimum.

Another Look at In-Sourcing

Other companies that experienced mixed results with outsourcing have re-examined the case for in-sourcing. These companies have inspected their ability to scale operations as demand fluctuates and are determining the overall cost to implement and maintain their service parts network.

Companies have a strong case for maintaining control of their SP&L operations when their network footprint matches with demand, their systems team can implement and integrate the necessary SP&L applications, and access to cost-effective transportation options that can meet customer commitments is available. This is especially so if they want to directly control that key customer touch-point.

Regardless of whether or not you choose to outsource, your service parts network should match up with your business model. Your inventory costs, product characteristics, and desired level of service will drive your choice of the following models:

1. Centralized network with same-day delivery. When your inventory costs are high, or there is a limited amount of available inventory, and the customer costs of a service outage are high.

2. Centralized network with next-day delivery. When next business day is sufficient and the product characteristics lend themselves to small-package delivery.

3. Decentralized network with same-day delivery. When your product is oversized, or when aggregated inventory carrying costs are less than the expedited transportation costs, and the customer costs of a service outage are high.

4. Decentralized network with next-day delivery. When your product mix differs vastly from region to region.

5. Mixed network. When key items are pre-positioned in forward-stocking locations and the remaining SKUs are ready for distribution from a centralized location.

Technology Ties it Together

Companies that have leading service parts networks—whether they are outsourced or managed in-house—realize greater profits within their overall service operations. Without adequate technology, both 3PLs and in-house SP&L operations are challenged to achieve the efficiencies they need to offer a quality, cost-effective service operation.

The intricacies and transaction volumes within SP&L predicate that customer service, dispatch, facility management, field technician, and service management personnel utilize process automation, inventory and transportation management, and end-to-end service order management systems to ensure each service order is accurately completed.