Companies are turning to information technology, logistics specialists, and partnerships with premium service carriers to keep their customers’ mission-critical systems running while minimizing their investment in parts inventory. Here’s a look at the unique challenges and solutions driving critical parts logistics today.
Maximizing equipment uptime is a top priority for manufacturers and other companies in a wide variety of industries such as aerospace and defense, automotive, information and medical technology, and telecommunications.
Companies risk substantial financial and production losses when critical parts malfunction. ABB Inc.’s Manufacturing Automation group, for example, supplies robots, robotic systems, and automation systems to the automotive, manufacturing, and consumer goods industries.
The company’s 130,000 robots perform critical functions such as arc and spot welding, assembly, painting, coating, and waterjet cutting. If one of its robots malfunctions, a production line may also go down—at an hourly cost of hundreds of thousands of dollars or more.
“Most customers use our automation system so that it directly touches the product in the manufacturing process,” explains Anthony J. Wisniewski, vice president and general manager of aftermarket services for ABB, Auburn Hills, Mich.
The same holds true for many manufacturers, which makes maximizing uptime crucial to success. So how do they do it? Optimizing critical parts logistics and supply chain management is often the first step.
The Four Service Pillars
A critical part is “any part that has a specific impact on a company’s ability to continue production or operation,” Wisniewski explains.
And, critical parts “have high availability requirements,” adds Greg Baxter, founder and CEO of Baxter Planning Systems, a web-based aftermarket service and parts solutions developer based in Austin, Texas.
Several factors—product, location, and customer requirements—go into determining a part’s critical nature. While not all companies’ needs are the same, “if a part is not available and it impacts their business, it’s critical,” Baxter says.
“In today’s world, when machines are broken, people want them fixed instantly. Tomorrow is not good enough,” says Rob Kass, president and CEO of Choice Logistics Inc., a New York-based service logistics and supply chain solutions provider. Some suppliers are even committing to one- to two-hour break-to-fix times.
In short, “critical parts are on the critical path to uptime or availability for end users,” according to Mark Vigoroso, vice president of service chain management research for The Aberdeen Group, Boston, and author of the Aberdeen Group’s Best Practices in Strategic Service Management.
Service parts, including critical parts, are one of the four pillars of strategic service management, according to the report. “Best-in-class companies are leveraging Internet, mobile, and machine-to-machine technologies to automate and better synchronize the four key pillars of service: process, people, parts, and data,” says Vigoroso.
“By mapping spare parts inventory stocking levels to customer-, region-, and part-specific demand patterns, best-in-class companies minimize service inventory investments, increase inventory turns, improve fill rates, and reduce stockouts—all while improving profitability, bolstering overall brand strength, and increasing customer satisfaction,” he says.
Despite many similarities, major differences exist between service supply chains and finished goods supply chains. In the service world, “balancing the decision between customer satisfaction and inventory cost can get complex,” notes Baxter.
Companies with service supply chains need to consider factors such as the cost to set up warehouses and forward stocking locations, transportation costs for replenishing and redeploying inventory, and parts availability.
“Businesses have to position parts close enough to deliver customers two- to four-hour availability,” Baxter explains. “The flip side is, a company may have only one customer in a particular city,” which presents challenges when determining what parts to stock in a certain location.
“Factors such as whether that customer is a major account, whether it’s paying a premium for a certain level of service, and whether penalty clauses exist come into play in those situations,” he says.
The product life cycle is another important factor. Determining parts requirements for new product introductions can be tricky because there is no history to build on. “Companies use the best information available from their marketing and engineering staffs to set up the initial stocking plan,” Baxter says.
The other end of a product’s life cycle also presents challenges, as do products with short life cycles.
In some industries, product life cycles have become so short that “a company will start up, ramp up, move into the service environment, then have to make end-of-life parts purchases to support the product” for a period of a year or two in the high-tech world, to 20 or 30 years in aerospace.
What’s the Difference?
The demand involved in supporting obsolete products varies greatly—another major difference between parts and finished goods supply chains.
Although finished goods demand is never predictable, “it’s a straightforward, mathematical equation that maximizes throughput and minimizes time, with predictable supply sources,” he says. “The service parts arena, however, is about managing ‘just-in-case’ parts, not just-in-time.”
Service parts have an “intermittent lump demand pattern,” explains Keith Nash, senior manager, Deloitte Consulting’s supply chain practice.
With automotive service parts, for example, “an OEM may have hundreds of thousands of part numbers on the books, but less than 100,000 sold in any one year, and maybe only 40,000 to 50,000 sold year in, year out,” says Nash. Eighty percent of part numbers in that case have intermittent, slow demand.
To optimize service parts planning, companies increasingly “leverage planning solutions that help deliver results such as 22 percent reduction in inventory levels and 90 percent and higher fill rates,” according to the Aberdeen report.
These solutions are specific to service parts. “A whole industry has grown up around parts planning,” says Kass. “Traditional Material Requirements Planning (MRP) packages don’t work in the parts environment. Systems need to factor in down time, mean time between failures, geographic dispersion, and contract response time.”
“Planning algorithms within ERP, MRP, and Advanced Planning and Scheduling (APS) systems are tailored for high-volume, replenishment-driven production environments,” says Vigoroso.
“This is in direct contrast to aftermarket service operations in which low volumes of service parts are consumed at multiple, disparate stocking locations across the service chain. Planning in such a distributed, low-volume environment requires solutions that provide unique service-specific algorithms tailored to address those dynamics.”
The Outsourcing Option
Many companies are turning to third-party providers to optimize their service parts logistics. Often, outsourcing service and parts support is a better option than investing hundreds of millions of dollars “to establish the people, systems, and facilities around the world,” says Nash.
Sun Microsystems, for example, selected DHL as its global logistics provider for aftermarket service parts. The new three-year agreement “involves more than 300 logistics facilities housing thousands of parts to be used for service support to 1.5 million Sun customer systems in more than 100 countries,” according to DHL.
Under the agreement, Sun will route parts to local DHL facilities, where DHL will pack and ship replacement components to Sun engineers in the field. In addition, DHL will co-develop a leading-edge global IT architecture specifically designed for service parts logistics management.
Logistics service providers and service parts solutions suppliers alike “have posted tremendous gains over the past 24 months,” Vigoroso says, due to a greater understanding of the unique requirements of specific industries. This includes a greater understanding of service parts demand patterns in, for example, the aerospace versus consumer goods industry.
In addition, service parts planning tool providers are partnering with 3PLs to deliver integrated planning/execution solutions—what Vigoroso calls “the one-two punch.”
Leveraging partnerships with service and logistics providers is one strategic service management best practice cited in the Aberdeen report. Bringing together field service and parts logistics under one operational umbrella is another.
“Companies are focused now on optimizing field service technicians—where they’re going and what they’re assigned to—based on constraints,” Vigoroso explains. “The people component is one side of the puzzle, which is often done separately from the service parts optimization effort.”
Companies have a greater chance of meeting the service parts challenge when they coordinate the optimization of both field technicians and service parts. “Sending the right technician with the right part to the right service location at the right time is key,” Vigoroso says.
Some companies look for ways to blend the two. “In a lot of companies, however, field technicians and service parts logistics function as silos. From a personnel and process point of view, the two often don’t share many intersection points,” says Vigoroso.
Other strategies instrumental for strategic service management, according to the Aberdeen report, include:
- Leverage technology solutions to synchronize the four service pillars: process, people, parts, and data.
- Address process deficiencies before deploying technology.
- Clearly define requirements and success criteria.
- Treat aftermarket service as a top-line business opportunity.
- Involve stakeholders in any transformation process.
- Measure aftermarket service from both an operational and a strategic point of view.
Applying these best practices helps many companies deliver results to their customers—and their top and bottom lines. Here are two examples: ABB Inc. and enterprise infrastructure provider Enterasys Networks Inc.
ABB’s Tailored Approach
ABB Inc. designs critical parts strategies on a customer-by-customer basis. To determine the right approach for each customer, “we ask specific questions about how they use our equipment, the equipment itself, and which parts we might expect to fail,” says Wisniewski. “The customer strategy depends on the level of redundancy they have in their operation, and how they plan their production process.”
Because a large part of its customer base is in the Midwest, ABB stocks parts at its central distribution operation in Auburn Hills.
“Even Midwestern customers, however, sometimes can’t wait the one or two hours it takes us to truck a part to them,” Wisniewski says. These critical parts are time-sensitive, so they have to be on site and ready to go.
The cost of these parts can be significant. “In the past, customers typically owned the inventory. But many customers now don’t want to hold inventory on their books,” Wisniewski explains. ABB has seen an upswing in the number of customers seeking vendor-managed inventory on site, where a third party or OEM owns the parts until they are used.
Only a few years ago, on-site consignment inventory shrinkage was a significant problem for ABB. With the cost of missing parts running to tens of thousands of dollars a month, the company began looking for a solution—one that operated via wireless technology. In most industrial plants, it’s difficult to have a phone line or cable hooked up to the customer’s network, Wisniewski says.
In 2002, ABB piloted one of the few wireless solutions available then, from asset management solutions provider SeeControl Inc., San Mateo, Calif.
The solution is now the infrastructure of ABB’s SmartSpares offering. The real-time inventory tracking and security system uses bar-code technology to track inventory and report consumption. It provides customers with a secure inventory environment, enables management of parts, and automates the replenishment process.
“SmartSpares gives us 100-percent visibility into customers’ inventory, and the ability to set inventory min/max levels. If we’re not adequately servicing the customer we can adjust on the fly,” Wisniewski notes.
The solution enables ABB to monitor usage data, and notifies the company if certain critical parts are used. Having such data significantly enhances customer intimacy.
“We can see usage trends, and talk to customers about the implications from a service perspective,” Wisniewski says. This gives ABB a significant proactive sales opportunity.
In addition, SmartSpares enables ABB to streamline its work. With automated replenishment capabilities, machines talk to machines.
“We no longer have to work to minimize the need for additional phone support,” Wisniewski explains. “From a customer perspective, it significantly eliminates paperwork related to the ordering process.”
Automatic replenishment based on usage has streamlined the process from weeks to days, even hours. In addition, customers can track all parts, as well as activity related to those parts. Companies using the technology have been able to slash inventory shrinkage to less than one percent.
Fielding Customer Requests
ABB is now looking at leveraging the solution to support its field service operation. “Customers who are not able to make a repair on their own expect that we’ll show up with the right part to fix the problem,” Wisniewski says. “But with 40,000 parts in this operation, it’s almost impossible for a field service engineer to have precisely the right part.”
The company is making headway toward improving that situation. “SmartSpares has the capability to help us minimize the inventory we have to carry, aggregate the data across our equipment, and see trends more accurately,” Wisniewski says.
ABB will be able to analyze data, for example, to identify usage patterns by variables such as geography, equipment, or customer application.
Machine-to-machine communication will be a major trend in service parts management, predicts Wisniewski. In the not-too-distant future, a wireless node on each piece of equipment will enable a machine to call the parts supplier’s system, and identify itself and the parts it needs, he says.
Until then, ABB’s SmartSpares solution helps customers—and ABB—reduce inventory investment, while increasing availability of on-site critical parts.
Providing enterprise infrastructure solutions to 25,000 organizations throughout the world, Enterasys Networks Inc. operates in a world where quick response and rapid recovery are critical. Though its customers range from large universities, hospitals and financial institutions to manufacturers and government agencies, the principles of networking are the same across the spectrum.
Available, Secure Parts
“The most dominant factors in the industry today are high availability and security,” says Tom Bunce, vice president of customer advocacy for Enterasys, Andover, Mass. Bunce’s organization has responsibility for global field service and parts logistics.
“At any point in the world, you need to have parts on site quickly to minimize network disruption,” he says. “Most networks today require a two-hour, four-hour, or next-business-day service commitment to have the right part there at that point in time.”
Products now are designed for high reliability and availability. The longer mean time between failure has implications for Enterasys’ network of parts depots that serve customers throughout the world. Thanks to more reliable products, based on a part’s failure rate, a depot may now carry one part to serve several customers, rather than one part per customer.
“Inventory is an expensive asset,” Bunce says. The challenge is to optimize service parts inventory without negatively affecting service levels. Early this year, Enterasys turned to Baxter Planning Systems to reduce parts inventory levels, optimize its parts network, and improve parts planning and execution.
“Baxter looked at every aspect of our repair cycle, including what spares we should have in what locations, our usage rate, repair rates, and costs of multiple logistics locations,” says Bunce.
Enterasys is now in the process of implementing Baxter’s recommendations. By year’s end, Bunce expects to achieve close to a 50-percent reduction in inventory. He also hopes to reduce the number of parts depots by nearly one-third.
“We’ve closed the depots methodically—about 30 so far, and we have another 20 to go,” Bunce says. At the same time, Enterasys has also added new locations. The approach is “not just fewer depots, but having depots strategically located so we can leverage inventory,” he explains.
Though Enterasys has made progress, it is focused on the bigger picture. The future challenge is to manage parts inventory throughout the product life cycle.
“What’s next is to focus on the new product introduction cycle, and the end-of-service life; manage parts inventory; and prevent any excess inventory surprises,” Bunce notes.
“Companies are giving more thought than ever before to service and critical parts,” notes Deloitte’s Nash. “They’ve discovered the goldmine, and that parts can be a major source of revenue.
“Management mindshare and investment dollars spent to improve and expand service parts logistics have increased,” Nash says. As a result, the bar is being raised for service parts logisticians.
“A new job description is being written for people working in the service parts supply chain,” he says.