Service Parts Logistics: Taking it Outside
Companies outsource service parts logistics to focus on their core competencies.
Outsourcing Not Always the Answer
Service parts logistics can provide companies with a critical competitive advantage. Just ask Ford Motor Company, which has turned to Caterpillar Logistics Services Inc. for software and logistics services. Ford and Cat Logistics have entered into a software alliance to develop a world-class logistics information system to speed service repair parts to market.
“This alliance is a critical element of our strategy to transform service parts logistics into an improved and sustainable competitive advantage for Ford Motor Company,” notes Don Johnson, director of global parts supply and logistics at Ford.
Companies are increasingly choosing to partner with third-party providers to handle their service parts logistics, says Joe Patton, a service parts logistics consultant who heads up Patton Consultants Inc., Hilton Head, S.C.
“Many companies have looked at the whole logistics side of service parts and decided that the warehousing, transportation, repair and physical handling of parts is something that a specialist can do better than they can,” he says.
One of the factors driving the move to outsourcing service parts logistics is a company’s desire to move parts inventory—and, sometimes, physical assets such as parts warehouses and depots—off their balance sheet and onto the third-party provider’s.
Going Through the E-motions
“Not every third-party logistics provider can do service parts logistics,” observes Paul Gettings, vice president of UPS Logistics Group, Atlanta, Ga. “A lot of third-party providers have built their business on supply chain or fulfillment, not on service parts logistics. Many of the transportation and warehousing systems were designed mainly to support finished goods distribution, not parts distribution.”
Service parts logistics differ from raw material and product logistics in a number of ways. “The primary difference is that service parts logistics deals with supporting a product after it has been sold, while fulfillment and supply chain management deal with the logistics before a product gets sold,” Gettings says.
“Supply chain logistics typically uses just-in-time methodology,” he says, “with the goal of minimizing investment in inventory and transportation costs. With service parts, it’s more just-in-case. Companies have to own service parts inventory like an insurance policy, in case the equipment goes down.”
In addition, he says, “the cost of nonconformance can be a big issue. With service parts logistics, you often deal with customers who are already angry or upset.” Such customers may have less tolerance for error so “you have to be that much better when you deliver the part to the customer.”
“There’s a lot of emotional content with service parts,” agrees service parts guru Joe Patton. “When somebody’s server is down, things can get a little hot.”
Velocity is another key factor in service parts logistics. “Service level agreements (SLAs) specify such things as how fast the product is to be repaired or how quickly the technician will respond,” Patton says. SLAs generally specify an average restoration time, sometimes for as little as two or four hours.
And, as Patton points out, “when customers say four-hour average restoration, they mean maximum restoration.”
Failure to meet service commitments can be costly, Gettings notes. “Some companies are assessed penalties if they don’t service the equipment fast enough.”
Service parts are frequently deployed in parts depots located close to customers. They are often needed after hours, on weekends and on holidays, which may not be part of a 3PL’s typical operating model. In addition, the compressed delivery cycle—often measured in terms of hours instead of days—may require transportation capabilities to provide product distribution services, Gettings says.
Add to that the need for reverse logistics, says Joe Patton. With service parts, “the speed of return and repair is more critical,” he says. Service parts logistics “is really a cycle, not a destination with an end,” Gettings explains, with service parts often being reused over and over again.
Service parts logistics’ unique requirements make it all the more important to carefully evaluate, select, and manage third-party providers. Here’s how some leading companies are doing so.
From In to Out
After managing its service parts logistics for many years, IKON Office Solutions Inc., headquartered in Malvern, Pa., is shifting to a new business model, outsourcing the storage and distribution of its parts inventory as well as its equipment and supplies. The move will enable IKON to enhance its focus on core competencies of sales and service while improving operational efficiencies.
The decision to outsource was made after IKON senior management identified the core competencies it wanted to invest its time and resources in, explains Stephen LaHood, vice president of supply chain for IKON.
“We don’t need to be core competent in stocking, picking, packing, and shipping inventory. We want to be really good at sales and service.”
The decision to outsource was also triggered by IKON’s re-engineering of its supply chain. Its distribution network evolved as a result of acquiring a number of companies. IKON’s physical distribution sites “weren’t the right size, and weren’t in the right spots,” according to LaHood. Revamping the distribution network would have required starting up two new parts warehouses and four new supply warehouses, as well as investing in a new warehouse management system.
After deciding to outsource its service parts distribution, IKON issued a Request for Proposal to 10 third-party providers, then whittled that down to a short list of five candidates. Three semi-finalists were identified after the 3PLs made presentations to IKON.
When the selection team visited the three sites, LaHood was impressed. “I hadn’t looked at 3PLs for several years,” he explains. “They’ve come a long way since then. The warehouse management systems were state-of-the-art, the facilities were well organized, and the providers were doing an excellent job for their customers.”
These site visits gave LaHood the opportunity to get a gut feel for each provider’s management culture. “If the cultures don’t match, the partnership is not going to work,” he says.
To dig into a provider’s culture at the grass roots level, LaHood started at each 3PL site’s receiving operation and worked his way through the facility. For example, “I’d spend a half hour at an inventory control desk with warehouse workers, not so much to observe what they are doing as to see how they respond to questions, how enthusiastic they are, whether they have the right tools,” he says.
IKON, which provides customers with total business solutions, ultimately selected UPS Logistics Group to manage parts and supplies distribution. UPS LG provides inventory and order management for parts and supplies from its central distribution centers and network of field stocking locations, as well as direct delivery of parts and supplies to IKON’s field service engineers and customers. Exel handles equipment distribution.
IKON’s distribution strategy is being integrated at the same time the company implements the Oracle E-Business Suite, which is being phased in over time. In the meantime, “UPS LG is spending a considerable amount of time in our operations so that it understands how material is received and put away, and how returns come back,” LaHood says.
The 3PL is also talking with IKON customers to get a clear understanding of their expectations. In addition, UPS LG and Exel are visiting IKON’s existing facilities and making presentations to associates. “I want them to hire as many people as they can,” LaHood notes. “It will make the implementation go a lot smoother.”
Working with a Team
Providing rapid parts replacement for the company’s computer storage solutions is the responsibility of the global logistics division at EMC Corporation, Franklin, Mass. In order to provide quick response service—as short as two hours, depending on the customer agreement—EMC stocks parts in critical parts warehouses throughout the country, and around the world.
The high-tech company has outsourced warehousing and distribution of its service parts for eight years, reports Steven Hill, global logistics distribution manager for EMC. Critical parts warehouses in the United States are managed by Choice Logistics and UPS Logistics Group, with DHL handling the task in Europe and Latin America. USCO Logistics manages EMC’s service parts distribution center in Dallas.
The DC handles inbound shipments, ships parts directly to customers, and replenishes the critical parts warehouses. When a system goes down, EMC’s customer engineer orders the necessary parts from the nearest critical parts warehouse. Once the part leaves the warehouse, it triggers an order at the distribution center, and a replenishment shipment is made. The customer engineer removes the defective part from the system, and sends it to the parts DC for processing and return to the manufacturer.
“Each vendor has its own niche, its own part of the distribution cycle that it’s responsible for,” Hill observes. “Everyone has to be aware of what’s required.”
That starts with an explicit statement of work. Hill makes sure that all internal customers agree on what they need from the providers, then includes those expectations in a detailed statement of work.
“We wrap service level agreements around it, as well as cycle count, physical inventory, and order picking accuracy,” he explains. If a 3PL’s performance starts falling off, “everyone knows it’s falling off, and we push real hard on the action plan.
“Five years ago, the required delivery performance was at 95 percent, now it’s at 98.5 percent,” says Hill. EMC believes strongly in continuous improvement, steadily increasing its expectations of providers. And the 3PLs are rising to the challenge.
Sometimes a third-party provider doesn’t do the job, or chooses to get out of the business. That was the case for Xerox Corporation in 1998, when it outsourced management of its service parts distribution centers, known as District Parts Centers (DPC). These centers provide parts for an array of document solutions and systems, including printers, digital products, and copiers.
Xerox works with two national third-party logistics providers and several local providers in the eastern United States, explains Elissa Dailey, parts fulfillment manager for the Eastern Region of Xerox’s Americas Manufacturing and Supply Chain Services.
To replace one of its third-party providers, which opted to get out of the service parts business, Xerox evaluated a number of potential providers. One of Dailey’s top priorities was to ensure that the new provider would enable Xerox to continue to deliver the same high levels of service to its customers.
The location of the parts distribution centers was similarly important. Another key factor in the 3PL selection process was continuity of employees. Dailey felt that it was important for the new provider to hire a number of employees from the previous provider to avoid starting up with a completely new workforce.
After evaluating potential providers, Xerox awarded a three-year contract to USCO Logistics, a third-party provider headquartered in Hamden, Conn. USCO’s transition to operating six of Xerox’s existing DPCs in the Northeast began last year.
“The transition has gone very well,” Dailey says. “USCO has delivered and accomplished the takeover of these six sites with no negative impact on our business or customers.”
Pulling Out All The Stops
Hitachi Data Systems Corporation made a similar change last year when it decided to switch providers because its existing 3PL wasn’t performing as required. Hitachi’s main product is a high-end disk storage system that houses mission-critical data for large customers such as airlines and banks. Service parts logistics is extremely important in such an environment.
“When a system is down, we pull out all the stops,” notes John Peterson, senior director of logistics for the Santa Clara, Calif.-based company.
While the need to switch providers was a priority, it wasn’t critical, so Hitachi invested the time needed to find the right partner.
“We called a lot of different companies and got their recommendations for potential providers,” Peterson says. He wanted to know how well these 3PLs delivered on what they said they were going to do, how well they followed through on issues and problems, and how well they delivered for their customers.
The selection team visited the service stocking centers of a handful of potential providers in order to review their operations for efficiency and organization. Then, Hitachi selected New York-based Choice Logistics to handle the service parts logistics.
“We changed over in July,” Peterson recalls. “The transition went very smoothly. We moved all 50 parts depots over one weekend.”
Choice Logistics arranged the transportation and handled the packaging. With the help of Hitachi service technicians, all the parts were moved and inventoried and “we were up and running that Monday morning,” Peterson says.
Pick and Choose
Companies sometimes elect to outsource certain components of their service parts logistics, while keeping the others in-house. Ford Motor Company, for example, elected to supplement its in-house operation in order to provide around-the-clock service to commercial truck customers in “vehicle down” emergency situations.
Ford partnered with FedEx Supply Chain Services to develop its Uptime Critical Parts Program, which supports critical truck needs outside of regular order-processing business hours.
Today, dealers continue to submit their normal stock, interim, and daily emergency requirements through the regular Ford Customer Service distribution channels. Dealer emergency orders received prior to the cut-off time of 3 p.m. EST are shipped from Ford’s parts distribution centers, with next business-day delivery for most items. Orders received after 3 p.m. and before midnight EST, however, are shipped from the FedEx-managed Commercial Truck Center (CTC), which is located close to the FedEx Superhub at the Memphis airport.
The parts hub performs customer order processing, warehousing, and delivery of critical commercial service truck parts. The CTC stocks parts that are essential for vehicle operation, including all critical powertrain, electrical, and chassis parts such as engines, transmissions, axles, springs, and wheels.
Secrets of Success
One of the secrets to successful relationships with service parts logistics providers is the willingness to establish a true partnership with the third party. This means “being willing to be open and honest and share information,” notes Elissa Dailey. Working together in true partnerships enables Xerox and its 3PLs to develop new opportunities to improve productivity, reduce costs, and maintain service levels.
Here are six secrets to successfully outsourcing service parts:
Get off to a good start. “Start with the relationship,” Paul Gettings advises. Outsourcing continues to be a people relationship as well as an operating one. “Understanding each others’ goals and expectations is very important,” he says.
While a solid contract and specific performance metrics are important to the relationship, it’s even more critical for the customer to feel that the supplier values their business and will be responsive, Gettings says.
Communications. Obtaining agreement on expectations, then putting in place mechanisms for open and constructive communication is a critical success factor for any outsourced relationship.
Hitachi laid the groundwork for effective communications with Choice Logistics from the very beginning, says John Peterson. This included talking through such items as expectations, reporting, and processes for taking corrective action.
IKON’s LaHood expects to communicate openly with all levels of a logistics provider. For example, he plans to continue his practice of holding employee roundtables when he visits 3PL sites. The roundtables provide the opportunity for him to discuss what’s going on at IKON and in its supply chain operation, as well as at the provider’s site.
“I consider these people part of IKON, even though they’re managed by somebody else,” he says.
Manage it closely. “People go wrong when they make the decision to outsource, hand everything over to their provider, then walk away and expect everything will be okay,” LaHood observes.
Managing the outsourced relationship is a critical part of its continuing success. “The way you do that is to set up the proper metrics,” he says, “and have specific reviews of those metrics daily, weekly, and quarterly, and completely understand what the requirements are from a service and an operating level.”
Xerox works through its 3PLs to ensure that they are delivering excellent service to customers. In addition to monthly evaluations of a parts center’s performance, “we conduct a customer satisfaction survey of our internal customers—who ultimately interface with our external customers,” Dailey points out.
The feedback from these surveys is provided to the 3PLs, and Xerox operations managers work closely with front-line management at each facility to ensure that potential problems are addressed early on.
Seek specialized systems. Service parts logistics systems have to track serialized parts as well as different and often changing values. They also have to handle repair and reverse logistics, according to Paul Gettings.
“You have to have a closed loop system so that reuse, repair, and reutilization of the part can occur. Your systems have to be able to manage the parts inventory, the delivery of the part, and the reverse logistics,” he says.
This requires closed-loop visibility. When considering potential 3PLs, make sure that their system can handle service parts logistics as well as supply chain and fulfillment requirements.
Commitment to employee and customer satisfaction. “It’s very important for the 3PL to have a strong employee focus, and to understand its employees’ needs,” says Elissa Dailey. The 3PL’s relationship with its employees is one of the cornerstones of customer satisfaction, Dailey explains; the 3PL’s employees are the voice of customer service for Xerox’s service technicians.
“It has to be a team,” she observes.
Don’t be afraid to switch if necessary. “Don’t be afraid to make a change if your current provider is not delivering for you,” advises John Peterson. Not every third-party provider has the expertise or systems to handle service parts logistics. Find the one that’s right for you.
Outsourcing Not Always the Answer
Not all companies are choosing to outsource their service parts logistics. Take IT infrastructure provider Amdahl IT Services, a Fujitsu Group company headquartered in Sunnyvale, Calif. Amdahl designs, builds, deploys, and supports integrated IT infrastructure solutions.
A few years ago, the company took a serious look at outsourcing its service parts logistics, explains Edward S. Kent, vice president of supply chain operations for Amdahl.
“We had a proprietary spare parts management system we had developed internally,” he recalls. It was not Y2K compliant, so Amdahl was “faced with the need to remediate the system, update it at considerable expense, outsource the service parts management, or look to an application provider for a solution,” Kent says.
Amdahl’s service parts inventories have a very high value, with some individual parts costing hundreds of thousands of dollars. “Due to the high value, we felt that we had to maintain control of service parts management,” Kent says. “If we entrust that to somebody else, and they make a mistake, it could cost us hundreds of thousands of dollars.”
In addition, he notes, “we have very stringent response-time commitments for serving our customers.” It’s not unusual for Amdahl to have service-level agreements with customers that have commitments to provide spare parts on site in less than two hours.
“Spare parts management becomes critical to us in meeting those service levels,” Kent says. “Because we offer this level of service, we maintain a very competitive position in the service industry, and we couldn’t compromise that.”
There were benefits to outsourcing, including lower costs stemming from potential economies of scale that could be realized by a third-party provider specializing in service parts logistics.
“Our business, however, is based on response-time commitments and managing high-value inventories,” Kent says. So Amdahl IT Services made the decision to keep its service parts logistics in-house and either update its existing parts management system or consider alternatives.
Ultimately, the company elected to implement the PartsPlan service parts planning and forecasting software from Servigistics. In just a few months since going live, Amdahl has already “realized a great deal of success in meeting some of our objectives,” says Kent.
The parts solution has enabled Amdahl to identify excess inventory in some field depot locations and redeploy it to others, eliminating the need to purchase additional spare parts. Some of the excess parts have been scrapped, reducing the net book value of parts inventory, generating some revenue and reducing the cost of parts storage.
Most importantly, Amdahl has been able to deliver better service to customers. “We’re fully covered now, and have the right parts in the right place,” Kent says.