2004 Articles
July 01, 2004
Frontline Solutions - Industry Rises to Aftermarket Parts Challenges
Increasingly, businesses are turning to new technology tools and outsourcing to become more competitive.
Although spare parts planners haven't exactly resorted to casting runes or reading tealeaves to create their inventory forecasts, the tools available to them have often been insufficient to the task. Managing aftermarket parts inventories is notoriously difficult because of unpredictable equipment failures, reverse logistics issues, stocking of refurbished equipment, and widely dispersed inventory locations. Service-level agreements with customers are also more complex; they now include contracted response times ranging from two days to two hours.
More and more, companies are turning to a combination of logistics outsourcing and technology solutions. Service parts planners have a growing array of tools to choose from, on both the planning and execution fronts. And according to AMR Research, they spent $1.7 billion last year on parts management.
Traditional vendors such as Servigistics, Baxter Planning Systems, and MCA Solutions have continued to grow their products and their businesses, and Xelus, which had been losing ground to its competitors, has realigned its product suite and added features.
At Avaya Inc., a global provider of business communications and networking systems, parts planners had tried to manage 20 million unique part/location combinations by using spreadsheets, but the task became too difficult. Now that the planning function is centralized in a parts planning tool from Servigistics, Jeff Gardner, director of aftermarket operations, says the company has reduced parts expediting and inventory levels.
"We've got a consistent tool that captures all of our supply and demand," Gardner says. "We have strict service-level agreement requirements, and we needed both elements in one system to meet them."
No Longer an Afterthought
The aftermarket has only recently gone from being viewed as a cost center to a source of revenue, and many companies have a lot of catching up to do in terms of operational efficiencies. Forrester Research estimates that manufacturers' service supply networks are 10 years behind their product supply networks in terms of process sophistication and use of packaged applications, and that during the next five years these companies could spend up to $3.7 billion on improvements.
For instance, Ford Motor Co. has embarked on an enormous aftermarket restructuring that has so far involved building 11 new distribution centers and realigning its supply chain network so that parts are categorized by velocity and size. Ford has also contracted with Caterpillar Logistics Services Inc. and SAP to develop new software to manage its huge volume of service parts.
"The need for better service parts management is finally gaining top-level attention in many companies, such as Boeing, Cisco, Nissan, and Philips Medical," says Sid Snitkin, vice president at ARC Advisory Group. "Excessive carrying costs and obsolescence losses are being recognized as an untapped opportunity for savings. Corporate initiatives to expand service offerings are also requiring more efficiency throughout the service chain."
The cost of poor service parts management can be high, but it's often hidden in the high margins service offers. According to the Aberdeen Group, companies responding to a service delivery survey reported an on-time delivery performance of 89% and first-time fill rates of 82%, which means more than 1 in 10 service parts deliveries are late, and nearly 2 of 10 service orders are not fulfilled correctly the first time. Companies experience an average of 272 service parts stockouts per year.
The problems stem from lack of inventory visibility, disparate sources for service parts data, inconsistent parts-naming conventions among suppliers, disconnected planning and execution procedures, and fragmented use of automation.
Improving performance can have big benefits. Aftermarket parts and services have a profit margin as much as 10 times that of initial product sales and account for 20% to 30% of revenues and 40% of profits for most manufacturers. Also, good service breeds customer loyalty. Spare parts and services account for 8% of the U.S. annual gross domestic product. More than $700 billion is spent on spare parts and services, according to Aberdeen, and Meta Group puts the global figure at more than $1.5 trillion.
Software Products Improving
Aberdeen found that most service parts automation efforts are driven by enterprise resource planning software and basic spreadsheet applications. Software systems often ineffectively support planning and operations across a distributed network, particularly in low-volume environments. Spreadsheets provide only limited computational capabilities.
"Service parts don't fit into the typical supply chain model," says John Miller, vice president for business development at Choice Logistics Inc., which provides outsourced logistics services. "The impact is much greater if you're not at 99% delivery. It can cost you millions."
Unlike some enterprise software projects, service parts management software can provide a return in as little as three to six months, according to some estimates, mostly through reduction in inventory and cutting down on expensive parts expediting. According to Aberdeen, the software can reduce inventory by an average of 22%, improve inventory turns 42%, provide first-time fill rates of up to 92% (compared with 82% for nonusers), and reduce stock outs by 16%.
In addition to traditional vendors tailoring their products for aftermarket applications, new vendors are also entering the market, says Mark McCluskey, an analyst at AMR Research Inc. Oracle is quickly improving its functionality in this area, and i2 Technologies has already done so. SAP will commercialize the product it develops with Ford and Caterpillar, and Logility is building momentum in the space as well.
"What we'll see is an expansion from the planning/optimization vendors, adding more service parts management functionality, such as reverse logistics and warranty management," McCluskey says. "But you still can't get all the components in one place today."
Different vendors have strengths in different areas, McCluskey says. For instance, Servigistics has been popular for global deployments, and MCA Solutions has expertise with complex goods manufacturers. Xelus has added reverse logistics and depot repair functionality through an acquisition and combined field-based and centralized planning tools in an integrated product. The rules-based decision engine in the warranty tool can help route jobs and returns. The depot repair tool can send failure data back to OEMs, and that data can benefit the sales and design teams.
Hewlett-Packard is using Xelus to manage its global service parts operation. Using UPS as its outsourcing partner, it was able to leverage the software to transition from a centralized service parts strategy to a dispersed model. The software integrates with the company's SAP back-office software, and HP expects a 15% reduction in logistics costs by using Xelus and outsourcing the logistics function.
Outsourcing
An increasingly popular way to handle service parts logistics is to hand off the problem to a third-party provider. UPS Supply Chain Solutions, Choice Logistics, Menlo Worldwide, DHL, Caterpillar, and others have developed robust service delivery systems that provide forward and reverse transportation services for parts, warehousing services, and, in some cases, even managing repair operations.
Aberdeen found that companies using logistics service providers reported 84% fewer stockouts per year and 7% more inventory turns. Fill rates averaged 87%, compared with 84% for nonusers, and on-time delivery rates averaged 90% for outsourcers versus 87% for those that handled the process internally.
"Companies have found that supporting themselves in trying to meet service parts logistics demands was simply not practical," says Peter Brennan, vice president for high-tech at UPS Supply Chain Solutions. "With UPS, we can leverage our network and facilities to handle all the day-to-day functions, and that frees our customers up to manage exceptions."
For instance, Avaya uses Choice Logistics to help manage its 500,000 maintenance contracts and 45,000 monthly parts deliveries. The company can get parts to a customer within three hours of a call.
Akibia Inc., a provider of infrastructure management and customer relationship management consulting services, uses Choice in the U.S. and Asia and another provider in Europe to manage its parts deliveries. The company stocks its remote locations out of a central, company-owned distribution center in Marlborough, Mass., and, like Avaya, uses Servigistics for parts planning.
According to Mike Parisi, Akibia's global director of logistics, the flexibility of the Choice network and its company culture has been invaluable to its parts operation. "You're always looking at the installed base to make sure you're configured to meet demand," Parisi says. "You want to always be analyzing demand and seeing where you can consolidate locations. Choice acts as an extension of our company, and we have a similar sort of corporate chemistry."
Some logistics providers, such as UPS, even offer outsourced repair services to their customers.
Some companies are even outsourcing the repair function as well. The Digital Products Division of Toshiba America Information Systems Inc. has hired UPS to manage its entire laptop repair process. Customers can drop off a damaged laptop at a UPS Store, and from there it's sent to a repair center at the UPS Supply Chain Solutions campus in Louisville, Ky. Laptops can be received, repaired, and shipped back to the customer in as little as one or two days via the UPS logistics network. Toshiba expects to save millions of dollars through streamlining, improving inventory visibility, and gathering product performance data that can be leveraged in the design and manufacturing process.
With outsourcing on the rise, the notion of parts pooling has gotten a lot of attention, although few companies have managed it successfully.
In a parts pooling model, a third party (like a logistics company) would manage a pool of standard parts for multiple customers. For example, imagine two competing networking companies drawing from the same stock of switches and routers. Competitive issues have made this concept difficult to implement.
"People have been talking about parts pooling for years," Brennan says. "What we've found is that it's all well and good until there's one part left and multiple customers are asking for it."
One company that has been successful with the parts pooling concept is Systems Design Advantage (SDA), an OEM reseller and value-added distributor of high-tech equipment that also provides same-day and next-day parts deliveries, as well as depot repair services. SDA has teamed with Choice for its physical logistics.
Service parts are difficult to manage, but specialized planning software and outsourced logistics services can simplify the task.
Although SDA receives stocking data from its customers, the company owns the inventory, which means it benefits from economies of scale and can reapportion inventory when demand from one customer or region declines or increases.
"Inventory will kill a company if it's not managed properly. That's why SDA's owning the inventory is key," says Jim Sahli, SDA's president and CEO. He adds the observation that the flexibility and cost savings available with outsourcing are the biggest benefits. "With us, a client can open up a whole new geography for customer contacts without the fixed cost of maintaining facilities and inventories."
BancTec Inc. is using SDA's services to provide parts for its nationwide server repair contracts. BancTec once had to manage parts inventories on its own, but now SDA has guaranteed delivery of mission-critical parts at a significant cost savings.
"We are constantly being hit by forward price pressure from our customers, and we have to be creative to compete," says Lee Micks, director of major account operations at BancTec. "SDA has shown a real commitment to partnering with us."
So far, the outsourcing concept has applied mostly to physical logistics and repair, whereas most companies have kept planning in-house. That could change, however. Baxter Planning Systems has already taken a step in this direction with its Outsourcing Services Group. The service includes software, hosting, and operational transfers under a variable cost model. Baxter says it can make stocking location and logistics network recommendations; forecast distribution center requirements; develop inventory utilization improvement models; and provide inventory procurement, replenishment, and rebalancing services.
"This is something people would not consider outsourcing even as recently as three or four years ago," says Brennan at UPS, which partners with Baxter. "For the most part, smaller and mid-sized companies are looking at it now. Planning software is expensive, and we can offer them that functionality on a transaction basis."
There are still risks, says Ed Wodarski, vice president and chief strategist at Xelus. "How does the outsourcer know if the data being fed into the forecast is bad or not?" he says. "Planning will be the last thing to be outsourced, but it's definitely coming." FS