December”s ”Supply Chain Standard” Roundtable, partnered by Kuehne + Nagel, looked at the logistics of critical spare parts and replacements. ”Critical”, of course, means different things to different people – it may be the need to get a part to a field service engineer to bring a production line back into use – but it could also be replacing that engineer”s mobile phone. So there are many possible models, from the user holding a complete inventory of every conceivable spare part, to the time-guaranteed supply of spares on demand from a central location.
But the nature of products and the way they are designed for maintenance is also changing. Terry Reynolds of office equipment supplier Ricoh (see panel for affiliations) pointed out that in many modern photocopiers, repair no longer involves individual parts but rather the replacement of one of a handful of modules. The effect, of course is that although ”spares” now involves many fewer stock items, their size is much bigger. This has a number of implications, not least that it may no longer be possible to deliver spares into an office letterbox.
SCS editor Nick Allen suggested that this implied a much stronger linkage between product design and the spares/maintenance function, and Reynolds agreed. ”The digital age means many fewer moving parts and small components. At the same time, machines are more multi-functional, so a user will have fewer different machines, but each one is more critical to the business, so they have to be more robust, and speed to fix a problem is of the essence. And you also have the question of whether an engineer is required, or whether replacing modules can be a customer fit”. As Stuart Miller of ByBox (which operates drop-box systems for unmanned goods reception) commented ”The last thing a small customer wants is to work while there is someone underneath the desk with a soldering iron”.
Miller also pointed to the greater demands and expectations of, for example, retailers. ”Often they may have only two Point of Sale machines – if one goes down and queues build up, the customer is going to walk next door. So you have to offer say a two or four hour fix if you are going to be competitive, and if you”re user is going to stay competitive”.
Reynolds offered the view that ”Supply chain hasn”t got it”s head round reverse logistics, and the fact that, often, there isn”t much wrong with the part or module that is being replaced (or sometimes nothing at all – the user just hasn”t turned it on properly!)”. That could mean a lot of serviceable equipment going to landfill. Reynolds said ”We”ve tried to “green” our operation by using a system of red and green bags:
red for obviously scrap parts, and green for parts which can probably be returned to use. But obviously a lot depends on the value attached to the part, and the cost of returning it into the supply chain”.
David Hyslop of automated warehouse systems company, Vanderlande, confirmed that as products have changed ”there is less appetite for repairs; no-one wants things being fixed on site, but against that there is an increasing cost related to disposal”, and Grahame Barrows of Kuehne + Nagel confirmed that K+N are seeing very different markets, from those that are looking for K+N to make a large investment in reverse logistics infrastructure, to those which are expecting replaced inventory to be written off and disposed of. ”There is a dilemma in finding the right level of service for the channel”.
Geography is also relevant, said Reynolds. In Central London, for example, Ricoh can use motorbikes bringing spares from a central store.
Miller speculated that, as the modular approach to equipment design and maintenance continues, there would be the potential to have ”banks of boxes containing interchangeable, modular parts, sited close to the users, although that would of course require collaboration between manufacturers”.
How far is it reasonable to expect customers to make an upfront investment in spares. Reynolds said that on one large contract recently the customer had bought 35 per cent of the contract value in spares. Hyslop suggested that ”Customers need to recognise that they have to buy spares. IT systems may last ten or twelve years, but many parts will have become obsolete – we have handling systems with a life of 25 years, during which the control system may have changed three or four times. So you have to have allocated stocks” – and someone has to pay for them!
”What we can do, though, is manage stocks, limit the number of alternative parts, where a card, say, is no longer available we have to solve compatibility problems with an alternative, and essentially we need to limit the number of different parts we use in the first place, so that we can have the stock holdings to serve the largest number of our customers”. At Heathrow, he explained, all spares for baggage handling equipment are held in a logistics centre and delivered to the point of use by a courier. This includes supporting the equipment of other manufacturers – Vanderlande won an overall spares supply contract under competitive tendering.
Minefield of change
Barrows compared this with what is happening in the mobile telecoms world, where ”the likes of Ericsson or Nokia used to be just suppliers of equipment; now they are saying “let us be your turnkey supplier, you don”t need to buy those spares, we will supply them”. At the same time networks are merging, for example Orange and Vodafone in the UK, and the industry is saying “Let”s compete where we should, on the High Street, but why do we need to have our own separate masts and infrastructures?” There is a minefield of change”, he said. ”There”s a danger that we have got a service that can support this industry – and then the industry goes off in another direction”. He noted ”Last year there were three pan-European spares tenders that all came to nothing – either Procurement trying to save money, or it was seen as “just too difficult”.”
Derek Hill of automation company, FKI Logistics, said there was a ”no compromise culture”; users just want a quick swap-out. Complex shared user operations sound Utopian, but might be too difficult.
Barrows explained that ”K+N didn”t want to be just another deliverer of parts. That”s why we”ve engaged with ByBox as an integral part of our operation where needed. There is some intelligence in a ByBox, and more in our own processes, so we can minimise inventory and costs, squash everything up and make it all go faster”.
Hyslop agreed. ”It”s about moving the data, not the part. Often, the part is already in the right place, we just don”t know about it. Why are we sending parts back up the supply chain for somebody to say “there”s nothing wrong with this”? Someone else already knew that”. Barrows said ”screening products on return to say “it works, put it back in inventory” is a logistics cost, not a high value repair cost”.
Hill suggested that there are two core aspects – the primary fulfilment task of meeting customer expectations, and the question of operational efficiency. Spares, he said, has to be fundamentally a reverse logistics process. It”s about visibility, said Reynolds – ”our red and green bin liners – of course We need to design out risk – design in redundancy and resilience so that a failure isn”t ”critical”. ”Critical” implies poor design – standardisation and preventative maintenance are keythere is always someone to mess it up with a black bag, but at least if the engineers route parts this way we are giving ourselves a fighting chance”.
The question of where to hold spares is also moot, and several of those present had oscillated between centralised and distributed holdings. Ricoh for example has a centralised store in Europe, but has more recently recreated local sub-stocks: at present around 75 per cent of UK spares demand is supplied from UK holdings. Centralised stockholding can have unforeseen consequences, said Hyslop. ”Often the central warehouse is in effect a third party supplier to the country. If we send three parts out to an engineer, he may fit one and return two. This leads to a big stockpile of parts in engineers” vans – because if the parts are returned to the central warehouse, we only get 80 per cent of the value credited back (to cover the warehouses repackaging and other costs). So we end up with large local stocks and no data visibility!” Reynolds agreed that ”as soon as we centralised in Europe, our engineers increased their stocks!”. Allen wondered if that created a role for RFID – the blunt answer from Hyslop was ”Only if it”s fitted in the engineer”s garage”. More practically, Barrows revealed that K+N had trialled RFID with Orange in France but ”It didn”t pass muster – accuracies were below 90 per cent”.
The dynamics of logistics control for critical spares are, said Barrows, very different from those of traditional fulfilment. ”We need to develop new systems because traditional warehouse management systems don”t have the bandwidth to capture all the data and visibility”.
Spares provision isn”t just about happy customers, it is increasingly a profit centre in its own right – the chairman mentioned a recent Cap Gemini report suggesting that manufacturers are having to become far more reliant on revenues from aftersales. Barrows said ”There was a point when manufacturing was all about the front end, and the aftermarket was kept well away. Now our experience is that people are suddenly saying “this is a big spend, and margins are tight – let”s put it under the microscope”.
On the other hand, Hyslop suggested, the market is very segmented. ”For example, TVs don”t break down any more. Would you repair a mobile phone? A lot of consumer goods are moving away from the concept of spares and repairs. Things are lasting longer than the business case or the customer need”. Barrows agreed that goods like TVs are replaced because customers want the next technology, not because they have broken, but on the other hand ”for items like iPods and mobiles, warranty business is very active. We support mobile replacement at a rate of 100,000 a month for one network alone. It”s about their churn rate and stopping customers taking their contract elsewhere.” But there is a big difference between critical spares support for industry, where there may be penalties kicking in after two or four hours if a problem isn”t fixed, and consumer goods where the service may be of swapping new for old, in-store or by courier, or offering a collect/repair/return service.
Either way, there is a problem of what to do with returned parts. Reynolds explained that his central warehouse in Holland has to maintain two tiers of inventory – brand new, and returned. As he says ”I can issue returned parts to my own engineers, but a dealer”s engineer will demand brand new parts”.
If the replacement routine for a mobile phone breaks down, the worst that happens is that the network loses a customer. A breakdown in critical spares to industry may be much more serious, and so contracts are hedged around with service level agreements (SLAs) and penalty clauses (not all of which may actually be legally enforceable). Barrows said ”We”ve walked away from business because procurement teams have wanted draconian penalties out of proportion to the service. Hill said ”Spares are all about overcoming risk. The risk depends on the SLA, and that should have provision for both general and critical spares. And you need to ask whether the SLA is based on actual operating output/delivery, or on notional availability.
”We need to design out risk – design in redundancy and resilience so that a failure isn”t “critical”. “Critical” implies poor design”. With standardisation, commonality, preventative maintenance routines you can reduce inventory and the consequences of failure at the same time. Hyslop agreed: ”We don”t really suffer down-time penalties. We have built in redundancy, with maintenance engineers on site, and you don”t really “lose” an automated warehouse. If you lose one crane it isn”t the end of the world: there are other cranes, and the stock will be in multiple locations”.
”All of which”, summarised Derek Hill, ”has made me think – what does “critical” actually mean?”
The digital age means fewer moving parts and smaller components. But machines are more multi-functional and so more critical to the business – speed to fix is of the essence
Nick allen (chair)
editor supply chain standard
”Is there are a stronger linkage between product design and the spares and maintenance function than one might think?”
business development director, Kuehne + Nagel
”We support mobile replacement at a rate of 100,000 a month for one network alone. It”s about their churn rate and stopping customers taking their contract elsewhere”
managing director, Vanderlande Industries UK
”Customers need to recognise that they have to buy spares. IT systems may last ten or twelve years, but many parts will have become obsolete – we have handling systems with a life of 25 years”
UK sales director, FKI Logistics
”Spares are all about overcoming risk. The risk depends on the SLA, and that should have provision for both general and critical spares”
chief executive officer, ByBox
”The last thing a small customer wants is to work while there is someone underneath the desk with a soldering iron”
logistics director, Ricoh UK
”Repair no longer involves individual parts but rather the replacement of modules. The effect, is that although “spares” now involves many fewer stock items, their size is much bigger”