Pain or gain?

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Spares and support has become big news over the past few years with the realisation in many companies of just how much capital can be tied up in this part of the supply chain. Many firms have now tightened up their production supply chains but the spares and support part of their operations have been left untouched, not least because it is seen as a difficult area. Nevertheless, the rewards for enterprises prepared to grasp the nettle are immense.

Telecoms giant BT International, which is roughly two-thirds of the way through its ‘Global Spares Initiative’, reckons that it is already saving e35 million a year in reduced inventory and operating costs but that figure could go to e80m a year when the programme is fully realised – not to mention savings in manpower.

Telecoms firms are globalised businesses these days and none more so than BT which is involved in providing international and domestic telecoms infrastructure in all four corners of the globe. It is present in 70 countries and serves around 300 points worldwide, says global services logistics and inventory development manager, Andie Ainsworth.

Ainsworth explains: ‘Three or four years ago we looked at the way our whole inventory process ran.’ This was the start of a ‘vast’ project that was to take two years just in the planning. ‘We wanted better visibility and use of inventory, and to reduce capital expenditure and operating costs.’ As is often the case with globalised businesses, BT’s international supply chain at the time was pretty fragmented. IT was similarly patchy.

Centralised system
The end result, when the programme is completed by the end of the year, will be a fully centralised system for spares inventory based on just two points – one in the US serving the Americas and the Far East and another for Europe, Middle East and Africa, based in the UK. PD Logistics, which has a long association with BT, provides the global depot service and transport is subcontracted out.

There are many advantages to concentrating on just a couple of major hubs. Instead of individual suppliers having to approach separate vendors, there is now just one point of reference. ‘But the biggest win,’ Ainsworth adds, ‘is the reduction in capital expenditure. Can you imagine all the spares, in all denominations, we use?’

Now, BT’s policy is to hold only critical items on site – basically, those that would shut down a phone network completely – with all the rest being held at the two distribution centres. In fact, a major component of the planning exercise was determining the criticality of each component. Centralising cut out a huge amount of duplicate stock-holding – very important considering that some parts cost tens of thousands of euros each. This is doubly important in the telecoms business. Telecoms networks are upgraded frequently so spares stocks often become obsolete. A lot of what were held as spares was quickly recycled into extensions to the BT network.

But as well as saving BT money, GSI also raised service standards. ‘To date we haven’t had a single sales inventory failure. We’ve got visibility from site to site and service standards are delivery in 48 or 72 hours, except in a few cases where there are customs clearance issues.’

Express solution
The fact that companies like BT are able to contemplate centralising their spares inventory on such a global scale is largely down to the revolution in the express freight industry of the past two decades.

‘We are certainly a factor in companies re-engineering their supply chains,’ agrees David Eastland, vice-president of business development and marketing for UPS Supply Chain Solutions. ‘But while the finished goods area has largely been re-engineered the after-market is now very much on companies’ radar, both because it’s a potential revenue-stream and because it supports the sale of finished goods.’

He adds though that the traditional view of spares inventory is: costly to service, high penalties for failure and a complex supply chain. Companies like UPS have scored by holding stocks of inventory often not on a single country level but on a pan-European basis.

‘There have been cases where customers have been able to reduce spares inventory from 15,000 items to just 250,’ says Eastman. ‘This means reduced exposure to obsolescence.’

Maintaining a fast-response after-sales service without a huge network of parts distribution centres can be a challenge, especially with as demanding a customer as Rolls-Royce Motor Cars, says Paul Glanville, director, service parts solutions at Exel Automotive. The answer here is not necessarily centralisation but rationalisation, based on some sophisticated IT systems. ‘Internet track and trace is treated as a given – it’s what you do with the information that counts,’ he explains.

Automotive spares can be a difficult area. There is a need for rapid response but, outside the luxury segment, airfreight cannot often be justified due to the weight and size of many components. This means a network of RDCs rather than a single European hub. The trick is to ensure that inventory is available to meet requirements but not tying up huge amounts of it.

While car makers have traditionally done well out of the after-market, competition is hotting up with the end of the EU ‘block exemption’ which could allow many more competitors into the repair and servicing market. But clever logistics firms could make a big contribution to lean operations by allowing service agents to keep much of their inventory ‘off base’. If nothing else, it makes for a much less cluttered workplace.

Given the nature of the business, the auto spares supply chain is crying out for a shared user approach. ‘However, the question is how ready are our customers to adopt that approach. Many still see their spares supply chain as a key differentiator,’ explains Paul Glanville.

Lack of suitable software and systems might also have held some firms back from tackling their spares supply chain. Traditional solutions providers have a problem. Most have been designed around MRP/ERP activities and don’t cope well with the rather messier and uncertain world of after-sales and support. In fact, it is often the organisation that pulls all the component suppliers together that needs the cleverest software.

One excellent way of reducing spares inventory is not to have breakdowns and failures in the first place. Companies are paying more attention to designing out ‘breakdowns in the field’ and central to that strategy is Product Lifecycle Management.

Jonathan Gable of specialist company MatrixOne is convinced that this will become one of the pillars of effective management over the next two years. R&D, even in commercial firms, has had an ‘ivory tower’ image. History is littered with examples of firms that came up with brilliant ideas that they failed to exploit commercially or even make work reliably.

Essentially, PLM attempts to better synchronise the product development aspects of a company’s activities with the more directly commercial areas and to ensure that R&D resources and efforts are used wisely. It also tries to ensure that any tweaking of the product to make it more reliable is done at the earlier stages of development rather than more expensively – and often less effectively – once production is in full swing.

Preventing the unknown
MatrixOne’s tools are used extensively in the hightech, aerospace, automotive and defence industries in Europe, North America and Asia basically ‘to prevent the unknown’ as far as possible says Gable. By tapping into warranty information the system can not only ascertain where problems occur but can also be used to help designers minimise their use of new or unproven components and also to prioritise those areas most in need of improvement. Another important function is to monitor the performance of third party suppliers.

Derek Payne, fulfilment technology manager at Leica Microsystems – which makes cutting-edge microscopes and similar equipment – has been turning his attention to better managing the company’s back-office spares inventory, in the US and Europe, with the help of Sterling Commerce’s business process management (BPM) ‘Integrator’ software.

The old system was the familiar picture of spreadsheets updated by faxes and emails, with people on both continents constantly keying data into their individual back-office systems to try and keep things up to date. There was – and is – an EDI system for handling purchase orders which worked reasonably well but problems came from the 20 per cent or so of messages that contained an error of some sort. These needed specialist help from the IT department to sort out. It all added up to delays, often spread over days by time differences between the US and Europe.

Payne explained: ‘Our strategy was to use software to treat the whole thing as a business process rather than an EDI issue. It’s a better way of handling exceptions.’ What Leica was able to do, effectively, was to overlay web-type features on the existing EDI system and, where appropriate, messages could be sent in HTML form. In future, Payne hopes to use the web-style features of the system to obtain a ‘snap-shot of inventory’.

The system has helped Leica reduce errors and has cut the time needed to correct any that do arise. ‘It means that they can be dealt with within an hour, not a day,’ explains Payne. ‘Also, in our business, our product line is expensive and complex, and so are the spares. We want to manage that inventory better and to respond more quickly.’ Inventory accuracy is extremely important. Orders for spares can be despatched more promptly because the system is automated – staff at Leica’s third party-managed spares warehouses can start dealing with orders when they come in at 6am.

Logically, the next step will be to use the system to reduce inventory levels but here Leica is proceeding cautiously. The company needs first to build up a picture of demand and to assess business risks.

One of the big changes now coming in the aftermarket and spares business, says John Love, director of business consulting at G-Log, is a willingness to break it up into categories and adopt different logistics strategies for each sub-segment. ‘For example, in automotive they may break down those parts into those that can keep a car off the road, and those that don’t. Or, it might be a question of handling – those items that can easily be handled by a parcels firm and big items like body parts that can’t.’ Rarely-needed parts might be held centrally and their movement expedited when required .

That said, in many mature industries, ‘people are talking rather than doing’, says Love. Newer industries, like computers have less trouble adapting their spare parts strategies. Even automotive manufacturers like Ford in the US are aware of the benefits of not pushing all parts down the same pipe and have, for example, completely separated body panels from the rest of the spares supply chain.

Time to let go
With so much outsourcing going on in manufacturing today, is there a case for putting the parts manufacturers in charge of the supply chain? That certainly goes on in the newer industries but older ones like the car makers find it difficult to let go, which is one reason why they have found it difficult to reconfigure this part of their supply chains. There is no shortage of data and analysis – it’s just that it’s been difficult to integrate that information into their strategy.

A factor that has made spare parts logistics ‘interesting’, adds Love, is an explosion in customer expectation. Motorists expect to be mobile for life and banks and businesses cannot afford to have computer systems down for more than a few hours. ‘That has driven an awful lot in the industry, and if you use single pipe logistics it adds an enormous, unsustainable cost in terms off additional inventoryholding. Very often, the quality of back-up service is seen as the true differentiator of product quality and the quality of that service is ultimately down to that of the logistics operation behind it.’

The term ‘support chain’ can mean anything that is used by a business to keep its operations running – even the laundry. Many businesses, from fish restaurants to computer chip makers have to supply their workers with overalls and other clothing to the correct standard and ensure it is kept clean – a task nowadays often outsourced. But while requirements are often exacting, with major implications for company image or even its standing with the health and safety authorities if things go wrong, managing such functions are often delegated to quite junior members of staff.

This is where Johnson Service Group comes in. The company offers a comprehensive range of workware and hygiene services, is one of the largest providers of textile rental services and is the biggest dry-cleaner in Britain. ‘This is one of the few businesses that take back everything it sells its customers,’ jokes Mark Cosh, JSG’s sales director. ‘We found that visibility of the supply chain was affecting customer retention. It took clients a long time to find out what was in stock, how long it would take to be delivered and so on.’

The answer was to use Business Objects’ service. This integrated data from 17 services into a single consolidated database published on an extranet. As Cosh explains, ‘There is plenty of technology out there but people find most of it daunting. Anyone that knows how a browser works can use this.’

While laundry might be quite a specialised part of the support chain, the principle could be applied to a wide range of service and repair industries, adds Business Objects’ product marketing manager Richard Neale.

Manugistics got into the spares and service space a few years back with its acquisition of specialist firm WDS, explains vice-president of Northern Europe, Ron Kubera. Moreover, companies are getting evermore conscious of the cost of holding inventories. More so than in most other sectors of supply chain management, the spares side of most businesses must able to operate across multiple sites.

One reason why supply chain experts have neglected spares until now is their complexity. As Kubera says, when a US Navy aircraft comes in for maintenance, ‘it’s not just a matter of getting hold of the right spare parts – labour has to be organised and the whole operation dovetailed so that the plane is back in the air again in as short a time as possible’. 

But the reward can be massive savings, and very likely a shorter payback than is achievable in many other parts of the supply chain – perhaps three to six months compared with six to nine months.

‘Effective spares management depends, more than anything else, on robust statistical forecasting’ Kubera continues. ‘I know that you can never forecast perfectly but any improvements you can make will have a direct impact on your inventory levels.’ The algorithms used have become more sophisticated and latest versions can effectively ‘self tune’ themselves.

Another area, and one where we are only just beginning to scratch the surface, is ‘self-diagnosing’ machinery and equipment. This is beginning to have an impact in aerospace and the upper echelons of the automotive industry and is likely to increase both in extent and in sophistication.

One reason for the explosion of interest in the service and support chain is that companies have finally realised that they can make money out of it. Leighton Morgans of software specialist Servigistics says: ‘Sales used to be king while after-sales was very much an afterthought, but in the most enlightened firms the service department is moving out of the 40-watt bulb area to the forefront of customer services and expectations.’

Planning solutions
Servigistics provides planning solutions to support companies that want to transform this part of their supply chain. Clients include Dell, Sun Microsystems, Volvo Trucks, Toshiba Medial and EMC.

‘Service has been the key to differentiation,’ Morgans says. ‘Typically, 75 per cent of a firm’s revenue may have come from finished goods and only 25 per cent from service. But in profit terms, it’s turned on its head – perhaps 55 per cent from servicing and 45 per cent from finished goods.’ A lot of finished goods markets – cars, computers and others – have commoditised with manufacturers selling the original equipment at not much more than cost price. Computer giant Dell, for example, reckons that 30 per cent of its revenue will come from servicing within the next two years.

Until now though, the service segment has not been an investment priority and, moreover, traditional forecasting techniques don’t always work very well. 

An added complication, and one that is becoming increasingly common, is that spare parts are often returned and this will increase as more legislation is imposed by Brussels. Spares and servicing networks are now often complex, Morgans adds. 

The old way of protecting against an uncertain world was to increase inventory levels but this can no longer be tolerated. Not only is the cost of inventory huge in itself, but with the pace of innovation it is often highly perishable, meaning that valuable chunks might have to be written off. In Morgans’ experience, managers of large companies admit to having perhaps 20 or 30 per cent excess inventory.

That said, some managers have done more harm than good in their attempts to bring inventory under control by cutting back holdings indiscriminately. ‘There is a tendency sometimes to burn off the ‘good’ inventory, along with the bad,’ adds Morgans.

But there is a lot that can be done to predict and manage demand. A computer chip manufacturer could, for example, examine the demand patterns for the previous chip and use these to model likely demand for the new one. And there are tools available to analyse and predict mean times between equipment failures.

Network management is also key. Spares can be held at a central warehouse but they could equally be at a client’s premises or even in an engineer’s van. Again, there are tools that can help optimise where inventory is held. With increasing visibility of the spares inventory and more sophisticated communications, it might be possible to cut holdings of expensive and infrequently needed items by pooling items.

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