Aftermarket supply chains are complex, involving multiple distribution and service delivery channels. They typically involve a large product portfolio with a high number of stock keeping units (SKUs) to manage multiple material flow paths, a high number of service providers, and significant reverse logistics issues relating to returns and remanufacturing of components – all adding to the complexity. Traditional thinking dictates additional investment in infrastructure, service parts inventory and working capital in order to meet soaring customer expectations. Contrary to that thinking, companies are able to satisfy those customer service demands by viewing the complete supply chain as an untapped source for generating value.
The aftermarket has always demanded the highest levels of service and there will be no exception in the future, however in order for companies to be more competitive then the cost at which services are delivered needs to be reduced significantly, requiring the aftermarket supply chain to be restructured.
Three significant developments are currently changing the strategies and the cost structures of companies operating in the aftermarket industry.
A shift from the traditional model
Firstly, for a number of years there has been a segment of the market that has required a two-hour and a four-hour call-to-fix service. This service is measured from receiving notification of an issue from a customer to having the engineer and parts on site. The other segment of the market has traditionally sold a lower, or slower, level of service, for example lifetime warranties or five, 15 or 35-day repair and return.
Now, however, the end customer has become more educated on the range of services available, hardware has become more business critical and competition from other aftermarket service providers who are prepared to maintain multi-vendor products has intensified. This is forcing the latter segment of the market to change to same-day service offerings.
Focus is therefore shifting from the traditional model, often called the Returns Material Authorisation (RMA) model. Here the end customer identifies an issue with their product and contacts a help desk or uses the internet to register the issue. If the issue cannot be resolved remotely then the part is collected from the customer, or shipped by the customer, to a facility in their local country (country store) or in some cases to a single facility for Europe. From here the product is shipped to repair and then returned to the customer.
Today’s developing model provides the infrastructure to offer services around a two-hour and four-hour service window from initial customer call to part on site, and requires inventory to be held at many sites and shipped using local couriers. Business rules, built into the operating system, allow strategic supply and replenishment of parts. Visibility of parts across the supply chain including those outstanding in the field is key, as this model requires a significant amount of additional inventory to support the required service levels.
The critical enhancements demanded from a business moving from the RMA model to the same-day model are based around planning, systems, inventory and returns management. It is feasible to be using 100 plus sites to serve customers in the Europe, Middle East and Africa (EMEA) region and each of these needs to have optimum stock positioned and continually reviewed. There is also significant cost in shipping parts between the locations which can be 60 per cent of the total logistics cost and therefore it is important, where possible, to consolidate shipments.
Focus on core competence
Secondly, as companies focus on ‘core activities’ they consider whether it is appropriate to outsource ‘non-core’ services such as call centres – both technical and non technical – procurement, provisioning and positioning of parts, repair and repair management activities, management of warranty claims and management of engineers. Alongside these key activities, responsibility for parts outstanding in the field, selecting the method of supplying parts to engineers and the level of stock that engineers should carry is increasingly being considered as ‘non-core’.
Whereas just two years ago it was common for companies to use their own system throughout the logistics network, logistics providers are now being asked to provide total visibility of the entire supply chain, often with links to customers’ ERP systems. Engineering services are becoming more regularly, totally or partially, outsourced with many companies using their own engineers for the most technical products or the most valuable customers, using technical couriers for low-end fixes and swaps and third-party engineers for the bit in the middle.
Outsourcing non-core activities should drive both service improvement and cost reduction. The ratio of costs for each of the key activities will change based on the individual business, however for the same-day solution it would not be unusual to find the following: logistics will be around 20 per cent of the total cost; inventory financing and obsolescence will be around 25 per cent of the total cost; repair costs will be around 22 per cent of the total; and engineers are typically around 25 per cent of total cost, but can be as high as 80 per cent.
Increase in geographical scope
Thirdly, in order to better utilise internal management time and to get economies of scale in purchasing, companies have moved to managing and procuring services at a theatre (eg EMEA) or even a global level. This has in the past been an activity undertaken at a country level.
This process often follows an internal restructure of the profit and loss (P&L) focus, where country P&Ls are replaced by or consolidated into a European P&L. Procuring at this level allows companies to reduce their total operating cost, provides them with better visibility, ensures operational consistency, increases flexibility and improves the service reporting when compared to relationships built around individual country solutions. Building this level of relationship allows companies to refocus their management time, however it is important that the local management are bought into the process as it is here that the end-customer relationship is owned and this team can influence the success of the change.
As companies search for new ways of being competitive it is important for them to consider three key areas of development within the aftermarket: service level requirements, range of activities and geographic scope. The implementation of these changes will affect many parts of their organisations, it will cut across different cultures and will often involve the introduction of new systems, processes and reporting structures. Although this introduces new areas of risk to the business the upside of restructuring the aftermarket supply chain creates significant value and enables companies to remain competitive.
Peter Eglinton is global product director – service logistics for Exel, and can be contacted at email@example.com.
- High number of SKUs making it difficult to effectively forecast, set stock levels, plan and process orders with existing planning staff
- Low inventory turns caused by high service level requirement, sporadic, low volume demand, part number proliferation, long lead times, and poor supplier performance
- High customer service level expectation as customers move toward measuring time to fix and introduce penalties for service failure
- Lack of supply chain visibility and co-operation between companies limits the ability to improve response time, increase velocity, smooth demand, reduce inventory redundancy and increase efficiency
- High obsolescence and scrap caused by inaccurate initial provisioning, part transitions, returns, product-life-cycle transitions and end-of-life buys
- Network complexity which requires the network to be continually reviewed to ensure customer commitments can be met against an affordable cost base
- Higher transportation costs caused by increasing customer delivery expectations, small-sized shipments that often attract a minimum cost, especially with a wider geographical coverage
- Squeezed service margins as new product prices fall and the replacement versus repair trade off changes
- Which services to provide in house and which services to outsource