The landscape of the aftermarket spares supply chain (or the support chain, as it is becoming known) has changed dramatically in recent years, not least because, especially for many manufacturers, aftersales and servicing has become a major source of income. As DHL Solutions’ head of marketing and business development Oliver Landgraf points out, IBM only makes 35 per cent of its revenue from hardware, its main income coming from services. And HPQ, Nokia and many car firms too, now garner most of their profit from aftersales, while some truck manufacturers reckon to make almost nothing from selling vehicles – almost all their profit comes from servicing and repairs.
Chris Wallace, business development director EMEA for Cat Logistics says that ‘the contribution to profits from downstream parts can now range from half of the initial purchase price in the car industry up to three times the purchase price in some heavy machinery sectors’. Wallace’s company grew out of Caterpillar, the heavy machinery firm, but now finds that around 75-80 per cent of its business is in service logistics for clients such as Agco (parent company of Massey Ferguson) Land Rover, Hyndai, MG Rover, Ford and others in aerospace.
There is no doubt, then, that the aftermarket has become very significant. In the high tech sector, price wars have brought the cost of many devices down to minimal levels. Most of us will have had the experience of buying a cheap computer in our friendly high street electronics retailer and then being asked if we’re interested in buying an expensive 12-month warranty.
As Dell’s director for EMEA logistics, Gerard Macken says, ‘Aftersales warranties, if managed well, can be an important revenue generator – but if not, they can become a real millstone round your neck.’
Managing spares inventory has become a mainstream activity for 3PL and 4PL operators, whereas a couple of decades ago this was handled mainly by ‘express’ parcels firms. Some fast freight firms – like DHL – are still strongly represented in the area although DHL itself has become part of a much broader-based logistics operation. ‘New DHL’, as Landgraf calls his company, subdivides the supply chain into four main markets: inbound, supplier-customer, aftersales and reverse logistics. He is concerned with the third category and, to some extent, the fourth, though New DHL prides itself on being one of the few operators that can provide service across all four categories.
Driving new demands
DHL Solutions can now manage inventory at anything from country to local drop-point levels. One trend that Landgraf has observed in the past few years is that ‘companies are now coming to us not only for execution but also for planning. This is driven partly by the desire for efficiency but mainly by availability. It’s been identified as a differentiator and also an area where it is possible to gain efficiency and reduce costs’.
The value of this inventory can be very high. One effect of the introduction of ERP systems is that firms have realised, maybe for the first time, just how much inventory they have locked up in spare parts.
One problem in trying to get to grips with the ‘support chain’, is that parts can be scattered in all sorts of nooks and crannies – even in technicians’ homes. Of course, sophisticated IT systems are useful in keeping track of this scattered flock, though there are limits to what these can achieve when items stray too far from within the company’s own four walls.
‘One of the keys to the support chain is understanding that handling service parts is different from other kinds of logistics,’ says Wallace. ‘There are lots of SKUs, lots of slow-movers and even a certain element of seasonal demand.’
Another factor, and one that has emerged as a major issue in the high tech sectors, is obsolescence. For instance, when a computer which it is still guaranteeing goes out of production, Dell might carry out a ‘last time buy’ to ensure that it has sufficient spares to meet its warranty commitments. (Interestingly, in computers, this is not to much of an issue as newer parts can frequently be used in older computers.) Wallace is seeing an increasing proportion of spares orders, even those for routine servicing, to be ordered as ‘emergency’ spares. Dealers, it seems, are less willing to hold stock for any longer than necessary.
And Dell too, has been considering the ownership issue. While the company’s policy on inventory for regular production has been for ownership to remain with the supplier until around two hours before use, it has until now held back from applying this to its spares inventory. However, this is one area at which the company is actively looking, says Gerard Macken. ‘Ownership issues in computer spares are frequently complex. Sometimes engineers take spares to jobs that they end up not using, so inevitably there is some movement of unused spares. Unused spares have to be evaluated before being put back into the parts centre, while other components may be reworked, repaired or scrapped.’
In-depth fault analysis
Dell has put great effort into minimising technicians taking unnecessary parts with them through in-depth telephone fault analysis and also through on-line systems that not only record the components in any systems it has sold but also give the technician a list of compatible components. Apart from anything else, if technicians order parts from stock that they don’t need, it can artificially inflate demand as perceived by the company’s monitoring systems as there is inevitably a time-lag before the part is returned.
And there is another incentive for manufacturers to make their support chain operation as slick as possible, these days. It’s pretty widely known that the phone companies don’t make money from flogging handsets but from usage. If the handset is faulty, not only does the phone company have an annoyed customer to deal with, it stands to lose revenue as well. Photocopiers are another area where the main revenue earner is usage, not sales of equipment, and the same goes for some segments of the computer and IT market.
One characteristic of the support chain is the need for fast response times, though this does depend on market segment. Contracts for the support of banks’ computer operations may stipulate that spare parts are no more than two hours away; in the consumer sector, the need for speed may depend on whether it is luxury or mainstream. Whichever, manufacturers themselves are less and less willing to engage in fixed costs for their support chain operations. ‘The only exceptions might be those companies who really believe that their differentiator is their service level,’ says Landgraf. ‘Increasing pressure from those firms might lead to an upsurge in shared support chain facilities.’
The motor trade is, of course, something else. It is widely expected that changes to EU legislation governing motor dealerships and serving agents could lead to an increase in multi-make service agents, though the jury is still out on what the ending of the old ‘block exemption’ will mean in practice. ‘If it means that what used to be a Mercedes repair shop will also require BMW parts, then the distribution system will need to change. At the moment, it’s geared to support one brand only, but I could envisage a need for multiple inputs and outputs,’ says Landgraf.
Is support chain activity a growing area for service providers like DHL? That is an interesting question, says Landgraf, but it isn’t easy to answer. ‘Typically, the lifetime of if products is becoming longer and the failure rates for equipment is also going down.’ But on the other hand, technology is also becoming more widespread throughout society. Add to that, when economies go into recession – and many in Europe are – the tendency is to keep old equipment working longer rather than splash out on new kit.
European governments have got particularly tough on manufacturers over the mounds of obsolete junk they reckon threatens to overwhelm the environment. In some cases, there isn’t really a problem. Some parts can be repaired or reused, especially if they are not vital for safety. Bulky old cathode ray computer monitors, rejected by businesses in favour of smarter, flat units, may be sent to schools, charities or private homes. However, the logistics element of the refurbishment or reuse process must not be underestimated. Some logistics operators are even certified by the German authorities to carry out waste sorting and treatment operations. It can make economic – and environmental – sense to do this within the supply chain rather than trying to set up vast centralised recycling centres. Remember, the ‘WEEE’ European Waste Directive for electrical goods comes into force shortly, and could give some manufacturers a serious headache.
Stefan Willemen, until recently managing consultant for the Products sector of Cap Gemini Ernst & Young in the Netherlands points out that while electronics repair is usually local, taking place in relatively expensive Western European countries, Eastern European countries like Hungary and the Czech Republic offer labour costs at about a third of those levels. For this reason, labour-intensive repair processes will increasingly take place in low cost countries and at large, centralised hubs. He warns: ‘Repair in Eastern European countries means that the complexity of logistics will increase dramatically.’
Running a successful aftermarket support operation means having constantly to weigh up desired service levels against the cost of not making the customer happy – and also making decisions on how much stock to hold and where. At one extreme, routine parts needed for servicing or items that break frequently may be held locally. At the other end of the spectrum, rarely required items like engine blocks might be held centrally in very small numbers. Some manufacturers, like Caterpillar, will make exceptional items to order.
Scania, a Cat Logistics client, has a central warehouse but has satellite operations in places like Iberia and the UK. Dell runs an interesting two-tier model, with a central DC for spares on the Belgian-Dutch border with satellites in the UK, the Nordic region, France and Switzerland to cover next-day requirements, plus a further 110 or so facilities geared to the needs of its four-hour, mostly corporate, clients.
The obvious difference between the aftermarket and the production supply chain, says DAF Trucks NV’s director, aftersales Pieter de Grauw, lies in demand pattern. In the aftermarket, this is less predictable, erratic even, and so forecasting is more difficult. ‘It’s a matter of balancing service levels with cost,’ he adds. ‘The aftermarket supply chain is much more dictated by lead time and service.’
DAF operates through a network of independent dealers, with orders from them and also some direct customer orders going direct to the manufacturer’s main hub and central warehouse in Eindhoven. This, though, is not the only hub in Europe – a major facility is under construction in the UK, taking over from a third party-operated facility and there is another smaller one in Madrid for rush orders. Possible hubs to serve the new markets of eastern and central Europe are under study. ‘From that structure,’ says de Grauw, ‘we can observe and monitor service levels.’
One important way in which DAF tries to get more of a grip on its aftermarket supply chain is through a Managed Dealer Inventory programme, again managed in Eindhoven. ‘This suggests to dealers what to order, and it’s managed centrally with centralised algorithms. The end result is higher availability for the customer and lower inventory holding costs for dealers,’ says de Grauw.
The ‘Connect’ programme
DAF has a second, slightly lengthier aftermarket chain whereby it delivers parts direct to the workshops of medium and small fleet operators. For this, it has developed the ‘Connect’ programme, which offers basic scheduling and support, linked again to DAF’s main parts supply system. de Grauw adds: ‘It also gives us an insight into what customers are really taking from dealers.’
The logistics of the aftermarket is something that DAF, and parent company PACCAR, prefers to keep under its own control, though it is open-minded on the subject. As de Grauw says: ‘We see aftermarket logistics as a core competency.’ That said, transport from Paccar’s seven owned hubs in the US is outsourced, as is operation of the hubs in Eindhoven and Madrid, though in these latter cases the service providers – De Rooy Logistics and Redur respectively – work very closely with DAF based on perameters of tight quality and cost control.
While people tend to talk of the aftermarket as if it were a single entity, in reality in many industries such as trucks, it is subdivided. There are stock orders, which might be for parts needed for routine servicing, and the ‘vehicle off road’ segment – which could be split again to meet situations where 24 hour service is acceptable – a vehicle in the operator’s yard at the weekend – and those where even an hour is too long – truck sitting on the hard shoulder of the motorway. Increasingly, DAF is moving towards offering customers a one-stop solution, covering both vehicle support and regular maintenance and repair on trucks, trailers and bodies. It is also moving into supply of other manufacturers’ parts, a useful tactic in an industry where the ending of EU ‘block exemption’ rules could lead to an upsurge in multi-make service agents.
Truck operators are demanding customers who can’t afford to have vehicles off the road for long, whether for repairs or routine servicing. ‘We’re talking these days much more about job availability, as well as parts availability, which means making sure that parts, diagrams and other necessities arrive at the same time and in the same place as the mechanic doing the job,’ says de Grauw.
Of course, the day is not so very far off when complex machines like trucks will be able to ‘diagnose’ themselves and telematically send details of when services or repairs might be required, along with any parts needed, to interested parties including the logistics department. Already, the technology exists nowadays to direct a truck needing a service to the nearest agent.
It’s about information
Pieter de Grauw concludes: ‘Really, the aftermarket today is as much about providing information as it is about parts and service. It’s this information that really adds value for the customer. Here we see the emergence of the next generation of aftermarket services.’
Mike Belk, aftersales director for DaimlerChrysler UK, echoes these sentiments. ‘The biggest issue we face is not the parts business as such, but customer satisfaction.’ Like many of the major manufacturers, DaimlerChrysler has diversified and Belk is now responsible not only for Mercedes Benz cars, but also vehicles including trucks, vans, Chrysler jeeps and the ultra-small ‘Smart’ cars, to name but a few.
He aims to provide his dealers with as flexible a service as possible, whether for stock items or vehicle off road (VOR) parts. For him, it’s particularly important to maintain a well-balanced inventory.
DaimlerChrysler (DC) uses a mixture of roadbased delivery services, capable of getting a part ordered before 4pm to virtually anywhere in the UK and Ireland before 9am. ‘If it’s a part we don’t have in stock but it exists elsewhere we can truck it specially or even fly it in.’
For a motor manufacturer though, keeping parts in inventory is a headache as they are legally bound in Europe to supply spare parts for 15 years after a model ceases production.
‘This means a vast stockholding,’ explains Belk, ‘and it raises the question of how many parts need to be held in local as against national distribution points.’ In fact, DC aims to satisfy 93 per cent of orders on a ‘first pick’ basis and to supply 98 per cent within 72 hours, from inventory held in Stuttgart if necessary. The main exceptions are high-security items like replacement starter-keys, though the manufacturer is looking at how best to speed up response times in this area as well.
One way of eliminating wasted time in the repair process is to pre-diagnose repair jobs, and DC has a number of pilot projects in this area. The savings in inventory and logistics costs could be enormous.
Sophisticated self-diagnosing technology, as already used on Mercedes’ Actros trucks, could give a huge boost to this process, and there is ultimately the potential for telediagnostics.
For DC, says Belk, electronics is beginning to take over from some physical spare parts replacement operations. Fixing a modern car engine may be more a matter of downloading software than changing spare plugs or points these days. And improved manufacturing tolerances mean that mechanical parts have much longer lives these days. That has not however removed the need to keep spares in stock. Despite their best efforts to standardise parts, all motor manufacturers face the problem that their parts ‘tail’ can be long indeed.
One solution DC is exploring is holding parts in part-manufactured form, carrying out operations such as painting only where they are required. That way, it would be possible to hold a single stock of, say, rear bumpers, instead of separate stocks of every possible colour. This would also mean no longer having to second-guess whether, say, the demand for replacement crimson red bumpers is going to outstrip that for metallic silver ones.
Another important innovation might be to retain stocks of sub-assemblies, instead of keeping stocks as individual spare parts – a complete gearbox rather than the component parts, for example. Yes, complete sub-assemblies cost more to make than individual bits and pieces, but the brutal truth is that labour costs in western Europe and North America are so high now that it is almost always cheaper to bolt in a complete new assembly than to repair a broken or worn out one.