Supply Chain Management: Morphing the Functional Scope of Service Parts
Written By: Predrag Jakovljevic
Published On: July 30 2005
The Morphing Functional Scope of Service Parts SCM
are many requirements involved in the supply chain management (SCM)
of service and replacement parts that make the process different from traditional,
"new parts" SCM (see Part
One). As a result, some specialist SCM solutions have been developed to
address these challenges. Some might resemble conventional SCM solutions, but
feature different approaches. The requirements of service and replacement parts
SCM solutions also vary given the wide range of members that exist across multi-node
supply chains. Each of these members can be grouped into a few major solution
Two of the Lucrative but Risky "Aftermarket" Business: Service and Replacement
Parts SCM series.
and replacement parts resource management, which is the main focus of this
article, consists of a variety of solutions that are comparable to supply
chain planning (SCP) components in conventional SCM suites. Service and
replacement parts management has inventory optimization at its core
that determines the best way to stock inventory across the supply chain to maximize
service levels while minimizing investment. In other words, the basic goal is
to maintain the optimal placement of resources, including parts, tools, and
service technicians, across service regions to meet service level agreement
(SLA) commitments at the lowest possible cost.
These spare parts planning systems provide the means to define and implement a spare parts inventory strategy that meets enterprise objectives. In other words, they tend to help enterprises understand the relationship between a customer service target level and the value of the inventory required to support it. To that end, they combine forecasting with replenishment logic to determine the optimal level and mix of parts to carry at each stocking tier, given certain capital investment targets and customer service level goals. Unlike finished goods, where nearly 100 percent customer service levels are desirable, here only certain classes of spare parts need to be available all the time, at all supply chain nodes.
Spare parts planning systems might also improve user productivity, since by automating the basic forecasting and replenishment process, planners and inventory managers can focus on exceptions and more-strategic planning activities, such as how to handle expensive, slow-moving items or how to use substitute parts to reduce costs or obsolescence.
this goal requires a mix of tools. These range from strategic tools identifying
demand profiles, service objectives, and the best way to position resources
to meet demand, to tactical tools determining what orders need to be placed
to meet strategic objectives. Such goals include managing the risk inherent
in allocations and transships; repair or new purchase orders; new product
introductions (NPI) or discontinuations; and the replenishment and redeployment
Tactical refinements of inventory optimization entail setting minimum and maximum inventory levels, which recognizing stochastic, changing demand and lead-time. The algorithms required to provide this support are significantly different from those found in conventional, new parts production SCM, and justify the use of focused, point solutions, including dynamic programming, simulation, mixed integer optimization, etc. In the case of inventory optimization, two parts may be present:
optimization determines optimal stocking levels of an item at a particular
location, based on the item's possible investment levels. In this case, an
echelon is the level of supply chain nodes, or disintermediation. For example,
a supply chain with two independent factory warehouses and nine wholesale
warehouses delivering product to 350 retail stores is a supply chain with
three echelons between the factory and the end customer. One echelon consists
of the two independent factory warehouses, the other echelon consists of the
nine wholesale warehouses, and the third echelon consists of the 350 retail
stores. Each echelon adds operating expenses, holds inventory, adds to the
cycle time, and expects to make a profit.
optimization determines the optimal allocation of inventory investment
across items in a product group.
fundamental concepts like customer service level are different in the service
and replacement parts milieu. Namely, in new parts production, the customer
service level (synonymous with customer service ratio, fill rate,
order-fill ratio, and percent of fill) is a measure of the
delivery performance of finished goods, usually expressed as a percentage. In
a make-to-stock (MTS) company, this percentage usually represents the
number of items or dollars (on one or more customer orders) that were shipped
on schedule for a specific time period, compared with the total that were supposed
to be shipped in that time period. Likewise, in a make-to-order (MTO)
company, the customer service level is usually a comparison between the number
of jobs or dollars shipped in a given time period and the number of jobs or
dollars that were supposed to be shipped in the same period. Yet, in the service
and replacement parts world, with a high level of unpredictability, how can
one forecast the dollar amount of service or repair parts that were supposed
to be shipped during a particular period?
given the random nature of service and breakdown events, it is clear that demand
uncertainty (which can be measured by the standard deviation, mean absolute
deviation [MAD], or variance of forecast errors) cannot be eliminated through
traditional forecasting methods. Hence, trade-offs must be evaluated on the
basis of captured future risk assessments; estimates of demand probability distribution,
relevant to specific customer products; and locations at future points in time.
The decisions made across the planning horizon thus constitutes an exercise
in risk management
is Part Two of a four-part note.
One discussed the business challenge.
Three will continue analyzing service parts planning.
Four will cover players and benefits and make user recommendations.
Comparing Traditional Planning to Risk Management
1 compares the traditional planning approach found in enterprise resource
planning (ERP), supply chain planning (SCP), and first generation
service supply chains to elements of advanced, contemporary risk management
planning approaches. It should clarify why traditional, new products SCM approaches
are not able to handle the demands of the service parts supply chain.
Creation of service offerings with limited understanding of cost and service
tradeoffs. Budgets are created through crude estimation, guesswork and historical
Intelligent design and modeling of service offerings include pricing of
offering, SLA and inventory tradeoffs, and network configuration scenarios to
optimize investment in assets to achieve maximum return.
Production-based forecasting from historical demand that does not recognize
probabilistic nature of demand.
A proprietary composite forecasting methodology that combines time series
demand history with causal factor projections to generate item-location
specific estimates of usage probability distributions.
Each part location and inventory echelon is planned in isolation or in planning
groups, without considering multi-echelon, multi-indenture, and system interactions.
Up to date multi-echelon optimization based on rapid solution algorithms
and strong model or system architectures that can be applied across a wide
range of industries and company contexts.
Deterministic distribution requirements planning (DRP) type logic
using deterministic forecasts not suited to intermittent demand environment.
Characterized by unplanned, reactive expediting.
Risk-based decision-making that incorporates the probability of stock-out
in all order generation and deployment activities, integrating strategic
and tactical planning.
Fulfillment to traditional fill rate metrics, whereby fulfillment strategy
is not tied to asset management strategy, and responses are reactive.
SLA commitments enabled by strategic positioning of inventory, including
availability-based planning, which maximizes product up-time for budget
constrained multi-echelon, multi-indenture, multi-period environments. Consequently,
responses are pro-active through asset re-deployment prior to service event
based on risk projections and optimized post-event fulfillment.
1: Traditional versus risk management approaches.
Source: MCA Solutions
functional category, service and replacement parts delivery management
solutions, are analogous to supply chain execution (SCE) components
in conventional supply chains. The execution side of inventory optimization
takes into consideration constraints on supply, transportation, and warehouse
resources, perform detailed tactical cost minimization (such as possible consolidation
opportunities, etc.), enable visibility into stock movements, leverage lateral
transfers, etc. For more information, see SCP
and SCE Need to Collaborate for Better Fulfillment.
with these, customer relationship management-like (CRM) solutions provide
a means to manage service requests considering contractual or SLA entitlements
(or restrictions) and resource availability. Additionally, relevant logistics
management solutions manage the rapid dispatch of parts to customers and the
return, repair, or discontinuation of broken or condemned parts. Service requests
can come from many places in addition to a problem report from a customer, and
these service requests must be routed to the right company representative and
then efficiently dispatched for field service.
In addition to reported problems, effective service management requires that service problems and preventative maintenance calls be proactively generated by these applications. As the service request is reviewed, company representatives must have the ability to review all past service requests, as well as all relevant contracts, SLAs, and warranties in order to determine customer entitlements and the best course of action. Near real-time tracking of service delivery and repair activities across depots and service centers are other crucial components of the execution side. In this regard, mobile, wireless technologies are playing an increasingly important role.
Service Life Cycle Management
brings us to service life cycle management (SLM), which is a holistic
business initiative focused on the after-sale service of products and clients.
Simply put, SLM focuses on making more money from the product after the initial
sale and is a way to become a strategic part of the customer's business after
the sale is completed. Another benefit of SLM is the automation and optimization
of the service processes in the field, since resource utilization and efficiency
can be increased through effective call scheduling, allowing more service to
be performed with fewer technicians. Companies see the value of completing service
calls on the first visit through deploying the right technician with the right
skills and service parts at the right time.
Perhaps most importantly, SLM can integrate service-oriented business processes that span from the time of the service request, to the satisfaction of need, to billing or warranty. SLM, like any other business initiative that involves new business processes is best implemented alongside other strong enterprise applications. Two primary capabilities that are required in this process are call center and field service applications. These two categories of software provide support for capturing or generating the initial service request and manage them through to completion all the way to the back-office. In order to manage the total life cycle of the service requirement in a continuous business process, integrated call center and field services capabilities are essential.
Call center applications must manage the demand for service through to completion, in order to satisfy the needs of the customer and the manufacturer or distributor. The initial service request may come from a number of different sources, all of which must be captured and processed through the call center. In addition to telephone, self-service, or e-mail requests, an increasing number of products are being embedded with self-monitoring capabilities that can evaluate the health of the product and self-report on service needs.
Once the service request has been reviewed and targeted for service, field service applications must then be able to ensure that optimal resources are deployed to provide the service. Once dispatched, technicians or service representatives should have ready access to information about the product they are servicing; the customer; and the product's maintenance history and configuration in order to complete the service on the first call. In addition to being knowledgeable, the technician should be armed with the appropriate parts and tools for the job—parts that may have been planned months in advance, when applicable (e.g., in case of periodic maintenance).
representatives should then be able to close the loop on the service call and
provide the home office with appropriate information on the time and materials
used to complete the call, which is then used to generate appropriate billing
and update warranties and SLAs. For more information, see Service
Lifecycle Management—Tapping into the Value of the Product Aftermarket.
given the existence of a number of various third party providers in the service
and replacement parts supply chains, there is a need for service and replacement
parts network management applications to coordinate all the parties involved
in supporting the needs of OEMs and asset owners. This requires a collaborative
infrastructure that integrates business processes and automates transactions
across SCM trading partners. The integration and role-based portal presentation
of network information, like product designs, service contracts, and asset and
service histories are another key responsibility of this functional suite of
but not least, enterprise asset management (EAM) or computerized
maintenance management systems (CMMS) solutions are also related, despite
their focus on asset owners instead of the service and replacement part providers
per se (for more information, see EAM
Versus CMMS: What's Right for Your Company?).
integrating information about assets (e.g., drawings, service history, etc.),
and asset owners and their activities into the service and replacement parts
supply chain is critical, as companies shift to newer outsourced EAM business
models. Proactive maintenance strategies, such as reliability driven maintenance
(RDM), enabled by external access to plant instrumentation monitoring and alerts
is a prime example of how tight integration between EAM and spare and replacement
parts SCM can facilitate better handling (for more information, see Reliability
Driven Maintenance—Closing the CMMS "Value Gap"?).
concludes Part Two of a four-part note.
Part One discussed the business challenge.
Three will continue analyzing service parts planning.
Four will cover players and benefits and make user recommendations.
Thompson is a principal of Process ERP Partners. He has over twenty-five
years experience as an executive in the software industry. Thompson has been
called "the Father of Process ERP." He is a frequent author and an award-winning
speaker on topics of gaining value from ERP, SCP, e-commerce and the impact
of technology on industry.
can be reached at Olin@ProcessERP.com
Jakovljevic is a principal analyst with TechnologyEvaluation.com (TEC),
with a focus on the enterprise applications market. He has nearly twenty years
of manufacturing industry experience, including several years as a power user
of IT/ERP, as well as being a consultant/implementer and market analyst. He
holds a bachelor's degree in mechanical engineering from the University of Belgrade,
from the former Yugoslavia, and he has also been certified in production and
inventory management (CPIM) and in integrated resources management (CIRM) by