Supply Chain Management Systems for Service and Replacement Parts: Players, Benefits, and User Recommendations

Who Are The Players?

The differences between new parts production supply chain and service and replacement parts supply chain are significant. Companies using conventional supply chain management (SCM) methods to track their service and replacement parts supply are failing to grasp the special needs of the aftermarket. Further , one can even differentiate between the inventory optimization approaches of new production parts. Pure distribution parts include finished consumer goods (not including fashion/apparel items due to their seasonality idiosyncrasies, see Intentia: Stepping Out With Fashion and Style; Part One: Characteristics and Trends of the Fashion Industry), with a large number of items, large number of locations (whereby store levels can get out of hand), and with a desire for very high customer service levels (98 percent or more). The vendors that cater to these customers would be the likes of ToolsGroup. Mixed manufacturing and distribution for new parts require the exact positioning of parts. Exact positioning is highly important for manufacturing and configuring (postponement) purposes, because bill of materials (BOM) logic is heavily leveraged for inventory planning and optimization. Leading vendors in this market include Optiant, LogicTools, SmartOps, or i2 Technologies.

Part Four of the Lucrative but "Risky" Aftermarket Business—Service and Replacement Parts for SCM series.

These solutions typically leverage stochastic optimization using nonlinear modeling techniques to analyze input data for randomness. This knowledge is applied to determine an optimal inventory policy at a particular node in a multi-tier supply network. Namely, as supply chain variability has increased, the data has become more random. Consequently, user companies need to not only look at the nominal values per se, but also at the probability of the value. For example, they need to know what the probability is of the forecast value, the purchase/transportation lead time, the manufacturing run time, the supplier quality, etc.

Contrary to these new parts production segments, aftermarket service and replacement parts are typically "slow movers," but may be critical for the operation of expensive equipment, often containing associated service level agreement (SLA) penalties for inadequate service. Thus, for the reasons of repair and indenture level and SLA considerations, one has to optimize inventories for required service levels and end-equipment availability. Varied service and customer entitlements complicate things, since aftermarket service must support warranty commitments; contract extensions, which might include same-day or next-day service; and direct or through distributor part sales. These entitlements may have different service objectives, which may include fill rates, response times, or system uptime maintenance.

How is risk factored into decision-making for service parts? In this case, forecasting might use demand history, but perhaps more importantly, mean time between failure (MTBF) data and an analysis of causal factors can provide item- and location-specific estimates of usage. This data can also be used to calculate the probability of demand occurring during the planning period in question. For example, a forecast might state that there is a 12 percent chance that the user will need a specific part in the next thirty days at a specific location. However, this forecast is risk-based, rather than consumption-based, as it is in new parts production supply chain planning (SCP).

Moreover, the design of the distribution network including which parts and how many of each are positioned at which depot(s) is another risk based evaluation. Typically, this dictates a multi-tier or multi-echelon depot strategy, where tactical planning involves risk-based decision-making that considers the probability of demand and therefore, the probability of a stockout. To refresh our memory, stockout costs may include lost sales, backorder costs, expediting, and additional manufacturing and purchasing costs (not to mention lost face before the customer and hurting SLA penalties). Thus, the strategy include issues like, if we have a 20 percent chance of needing a single unit of a specific part in the next thirty days, what are the odds that we will need two? Moreover, given the part delivery lead time, what are the odds that the demand for two will create a stockout?

Given the random, sporadic nature of service events, forecasting approaches cannot eliminate the uncertainty of demand. Hence, inventory decisions must be evaluated on the basis of risk, whereby the considerations should include MTBF; the number of a particular asset type to be maintained; the product life cycle stage; the locations of assets and available spare parts; SLA commitments; the cost of downtime and of the service or replacement part, etc. To deal with these variables effectively companies must address the complexity and the need to manage risk directly. Some vendors, as will be described later, have developed approaches incorporating these factors into the proprietary models and algorithms.

Service and replacement parts inventory optimization is a big issue for a wide gamut of manufacturers. Aeronautical and defense (A&D) companies that design products for high reliability figure most prominently, but they still have to maintain stocks of complex and expensive spare and replacement parts, since the impact of any type of failure is large and requires the widespread and global stocks of parts for rapid replacement. The situation becomes even more complicated with rotable parts, such as the interchangeable elements of an aircraft that are removed, rebuilt, or reinstalled, which, almost as a rule, are always on a different aircraft. In an industry where every nut and bolt is important for safe operation, immense amounts of attention and effort are used to track interchangeable components and subassemblies for costing, replacement scheduling, and mean time-for-failure (MTFF) prediction.

A&D companies design low-volume, high-cost products for high reliability, but still maintain stocks of complex and expensive spares, since the impact of any failure in this industry, is large and requires adequate stocks of parts at several locations for rapid replacement in case of repair. On one hand, minimizing the number of new parts introduced into the market (and subsequently into inventory) should be a major aim, particularly because parts face obsolescence as new finished product are introduced. Yet, on the other hand, rotable parts and reusing ("harvesting") repaired components only adds to the complexity and likely impaired the efficiency of this process. Further, lot and serial tracking capabilities, the so-called tail effectivity, permits users to tie every part (within part lists and diagrams) on a plane back to that one entity. For more information, see MRO and Spare Parts Management Considerations.

Similar low-volume, high-cost, high-impact concerns are applicable to a range of other manufacturers, such as automotive and high-tech/electronics makers of complex medical equipment, large industrial systems, and mining equipment. All have immense, installed bases and complex, multi-echelon supply chains with high occurrences of slow-moving parts. Manufacturers of durable goods, like household appliances, have an additional issue with the need for highly mobile service van stocks. In addition to original equipment manufacturers (OEM), asset-intensive manufacturers, and service organizations, like refineries, chemical plants, primary metals producers, telecommunications, utilities, and municipalities, have to maintain large stores of spare parts to minimize the impact of failures on their revenue generating activities.

This is Part Four of a four-part note. Part One discussed the business challenge.

Part Two analyzed changes in the scope of service parts SCM.

Part Three continued the detailed service parts planning.

Major Specialist Vendors

Other than some small specialized spare parts inventory control systems that can be used in conjunction with planning systems for complete spare-parts inventory management like Foresight Software (a sister company of ProfitKey ERP), Innovative Computer Concepts, or Metrix, major specialist vendors offering solutions for spare and replacement parts planning and management include

Considering the complexity of spare parts considerations, these vendors initially focused on specific vertical markets. For instance, Manugistics and Xelus (now part of Click Commerce [NASDAQ: CKCM]) are regarded as the market leaders in inventory optimization solutions for the demanding needs of the A&D industry. Manugistics has a lengthy experience in the commercial airline sector where carriers like Delta and Continental Airlines have been using its revenue management and optimization applications. The vendor has further strengthened its focus with the acquisition of former Western Data Systems (WDS) in 2002, a depot repair ERP solution provider (see Manugistics Indulges in the Open M&A Season).

Still, both vendors have applied their solutions to other industries that have to deal with expensive, low-volume service parts requirements, like telecommunications, industrial equipment, and high-tech/commercial electronics. Although i2 has Southwest Airlines as its marquee A&D customer, i2 has focused more on industries with somewhat higher-volume and complex supply chains, such as segments of the telecommunications and commercial electronics industry, as well as automotive parts. This similarly holds for other traditional (new parts) SCP providers, which are also beginning to realized the service parts SCM opportunity. Among such companies are Infor Global Solutions (www.infor.com, via its recent acquisition of the demand planning vendor Mercia Software) and Logility (NASDAQ: LGTY), whose client roster includes Komatsu Europe International, a provider of construction and mining equipment, and Delco Remy International, a manufacturer and re-manufacturer of automotive electrical and drive-train/power-train products.

To that end, recent service parts enhancements to the Logility Voyager Solutions SCM suite include more robust forecasting techniques for normal, seasonal, short-life cycle, intermittent demand, end-of-life (EOL) purchases (all time buys), and reverse logistics planning. Streamlining the reverse logistics process is critical for companies that manage high value, service exchange units from return to refurbishment to re-sale. Logility also provides a method to forecast returns and conduct make/buy analysis, which helps companies synchronize their inventory investments with service-level goals, and accelerate the receipt of returned goods into inventory.

Pure-play providers beside Xelux, such as Servigistics, Baxter Planning, and MCA Solutions have focused exclusively on the requirements of service parts inventory management and optimization, and have gained recognition in some market segments for their deep spare parts management expertise and scalable technical solutions. Servigistics has carved niches in medical devices and commercial electronics and MCA in telecommunications and industrial equipment; while Baxter often competes with MCA in telecommunications, and with Servigistics in high-tech/electronics. The enterprise resource planning (ERP) (and possibly SCP too) leader SAP has long been dabbling with delivering a spare parts and MRO solutions, via a longstanding alliance with Caterpillar-Ford Motor, but a solid, commercially available solution is yet to come. International Business Systems (IBS) has capabilities in determining part criticality measures and optimum service levels, as a result of its acquisition of Stratman Software. Yet, today's ERP systems generally do not contain adequate, let alone advanced spare parts planning functionality.

The spare parts planning market thus seems a prosperous area, as seen by Click Commerce's interest through acquiring Xelus. Click Commerce started out as one of several up-and-coming SCM vendors focused on coordinating and optimizing supply chain processes across multiple channels of suppliers, customers, and partners. It features leading-edge technology that is based on open Internet standards and a component-based architecture. Also, over the past few years, the vendor has rapidly corralled its partner relationship management (PRM), and moved beyond product portfolio by acquiring several niche providers, such as

• ChannelWave, a former PRM peer's channel management and service automation software assets in 2005,
  
  
• Optum, a warehouse management vendor, in 2005, which had previously acquired V3 Systems and WorldChain, respective providers of software for supplier management and vendor managed inventory (VMI), in 2004,
  
  
• bTrade, a specialist in connectivity and Internet-based electronic data interchange (EDI) for trading partner management, in 2004,
  
  
• Webridge, a provider of secure extranet portal solutions, in 2004, and
  
  
• Allegis, a data center and hosting PRM provider, in 2003 (see Click Commerce Acquires Allegis).

In addition to Xelus' forays in leveraging radio frequency identification (RFID) in tracking and analyzing service parts, Click Commerce hopes to hereby broaden its footprint with the service parts planning and reverse logistics expertise of Xelus. Xelus should eventually manage the entire gamut of operations, from ordering, moving and fulfillment of parts, including raw materials, via subassemblies and finished goods to aftermarket, spare parts. But, the acquisition also points out that the spare parts market is also challenging one even for pioneers like Xelus or former Slimstock Systems (now offered by Railpart UK Ltd.). Namely, Xelus has been in business for over twenty-five years, and with solid functional products that are, unfortunately, based on older technology. Therefore, it has lately struggled to compete with the likes of MCA Solutions, which provides solutions for service parts management that may not necessarily have all the functional "bells and whistles" or the largest install base, but is based on modern Java 2 Enterprise Edition (J2EE) technology.

Although Click Commerce has good technology, an intriguing product roadmap, and an outstanding list of customers, such as Microsoft, Delphi, Honda, Citibank, FedEx, Carrier, Samsung, Hitachi, and Ryder, one should wait and see how the company, with no prior expertise in planning, will enhance the product. Also, the footprint has now become indisputably large and ambiguous, and one that will involve some notable integration work.

Potential Results and Benefits

Discussing the results of risk-based service part planning solutions deployments with multiple vendors shows a consensus. Those manufacturing enterprises that have not produced effective strategies for managing spare parts (including parts for field service and plant maintenance) will likely leave significant amounts of money on the table in terms of excess inventory carrying costs or missed potential sales opportunities. On average, spare parts planning systems lower inventory levels by up to 35 percent while simultaneously improving customer service levels, decreasing expediting costs and increasing field service technicians productivity, for example, increasing first-time fix rates. Some enterprises implementing these systems have reportedly seen payback times of six to nine months, while some have subsequently found out that as much as 40 percent of their parts inventory is obsolete.

According to Baxter, the result is the right product in the right place at the right time from the right source, while Xelus' inventory optimization customer, Delta Air Lines, reported an eleven percent maintenance cost reductions in 2002, which is a no small chunk of change for a financially embattled company.

MCA's management, related the success of Cisco, whose service business has over 100,000 supported service parts, over 700 stocking locations, and multiple classes of support contracts with 10 million assets to be maintained. Many of Cisco's larger customers have different service contracts for specific sets of products or locations, while other customers are not covered by any service contract, but still require service parts and support. Despite employing a variety of ERP, SCM, and CRM systems, Cisco found that none of the existing software met its requirements for service parts forecasting and inventory positioning. Thus, in 2001, Cisco implemented MCA's Service Planning and Optimization (SPO) software product, and within five months, Cisco had rolled out SPO worldwide, with over 1,000 users. The results included service level increases from 94 percent to 97 percent, while spare parts inventory was reduced by 21 percent.

Servigistics' customer Cray Computer objectives were reducing inventory without compromising parts availability, and Cray has 14,000 service parts and with sites in 30 countries. Cray reported a 27 percent inventory reduction without compromising service part availability or customer service. The like case study list could go on—while these vendors might have nascent install bases, some of them like MCA tout 100 percent customer success and availability for references.

Summary and User Recommendations

Why should prospective user companies care about spare and replacement parts SCM solutions? Well, they might have customer commitments to maintain, but the service parts and accompanying services revenue (tapping into the value of the aftermarket) is a key element of their financial success. According to Brian Albright of Frontline Solutions, "Aftermarket parts and services have a profit margin as much as 10 times that of initial product sales and account for 20 percent to 30 percent of revenues, and 40 percent of profits for most manufacturers".

Improved service management boosts revenue from both service offerings and new product sales, while improved customer service and enhanced offerings increase customer retention, and draw new service business, providing an additional, low risk and likely repeated revenue stream over a long period of ownership. Increased customer satisfaction rates, in turn, aid new product sales. Further, some advanced risk-based service planning offerings allow service organizations to move from a focus on simply selling parts, to comprehensive offerings tailored to the needs of individual customers, including premium and differentiated service offerings as well as multi-supplier support.

Asset intensive industries such as A&D, automotive, computer, data storage, medical equipment, semi-conductor, telecommunications, with large investments in spare and replacement parts inventories, high parts, field personnel availability, and SLA requirements, have limited options to lower inventory while increasing parts availability. Implementing well-suited service parts planning can cut inventory levels up to 50 percent, resulting in reduced inventory carrying costs, lower new purchase expenditures, and fewer parts becoming obsolete. Network rationalization, more effective planning, and less need for expedited shipping provides further savings.

Prospective users should evaluate the value of these solutions in their business in terms of increased service revenue, decreased cost, and increased customer satisfaction. They should define their overall SLM strategy to achieve a tangible return on investment (ROI) from the holistic initiative, while determining their service management requirements based on real business needs. They should look for integration of the SLM business processes from the viewpoint of their customers, as to integrate the service requests with the activity in the field.

Enterprises should look at vendors with deep products and experience in managing service operations in their industry, bearing in mind the suitability of a particular product for their real life problems, and with reasonably fast runtimes (i.e., quick "number crunching" capabilities for a vast number of service part numbers and supply chain echelons). They should also look for mobile and multi-platform solutions. Although these features may not be needed today, they will be requirement in the long term. Enterprises that offer MRO services or are looking to incorporate part criticality and failure rates into their replenishment strategies should consider offerings from the specialized spare-parts planning vendors described in this article, while other prospective users might want to consider offerings from general SCP/demand planning vendors.

Typical and necessary software components (and accompanying master data models) that are in place for these add-on solutions to work, include

• a sound supply chain model (from ERP, SCM, or legacy enterprise systems);
• a robust model of inventory impact on service;
• forecasted demand and lead time probability distributions; and
• optimized reorder points and order-up-to (minimum/maximum) levels for the items/item groups.

Nevertheless, one should try to avoid overlaps with existing enterprise applications, such as ERP and SCM systems, to reduce integration needs. These systems should be able to conduct inventory optimization across items, what-if scenario capabilities, and ideally a seamless handoff to execution systems. Prospective users should certainly consider a pilot implementation to prove the value proposition of the chosen solution.

In the long term, the aforementioned vendors should on their hand try to bring the cost of these tools down for the mid-market (given the current complexity and price attractiveness, mainly for the large corporations), provide simpler drilldowns and rationale explaining why the system made the choices it calculated, in order to bolster the user acceptance. Results are often counterintuitive and unexpected to "ordinary, non-academic mortals", despite being beneficial suggestions. On their hand, prospective users should at least be informed about optimization principles to be able to evaluate the fit of the optimization model used to solve the problem and produce the right data. They should also be knowledgeable enough to determine the fit of the tool to generate a logical answer to improve a decision. Rather than getting bogged down into vendors ramblings of their "perfect" algorithms, users should challenge contesting vendors to participate in proof-of-concept demos and pilot projects using users' data. Last but not least, the need for better ties with SCE systems go without saying.

About the Authors

Olin 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.

He can be reached at Olin@ProcessERP.com.

Predrag 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, in the former Yugoslavia, and he has also been certified in production and inventory management (CPIM) and in integrated resources management (CIRM) by APICS.