The Critical Nature of Logistics Systems in Parts Management

Dec. 1, 2008
Given the current economic situation, the pressure on firms to control cost has never been more intense. With the contraction of the credit market and

Given the current economic situation, the pressure on firms to control cost has never been more intense. With the contraction of the credit market and the loss of consumer spending, excessive inventories are a critical factor. If that was not enough to emphasize the depth of problem, the Council of Supply Chain Management Professionals’19th Annual State of Logistics Report stated that inventory carrying costs rose by 9 percent in 2007, outpacing increases in transportation. This cost of warehousing also increased by 9.9 percent.

The strategy in the past has been to remove excess inventory from the system, reducing inventories to bare minimum levels reflecting the entire just-in-time manufacturing mindset. Improved transportation made it possible for firms to reduce inventories as inventory-to-sales ratio dropped from 1.56 in January of 1992 to 1.28 by the end of 2006.

Those firms that manage their parts inventories will be well positioned to benefit when the economy improves as those who received spares on a timely basis are very likely to stay loyal to those suppliers. An even stronger reason is this income stream can be significant. A recent study by Deloitte Consulting showed that after sales service can provide from 19 percent to 47 percent of a firm’s income. Some manufacturers have found that revenue from the service side of the business can produce margins that are 30 percent to 200 percent greater than those for product sales

Business literature points to Strategic Service Management (SSM) as a sea change that represents a fundamental shift in how companies conduct business. SSM requires that the firm understand the dominance and significance that is associated with delivering on the service commitment to customers. SSM necessitates that practitioners completely overhaul how their possibly poorly performing service businesses supervise their commitments, resources, trading partners and pricing. At the same time, SSM is allowing organizations to investigate for creative ways to increase service related profitability while efficiently and effectively performing the tasks which support the service commitments they’ve made to their customers.

Service Parts Management supports planning, fulfillment and execution of service parts involving activities like demand forecasting, parts distribution, warehouse management and repair of parts. It furthermore includes collaboration processes with all the relevant business partners, e.g. customers, suppliers and service providers, as well as monitoring and analysis. The scenario supports the organization's customer service management activities to ensure an adequate supply of service parts.

Neither of these techniques will work without a robust suite of computer programs capable of dealing with the extremely complex factors discussed above. Parts and spares tracking is mission critical and impact any logistics techniques that may be deployed. Neither can function effectively without the other but it all starts with control and measurement, neither of which can happen without software support.

Firms who supply parts and spares for systems and equipment have found that without such support, they must contend with excessive inventories while still not having the right item at the right time in the right place. One company found that not only could they reduce inventory by over 10 percent, they were able to provide better service. This allowed them shift from “fire fighting” to strategic and tactical planning as the computer software increased the span of their control from vendor through to the end user.

Probably this is nowhere more crucial than in the automotive and transportation arena. With parts sourced from multiple global suppliers, supply chain visibility is a huge issue for anyone in this sector. Given the diversity of suppliers and transport methods, a software system that can track multiple channels and report exceptions for attention by management is tantamount to success.

One such firm found that they could take two weeks out of the cycle time as they have confidence in the computer software’s outputs and can plan accordingly. Their dealers could rely on consistent delivery time and extremely accurate parts fill rates. The dealers found that this built loyalty from their customers, which in turn benefits the parent firm.

The current economy is driving a “repair vs. replace” attitude for consumers and industrial customers alike, putting a critical emphasis on getting service parts management in order. Companies that can perform well on after-sales service will have a clear advantage in this market.