White Paper - Challenges in Service Parts Supply Chain

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Challenges in Service Parts Supply

Chain

14-JUNE-2013. VERSION 1.0. ANANTHA SHANKAR

Challenges in Service Parts Supply Chain

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Table of Contents Introduction to Service Parts Supply Chain .................................................................................................. 3

Major Challenges in Service Parts Supply Chain ........................................................................................... 3

The Inventory Problem ............................................................................................................................. 4

The Dilemma between High Customer Service Levels and Rising Stocking Costs .................................... 4

The Erratic Nature of Service Parts Demand ............................................................................................ 4

Complex Distribution Networks ................................................................................................................ 5

The Problem Arising From Multiple Suppliers .......................................................................................... 5

Lack of Inventory Visibility ........................................................................................................................ 6

End-to-End integration, Or the Lack of It .................................................................................................. 7

Conclusion ..................................................................................................................................................... 7


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Introduction to Service Parts Supply Chain An automobile company can build a good brand by making good automobiles, but if it wants to become

a truly great brand, the availability of after-sales service becomes the deal breaker. The service parts

supply chain caters to this after-sales service, providing replacement or alternate parts for damaged or

worn-out components. Service parts and components play a major role in many industries, especially in

Computers, Telecom, and Aerospace and Automobile industries. Though service parts supply chain have

lesser focus compared to production parts supply chain, their profit margins in service parts are typically

higher. While the cost of a smart-phone has considerably decreased, the costs of spare batteries,

chargers, and USB data cables have increased. A mature service parts supply chain will enable a business

to have higher revenues, lower costs incurred in servicing, and an increased level of customer

satisfaction. The service parts supply chain unlike the production parts supply chain, has various

characteristics of its own. A typical service parts supply chain is characterized by high number of Stock

Keeping Units (SKU), the vast majority of which have abnormal demand. There are many challenges

unique to the spare parts supply chain when compared to normal supply chain. Despite the inherent

complexity of the supply chain, many strategists are seeing the profitability of investing in improving

their spare parts supply chain. This whitepaper is written with a view to enable the top management to

appreciate the kind of problems faced by a typical spare parts supply chain.

Major Challenges in Service Parts Supply Chain The problems associated with service parts supply chain can loosely be traced to one major root cause –

the huge number of SKUs. A typical spare parts supply chain may have up to a hundred thousand SKUs.

The major decision that needs to be made is which parts to stock and which not to. This decision is

directly linked to customer service levels while the supply chain manager has to make a call between

rising stock holding costs and customer service demand levels. The other problem that arises is lack of

supplier integration. Many alternative products give rise to many different suppliers, so the cost of

supplier development simply does not justify the returns. Soon the visibility of inventory becomes a

major problem as tracking countless parts is a cumbersome task. There is no solution to this problem

from the demand side as the erratic nature of the demand makes it difficult to forecast for it. The

distribution network demands that the supply be as close to the demand as possible which leads to

complex sourcing patterns when lack of scale is an issue. If the IT infrastructure is primitive in nature, all

these problems will combine due to the lack of end-to-end integration of all parts of the supply chain.

Let us see each of these in detail.


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The Inventory Problem A normal car can have as many as 30,000 parts when counted down to the last screw. A windshield

wiper of car manufactured by Brand A, can be purchased from either the original manufacturer (Brand A

in this case) or from a local manufacturer. There are multiple manufacturers for the same component,

leaving the customer with many options to choose from. Meeting customer’s demands in such a

scenario becomes a chore as no two customers have the same requirement. The advantages of a service

business, in this case customization, become a disadvantage.

Service centers do not have enough space to stock all the products and their variants. To reduce

inventory and warehouse costs, not all products are kept at all locations. The decision whether to stock

a part at a particular location depends on the cost of the part and the demand for the part at that

location. If the part is cheap and the demand for the part is high, then it makes sense for the product to

be stocked. Many times, parts that are costly are not stocked as they can be procured if and when the

demand arises. These stocking decisions need to be taken at a local level, and thus differ depending on

the type of location. The main warehouse may have different rules for stocking compared to the

regional stocking centers as it has to stock more parts in larger quantities as compared to a service

location where there will be lesser number of parts in reduced quantities.

Another problem that arises due to this issue is that of inventory availability at different locations.

Often, inventory may be needed at one service center but the stock for that inventory is only available

at another service center. A decision must be taken whether to move the inventory or procure it locally.

This decision needs to be made by comparing the costs of moving the inventory through stock transfer

against the benefit from servicing the customer. Inventory balancing scenarios across locations often

arise in the case of automobile service parts supply chain.

The Dilemma between High Customer Service Levels and Rising Stocking Costs Customer service level is a key metric that determines the robustness of any service industry. For the

service parts industry, the customer service level can be loosely defined as the degree to which

customer orders can be executed in accordance with terms that are generally accepted in the market.

With higher customer service levels, the service center is supposed to provide parts that the customer

wants within a specified period of time. To obtain higher service levels, it makes sense to increase the

number and quantity of SKUs being stocked. At this juncture stock holding costs are high, and stocking

more than what is necessary will risk losing money on increased stock holding costs. This decision of

whether the company should stick to high service levels or save money by reducing the number and

quantity of items being stocked is a dilemma for the service center head. The current industry standard

is to analyze those parts for which there is considerable demand at a particular location and forecast for

that particular part and stock the required quantity. Sophisticated IT solutions are required to

implement this methodology for a large number of parts across various locations.

The Erratic Nature of Service Parts Demand Forecasting for all the products at all locations in the supply chain is a time consuming activity due to

sheer size of data that needs to be considered. Moreover the demand for parts is erratic in nature.


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Many times there is abnormal demand for parts. A particular part might have zero demand for a

considerable period of time and suddenly demand will spike up for these products. There are also some

parts that do not follow the usual rules for forecasting, for example, a part may need to be replaced

after the usage count has reached one thousand.

The demand for spare parts is usually very low. Unlike other supply chain where the norm is pallets in,

pallets out, in service parts supply chain, it is pallets in, pieces out. Standard forecasting models tend to

give unsatisfactory results. Companies categorize parts based on their demand and forecasting is

generally done for those parts with high demand. Certain software solutions also aggregate demand for

a particular product across a region and then apply forecasting techniques to this collective demand and

then divide them accordingly to the respective locations.

Complex Distribution Networks Distribution network complexity is one of the key issues that the top management has to grapple with.

The location of service centers need to be close to where the sales are high. This means that the after-

sales service can cater to a higher number of customers. But in spare parts, the original supplier will be

closer to the production plant than the service plant. Many times, companies go for a hub-and-spoke

model with a warehouse acting as a stockholding location and the service center acting simply as the

point of sale. Companies with less mature supply chains stock their parts at the service centers. The

distribution networks get more complex when certain locations are scrapped altogether or new

locations come up in the vicinity. Franchises make the network more complex by forcing standard

operating procedures, which will make inventory optimization a little tougher to implement.

When a distribution network is changed, or when a service center is taken out of the equation, it

changes the inventory stocking pattern. A hub may not have to store inventory of a particular product

whose demand existed at this location alone, anymore. Aggregation during forecasting will now have a

smaller quantity for that product at a region level.

The Problem Arising From Multiple Suppliers As discussed in the previous section, a disconnect exists between the location of service centers and the

location of suppliers. Consequently, service centers typically procure the stock at a higher price from a

local supplier. A service center usually purchases a particular part (or its alternative) from a list of local

suppliers, from the lowest bidder. In cases where there is centralized procurement, the service center

purchases from the local vendors only when there is an urgent necessity. Parts beyond a certain

quantity/price may need approval from the higher management before they are purchased from a local

vendor.


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In these scenarios, a variety of problems arise. First, there is no supplier integration. The supplier may

not have any information regarding the stock held at the service center for a particular part and thereby

are reduced to a mere seller of parts. Purchasing of parts through centralized procurement is affected as

the business is unable to reduce costs via bulk purchases. Unavailability of a particular part at the local

vendor may lead to the purchase of an alternate part that serves the same purpose, which hampers the

service level. There is no relationship development with the local supplier, and therefore no incentive

for the local supplier to provide parts at a lower price. Prices of parts keep changing and it is difficult to

keep these prices updated. Multiple calls need to be made to the list of suppliers to identify the

cheapest option for parts.

Lack of Inventory Visibility Lack of inventory visibility is a problem that will pervade across service parts of any industry. Despite the

arrival of bar coding techniques, there are just way too many SKUs to keep track of efficiently. Inventory

audits need to be done frequently to match the inventory records that are available physically and

online.

The major reason for this is usually human error. The service center personnel may not have recorded

the receipt of a certain group of parts into the system. In some cases, faulty numbers are entered and in

other cases, parts of the wrong SKU are recorded. Another reason is the huge number of SKUs. This

usually becomes a problem at the hub warehouse where a large number of parts of various quantities

need to be stored appropriately for easy retrieval.

The huge number of SKUs becomes a problem when inventory balancing needs to be carried out and

when the parts need to be transferred from the hub to the service center. Periodic Inventory audits are

the only solution to this issue.


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End-to-End integration, Or the Lack of It In the case of supply chains that do not have a proper planning tool for their service parts supply chain,

one glaring issue is the lack of end-to-end integration. Each node in the supply chain is in silos and has

little or no knowledge of the other node in the supply chain. The supplier has no knowledge of the

inventory situation at the hubs and service centers. The lack of integration in the supply chain leads to

problems in inventory balancing across the network. Primitive IT systems only cater to a specific part of

the supply chain. A well integrated planning and execution system would be necessary to provide real

time visibility of inventory across the supply chain network.

End-to-end integration provides control over inventory that was not available in primitive systems. Lack

of integration in a system leads to lack of quality data. Sales records need to be reformatted so as to

provide input for forecasting systems. This can lead to manual interference in data and the possibility of

human errors increases. As the supply chain matures, investments in IT solutions need to happen in

tandem. This will enable the scalability of the service business model of the company to replicate local

successes across newer locations too. These investments would not only increase the efficiency of the

business but also enable in cutting costs.

Conclusion Thus we saw a brief of each of the supply chain challenges that are characteristic to most of the service

parts supply chains. Established players in the various industries have resorted to technology to help

tackle these problems and a lot of solutions are available at both the planning side and the execution

side of the supply chain. The design of networks plays an important role and expansion plans in this

business need to be vetted as early as possible to reduce costs due to poor network design. Inventory

classification techniques for different categories would enable the business to manage inventory better.

Centralized sourcing coupled with a hub-and-spoke distribution model would help in further lowering

costs and reducing dependency on multiple suppliers.

Demand Driven S&OP – Maximizing Output to Match Demand Variations

Partner with Bristlecone to optimize your supply chain investment and implement quick time-to-value solutions. To set up a discussion with our team, please send your inquiry to [email protected]

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White Paper - Challenges in Service Parts Supply Chain