Growing pressure to improve customer responsiveness and profits has lately changed the traditional role of service management for spare and replacement parts. As competitive pressures push more products to a commodity-like business model, many manufacturing companies are increasingly relying on customer service to retain or establish a competitive advantage. Many manufacturers and distributors are also beginning to recognize that there are significant revenue stream and ways to increase customer satisfaction in the aftermarket once their product has been sold.
The aftermarket has traditionally been a lower priority, a sort of "necessary evil" for many, particularly manufacturers, who historically view themselves purely as product companies where their brand new or well established products are "cash cows" consistently generating revenue for the company. However, the singular focus of developing and selling products ignores the fact that maintenance costs can easily be several times greater than the purchasing cost of the product. As a result, this additional revenue has often been left to various third party companies, such as third party parts, service, and repair providers.
Lately, the aftermarket is becoming a major driving force for many original equipment manufacturers (OEM) as opportunities are created when original parts include additional and often heavy customizations designed to ameliorate the operation and care of products and services. The value of the aftermarket is highly dependent on the type of product and the industry. In industries that sell capital equipment such as medical devices, telecommunications, instrumentation, information technology (IT) hardware and other complex equipment, companies are starting to significantly increase their focus on services revenue. For some companies this is a strategic move to increase the top line, while others are looking to replace revenue from slower new product sales in the current economic conditions.
Immaculate service has also been directly correlated to improved customer satisfaction and loyalty. Many manufacturers are discovering that maintaining account control of their customers and differentiating themselves from intense, global competition, means offering enticing and creative service, maintenance, repair, and warranty programs. Managing spare parts is a critical part of accomplishing this. Some firms like third party service providers even offer to manage the spare parts inventories of their customers, often with a consignment payment or vendor managed inventory (VMI) arrangement. In such arrangements the customer does not own nor is invoiced for the part until it is used.
General Electric (GE) is an excellent example of a company that has focused on aftermarket opportunities, going so far as to call itself a "services" company as opposed to a "products" company. GE has proved the value of serving the product aftermarket. It has been widely reported that the company has significantly increased both its total revenue and profitability by focusing on service opportunities in addition to developing world-class products,
APICS Dictionary (the 11th Edition) defines service parts (synonymous with repair parts and spare parts) as those modules, components, and elements that are planned to be used, without modification, to replace an original part. They differ from replacement parts<, which are parts that can be used in place of original parts, after some physical modification (e.g., boring, cutting, grinding, or drilling). Likewise, replacement parts differ from interchangeable service parts. In any case, both service and replacement parts are delivered to end users by a diverse network of partners including OEMs, distributors, retailers, third party logistics providers (3PL), and other third party service providers. Also, for asset-intensive industries, asset owners might deliver these parts to various locations.
Associated with these are service parts demand, which is the need or requirement for a component to be sold by itself, as opposed to being used in production to make higher level products or finished goods. To that end, service part planning requires dealing with a sparse and certainly uneven, volatile demand. For example, two units per year, may be requested. It also requires dealing with supply chains that are much more complex than those in new product manufacturing, wholesale distribution, and retail, because knowing in advance when, where, or what kind of equipment breakdown (or any other reason for a service part requirement) will take place, is difficult for anyone (other than clairvoyant fortunetellers). Estimating typically low, yet highly stochastic demand; exploiting multinode opportunities to determine optimal safety stocks within the supply chain; incorporating parts substitution (e.g., interchangeable and rotable parts) and assembly options; and integrating repair streams with replenishment require quite different supply chain management (SCM) methods.
The challenge is having the right number of spare parts to meet demand. This is a precise process, because having too many parts will unnecessarily increase and tie-up investment, overhead, and other inventory carrying costs; however, having too few parts will impede swift replacement and contractual service level agreements (SLA). Inventory carrying cost (synonymous with holding cost) is the cost of holding inventory, usually defined as a percentage of the dollar value of inventory, per unit of time (generally one year). Currently, the technology component within parts, such as programmable logic memory chips, has increased and has changed the parts cost structure. Namely, stock items with embedded expensive technology can each cost a thousand dollars or more. Consequently, associated inventory carrying costs have increased to the point where intelligently planning parts inventory has become a financial necessity for many enterprises.
Carrying cost depends mainly on the cost of the capital invested and of maintaining inventory. These include taxes, insurance, obsolescence, spoilage, and space occupied, and cost between 10 percent to 35 percent annually, depending on type of industry. Carrying cost is ultimately a policy variable reflecting the opportunity cost of alternative uses for funds invested in inventory. Storage costs is a subset of inventory carrying costs, including the cost of warehouse utilities, material handling personnel, equipment maintenance, building maintenance, and security personnel.
Further, holistic service and replacement parts supply chains should provide support to end users of serviceable products via several channels, including
* call centers (with necessary information on hand and call-in assistance for self-service);
�
* available service and replacement parts, where and when required;
�
* field service or after-sale service (the functions of installing and maintaining a product for a customer after the sale or during the lease, which may also include training and implementation assistance); and
�
* provided carry-in service support (service centers/repair depots).
Therefore, service or spare parts have lately become both a blessing and a curse for many manufacturers of complex finished products. On one hand, contract manufacturing, maintenance repair and overhaul (MRO), depot repair activities, and aftermarket service parts and sales can generate additional revenue streams with higher margins (even at multiple levels of original product sales). They can also contribute significantly to corporate profits and thus offset typically lackluster growth in other mainstream operations. Yet, on the other hand, these companies must maintain large inventories of highly expensive, often slow-moving parts. At the same time, they are dangerously susceptible to obsolescence, as they satisfy customer demands for immediate delivery and action. Shrinking margins are placing greater pressure on all manufacturers to operate with leaner inventories (including spare parts) throughout their complex supply chain networks. At the same time, many enterprises are realizing that a good way to increase margins is to offer MRO services. In fact, a number of high tech and electronics companies make the most of their profits from repairs and upgrade kits. Industrial equipment manufacturers often earn more than half of their gross margins on complex spare parts, without incurring much sales costs (given that most equipment users are captive audiences for spare parts anyway).
Additionally, the need for better service parts management is finally gaining top-level management attention in many aerospace and defense (A&D) companies, and in similar complex manufacturing or asset intensive industries, including automotive, high tech/electronics, medical equipment, office equipment, specialty equipment, telecommunications, utilities, etc. The basis for this new found interest is that excessive inventory carrying costs and obsolescence losses are now being recognized as an unexploited opportunity for savings and a means to better bottom-line performance. Companies with extensive spare parts needs include manufacturers that service products (e.g., IBM, Philips Medical, Nortel Networks or Cisco Systems), provide parts for dealers or others to service products (e.g., Ford, Nissan, or Boeing), or oown a large number of assets which they maintain themselves (e.g., United Airlines, US Airways, DHL, Delta Air Lines, or FedEx).
The aftermarket has traditionally been a lower priority, a sort of "necessary evil" for many, particularly manufacturers, who historically view themselves purely as product companies where their brand new or well established products are "cash cows" consistently generating revenue for the company. However, the singular focus of developing and selling products ignores the fact that maintenance costs can easily be several times greater than the purchasing cost of the product. As a result, this additional revenue has often been left to various third party companies, such as third party parts, service, and repair providers.
Lately, the aftermarket is becoming a major driving force for many original equipment manufacturers (OEM) as opportunities are created when original parts include additional and often heavy customizations designed to ameliorate the operation and care of products and services. The value of the aftermarket is highly dependent on the type of product and the industry. In industries that sell capital equipment such as medical devices, telecommunications, instrumentation, information technology (IT) hardware and other complex equipment, companies are starting to significantly increase their focus on services revenue. For some companies this is a strategic move to increase the top line, while others are looking to replace revenue from slower new product sales in the current economic conditions.
Immaculate service has also been directly correlated to improved customer satisfaction and loyalty. Many manufacturers are discovering that maintaining account control of their customers and differentiating themselves from intense, global competition, means offering enticing and creative service, maintenance, repair, and warranty programs. Managing spare parts is a critical part of accomplishing this. Some firms like third party service providers even offer to manage the spare parts inventories of their customers, often with a consignment payment or vendor managed inventory (VMI) arrangement. In such arrangements the customer does not own nor is invoiced for the part until it is used.
General Electric (GE) is an excellent example of a company that has focused on aftermarket opportunities, going so far as to call itself a "services" company as opposed to a "products" company. GE has proved the value of serving the product aftermarket. It has been widely reported that the company has significantly increased both its total revenue and profitability by focusing on service opportunities in addition to developing world-class products,
APICS Dictionary (the 11th Edition) defines service parts (synonymous with repair parts and spare parts) as those modules, components, and elements that are planned to be used, without modification, to replace an original part. They differ from replacement parts<, which are parts that can be used in place of original parts, after some physical modification (e.g., boring, cutting, grinding, or drilling). Likewise, replacement parts differ from interchangeable service parts. In any case, both service and replacement parts are delivered to end users by a diverse network of partners including OEMs, distributors, retailers, third party logistics providers (3PL), and other third party service providers. Also, for asset-intensive industries, asset owners might deliver these parts to various locations.
Associated with these are service parts demand, which is the need or requirement for a component to be sold by itself, as opposed to being used in production to make higher level products or finished goods. To that end, service part planning requires dealing with a sparse and certainly uneven, volatile demand. For example, two units per year, may be requested. It also requires dealing with supply chains that are much more complex than those in new product manufacturing, wholesale distribution, and retail, because knowing in advance when, where, or what kind of equipment breakdown (or any other reason for a service part requirement) will take place, is difficult for anyone (other than clairvoyant fortunetellers). Estimating typically low, yet highly stochastic demand; exploiting multinode opportunities to determine optimal safety stocks within the supply chain; incorporating parts substitution (e.g., interchangeable and rotable parts) and assembly options; and integrating repair streams with replenishment require quite different supply chain management (SCM) methods.
The challenge is having the right number of spare parts to meet demand. This is a precise process, because having too many parts will unnecessarily increase and tie-up investment, overhead, and other inventory carrying costs; however, having too few parts will impede swift replacement and contractual service level agreements (SLA). Inventory carrying cost (synonymous with holding cost) is the cost of holding inventory, usually defined as a percentage of the dollar value of inventory, per unit of time (generally one year). Currently, the technology component within parts, such as programmable logic memory chips, has increased and has changed the parts cost structure. Namely, stock items with embedded expensive technology can each cost a thousand dollars or more. Consequently, associated inventory carrying costs have increased to the point where intelligently planning parts inventory has become a financial necessity for many enterprises.
Carrying cost depends mainly on the cost of the capital invested and of maintaining inventory. These include taxes, insurance, obsolescence, spoilage, and space occupied, and cost between 10 percent to 35 percent annually, depending on type of industry. Carrying cost is ultimately a policy variable reflecting the opportunity cost of alternative uses for funds invested in inventory. Storage costs is a subset of inventory carrying costs, including the cost of warehouse utilities, material handling personnel, equipment maintenance, building maintenance, and security personnel.
Further, holistic service and replacement parts supply chains should provide support to end users of serviceable products via several channels, including
* call centers (with necessary information on hand and call-in assistance for self-service);
�
* available service and replacement parts, where and when required;
�
* field service or after-sale service (the functions of installing and maintaining a product for a customer after the sale or during the lease, which may also include training and implementation assistance); and
�
* provided carry-in service support (service centers/repair depots).
Therefore, service or spare parts have lately become both a blessing and a curse for many manufacturers of complex finished products. On one hand, contract manufacturing, maintenance repair and overhaul (MRO), depot repair activities, and aftermarket service parts and sales can generate additional revenue streams with higher margins (even at multiple levels of original product sales). They can also contribute significantly to corporate profits and thus offset typically lackluster growth in other mainstream operations. Yet, on the other hand, these companies must maintain large inventories of highly expensive, often slow-moving parts. At the same time, they are dangerously susceptible to obsolescence, as they satisfy customer demands for immediate delivery and action. Shrinking margins are placing greater pressure on all manufacturers to operate with leaner inventories (including spare parts) throughout their complex supply chain networks. At the same time, many enterprises are realizing that a good way to increase margins is to offer MRO services. In fact, a number of high tech and electronics companies make the most of their profits from repairs and upgrade kits. Industrial equipment manufacturers often earn more than half of their gross margins on complex spare parts, without incurring much sales costs (given that most equipment users are captive audiences for spare parts anyway).
Additionally, the need for better service parts management is finally gaining top-level management attention in many aerospace and defense (A&D) companies, and in similar complex manufacturing or asset intensive industries, including automotive, high tech/electronics, medical equipment, office equipment, specialty equipment, telecommunications, utilities, etc. The basis for this new found interest is that excessive inventory carrying costs and obsolescence losses are now being recognized as an unexploited opportunity for savings and a means to better bottom-line performance. Companies with extensive spare parts needs include manufacturers that service products (e.g., IBM, Philips Medical, Nortel Networks or Cisco Systems), provide parts for dealers or others to service products (e.g., Ford, Nissan, or Boeing), or oown a large number of assets which they maintain themselves (e.g., United Airlines, US Airways, DHL, Delta Air Lines, or FedEx).
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