Logistics Systems Play Critical Role in Parts Management

The pressure on merchants 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.

The Council of Supply Chain Management Professionals’19th Annual State of Logistics Report states that inventory carrying costs rose 9% in 2007, outpacing increases in transportation. This cost of warehousing also increased by 9.9%.

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

Firms that do a good job of managing spare parts inventories will be well positioned to benefit when the economy improves. That’s because customers who receive parts on a timely basis are more likely to stay loyal.

What’s more, this income stream can be significant: A recent study by Deloitte Consulting showed that after-sales service could provide 19% to 47% of a firm’s income. Some manufacturers have found that revenue from the service side of the business can produce margins that are 30% to 200% 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 importance of delivering on service commitments. Very often it necessitates that practitioners completely overhaul their service businesses.

At the same time, SSM is allowing organizations to investigate creative ways to increase service related profitability, while efficiently and effectively performing the tasks that 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 also 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.

Businesses that 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 it reduce inventory by more than 10%, it was able to provide better service. This allowed it shift from “fire fighting” to strategic and tactical planning, as the computer software increased the span of its control from vendor through to the end user.

This is perhaps 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 it could take two weeks out of the cycle time, as it has confidence in the computer software’s outputs and can plan accordingly. The company’s dealers could rely on consistent delivery time and extremely accurate parts fill rates. The dealers found that this increased customer loyalty, which in turn benefitted 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.

Walter Weart is a freelance writer with more than 40 years experience in logistics and transportation.

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