Industry rises to aftermarket parts challenges: increasingly, businesses are turning to new technology tools and outsourcing to become more competitive

Frontline Solutions, July, 2004 by Brian Albright

Although spare parts planners haven't exactly resorted to casting runes or reading tea leaves to create their inventory forecasts, the tools available to them have often been insufficient to the task. Managing aftermarket parts inventories is notoriously difficult because of unpredictable equipment failures, reverse logistics issues, stocking of refurbished equipment, and widely dispersed inventory locations. Service-level agreements with customers are also more complex; they now include contracted response times ranging from two days to two hours.

More and more, companies are turning to a combination of logistics outsourcing and technology solutions. Service parts planners have a growing array of tools to choose from, on both the planning and execution fronts. And according to AMR Research, they spent $1.7 billion last year on parts management.

Traditional vendors such as Servigistics, Baxter Planning Systems, and MCA Solutions have continued to grow their products and their businesses, and Xelus, which had been losing ground to its competitors, has realigned its product suite and added features.

At Avaya Inc., a global provider of business communications and networking systems, parts planners had tried to manage 20 million unique part/location combinations by using spreadsheets, but the task became too difficult. Now that the planning function is centralized in a parts planning tool from Servigistics, Jeff Gardner, director of aftermarket operations, says the company has reduced parts expediting and inventory levels.

"We've got a consistent tool that captures all of our supply and demand," Gardner says. "We have strict service-level agreement requirements, and we needed both elements in one system to meet them."

No Longer an Afterthought

The aftermarket has only recently gone from being viewed as a cost center to a source of revenue, and many companies have a lot of catching up to do in terms of operational efficiencies. Forrester Research estimates that manufacturers' service supply networks are 10 years behind their product supply networks in terms of process sophistication and use of packaged applications, and that during the next five years these companies could spend up to $3.7 billion on improvements.

For instance, Ford Motor Co. has embarked on an enormous aftermarket restructuring that has so far involved building 11 new distribution centers and realigning its supply chain network so that parts are categorized by velocity and size. Ford has also contracted with Caterpillar Logistics Services Inc. and SAP to develop new software to manage its huge volume of service parts.

"The need for better service parts management is finally gaining top-level attention in many companies, such as Boeing, Cisco, Nissan, and Philips Medical," says Sid Snitkin, vice president at ARC Advisory Group. "Excessive carrying costs and obsolescence losses are being recognized as an untapped opportunity for savings. Corporate initiatives to expand service offerings are also requiring more efficiency throughout the service chain."

The cost of poor service parts management can be high, but it's often hidden in the high margins service offers. According to the Aberdeen Group, companies responding to a service delivery survey reported an on-time delivery performance of 89% and first-time fill rates of 82%, which means more than 1 in 10 service parts deliveries are late, and nearly 2 of 10 service orders are not fulfilled correctly the first time. Companies experience an average of 272 service parts stockouts per year.

The problems stem from lack of inventory visibility, disparate sources for service parts data, inconsistent parts-naming conventions among suppliers, disconnected planning and execution procedures, and fragmented use of automation.

Improving performance can have big benefits. Aftermarket parts and services have a profit margin as much as 10 times that of initial product sales and account for 20% to 30% of revenues and 40% of profits for most manufacturers. Also, good service breeds customer loyalty. Spare parts and services account for 8% of the U.S. annual gross domestic product. More than $700 billion is spent on spare parts and services, according to Aberdeen, and Meta Group puts the global figure at more than $1.5 trillion.

Software Products Improving

Aberdeen found that most service parts automation efforts are driven by enterprise resource planning software and basic spreadsheet applications. Software systems often ineffectively support planning and operations across a distributed network, particularly in low-volume environments. Spreadsheets provide only limited computational capabilities.

"Service parts don't fit into the typical supply chain model," says John Miller, vice president for business development at Choice Logistics Inc., which provides outsourced logistics services. "The impact is much greater if you're not at 99% delivery. It can cost you millions."

Unlike some enterprise software projects, service parts management software can provide a return in as little as three to six months, according to some estimates, mostly through reduction in inventory and cutting down on expensive parts expediting. According to Aberdeen, the software can reduce inventory by an average of 22%, improve inventory turns 42%, provide first-time fill rates of up to 92% (compared with 82% for nonusers), and reduce stockouts by 16%.