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APICS- Spare Parts Strengthen the Whole

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APICS- Spare Parts Strengthen the Whole

  1. 1. EXCESS ADEQUATE ADEQUATE EXCESS 42 May/June 2015 Howtooptimize thisessentialinventory without hurting service levels BY JOZO ACKSTEINER AND SHAWN TAY The shorter the replacement time, the more stocking locations close to customers likely are going to have to be provided. Look at the spare parts network and transportation options. Professionals who manage spare parts often face extreme situations where, for example, 5 percent of parts represent 90 percent of the overall consumption. All spare parts are not the same; nor do they provide the same service to customers. Incorrect parts provisioning can lead to poor customer service. Spare Parts STRENGTHEN THE WHOLE
  2. 2. apics.org/magazine 43 I t’s crucial for spare parts supply chains to have the necessary inventory at the right time and right place to meet customer service performance expectations. Inventory reduction initiatives therefore typically are considered off-limits in the after-sale-support supply chain. However, the following strategies make it possible to identify opportunities for optimization, significantly reduce inventory, and maintain service levels. Spare parts services impose lofty requirements on supply chain professionals. The need for service typically arises when a customer is facing an emergency—often one in which a product does not work and there is an urgent need for replacement parts. Providing them quickly can be costly, particularly if there are hundreds or thousands of items with low turnover. Inventory is a deciding factor for both service quality and cost. Having stock in place guarantees that a needed part is available in a timely manner. But the cost of holding spare parts inventory can be huge—sometimes significantly higher than the original item value— and it may not generate any revenue for the business. The authors have analyzed numerous spare parts supply chains and discovered that inventory levels often are misallocated. Sometimes, there is insufficient or incorrectly positioned inventory for critical or high-demand parts, which causes customer dissatisfaction. Other times, fear of poor service levels results in bloated inventories. Meanwhile, inventory is seen as too revered to question. Some supply chain managers even claim that, despite company-wide inventory reduction targets, spare parts inventory should be increased. Such situations demand change and improvement. Analytics can help establish more logical inventory levels and ensure that spare parts supply chains are appropriately arranged. FOUR MYTHS There are four myths in spare parts supply chains that must be busted in order to apply proper analytics and reach inventory- improvement goals. Myth 1: All spare parts are equal. All spare parts are not the same; nor do they provide the same service to customers. This fallacy is a major driver of inefficient spare parts supply chains and misallocation of parts inventory. Furthermore, incorrect parts provisioning can lead to poor customer service. Different parts have different effects on overall service perfor- mance. There are three major factors that distinguish the importance of a spare part to the customer: criticality of the part, contractual obligation for providing the part, and demand for the part. Managers must take these factors into consideration as they plan for parts provisioning. First, criticality describes the importance of the part to keeping a product running. For example, an industrial printer can run with a dented panel, but not with a worn out drive motor com- ponent. Criticality influences the urgency of needing the part and, therefore, stocking quantity and proximity to the customer. Next, contractual obligation deals with the service commitment to the customer. The contract determines the service that is required for a product. The metrics that have the greatest impact on spare part stocking requirements are as follows: • Reaction and replacement time in which the organization com- mits to providing a part: The shorter the replacement time, the more stocking locations close to customers likely are going to have to be provided. • Committed service level: This often is measured through the percentage of parts that are delivered on time. The higher the committed service level, the more inventory needs to be provided to avoid stockouts. Lastly, demand for the number of parts consumed and the pattern of consumption must be well-thought-out. The impact of part demand on overall spare parts supply chain performance often is underesti- mated. The number of parts needed to service a product can easily go into the hundreds or thousands. However, part demand distribution might be uneven. Professionals who manage spare parts often face extreme situations where, for example, 5 percent of parts represent 90 percent of the over- all consumption. This means that a very tiny number of parts are driv- ing the bulk of service and supply chain performance. After all, if 5 percent of the parts contribute to 90 percent of supply chain functions, then a whopping 95 percent affect only 10 percent of performance. Myth 2: Inventory-related costs are unimportant. Frequently, inventory-related spare parts costs are unclear. This often results in these costs being underestimated. Over the potentially long holding time of a spare part, these expenses really add up. For instance, if inventory-related costs are 10 percent of the parts price each year, and the profit margin on service parts is 10 percent, then holding a compo- nent for one year will consume that part’s entire profit. For low-running parts, holding time can be several years before the item is actually used. But no matter how low the volume, there must be at least one unit available to ensure serviceability. Therefore, the days of inventory of such low-running parts, calculated by average stock divided by demand, are extremely high. The inventory-related costs skyrocket, easily exceeding the value of the part. Myth 3: Every product sale is a good sale. Another common issue is considering the selling of a product independently of the after-sales The cost of holding spare parts inventory can be huge—sometimes significantly higher than the original item value.
  3. 3. service commitment. This can result in a significant loss, particularly if the error is combined with the underestimation of inventory costs, as described in the previous section. Myth 4: Inventory reduction always results in poorer service levels. The last myth is the belief that reducing inventory will always result in higher stockouts and lower service levels. This concept proves to be true when taking into account only one individual part. However, on an aggregated level—when considering overall inventory and service level performance—there may be different results. Stock distribution can be so ineffective that reducing inventory improves service. Low-volume parts tend to be over-stocked, while high-volume parts have insufficient inventory. In such cases, inventory rebalancing achieved by eliminating low-volume parts and allocating more of the budget to high-volume parts is worthwhile. It is possible to significantly raise service levels on those high-volume parts and, thus, increase overall service while trading off a minimal impact on low-volume parts. SPARE PARTS INVENTORY CONTROL To address these challenges, it’s first necessary to acknowledge that a 100 percent customer service level is not achievable. As most businesses near 100 percent, the costs begin to rise exponentially as inventory levels climb. The right approach is to decide what service level is right for the company and how to achieve it most effectively. Use Pareto anal- ysis on parts demand to better understand the portfolio. (See Figure 1.) Which parts make up the bulk of the demand and hence have the highest impact on service? These items are the key to success. In addition, it’s important to know where the insignificance barrier lies. This is the point where demand of parts is so small that, for the considered timeframe, it’s impossible to predict if demand will be zero or just close to zero. Note that it is unfeasible to prioritize such parts based on their forecast volume. Parts with volume falling below this barrier should be deprioritized for inventory holding unless they are critical to the operations of a product or if there is a contractual obligation to provide the item. Next, identify the root causes behind service-level misses by con- ducting a thorough analysis of past failures. Were requests left unful- filled because the parts were unavailable? If so, this points to a flawed inventory policy. Or perhaps parts were available, but there were other issues, such as poor logistics network performance? Such a scenario reveals a supply chain obstacle beyond spare parts inventory. Figure 2 illustrates a company whose service-level misses mostly result from stockouts—largely high-demand parts. This would be an easy fix, as stocking more high runners does not require much inventory. If it is determined that service-level failures are being driven by insuf- ficient spare parts inventory, it’s time to improve inventory distribution. As mentioned previously, not all parts are equal. Thus, it is advisable to segment inventory into two dimensions: service commitment and volume. Focus attention on providing the appropriate inventory for the highest-volume parts and items requiring the greatest service commit- ment. Target inventory reduction efforts at the parts with low demand and low service commitment—or find stocking alternatives. However, parts segmentation alone cannot optimize inventory. While it is helpful to set a general stocking strategy, each part needs to be evaluated individually. Ask ques- tions such as if the part is important for a new product introduction or if there are contractual obligations to stock a specific part. Next, consider alternatives to stocking. One option is to use expedited shipments. Look at the spare parts network and trans- portation options. Would the cost of express shipment from cen- tral locations outweigh the cost of holding inventory? A second possibility for critical parts is to stock them on-site at the customer facility. Three-dimensional printing may be applicable, as well. Several industries are running pilots to test this alternative to parts stocking. Another option is to leverage low-running parts across several regions. If regional demand for the items is low, then cross-regional 44 May/June 2015 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% PERCENTOFCONSUMPTION  HIGH RUNNERS 2 PERCENT OF PARTS, 80 PERCENT OF VOLUME  MEDIUM RUNNERS 3 PERCENT OF PARTS, 10 PERCENT OF VOLUME  LOW RUNNERS 90 PERCENT OF PARTS, 10 PERCENT OF VOLUME 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% INSIGNIFICANCE BARRIER Figure 1: Pareto analysis of serviced parts SPARE PARTS STRENGTHEN THE WHOLE
  4. 4. apics.org/magazine 45 demand might be a good lever. Of course, such parts may require expedited shipments to meet service commitments. Finally, collaboration between sales and operations is crucial to ensuring effective inventory allocation. Total product profitability does not stop at revenue minus cost of goods; rather, the expenses associated with providing support throughout an item’s service life cycle must be considered when determining whether and how a product is brought to market. Jozo Acksteiner is a strategy and analytics manager for Hewlett-Packard’s Strategic Planning and Modeling group in Singapore. He also is an associate professor in the department of Industrial and Systems Engineering at the National University of Singapore and the founder of geolyx.com, a geographical analytics solutions provider. Acksteiner may be contacted at jozo.acksteiner@hp.com. Shawn Tay is a strategy and analytics manager for Hewlett-Packard’s Strategic Planning and Modeling group in Singapore. He has almost 20 years of industry experience, and previously worked for Deloitte Consulting’s supply chain practice, Wal-Mart, Safeway, and the Tibbett and Britten group (now a part of DHL-Exel). Tay may be contacted at shawn.tay@hp.com. To comment on this article, send a message to feedback@apics.org. Figure 2: Sample hit-or-miss analysis and detailed breakdown of stockouts HIT RATE POTENTIAL IF ALL STOCKOUTS ARE AVOIDED Miss Hit 100 Total Stockout Logistics Information Technology/Other 7 2 1 90 10 97  HIGH RUNNERS 76 PERCENT  MEDIUM RUNNERS 8 PERCENT  LOW RUNNERS 16 PERCENT Register at apics.org/extralive. APICS Extra Live: Optimize Spare Parts Inventory and Service Levels Attend this APICS Extra Live to gain deeper insight into the May/June article “Spare Parts Strengthen the Whole.” The authors will reveal how it is possible to significantly reduce inventory while preserving service-level expectations in spare parts supply chains. Participants will discover ̥ a proven strategy for analyzing and improving spare parts supply chains ̥ effective techniques for meeting customer requirements ̥ essential inventory lessons and concepts in after-sale support. Presented by: Jozo Acksteiner Strategy and Analytics Manager Hewlett-Packard Shawn Tay Strategy and Analytics Manager Hewlett-Packard Date: June 4, 2015 Time: 9:00 a.m. Central