1. The current issue and full text archive of this journal is available at
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BIJ
18,6 Spare parts logistics for the
Chinese market
Heiko Gebauer
748 Innovation Research in Utility Sectors,
Eawag: Swiss Federal Institute of Aquatic Science and Technology,
¨
Dubendorf, Switzerland
Gunther Kucza
School of Management and Law, Winterthur, Switzerland, and
Chunzhi Wang
College of Economics and Management, Dalian Nationalities University,
Dalian City, China
Abstract
Purpose – This paper aims to offer recommendations to increase spare parts logistics performance.
Recommendations have been rare despite the proven benefits of high-performing spare parts logistics.
The spare part business is the profit pool of the capital goods industry: creating about 17 percent of the
industry’s total revenue. The margins involved in spare parts revenue are, on average, 25 percent
compared to 2-3 percent of the capital goods.
Design/methodology/approach – The authors conducted an extensive benchmarking project with
a variety of firms (focus group and single case study) to gain a better understanding of spare parts
logistics in China. By reviewing the first benchmarking findings with a single company that struggled
to achieve sufficient spare parts logistics performance, additional insight was gained.
Findings – The paper attempts to provide a better understanding of the necessary changes for
improving logistics performance in the Chinese market. It analyzes the necessary changes to achieve a
cutting-edge logistics solution, and shows how companies can implement the solution.
Research limitations/implications – The qualitative nature of the research.
Practical implications – Managers can develop a procedure to initiate logistics projects that lead to
cutting-edge logistics performance.
Originality/value – The paper develops a cutting-edge logistics solution for China and Asia based
on two main pillars: companies should try to develop logistics solutions for Asia that consider existing
Asian and Chinese constraints rather than adapting the logistics practices used in mature markets and
the development of the logistics solution should be in intensive collaboration with the logistics
providers.
Keywords Services in manufacturing companies, Spare parts logistic, China, Logistics solution,
After-sales services, Spare parts, Distribution management
Paper type Research paper
The authors would like to thank the Swiss National Science Foundation (SNF) for supporting
Heiko Gebauer’s research. They would like to express their deep gratitude to Maureen Sondell
Benchmarking: An International for her language editing services.
Journal
Vol. 18 No. 6, 2011 This article is part of the special issue: “Supply chain networks in emerging markets” guest
pp. 748-768 edited by Harri Lorentz, Yongjiang Shi, Olli-Pekka Hilmola and Jagjit Singh Srai. Due to an
q Emerald Group Publishing Limited
1463-5771
administrative error at Emerald, the Editorial to accompany this special issue is published
DOI 10.1108/14635771111180680 separately in BIJ Volume 19, Issue 1, 2012.

2. Introduction Spare parts
The recent strong growth of the Chinese manufacturing industry has increased the logistics
demand for capital goods (e.g. manufacturing machines and equipment). China’s
manufacturing industry continues moreover to mature. This, in turn, places more
complex requirements on the spare parts supply chain for capital goods, including the
availability of spare parts in general and of spare parts for older installations (Zhu et al.,
2007). The capital goods industry must modify not only manufacturing and supply 749
chain strategy but also the logistics of procuring specific spare parts. Manufacturing
and supply chain strategy has previously been discussed in the literature (Pyke et al.,
2000) whereas spare parts logistics for the emerging Chinese market has been largely
neglected. Spare parts issues are either related to supply chain literature or are
considered as being part of the service offered by manufacturers of capital goods. Supply
chain literature related to spare parts discusses maintenance and reliability, production
and inventory control along with some strategic aspects such as warehouse locations
and service levels (Huiskonen, 2001). Literature on the service offered by manufacturers
of capital goods assumes that spare parts are incorporated into repair or maintenance
services (Gebauer et al., 2005; Oliva and Kallenberg, 2003). Neither of these research
fields provides any detailed concept of the design of spare parts logistics in China,
offering instead some general recommendations. The literature thus rather neglects the
area of spare parts logistics pertaining to the emerging Chinese market. A cross-cultural
comparison between Western countries and China is, therefore, rather limited.
The absence of spare part logistic concepts for China is nonetheless surprising,
since the spare part business is the profit pool of the capital goods industry: spare parts
create about 17 percent of the industry’s total revenue. The margins involved in this
spare parts revenue are, on average, 25 percent compared to 2-3 percent of the capital
goods. In addition, local manufacturers are increasingly copying spare parts and legal
actions to prevent them doing so seem to be limited. More attractive response and
delivery times, along with reasonable prices, seem to be the only way to compete
successfully with local part manufacturers. Despite the high margins of the spare parts
business and their strong contribution to the overall financial success of manufacturers
of capital goods, it remains unclear how companies should approach the logistics of
spare parts in China or, in a broader context, Asia (VDMA, 2008).
In collaboration with a European manufacturer of capital goods, a three-year effort
to redesign the spare parts logistics of a European capital goods company was studied.
It was difficult to frame the evidence found with existing theories in both service
business development and supply chain management. The findings indicated various
bottlenecks, constraints and adjustments in supply chain networks that arise
specifically in China and, in a broader context, in Asia that differ in essence from
logistic practices in mature markets.
This paper is organized as follows: first, the literature regarding the factors
determining the logistics of spare parts is examined from a supply chain perspective,
along with a description of how existing recommendations of service business
development influence the concept of spare part logistics. The research setting of the
study is then analyzed and the results obtained are presented. This is followed by a
discussion on the way in which the findings complement existing theory and, finally,
avenues of future research are identified.

3. BIJ Theoretical background
18,6 Spare parts logistics
The logistics of spare parts constitutes a minor research field of its own in the area of
supply chains and includes topics such as maintenance, reliability, supply chain
management, production and inventory control along with some aspects of strategic
management, such as warehouse location and service levels (Huiskonen, 2001). With
750 the exception of a few management publications (Lawrenson, 1986; Patton and
Feldmann, 1997) research into spare parts has focused mostly on inventory modelling
(Silver et al., 1998; Cohen et al., 1997). It is, however, beyond the scope of this paper to
review all of these areas. The literature review concentrates on strategic choices
pertaining to the logistics of spare parts relevant to their use in Asian markets.
Huiskonen (2001) categorizes control situations and describes respective strategies
and policies. The control situations can be described according to the criticality and
specificity of parts, e.g. in the case of standard and high-value parts of high criticality,
suppliers are required to either optimize the safety stock of the customer and define
time-guaranteed supplies from established service company or else coordinate several
customers to set up co-operative stock pools.
Cohen et al. (1997) provide an overview of current industrial practice as well as
emerging trends in the logistics of handling spare parts. Inventory investments and
turnover have emerged as being critical internal metrics, the computation of which
should consider the value of the parts and the speed at which they move through the
logistics system. The classification analysis of the spare parts should therefore reach
beyond traditional ABC methods. Industrial practices also reveal that companies often
face a set of distribution network structures that have simply evolved over a period of
time. Making the distribution system leaner and more efficient should not, however,
only include the reduction of fixed costs for facilities that are eliminated but also the
risk of pooling in multiple locations.
Another research topic that is emerging in the field of spare parts logistics is the
analysis of repairable items (Cohen et al., 1997). Since items can be returned from repair,
the spare parts operation contains two independent processes: one with repairable and
one with non-repairable items. The two processes differ in the consequences for both the
replenishment process and the management of inventories (Kennedy et al., 2002).
By benchmarking current practices in spare parts logistics, Pfohl and Ester (1999)
argue that key performance metrics within the planning and controlling logistics
processes of spare parts are not wide spread. Very few companies use metrics
regularly. Even if companies use key performance metrics, companies rarely
benchmark the obtained key performance indicators with other companies (Pfohl and
Ester, 1999; Sueur Le and Dale, 1997).
Spare parts as an integral part of developing the service business
The literature relating to development of the service business has focused on service
strategies (Mathieu, 2001; Gebauer, 2008), the organizational structure of the service
business (Oliva and Kallenberg, 2003) and the service orientation in corporate culture
and human resource management (Homburg et al., 2003), as well as measurement and
reward systems (Matthyssens and Vandenbempt, 1998) and decision-making processes
(Neu and Brown, 2005). These areas are all intricately linked to the logistics of handling
spare parts.

4. The different requirements of the service strategies described as “after-sales service Spare parts
providers” and “customer support service providers” influence the logistics of spare logistics
parts (Gebauer, 2008). In the event of breakdown or failure, for example, after-sales
service providers react as quickly as possible to solve the problem. Customer support
service providers, in contrast, do not react immediately to failures: they concentrate on
preventing breakdowns from occurring in the first place. From the perspective of spare
parts logistics, after-sales service providers are confronted with unpredictability and 751
high customer expectations regarding delivery times. Thus, spare parts logistics tend to
focus on shortening delivery times and having relatively high stock values in order to
meet availability requirements. Preventive maintenance contracts, on the other hand,
include pre-defined exchange parts, leading to a relatively predictable demand.
The spare part concept is thus centralized, with a relatively smaller stock value.
Performance measurements also link the cost-effective spare parts logistics with the
improvements made in the after-sales service function. After-sales service providers
react as quickly as possible to machine failure, concentrating on minimizing the time
span from when the customer calls until the repair is complete and the machine is in
operation again. It is within this time span that after-sales service providers measure the
percentage of remote diagnoses and on-site diagnoses, i.e. “service response time”
(Cohen et al., 1997). Customer support service providers emphasize instead the
prevention of machine breakdown, focusing on monitoring the ratio between scheduled
and unscheduled service activities. Scheduled service activities are measured by the
number of on-site visits and remote diagnoses necessary to avoid machine failure,
whereas unscheduled services involve performance measurements similar to those used
by after-sales service providers.
Another factor pertaining to the logistics of spare parts and determinants in the
development of services is the discussion regarding the separation or integration of
products and services (Gebauer et al., 2005; Oliva and Kallenberg, 2003; Neu and Brown,
2005). Should companies separate services from products, then the service business
will form a distinct strategic business unit with its own financial responsibility
(Auguste et al., 2006). The service business is responsible, as a strategic business unit,
for spare parts and is forced to maximize its profit contributions. This, in turn, places
pressure on stock values for spare parts to improve working capital costs. Smaller stock
values would decrease the availability of spare parts and, most likely, increase delivery
times. The service organizations would face increasing pressure to improve
their financial performance, since they are evaluated as independent profit centres;
their returns on assets and inventory turnover levels are hence compared with the
corresponding values for the manufacture and distribution of the finished products
within the company (Cohen et al., 1997).
Issues pertaining to spare parts in the Chinese market
The logistics of spare parts and the development of services in China are far from simple
issues (Gebauer, 2007). Despite observed improvements in highway, rail, water, and civil
air transport, as well as warehousing and communication infrastructure, there remain
general logistic challenges (Goh and Ling, 2003). Although spare parts logistics face
many challenges (Pyke et al., 2000) there are two supply chain worlds in China: one
focuses on exports and the other on the domestic market. Export-focused supply
chains currently enjoy a reasonable logistics infrastructure, low-cost production

5. BIJ and streamlined logistic networks. Supported by world-class companies such as UPS,
18,6 FedEx and DHL the coastal free-trade zones have efficient and simple supply chains,
enjoy high-quality logistic services and have strong logistic skills.
Domestically focused spare parts logistics, on the other hand, is confronted with the
difficulties of reaching the Chinese end-customers, which include underdeveloped
transportation infrastructures, the insufficient skills of logistics providers,
752 underdeveloped IT-interfaces and protectionist customs regulations. According to
the latter, companies face difficulties in clearing customs and are confronted with a
labyrinth of rules and regulations. Even through the lasted efforts to enforce
standardization of customs regulations, various regions continue to make arbitrary
decisions on goods categories and customs clearance procedures. Customs clearance
times are reported to range between two days and two months. Such erratic customs
clearance times make it extremely difficult to provide satisfactory spare parts delivery
performances (Goh and Ling, 2003). The domestic supply chain comprises domestic
players supplying small to midsize companies and is rather fragmented. This has led
to complaints of high inventory costs and long delivery times for spare parts, and is
aggravated by the bureaucratic restrictions surrounding the legal importation, selling
and servicing of spare parts ( Jiang, 2002; Hong et al., 2006).
Costs for domestic logistics are still on a low to moderate level, but companies face
difficulties in identifying the components of logistics cost (transportation, warehousing
costs and so on). Furthermore, research reports a lack of qualified logistics personnel,
even in logistics service providers. Therefore, employee training and education is an
imperative for the effective implementation of best-practice logistic solutions (Song and
Wang, 2009). In order to respond to these challenges, companies cultivate relationships
with appropriate parties (customs or logistics providers), hire logistics provider to
monitor the movement of spare parts, establish firm’s own transportation and logistics
infrastructure, share transportation network with other firms, provide training in
transportation management skills, or build multiple warehouses (Ta et al., 2000).
The challenge of today could nevertheless well be the business opportunity of
tomorrow for manufacturers of capital goods. Constraints can become opportunities:
innovative solutions for spare parts logistics can be created specifically for the Chinese
market. The combination of a relatively immature market with the shortening of
delivery and response times, along with reductions in inventory and warehousing costs,
should allow sustainable competitive advantages to be gained. Using China as a logistic
hub for solving challenges in spare parts logistics should also benefit the Asian market
in general.
The research process
Assessment of the quality of the research
The objective of this study was to explore the design of spare parts logistics concepts
for the emerging Asian and Chinese markets, and involved action research. The action
research, which was organized into a focus group and a single case study, followed the
principles of the iterative grounded theory (Orton, 1997). Iterative grounded theory
suggests that the researcher examines the literature relevant to spare parts logistics
and employs the empirical data to fill in the gaps. Through this procedure, researchers
reveal flaws in the empirical data and literature, elaborate their meaning and extending

6. their coverage. This eventually helps to create internal and external reference points Spare parts
for the emergent explanatory logic in the research process. logistics
The action research was guided by Lincoln and Guba’s (1986) criteria for achieving
trustworthiness: credibility, dependability and transferability. Credibility in the extent
to which the findings correspond with reality was ensured through the following
activities: triangulation of different types of data (focus groups, participation in
workshops, interviews, reports, etc.) and being in situ (i.e. in the company) over a period 753
of time. Dependability ensures the consistency of the findings. It was addressed by
accounting in detail for the choices made in the action research. Transferability
corresponds to the conventional terms of “internal validity”, “reliability” and “external
validity”. It reflects the extent to which the findings can be “transferred” to other
situations. Similar attributes (e.g. size of the company, experience in the Chinese market
and type of products) enhance the transferability in terms of external validity. In order to
reduce the likelihood of false interpretations being made, as well as to obtain internal
validity, a distinctive feature of the research is the above-mentioned triangulation of
sources of evidence (Yin, 1994). Moreover, participants reviewed all preliminary
research reports to enhance validity and reliability further. The reviews often led
participants to provide more detailed information. Finally, to assure reliability and
validity of the data analysis, manual and computer-aided content analyses based on the
NVivo 7.0q procedure were used for data analysis. NVivo was used when we worked
with various unstructured information obtained in the research process.
NVivo allows us to codify, organize and classify data according to dependent,
independent and context variables. Logistics performance measurements, such as
delivery time, costs, inventory and working capital costs, are the dependent variables.
Independent variables include logistical design elements such as logistic processes,
warehouse locations, warehousing structure (local, regional, global, decentralized or
centralized), customs arrangements (bonded and non-bonded) and inventory planning
processes. Logistics processes can be grouped into inbound, outbound and return
processes. Local warehouses (distribution centres of spare parts) implicate a rather
decentralized structure and may well be replenished through regional and global
warehouses. The existence of global warehouses that do not have local distribution
centres for spare parts suggests a rather centralized warehouse structure. Context
variables include the size of the company, type of service strategy and the number of
installed bases.
Research study of the focus group
The action research started with an exploratory focus group (Morgan, 1988). This
focus group met for about six hours and began with a discussion of the challenges of
delivering spare parts from Europe to Asia as well as within each Asian country and,
more specifically, within China. The participants outlined their challenges and
described the way in which they approached spare parts logistics. The moderator used
a flip chart to summarize and highlight discussion points and assist participants in
describing potential logistics concepts. The findings were used to substantiate the
theoretical insights gained from the literature review and preliminary understanding
of the research topic (Miles and Huberman, 1994). The results of this focus group
provided guidance for the single case study.

7. BIJ Single case study of Machine Incorporation
18,6 The single case study was chosen on conceptual grounds rather than for it being
representative (Miles and Huberman, 1994). The aim was to provide fertile ground for
understanding the design of Asian spare parts logistics: a company that has actively
redesigned its logistics activities was therefore chosen.
The single case study was conducted in a major European capital goods
754 manufacturer that designs and manufactures machines and automation equipment for
the tool and die-casting industry. The company is also actively developing a
service business, which created about 27 percent of the total revenue in 2006-2008.
The service revenue involves labor services (repair and maintenance) as well as parts.
The spare parts business creates about 75 percent of the service business. Its margins
leverage with the product business is about ten. The company, which is here known by
the pseudonym Machine Inc., generated approximately e650 million in revenue and
employed almost 3,300 people worldwide in 2008. Europe and North America were the
main markets during that time, but the Asian market provides a very attractive potential
for future growth. The revenues created in Asia accounted for about 30 percent of the
total revenue.
The key facts with respect to the spare parts business can be summarized as
follows:
.
approx. 10,000 machines installed in Asia in mid-2007 with China representing
around 50 percent of the installed base;
.
local warehouses in seven different location (Beijing, Shanghai, Shenzhen/Hong
Kong, South Korea, Japan, Singapore, and Taiwan);
.
total gross book value of e6 million;
.
availability of spare parts in local warehouses ranged from 15 to 80 percent; and
.
average delivery time of 64 hours.
These are shown in more detail in Table I, which also illustrates the initial logistic
situation.
The single case study involved inquiries over a period of 24 months (Eisenhardt,
1989). This allowed direct observation of the key parts of the corporation’s main
redesign process of the Asian spare parts logistics concept. The redesign process was
an integral part of the global parts distribution concept. It was one of the main pillars
of the customer services concept aiming at improving customer satisfaction and the
profitability of spare parts.
The single case is compiled through multiple sources of evidence, including company
documentation and, most importantly, participation in internal workshops and
interviews with employees, ranging from logistics and service employees to the sales
manager for Asia and the head of the spare parts and service business areas. The author
participated in a total of 31 workshops and interviewed more than 17 employees. The
involvement of the author started in October 2007 when the company recognized that its
performance in the logistics of spare parts did not reach customer expectations and that
its logistic structure was problematic. The company contacted the author and requested
academic input in the analysis and resolution of its design problems, from an operational
as opposed to a strategic or organizational angle. The study proceeded in five phases
from October 2007 to January 2009; the content and sources of evidence are illustrated

8. Spare parts
(2) Provision of spare parts from local
(1) Direct export of spare parts from warehouses and warehouses replenished logistics
Europe to customers in China (Asia) from Europe to customers in China (Asia)
Description Companies run a central warehouse Beside a central warehouse, companies
carrying spare parts in Europe and have run decentralized (local) warehouses in
no local warehouses in China and other different regions of China and in various 755
Asian markets Asian markets
Inventory planning and control are Local warehouses are responsible for
conducted at the central warehouse basedinventory planning and control based on
on state-of-the-art methods relatively unsophisticated inventory
methods
Parts are exported and delivered from the Parts are delivered from the local
central European warehouse directly to warehouse to the customer if they are
the Chinese customers available locally
Parts are exported from the central
warehouse if they are not available
locally
Advantages Low inventory and working capital costs Short delivery times for parts available
locally
Low operating costs for the central High customer satisfaction due to short
warehouse in Europe delivery times
High availability of spare parts at the Low logistics costs due to replenishment
central warehouse shipments from Europe to Asia rather
than single express deliveries
Disadvantages High logistics costs due to express High inventory and working capital costs
transport mode
Long delivery times caused by customs High costs for operating and maintaining Table I.
clearance delays a network of local warehouses Results of the exploratory
Low customer satisfaction due to long Limited availability of spare parts at the research activities (focus
delivery times local warehouses group)
in Table II. The activities also involved logistics providers such as DHL, Sinotrans,
TNT, FedEx and Schenker. The author maintained frequent contact with Machine Inc.
throughout the duration of the study.
Results
The exploratory study (focus group)
The exploratory study reveals two basic approaches to the logistics of providing spare
parts to the Chinese and, in a broader sense, the Asian markets. They are the direct
export of spare parts from Europe to Asia and using local warehouses in Asian
subsidiaries.
Direct export of spare parts from Europe to Asia. The first logistics approach
involves the direct export of spare parts from Europe to the Asian subsidiaries whenever
the customer orders a spare part. The spare part is delivered directly from the subsidiary
to the customer. The local storage of spare parts, with inventory planning and control, is
unnecessary.
The main advantage associated with this approach is the relatively low capital cost
due to the significant consolidation effect in the central European warehouse. Resources
regarding inventory planning and control are also centralized, avoiding coordination

9. BIJ
Phase 1:
18,6 analysis of the Phase 2: Phase 3: detailed
logistics preliminary logistics Phase 4: planning Phase 5:
performance logistics concept concepts implementation implementation
Primary Workshops on Carrier tenders Site visits toSite visits to Stock
756 and preparing a obtained re: various logistics
various Asian movement
secondary template for potential providers in sales companies to from Europe to
sources of measuring logistics and China (UPS, design the Shanghai
data and logistics to service levels in DHL, Schenker interfaces of the
related discover the Asia and Sinotrans)logistics hub
activities actual logistics (e.g. financial,
performance document and
process flows)
Survey carried Analysis of the Discussion of the Workshops with Migration of
out of all the carrier tenders logistics solution local parts, local inventory
Asian and proposed logistics and
Chinese sales service managers
companies on the migration
involved of local
inventories to the
new warehouse
Descriptive Description of Further Specification Workshops
analysis of the various logistics development of sheets for all with logistic
survey scenarios for one logistics inbound, managers on
regional solution via outbound and process
warehouses interactive return processes, improvements
(e.g. Shanghai, workshops with especially post-
Hong Kong and that logistics customs clearance
Singapore) provider and temporary
borrowing
Site visits to Selection of Workshop with Contract on Workshop with
verify the most attractive all managing performance managing
logistics logistic directors from criteria for the directors to
performance at providers Asia to review logistics provider review the
Beijing, according to the the logistic logistics
Shanghai, carrier tenders solutions performance
Hong Kong and and logistics proposed
Singapore scenarios
Telephone Workshop with Workshop with Workshops with
interviews with all managing the European the IOR/EOR to
sales directors from organization to confirm
companies in Asia to review incorporate the post-customs
Taiwan, Japan the logistics logistics solution procedures and
and scenarios proposed into export conditions
South Korea existing for repairable
processes parts returned to
Europe
Workshop with
all managing
directors from
Table II. Asia on the
Details on the single logistics
case study performance

10. costs for different local inventory storages as well as enterprise resource planning (ERP) Spare parts
systems. Availability in the central warehouse is very high, often exceeding 95 percent. logistics
The approaches used by the central warehouses include ABC analysis and strategies
using value, frequency and criticality of parts.
Whilst direct export is very suitable in mature Asian markets such as South Korea,
Japan, Taiwan, Hong Kong and Singapore, various disadvantages arise in the Chinese
market. Chinese customer satisfaction regarding the direct export approach is relatively 757
low despite high availability. Customers complain specifically about the long delivery
times involved: the delivery time is still about ten days even when orders are placed
directly with Europe and express transport is used. For spare parts, this is rather
unacceptable. The delays are mainly caused by the time required for customs clearance
in China, a procedure that places an essential constraint on the overall delivery time.
It normally takes one day to process the order, another two days to ship the spare part
from Europe to China, at least five days for customs clearance and, finally, two days for
domestic delivery from the subsidiary to the customer. The international and domestic
transport modes are express deliveries, resulting in logistics costs being very high.
Another obstacle was revealed in the case of domestic deliveries: until 2007, no
international logistics provider was allowed to operate in the Chinese market. Instead of
employing door-to-door shipment, as in mature markets, companies had to set up
interfaces between international and national logistics providers. International logistics
provider delivered to the airport and, after successful customs clearance, a domestic
service provider delivered from the airport to the customer. This interface entailed
significant gaps in communication, such as the translation of delivery notes from
English to Chinese. Naturally, these gaps created problems and delayed the process.
The participants also argued that the domestic logistics providers available do not fully
cover the whole Chinese market. It was often necessary to collaborate with different
logistics providers for each region (e.g. Bohai Rim Region, Pearl River Delta and
Yangtze River Delta), thereby multiplying coordination and integration efforts.
Furthermore, the domestic providers lacked in additional services normally attributed to
standard deliveries. It was not possible to outsource services such as invoicing,
providing proof-of-delivery and tracking data.
Another disadvantage of this approach emerges around the repair process for spare
parts. Chinese regulations forbid the re-exportation of spare parts from China to other
countries. Once a new spare part has been installed, regardless of whether or not the
replaced part is repairable, it cannot be exported to Europe. This restriction limits the
costs of spare parts. In mature markets, the pricing of spare parts takes the possibility
of repairing them several times during their lifetime into consideration. Price sensitive
customers have the opportunity of buying repaired parts. Without the option of
repairing parts, companies have to either increase their prices or make less profit.
Local warehouses in Asian subsidiaries. The second approach involves setting up
local warehouses in Asian subsidiaries. A local warehouse, which is replenished from
the central warehouse, delivers spare parts directly to the customer. This logistic
approach is complemented by the direct export of spare parts if the part is not available
locally. A local warehouse is responsible for inventory planning and control. This
approach is relatively easy to apply in Asian markets such as such as South Korea,
Japan, Taiwan, Hong Kong and Singapore, as with the first concept, but various
bottlenecks and constraints arise in China.

11. BIJ The main advantage associated with this approach is a relatively short delivery time
18,6 since delays caused by customs clearance procedures are avoided. In order to achieve
these benefits, however, companies have to take operating costs for local warehouses
and working capital costs into consideration. The resources necessary for inventory
planning and control create higher operating costs: inventory planning and control
require an ERP system and each local warehouse has its own overheads. The
758 participants argued that the underlying skills are still insufficiently developed in Asia,
and specifically so in China. The lack of skills leads to less sophisticated approaches to
inventory planning and control. Local management tends therefore to make mistakes in
forecasting the requirement of spare parts, leading to relatively high depreciation costs.
In addition to this, Asian subsidiaries are difficult to integrate into European ERP
systems. International licenses are very expensive and subsidiaries either do not have
the skill to operate ERP system or they consider ERP operators to be too expensive: they
are difficult to find and already command a salary similar to that paid in Europe.
The participants also mentioned that only a few ERP systems include Asian
characters. Whilst this option is both expensive and requires Asian language skills
being available in Europe, providers of logistics service or local subsidiaries will
always have to duplicate the information if they are unable to create delivery
information in the local Asian language. There is, once again, the potential that failures
and inconsistencies may arise.
The necessity of storing the same parts in different local warehouses also causes
higher working capital costs. Since the local warehouses have already completed
customs clearance, the inventory belongs to the local subsidiaries and not the European
organization; the inventory value of the spare parts is therefore based on sales prices and
not manufacturing costs. The sale price includes value-added tax (VAT), duty and
surcharge levied on the manufacturing costs. Sales prices and the multiplication of
storage locations increase the working capital costs by 500-600 percent. In order to avoid
a cost explosion, it is natural that availability in local storage facilities is lower than in
the first approach: availability levels are typically around 60 percent.
Reduced logistic costs are another advantage of this approach: the majority of the
deliveries made from Europe to Asia are made by consolidated replenishments and not
express transport. The local delivery costs are rather similar to the first approach.
Table III summarizes both approaches, highlights their advantages and disadvantages
and illustrates the logistics activities.
Single case study
Despite the advantages of both logistics concepts, Machine Inc. did not regard either of
them as being an adequate way of fulfilling their logistics challenges, internal
requirements or customer expectations. The concepts were instead seen as a starting
point. It was assumed that an intensive elaboration of alternative solutions in close
collaboration with logistics providers, along with academic input, could lead to a better
solution (Tian et al., 2008). The logistics solution implemented embraced the following
five interrelated key issues arising directly from the idiosyncrasies of the Chinese
market:
(1) setting up one regional warehouse for Asia, including China;
(2) combining bonded and non-bonded warehouse options;

12. Subsidiary A B C D E F G Total
Estimated sales of parts (KEUR) 1,200 920 2,100 420 1,200 750 1,870 8,460
Number of shipments 3,790 1,080 2,500 970 1,940 3,900 6,370 2,0550
Gross inventory value (KEUR) 870 490 950 250 1,470 730 1,700 6,460
Rate of depreciation (%) 46 37 21 59 53 49 24 37.5
Availability of parts (%) 65 30 50 20 64 15 80 54
Estimated costs of warehouses (KEUR) 60 12 90 30 50 35 120 397
Delivery costs from local warehouse to customer 28 KEUR 43 KEUR 171 KEUR 2 KEUR 58 KCHF 24 KEUR 152 KEUR 478 KEUR
Delivery time (hours) 72 108 100 84 48 96 16 64
Delivery costs (Europe to local warehouses) (KEUR) 205 38 142 30 157 108 159 839
Note: Confidentiality reasons permit to use the names of the subsidiaries; thus, it is only referred to A, B, C, D, E, F and G, instead of Beijing, Shanghai,
Shenzhen/Hong Kong, Taiwan, Japan, Singapore and South Korea
logistics
logistics performance
measurements
The initial situation
Spare parts
as described by the
Table III.
759

13. BIJ (3) organizing post customs clearance for outbound processes;
18,6 (4) incorporating temporary borrowing into the outbound and return process of the
spare parts; and
(5) defining the roles and activities in the logistics concept.
Each of these key issues is described below.
760 According to the regional warehouse, Machine Inc. did not consider a simple
centralization or decentralization of direct export or local warehouses for any part of its
spare parts logistics chain: various options of configuring the logistics network were
considered instead. These options included using Beijing, Shanghai, Hong Kong or
Singapore as regional hubs that, in turn, provide spare parts to various countries.
Compared with the existing decentralized warehouse infrastructure, with its low degree
of availability and high depreciation costs due to the lack of planning skills, setting up
regional warehouses was expected to reduce fixed costs and offer the opportunity of
achieving an availability of spare parts of up to 90 percent. This involves 90 percent of all
spare parts being delivered from the regional warehouse direct to the customer, with
only 10 percent of the parts being delivered from the global European warehouse
directly to the final customer. The delivery time would then, of course, be higher than for
deliveries from local warehouses in each country. The total delivery time could
nevertheless be lower than in the initial situation, bearing in mind the relatively low level
of availability in local warehouses of between 30 and 60 percent. An initial estimation in
the setting up of regional warehouses in Shanghai, Beijing, Hong Kong and Singapore
gives an expected delivery time of 24-48 hours.
The estimated delivery times reveal that the most time-consuming element is the
customs clearance procedures necessary to import parts. This fact is of the utmost
importance: although China is the major market with the highest growth expectations,
the Chinese customers were regarded as being the most demanding in terms of service
levels and delivery times. Machine Inc. decided to set up a combined non-bonded/bonded
warehouse to overcome this disadvantage. The non-bonded warehouse would serve the
Chinese market without any time delays caused by customs clearance processes since all
of the parts in stock would already be declared: the additional bonded warehouse facility
would deliver parts to the other Asian market. Using a combined non-bonded/bonded
warehouse infrastructure, however, requires that the necessary logistics planning and
coordination actually function. The non-bonded warehouse would mean, in addition,
that the parts in stock are already declared, and that import duty and VAT have been
integrated into the parts value. The capital cost would thus be 27 percent higher.
Discussions with logistics providers have led to the alternative option of setting up a
combined non-bonded/bonded warehouse employing the post-customs clearance option
in Shanghai. This option offers clear additional advantages, the first of which lies in the
fact that all of the spare parts can be stored in the bonded warehouse. This bonded
warehouse is able to serve all of the other Asian markets in less than two days, and most
Chinese provinces within two days as well. Parts delivered to China would not have to be
declared before being delivered to the domestic Chinese customer. The post-customs
clearance option means that the part is delivered first and declared afterwards. In the
current project, this option was restricted to only five third-party logistics providers and
the bonded area in Shanghai, Shenzhen and Beijing. Consolidating the spare parts into
one single-bonded stock would lead to significant reductions in working capital costs

14. compared to having a bonded and a non-bonded warehouse. It would also avoid Spare parts
duplication in logistics planning and purchasing processes: one logistics competence logistics
centre, attached to the bonded regional warehouse, would suffice.
The bonded stock remains the responsibility of the European service organization
since it has not been declared. The stock value is calculated based on the cost of the
parts manufactured and not on the transfer price. As spare parts generate the most
profit for Machine Inc., the differences in the manufacturing costs of the spare parts 761
and the transfer price were, on average, 50 percent. This stock value could be reduced
significantly, leading to lower working capital costs.
Furthermore, the bonded warehouse offers the opportunity of operating the logistics
operation using the ERP system used in Western Europe and not that used by the Asian
subsidiaries. This enabled Machine Inc. to restrict the IT infrastructure necessary to a
simple ERP terminal in the bonded warehouse, thereby avoiding investments for
integrating the Western European and Asian ERP systems. Using SAP in the bonded
warehouse has the advantage that the stock can be managed from Europe, thus
minimizing investments in recruiting, training and retaining logistics skills. The
European headquarter, nevertheless, remains responsible for planning and purchasing
processes. The logistics provider operates the combined bonded regional warehouse and
takes over responsibility for quality inspection, warehousing and inbound and
outbound logistics. It charges Machine Inc. a fee for warehousing and the effective
logistics costs for inbound and outbound processes.
Elaboration of the outbound processes revealed an additional outbound process option
called “temporary borrowing”, a specific outbound process that is linked to the post
customer clearance procedure. Temporary borrowing offers the opportunity of supplying
more than one spare part to the customer if it is not possible to specify the part that needs
replacing: service technicians can, for example, order five spare parts to diagnose and
repair a machine. The variety of parts means that the service technicians have a better
chance of repairing the failure without any delays. The parts that are used for the
diagnosis and repair but are not installed in the machine may, however, be returned to the
bonded warehouse. Customs clearance will not be necessary, since the parts were only
borrowed temporarily from the bonded stock. Only if the parts are not returned within two
weeks will customs clearance be required. Temporary borrowing also enables the
company to send the used parts from a bonded warehouse to Europe for quality inspection
(e.g. a package was opened and the parts used for diagnosis and testing). The only type of
parts that may not be returned through the temporary borrowing system to the bonded
stock is the item that is the cause of the machine failure. Should these items be considered
as being repairable, they are stored in a small non-bonded stock attached to the
bonded warehouse. On reaching a minimum value, the repairable parts can be declared
and re-exported to Europe. No export duty or taxes have to be paid if each specific
repairable part is returned to China through the repair and return system.
Finally, Machine Inc. defined the roles of the logistics concept. The global spare parts
centre in Europe remains responsible for the definition of strategic guidelines for the
parts business in Asia. It plans inventory levels and monitors key performance
indicators for the spare parts business (e.g. availability, inventory levels and volume).
The regional warehouse is responsible for the implementation of the strategic guidelines
and shares logistic know-how with the Asian sales companies. It also monitors customer
satisfaction in terms of delivery times and service levels. Responsibilities also include

15. BIJ the selection of logistics partners for running the warehouses and local deliveries as well
18,6 as the management of the return process of repairable parts. Local sales companies
remain responsible for diagnosing machine breakdowns and ordering spare parts from
the regional warehouse.
The logistics concept can be summarized as identifying the most suitable location for
a regional warehouse; setting up a bonded warehouse in co-operation with a logistics
762 provider that is able to perform post-custom clearance procedures and can offer the
temporary borrowing option. Bonded regional warehouses thereby deliver parts
door-to-door to all Asian customers. Spare parts for the domestic Chinese market in
particular require the use of post-customs clearance procedures, before being delivered
door-to-door from the bonded warehouse to the final customer. The temporary
borrowing option enables Machine Inc. to deliver parts for diagnosis and testing to the
customer and to return them to the bonded warehouse without any customs clearance.
More specific details and performance indicators are illustrated in Table IV.
Discussion
The study goes beyond the existing literature (Patton and Feldmann, 1997; Pfohl and
Ester, 1999) on the management of spare parts. Conditions pertaining to spare parts
logistics specific to the Chinese market, which would allow a cross-cultural logistics
comparison, were explored (Luo et al., 2001). Rather than concentrating on performance
benchmarks of the supply chain of spare parts or specific aspects of spare parts
management, this article develops the setting up of a cutting-edge logistic solution for
China and Asia. The cutting-edge solution is based on two main pillars:
(1) Companies should try to develop logistics solutions for Asia that consider
existing Asian and Chinese constraints instead of taking the logistics practices
used in mature markets and trying to adapt them to the Chinese market.
(2) The development of the logistic solution should be in intensive collaboration
with the logistic providers.
Both pillars are discussed in more detail in the following paragraphs.
Interestingly, enough, both the exploratory focus group and the single case study
revealed an absence of a strict application of performance benchmarks. Literature often
suggests that logistics solutions could be evaluated based on performance benchmarks
during the design phase (Pfohl and Ester, 1999). The lack of internal data, however,
is often restrictive, forcing companies to rely on subjective estimation instead of
simulations and calculations of logistic performance. Furthermore, the Chinese market
seems to be rather complex with regard to measuring the performance of logistics.
Companies complain that they are only able to receive rough estimates for logistics costs
and delivery times from the logistic providers whereas, in most Western countries, it is
possible to receive guaranteed delivery times and costs for various post codes. Delivery
costs in China, for example, were often given in the form of average calculations for
whole provinces.
Another interesting observation emerged from the joint venture between the logistics
service provider and Machine Inc. Literature often reports intensive cooperation during
the operation of a logistics network, but tends to neglect the collaboration necessary for
designing the logistics program (Tian et al., 2008). Logistics partners are not involved in
designing the program: they are simply expected to respond to the specification sheet

16. Spare parts
After implementation of the logistics
Initial situation solution logistics
Description Local (non-bonded) warehouses attached One regional warehouse serves all Asian
to the seven Asian sales subsidiaries customers
(Beijing, Shanghai, Hong Kong, Japan, A regional warehouse is a bonded
Singapore, South Korea and Taiwan) warehouse with a minor non-bonded 763
Local sales subsidiaries are responsible for warehouse for repairable parts
planning inventory, diagnosing machine
failures and processing orders
Local warehouses operate using different
logistics providers
Global warehouse in Europe are used to Shipment of spare parts to the customer is
replenish local warehouses and send directmade either from the regional warehouse
shipments to customers (90 percent) or global warehouse
(10 percent)
Shipment of spare parts to customers Parts are shipped directly to the customer
either from local warehouses (60 percent) and declared afterwards (post-customs
or the global warehouse (40 percent) clearance option)
Parts are imported into China Parts are shipped under temporary
borrowing conditions. Parts that are not
installed are return to the regional
warehouse without customs declaration
being necessary
Repairable spare parts are not officially Repairable parts are returned directly to
allowed to be returned the customer from either the bonded or
non-bonded warehouse
Each local warehouse is responsible for One dedicated logistics provider is used for
inventory planning and purchasing regional warehousing, as well as for
shipments in Asia and China
The global spare parts centre defines
strategic guidelines, plans the inventory
and monitors key performance indicators
(e.g. availability, inventory levels and
volume)
The regional warehouse implements the
guidelines and monitors customer
satisfaction
Local sales companies diagnose machine
failures and order spare parts
Logistics Gross inventory value: 8,460 KEUR Gross inventory value: 2,200 KEUR
performance Working capital costs: 508 KEUR Working capital costs: 136 KEUR
Availability of parts: 54 percent Availability of parts: 90 percent
Warehousing and delivery costs (regional Warehousing and delivery costs (regional
warehouse to customer): 593 KEUR warehouse to customer): 593 KEUR Table IV.
Delivery costs (Europe to local warehouse): Delivery costs (Europe to regional The situation before and
839 KEUR warehouse): 273 KEUR after implementation of
Average delivery time: 64 hours Average delivery time: 24 hours the logistics solution
for logistics services and provide attractive prices. Collaboration in this single case
study proved to be very beneficial.
It was discovered that the development of a learning relationship between the logistics
provider and Machine Inc. was an important success factor. It resulted in the personnel

17. BIJ of the logistics service provider becoming more skilled and working actively towards
18,6 meeting the logistics needs of Machine Inc. The personnel of a logistics provider learn
about the complex logistics system and gain an intimate understanding of their logistics
requirements. Machine Inc. also learned about the capabilities of the logistics provider
and that the logistics provider can, in fact, be trusted to solve current and future logistics
challenges. The role of Machine Inc. in leading this joint support venture is also a success
764 factor. Although there was a lot of interaction between the logistics provider and Machine
Inc., the complexity of the logistics systems means that they are forced to team up if they
are to resolve challenges. The specific interrelationships between a bonded warehouse,
post-customs clearance and temporary borrowing would not be a part of the logistics
concept without such intimate collaboration (Tian et al., 2008).
The positive association between collaboration and logistics performance suggests
the existence of different types of inter-company collaboration. Logistics services in
mature logistics markets such as Western Europe or Northern America are highly
standardized; ongoing collaboration between logistics providers and capital goods
manufacturers is characterized by strong “transaction orientation”. This means that
the logistics fees and prices are a markup for warehousing and transportation costs
every time a logistics service is provided. This form of collaboration implies that
warehousing and transportation services are based on periodical tenders, and that
capital goods manufacturers choose the logistics partner with the most reasonable
prices for the delivery in question. The choice of logistics partner in China should,
on the contrary, consider the opportunities presented by such collaboration and not
concentrate solely on the price.
Inter-company collaboration should link the logistics people of the capital goods
manufacturers with a diverse collection of individuals from the logistics partner. In
China, such collaboration also requires the involvement of import of record (IOR) and
export of record (EOR) firms, which aids the development of a shared understanding of
both the logistics conditions and the complex requirements of spare parts logistics.
Close collaboration with logistics partners helps clarify the degree to which newly
formulated modifications in the logistics procedures fulfill the underlying logistics
needs and desires. It is therefore suggested that collaboration be centred on developing
a learning relationship. This, in turn, requires different roles and competences being
available at the logistics provider and the capital goods manufacturers. Logistics
providers have to be perceived as being trusted advisers; as such, they collaborate
with, and provide unbiased recommendations to, capital goods manufacturers as to
how they can achieve the improvements desired in the complex Chinese and Asian
logistics systems. They should participate in both the formulation and implementation
of logistics problems and not just in the implementation of a manufacturer’s solution.
Such a learning relationship is educational for logistics partners, as they gain
experience in problems surrounding the complexities of spare parts logistics.
Manufacturers gain an intimate understanding of Chinese as well as Asian logistics
systems. Succeeding in such a learning relationship requires behavioural and focused
attitudes from both partners. The learning processes are rather complex and should,
therefore, be firmly established with the leaders and managers, who can encourage and
monitor learning and collaboration performances. Bearing this in mind, establishing
leading-edge logistics solutions in China and Asia transcends traditional topics of logistics,

18. adressing instead the way in which logistics partners and capital goods manufacturers Spare parts
should work together. logistics
Furthermore, context factors do not determine the logistics concept. The companies
are first and foremost after-sales service providers in China; their logistics requirements
centre on delivering parts as quickly as possible to the customer in the event of a
breakdown. This argument agrees with the dominant customer expectations of Chinese
manufacturing companies. The major segments are highly sensitive either to price or the 765
logistics performance of their basic service requirements. Focus on basic service needs
corresponds with the value proposition of an after-sales service strategy. The density of
the installed base is still rather low, considering the geographical dimensions of China
and Asia, and restricts the establishment of additional local warehouses in China. The
logistics solution proposed by Machine Inc. is not, however, limited by the size of the
company: it can be implemented by medium-sized companies as well as multi-national
enterprises. The only restriction applies to small companies without their own
subsidiaries in China. A subsidiary is necessary because of the legal handling
requirements of non-bonded warehouses, which have to be attached to a local legal entity.
The practical impacts of collaboration hinge on the ability of the company to
develop useful recommendations for their managers. The managerial implications can
be formulated around the question of how managers can organize procedures and
processes for enhancing the company’s spare parts logistics in China and Asia.
Managers can judge the suitability of their existing logistics concepts by comparing
the approaches outlined. The description of the direct export of spare parts and the
provision of spare parts from local warehouses to customers can help managers focus
more on specific logistics issues. Managers can use the results obtained in this study to
challenge their current logistics practices and develop a project procedure on how to
initiate logistics projects that lead to cutting-edge logistics performance.
Despite substantial managerial and theoretical implications, the study also has
some limitations. General inferences cannot be made, as is the case with any qualitative
research. The focus groups and single case study were combined for reasons of
convenience rather than being representative (Miles and Huberman, 1994) and, as such,
the extent to which our results can be used to generalize examples remains unclear,
even though this method of analysis (exploratory focus group and longitudinal action
research) seems promising. Future research should obtain additional qualitative data
to replicate our findings. Researchers should then be able develop further hypotheses
on the relationships between logistics performance, logistical design elements and
context variables and test them empirically.
Conclusion
Conducting action research with a variety of firms allows this article to provide a better
understanding of challenges in the field of spare parts logistics in China. A cutting-edge
logistic solution is introduced to cope with the challenges faced. This solution uses not
only performance benchmarks of the supply chain of spare parts but also specific
aspects of the management of spare parts. In addition, this innovative solution is based
on two main pillars:
(1) Companies should try to develop logistics solutions for Asia that consider
existing Asian and Chinese constraints instead of taking the logistics practices
used in mature markets and trying to adapt them to the Chinese market.

19. BIJ (2) The development of the logistic solution should be in intensive collaboration
18,6 with the logistics providers.
Implementing this cutting-edge solution overcomes the disadvantages associated with
existing approaches to spare parts logistics, such as the direct export of spare parts
from Europe to customers in China (Asia) or the provision of spare parts to customers
766 in China (Asia) from local warehouses and warehouses replenished from Europe. The
cutting-edge solution takes advantage of short delivery times for parts, high customer
satisfaction and low logistics costs, as well as reasonable warehousing, inventory and
working capital costs.
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Corresponding author
Heiko Gebauer can be contacted at: heiko.gebauer@eawag.ch
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