How to Understand Spare Part Planning by Different Industries

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Executive Summary

There is a distinct difference between standard product and spare parts planning.
There are important industry differences in spare parts planning.

Introduction

Different industries have very different focuses on spare parts. Much of it has to do with the attributes of the products themselves. Some of these attributes are listed below:

The length of life of the supported product (i.e., heavy equipment has much longer service part lifetimes over consumer electronics)
The expense of the supported product
The complexity of the supply network

Larger, longer-lived, more complicated, and more expensive, a large percentage of overall revenues is derived from spare parts. Airplanes are an example of where revenues in spare parts can come 25 years or more after the initial sale.

The major industries for spare parts are the following:

Automotive:
Aerospace:
High Tech: (primarily for the manufacturing machines, such as semiconductor equipment)
Construction and Industrial Earth Moving Equipment: (the largest spare part organization and now spare part third party, Cat Logistics, was originally an internal organization to Caterpillar, which was set up to service Caterpillar tractors and other earthmoving equipment)
Consumer Durable Goods: Many consumer items are long-lived, such as washers, heaters, and refrigerators.
Medical Equipment: When one thinks of the expense and complexity of medicine (Cat Scan machines, PET Scan, MRI machines, etc..), it is easy to see why spare parts are so important. Different industries have very different focuses on spare parts. Much of it has to do with the attributes of the products themselves. Some of these attributes are listed below:

According to Deloitte, the service business represents 25% of manufacturing revenues but 46% of the production profits. Given this, one would assume that spare parts operations would be an area of concentration and investment by companies. However, this is not the case. Service organizations receive less than 25% of the IT investment that the business’s finished goods side receives.

This is not to say that several companies in the service market do invest in their service operations (Cisco, Cat Logistics, and Rolls Royce come to mind). However, the vast majority underinvest in their service infrastructure. One reasonably effective measurement technique for service effectiveness is to measure how much of the company’s own aftermarket business they service. One defense aerospace companies service only a small fraction of its products with spare parts. When other companies come in and service your products with parts a high percentage of the time, this says a lot about your service capabilities.

Customizing the Planning Method for Spare Part Planning

None of the major historical supply planning methods have ever been customized for spare parts before inventory optimization and multi-echelon. In industry, finished goods both tend to focus on where the majority of development effort goes. Part of this is driven by the fact that the finished goods market is significantly bigger and that service organizations tend to have much lower IT budgets to work with, even per dollar of revenue sold. The fact that spare parts operations tend to have high-profit margins does not seem to translate into IT budgets.

Therefore, DRP and advanced planning and scheduling (APS) software for supply planning were developed, all with finished goods in mind. There is are excellent observations on this in the HBR article Winning in the Aftermarket. There are so many spot-on observations in this article that I have listed some of my favorites below:

Companies neglect after-sales service supply chains because they’re tougher to manage than manufacturing supply chains. Their performance suffers by comparison too.
Executives swear by that services-centric view of the world, but privately, they admit to one niggling concern: Most companies either don’t know how or don’t care to provide after-sales services efficiently. Top managements the world over treat aftermarket services as an afterthought.
In industries such as automobiles, white goods, industrial machinery, and information technology, companies have sold so many units over the years that their aftermarkets have become 4 to 5 times larger than the original equipment business. Firms generate between 29% and 50% of their revenues by servicing products.
Providing support produces a low-risk revenue stream over an extended period. Aircraft manufacturers, for instance, can reap additional revenues for as long as 25 years after a sale. Also, increasing sales of parts and service-related products cost businesses far less than finding new customers.
The service network often has to cope with 20 times the number of SKUs that the manufacturing function deals with. – HBR
While finished goods supply chains may turn their inventory from six to fifty times per year, service supply chains turn from one to four times per year.

The Challenging Environment of Spare Part Planning

Many times businesses don’t appreciate those multiple challenges (of the spare part). They blindly apply enterprise resource planning thinking, processes, and software solutions to tackle support networks’ complexity.

Some years ago, when we studied the after-sales network of one of America’s biggest automobile manufacturers, we found little coordination between the company’s spare parts warehouses and its dealers. Roughly 50% of consumers with problems faced unnecessary delays in getting vehicles repaired because dealers didn’t have the right parts to fix them. Although original equipment manufacturers carry, on average, 10% of annual sales as spares, most don’t get the best out of those assets. People and facilities are often idle; inventory turns off just one to two times annually are standard, and a whopping 23% of parts become obsolete every year.

This story is well known for those who work in the service parts sector and is why the opportunity to improve service parts operations with planning software is so high.

The Inadequacy of ERP and Spreadsheet Planning for Spare Part Planning

These features combine to create a very challenging environment for service parts planning. The emphasis here is planning. The execution of the scheme is not very much different from the execution of original production items. This is why the requirements (planned production, transport, and new buy orders) can be efficiently executed through an ERP system but cannot be effectively planned by most ERP vendor planning systems. However, regardless of this fact, most companies are still planning their service parts with ERP systems with external planning spreadsheets.

One of the best articles on the importance of service parts planning is (Winning in the Aftermarket, HBR May 2006, Cohen, Agrawal, Agrawal.). In this article, the following are mentioned.

According to a 1999 AMR Research report, businesses earn 45% of gross profits from the aftermarket, although it accounts for only 24% of revenues.”

“On average whopping 23% of parts become obsolete every year.”

“Indeed, third-party vendors have become so price competitive that OEMs lose most of the aftermarket the moment the initial warranty period ends.””Each generation has different parts and vendors, so the service network often has to cope with 20 times the number of SKUs that the manufacturing function deals with.”

“Aircraft manufacturers, for instance, can reap additional revenues for as long as 25 years after a sale. The longer the life of the asset, the more opportunities companies will find down the line. Each generation has different parts and vendors, so the service network often has to cope with 20 times the number of SKUs that the manufacturing function deals with.” – AMR

Chicken or Egg of Nature of Spare Part Planning?

Whether purchasing companies or software companies were what retarded the market is interesting and could be the topic of a separate article. This shortage of service parts management systems has left the majority of service parts networks managed by manual means.

Paradoxically, due to the more complex nature of service part planning, it is even more difficult for a human planner to compete with a computerized solution than human planning to approach the quality of original product planning. While more sophisticated planning systems are required for service planning, companies’ desire to spend money on service parts infrastructure and software is lower. What results in a seriously sub-optimized sector of the economy? This is why we have proposed a 4PL model for service parts management described in this post.