Parts Supply Chain in a Nutshell

By Diego Esculies Roca Rey

Index

Introduction

How to know what and how many spare parts to have on stock to ensure customer satisfaction on maintenance or warrant services? How to know minimize the spare parts and inventory costs? How to control a complex supply chain operation? How does the supply chain management will look in the future? If you have some of these questions in mind, you may find some answers here.

The purpose of this article is to give a simple and complete overview of all the aspects involved on a Part Supply Chain operations and the key factors for success. The information provided is based on years of experience on this field.

1. Serviceability

The main reason for the supply chain to exist is to deliver items on the right place at the right time. This is the main concept of serviceability, where the ultimate objective is fulfilling orders by planning the inventory, using the art of prediction through statistics and a proper control of replenishment.

1.1. Stocking policy base on demand

The best way to control the inventory and drive replenishment orders is by defining stocking levels per item, mainly based on historical demand adjusted by known future changes. The key to successfully calculate stocking levels is by developing a model to define the Average Demand (AD), as accurate as possible and identifying the tendencies. In general, the best way to calculate an accurate average demand, the weighted average concept should be use, so that the most recent events are considered with more relevance that pasts events, without excluding them.

Following an example:

The next step is to define the Safety Stock (SS), to be used as buffer to be prepared for demand peaks or supply shortages. Mathematically it’s bases on the standard deviation of the demand history. By talking the values of the example bellow and applying the standard deviation formula on we get a value of 24.83.

The last variable needed is the Economic Order Quantity (EOQ), which is basically the most efficient quantity to be considered for each replenishment order, and it’s basically the middle point between the cost of ordering vs the cost of keeping the parts on the warehouse. Just to simplify the explanation, let’s say that by doing that calculation, the EOQ for his example is 30.

Just as reference, the EOQ formula is:

• EOQ = (2 * Annual Demand * Ordering Cost / Holding Cost) ^ (1/2).

Having all this scientific but valuable variables defined, it is just a matter defining the Minimum (MAX) and Maximum (MIN) level as the last step of this process, as following:

• MIN = AD + SS
• MAX = MIN + EOQ

Applied to the example bellow:

• MIN = 48.10 + 24.83 = 70
• MAX = 70 + 30 = 100

1.2. Initial Stocking

Even though the stocking policy based on historical demand will be a big portion of the inventory to be considered, the other key piece of it is the stock define based on information of new machines installed, where a seed stock should be considered based on theoretical and experimental rates, predicting the demand behavior to face the first periods. Then, once the parts start o fail, demand will be materialized and though we will have clearer idea of the quantities to stocked, based on the logic explained on the previous section.

The main components to take in account are:

• Install base: Quantity of machines installed and under service scope.
• Parts per unit: Number of parts of a given SKU included on the configuration of each machine.
• Failure rate: Theoretical value that should be provided by the Engineering’s team for initial reference.
• Commodity: Based on the commodity of the parts we should be able to classify them and define different initial stocking strategy.
• Cost: The cost of parts shouldn’t be a parameter in general, but the establishment of a threshold is usually recommended to avoid stocking too expensive parts, assuming a controlled risk.

Even though there might be many other factors to be considered, these are key.This would the basic formula:

• Initial Stocking: Install Base * Parts Per Unit * Failure Rate

Considering the following two to define thresholds or limits: Commodity and Cost.

1.3. Backorders management

Theoretically speaking it is impossible to fulfill 100% of the orders, since:

• The stocking strategy would never consider stocking every part, since the cost would be extremely high and through the business will not be profitable.
• And, due to external factors, for example: supply shortage, unpredicted demand peaks.

Therefore, it is required to have a management system in place to register every backorder (Not filled orders) and a close monitoring of them to:

• Ensure there’re later fulfillment, to track the orders to fulfill them
• Challenge every stage’s time
• And finally, to estimate and ETA (Estimated Time of Arrival) for the customer to have a clear and realistic expectation.

It’s important to take in account that there might be other alternative solutions to fulfill the orders other than the BAU option and they should be exploring immediately, for example: Substitute available, easy fix of an available bad part, part available on a close location, etc.

1.4. Service Level Agreement

The SLA (Service Level Agreement) it’s probably the most important element to be considered whether to decide if stock parts or not or how much and where.

Basically, there are 2 elements to be considered:

• The availability percentage committed: Usually it is between 90% and 98%, which means that if the orders fulfilled are less to that to the same percentage applied to the total volume od orders, a penalty will be charged by the customer.
• The time delivery committed: Usually it is between 4 hours and 2 days. If it is more aggressive than the capacity of the logistic operator to move the parts from one location to another, the part should be stocked on the required location itself. On the other hand, if is not that aggressive and less than what the logistic operator can offer, it’s possible to afford optimize the inventory by limiting the parts stock to the central stock room.

1.5. Month of Supply Control

Even though the success is ultimately measured by the dividing the orders fulfilled to the total volume of orders, we should not wait for that and instead continuously monitor the month of supply based on the current on hand, the in transits and the forecasted demand. By doing that, it would be possible to identify potential weaknesses points on the network, due to the lack for enough inventory or replenishment pipeline and though take some actions in advance to avoid future unfulfilled orders.

Following a couple of scenarios:

a) If we have an SKU with a current inventory of 50 units and a forecasted demand of 200 units/month and considering that the replenishment lead time is around 2 months, it’s very likely to have a stock shortage on the following days, unless we have orders in transit and planned to arrive on the following days.

• 50/200 < 2 → 0.5 < 2 (Month of supply < Leadtime)

b) If we have an SKU with a current inventory of 100 units and a forecasted demand of 10 units/month and considering that the replenishment lead time is around 2 months, it’s pretty to say that we are safe since the months of supply are higher that the lead time period.

• 100/10 > 2 → 10 > 2 (Month of supply > Leadtime)

1.6. In Transit Tracking

On the previous section we mentioned the importance of reviewing the in transit planned orders. Other than just reviewed the orders for parts with potential stock issues (Of course this should be priority) it’s key to continuously monitor all the in-transit orders inflow to ensure that both the orders to replenish the local stock and also the ones to fulfill emergencies.

By doing so, it would be possible to identify issues like:

• Shipments delays (On any stage)
• Processing delays (On any stage)
• Transportation issue
• Restrictions due to country regulations
• Fake orders (Orders that were cancelled or received but not without a proper transaction recorded) to be cleaned-up.

By having all these issues identified and a proper mapping of the replenishment flow, it would be very easy to have a clear view of the pain points and what to be address to Operations team to help with solutions to clean orders, accelerate the flow and improve the process.

1.7. Root Cause Analysis & Action Plans

Applying the continuous improvement methodology, it’s essential to take a look the past experience, identify the main root causes related to the unfilled orders and then establish a preventive action plan to face them, minimizing future impacts and though improving the serviceability level.

a) To properly assign a root cause for each of the unfilled orders it is key to consider:

• All potential issues and a list of standardized root causes to select one.
• Have a clear understanding of the process flows and steps to prioritize one vs another.
• Have all the data needed to analyze the situation, either historical or current.

b) To properly define the action plans to be implemented it is key to consider:

• Choosing only the top root causes, which are driving the main impact.
• Defining a preventive action plan thinking on the future and not in the past.
• To establish an action plan that it is SMART (Specific, Measurable, Achievable, Relevant, Time-limited) and with a clear responsible assigned.

2. Inventory Health

Serviceability and Inventory are the 2 sides of the same coin. On one side you must keep customers satisfied offering parts at a right place at a right time, and on the other you have to keep the inventory as low as possible to optimize costs and profitability.

2.1. End of life / End of contract

Every product has a life cycle and eventually it comes to and end, depending on the brand or product type, it could be sooner or later. On the other hand but similarly, we may have some contracts ending and not renewing that should be taken in account since the related machines will no longer trigger demand.

Despite the product, it is very important to identify or predict when that will happen in order to plan a stock reduction some before it happens to avoid ending up with a bunch of parts that probably won’t have any use (Unless a there’s any other product or location that can still use it).

By planning for these two types of demand reduction’s drivers, we will reach two important objectives:

• Avoid further replenishment pipeline by stop ordering more parts.
• Decrease the stocking policy to release the projected inventory, that won’t be necessary in the near future, as excess so it may be available to be burn on the remaining period or sent to other locations if needed.

2.2. Reserve & obsolete

Passed the life cycle or contract ending period, parts eventually will fall into a new category as reserved or obsolete parts, which basically means that they are old and haven’t had any demand for a while. In general, usually they change from being part of the company’s asset to a cost, and though they unwanted inventory.

Once parts hit this category, they should be treated a little different in terms of stocking policy, by applying more aggressive action to reduce them, if possible. Of course, not all of them should be considered as trash, since some of them could still be supporting a critical function of a on-service machine, but long term most of them will finally be useless and finally scrapped to reduce warehouse’s space.

2.3. Policy clean-up

Whatever the driver is: End of life, end of contract, obsolescence, reserve, etc; once a part is identified as no longer required on stock or with low probability to be used, it’s very important to delete any stocking policy set up as soon as possible, so the process can immediately consider it as inventory excess and though try to find it another location (Where could be needed), burned (When the reduction is partial) or sold.

The sooner the policy is cleaned up, the more possibilities the part will have to be match with requirement somewhere else and though avoid any eventual scrap cost.

2.4. Rebalances

Once all not-needed parts have been identified and its stocking levels reduced, all the excess will be updated and visible for any rebalance opportunity.

Every time we have an excess part on one place (Shipping location) and a stocking or immediate need on another place (Receiving location), there is a potential rebalance opportunity, by moving the part to a location where have absolute or at least higher chances to be used, optimizing the network and the global inventory.

Basically, rebalances will help by:

• Getting rid of a part where it is not needed.
• Avoiding placing a new order to feed the network, and though increasing the inventory, and instead just moving a part inside it.
• In some cases, the part could not be found anywhere else and the rebalances could be the only possible source for a requirement, supporting Serviceability as well.

2.5. Homologation and substitutes

A key concept to ensure a healthy inventory is to ensure as standardize as possible SKU homologation and as complete as possible substitute relationship links.

When a huge operation needs to be managed, with so many SKUs, locations, and volumes, it is necessary to count with a system that ensure recording every item with a common classification, name, label and coding. This will allow the any inventory optimization program to find compatibilities and/or rebalances opportunities to use parts somewhere else and/or as alternatives of other parts, avoiding new orders coming to the network and fulfilling open requirements.

3. Engineering

The Engineering organization is key not only to ensure lower costs by mainly developing and executing the parts reutilization processes but also by ensuring quality both new and repaired sources.

3.1. Reutilization

After parts are shipped to the field to fulfill a machine failure or maintenance requirements it is usually possible to save and return the failed replaced part through the reverse logistic process. Then these parts could be store on a separate warehouse, making sure are properly separate to avoid shipping to the field bad parts.

Once all these parts are stored and recorded on the inventory, es necessary to define whether they can be reutilized and if so to also implement a repair process, either by using an inhouse laboratory or by contracting a third party for it.

Finally, once all the components of a reutilization process are established, it is possible to start considering them as a source of replenishment to the main network by the planning systems. By doing so, the parts entering to the warehouse will be much cheaper, since the only cost related is the cost of repairing them and though the unit cost of the parts will dramatically drop.

To measure success, the key metrics to be considered are:

• Unit cost: Monitoring the trend of the average cost value of each part.
• Yield: Percentage of repair compared to the new buy replenishment.

3.2. Batteries

Most of the parts can be reutilized by changing failed components, either mechanical or electronic, to recover their full functionality. However, batteries have the following particularities:

• The have a limited shelf life: Since the day they are manufactured the time start counting for batteries to expire, since they cannot be used once the charge is lower than certain level, which may cause either hardware or software failures.
• The recovery is usually based on recharged rather than changing components: Due to the nature of their function, batteries need to be recharged so they can be used, so the reutilization process must have the proper equipment to do so.

Therefore, batteries could be the most difficult commodity to transport, stock and use. Though its reutilization process is key to ensure enough supply and at the lower cost possible.

3.3. Quality control

Embedded on every Engineering process it should always considered to ensure quality for all the sources, either by supporting on the certification of suppliers to purchase new parts or by ensuring reliable reutilization process so the resulting repaired process could be used as new.

Also, since there will always be a percentage of defective parts, for both new and repaired, it is necessary to establish a warranty process to request replacements for failed parts or recover any related credit with the suppliers.

4. Logistics

4.1. Network

The network design will define the maximum capability to fulfill orders based on the: locations, transportation, costs.

• Locations: The more locations across the covered zone the network has, the more chances to have the parts close to the customer requirement and though the delivery would be faster.
• Transportation: The more transportation vehicles, structure or faster response, the more chances to deliver the part faster, despite the distances.
• Cost: The delivery services available will define the decision of which one should be used depending on the emergency level of each situation and though the cost. If, for instance, a reasonable low-cost service may cover most of the cases to be delivered on a short time, the transportation cost would be low and vice versa.

Depending on the size of the operation, the number of hierarchies should be defined. Usually there are 3:

• Distribution center: The hub, which main objective is to consolidate all the stock needed from the suppliers to supply the whole network.
• Central stock room: The main warehouse on a geographic cluster, which main objective is to supply parts from the hub or other suppliers and then distribute to the other locations.
• Field locations: The most basic locations which do not have the objective of stock parts to supply any other and rather limit the shipments for final customer’s delivery.

4.2. Importation

The importation process it is key to ensure a fluid and fast replenishment of the parts which will ultimately means a shorter Leadtime and allowed better emergencies response and lower stock. Even though this process could be managed by a separate unit, it affects the parts supply chain.

The process of importation could have many stages, depending on the product, the source and the destination, but it is key to be aware of all the importation requirements and provide them to the operator to avoid any delay or penalty, such as: invoices, taxes, tariffs, certifications, data sheets, emergency level definition, etc.

4.3. Inventory Management

The inventory is the main asset of a parts supply chain operation, the same way a car is the main one of a taxi driver. If a taxi driver wants to ensure to have a fully functional car to do the highest number of rides possible at the lower cost of maintenance, gas, repairs, etc. Continuing the analogy, for a parts business is very important to have a proper inventory management, ensure to accomplish the following objectives:

• Warehousing: Clean, safe, reduced, organized, transitable.
• Parts: labeled, sorted, recorded, counted, safe.
• Docks: Clean, fluid, separated channels for shipping and receiving.
• Entrance: Secured, guarded and access controlled.

4.4. Distribution and reverse logistic

Once the parts are available on the stock and a customer requirement is received, depending on the severity, the part should be shipped through the cheapest channel but ensure to fulfill the SLA of the related contacted. The operator should follow these steps:

• Received the order and identify: Part needed and severity.
• Pick and pack the part: Identify the part location in the warehouse and prepared it to be shipped.
• Documentation: Ensure to carry the required documentation to deliver the part.
• Ship it through the best channel: The best fitted channel should be chosen, based on cost and severity.
• Transportation: Chose the best route for transportation efficiency based on time, cost and safety.
• Delivery: Deliver the part to the customer or engineer who will have to confirm the reception.
• Pick replaced part: If applicable the replaced bad part should be received in exchange.
• Reverse logistic: The vehicle should return to the warehouse and deliver the bad part exchanged.
• Receipt: The warehouse should process the receipt of the bad part to be stored on the proper stock for potential reutilization.

4.5. Supplier control tower

If it’s necessary to contract a third party to handle the logistic operation is extremely important to define and execute the key control points (KCP), which will ensure a controlled environment and proper management, avoiding unnecessary expenses and maximizing service quality.

To monitor a good performance of these KCPs it is recommended to ensure:

• A good relationship and fluid communication with the supplier.
• Frequent meetings to review the metrics.
• Training on key or to-be-improved areas.
• Supplier-Own systems and processed linked.
• Clear identifications of root causes and action plans.

Monitoring of action plans completion and effectiveness on better results.

5. Processes

As on any other organization, to ensure consistency, quality, alignment and ultimately a controlled process, it is necessary to define the process flow, share it and make sure that every involved person understands it.

Following the most important elements to consider:

• Key Control Points (KCP): Maybe the most important thing about a process is to ensure having control points before or after (Depending on the nature), of the most critical activities to minimize operational risk and maximize process liability.
• Approvals: Some of the activities may require validation to ensure ownership and leadership operation’s control. When this happens, approvals are requested, but it’s important to define: a) That the approvers are the ones that need to be involved and 2) That the number of approvers is limited per activity (The recommended number is 2).
• Responsibles: All the people that need to review, send, approve or take any action during the process should be considered as responsible of the process and need to be properly engaged to execute their parts. It is important that they al understand what, when and how to execute the activities related. Also, the process owner or leader should be focus on ensuring that the responsibles are executing the process properly.
• Leaders: As mentioned above, leaders should ensure that the process is flowing properly, under compliance, executing all activities, reporting the KCP and continuously looking for improvements for a better process definition.
• Scope: The process should be limited to the purpose of the operation, excluding: Not managed business, not related people, not involved systems, etc.
• Compliance tests: On a schedule frequent basis, compliance tests should be executed to assess if the process is fulfilling its purpose and specially if KCP are executed and documented properly.
• Audit: Depending on the structure of the organization it could be internal or external, but it’s important that a team outside of the operation review the whole process, testing it, identifying issues, requesting action plans and monitor the improvements, mainly to avoid business risks.

Finally, in addition to the process being properly defined, the results must be monitored through a Management System, were:

• All the key owners need to be involved,
• Reviewing the metrics,
• Identifying root causes to the main issues and
• Presenting status for the action plans.

6. Conclusions

In a nutshell, to ensure a successful parts supply chain operation, the key is to reach the right balance between serviceability and inventory, ensuring to stock the right parts at the right locations, based on both installs data and historical demand, while monitoring the inventory and replenishment flow, to ensure it is enough to support the operation but also minimizing the stock of parts not needed anymore by cleaning up the inventory, redistributing the parts were needed.

To optimize costs, the process should be designed to reutilize as many parts as possible, contributing on less inventory value, while ensuring good quality. Also, the logistic operation must support all the business commitments with infrastructure at the lower cost but taking care of the transportation and warehousing to ensure a proper care of the parts inventory as the main asset of the business. All this need to flow on a controlled environment by defining and monitoring the processes and constantly measuring results and looking for improvements.