Compared to retail goods like the above toilet paper example, the Service Parts Supply Chain is different. For service parts, demand is generally a random event. There is not typically a way to influence service parts demand with price or promotions. If you are a service provider that fixes beverage bottling equipment, and you bought too much of a certain part from your supplier and that part doesn’t fail as much as you would expect it to, you’re stuck with it. You can’t run a sale to clear out excess inventory–the bottling plants aren’t going to buy parts they don’t need, rather they only buy when they’re going to use those parts (i.e. when the equipment breaks and that part is needed).
Service parts are often consumed on service calls associated with service contracts. These service contracts are usually business-to-business (B2B) agreements. You can think of them as kind of like an extended service warranty that one company buys from another company on a product that they need.
As an example, let’s consider a broken escalator at an airport. Escalators are very important at busy airports due to the people and luggage that need to keep moving. When an escalator breaks down, the alternative is to use the elevators or the stairs, but elevators are slower and cannot handle as many people and stairs are difficult with heavy luggage (and when an escalator breaks down, it basically becomes another staircase). Due to the criticality of escalators in an airport environment, our example airport buys a service contract from a company that services escalators. In that contract, there is a service level agreement (SLA) to get a broken escalator fixed within four hours of initiating a service call. When the escalator breaks, somebody at the airport calls, and their contracted service company immediately sends a technician out to get started on a fix, because the clock to meet the SLA commitment has started ticking. The technician arrives, troubleshoots, and figures out the issue. A broken part needs to be replaced, but it’s a large part and they don’t have one in their van. Then the service company’s office starts looking in regional or local warehouses for that needed replacement part. The technician does a quick inventory search and finds that the needed part is in a nearby warehouse. Either the technician leaves the airport and drives to pick up the part or the part is delivered by a courier delivery service. Then the technician can finish their job.
In this scenario, the service company met their service level commitment of getting that escalator repaired within four hours of the initial service call.
A third-party logistics (3PL) company allows a company providing service to outsource elements of distribution, warehousing, and/or fulfillment services. Examples of companies that provide 3PL services include many recognizable names, such as UPS, FedEx, DHL, MNX, Choice, and Flash Logistics. These companies provide rentable warehouse space and services in cities around the globe. The 3PL is responsible for the employees, the infrastructure, the shelving, and more. These warehouses are incredibly flexible. If your company suddenly needs twenty-five square feet of warehouse space in Oklahoma City because you just sold a new service contract for twenty escalators at OKC airport, you call your 3PL provider and they add you as a client for that new warehouse. The burden of finding space, employees, and equipment to manage a new warehouse is no longer the responsibility of the service providing company, as the 3PL provides all of this.
The 3PL warehouse solves part of the problem in Service Parts Logistics, but another key issue is how to decide which parts to store in each warehouse based on the customers you need to support.
Install base is the equipment that you are supporting as a service provider. You need to be intelligent about which parts to stock in each warehouse, based on where your customers are located and the likelihood that their equipment is going to fail. That’s where a Service Parts Planning system comes into play. Service Parts Planning can be done with manual processes (spreadsheets) or with software specifically designed to plan service parts effectively and efficiently.
Service Parts Planning Systems
Manually planning service parts with spreadsheets can be done, but it’s prone to errors and simply cannot handle some of the more complicated aspects of managing service parts in the way a dedicated solution can.
Did you say, “Service Parts Planning Software?” Shameless plug ahead.
Baxter Planning is the premier provider of Service Parts Planning Software. Ok, shameless plug complete.
Planning software knows what equipment needs to be supported, where the spare parts are, where the warehouses are, and how often parts on the equipment fail. It brings all of this data together and then balances inventory costs and the warehousing costs to make intelligent decisions about what parts to stock where, and in what quantities.
Stockout costs are the costs a service organization incurs when a part needed immediately is unavailable.
Every part you stock costs money–the costs of the actual part, the space it takes in a warehouse, and manpower to manage the stocking. But there are also costs that you incur when you need a part you don’t have. These are the downtime costs that we talked about before, and they happen when there is a stockout. The diagram below shows the trade-off between potential stockout or downtime costs and inventory holding costs depending on how much inventory you stock.
An inventory planning system looks for the sweet spot in this balancing act. Finding that tradeoff point is a key goal of the optimization algorithms for a Service Parts Planning tool. It balances the right amount of inventory with the right amount of risk of downtime costs.