Service Supply Chain 101

Our subject matter experts often get asked to speak as guest lecturers at universities to share their knowledge about the Service Supply Chain. We thought it might be good to offer a Service Supply Chain 101 here on our blog for students and those new to this, the “other supply chain.”

Service Parts Logistics

Let’s start with a brief description of Service Parts Logistics –simply put, it’s the supply chain for replacement parts, which is sometimes also called service parts or spare parts.

Elevators, MRI machines, airplanes, computer servers, manufacturing machinery, cruise ships, and many other products and machines require replacement parts.

The Cost of Downtime

Minimizing downtime: That’s what Service Parts Logistics is all about. Downtime costs occur when products that people or businesses need are broken and need to be fixed. Downtime can lead to significant financial loss for an organization.

Example:
You’re on a flight waiting to take off and the captain says, “There’s an engine light on and maintenance needs to come check it out.” This situation can play out in a number of different ways. Hopefully, it’s something minor and the part needed for the fix is there (sometimes it’s something as simple as a lightbulb).

Maintenance fixes it and you’re ready to depart. But if that part is not readily available, the airline cancels the flight and everyone has to deplane. When that scheduled flight doesn’t fly, it’s more than just rebooking 100 – 200 passengers. If the airline cannot rebook someone on another flight that same day, the airline is on the hook to provide hotel and food vouchers for those passengers. Additionally, there are FAA penalties, mandated refunds, and more. Later flights even become impacted because that plane and the crew were supposed to be in another city and now they can’t make the next leg of their journey. It cascades and it’s costly when an airplane is on the ground and stuck because the right part isn’t there to get it fixed and back up in the air.

All of those costs are the downtime costs, and they can get really expensive, really fast. In some industries, the costs literally add up by the minute.

To counter these downtime costs, companies will pay a premium for service contracts with repair providers or the original equipment manufacturer to keep key equipment or products on which they depend up and running. The availability of spare parts to fix that equipment when it breaks is key to providing that service.

In a nutshell, Service Parts Logistics is making sure the right parts are in the right place, at the right time to fix products or machines that break. And building a supply chain network that allows for those parts to be in the right place, or get to the right place quickly, is what service parts logistics is all about.

Just like the airline, similar Service Parts Logistics requirements exist in almost every industry. When the data center that hosts your video conferencing platform has an issue, businesses that rely on that platform lose productivity (and trust) until it’s fixed.

These shutdowns cost a lot of money for the companies that rely on that service. So, the common thread here is all of these different business problems need parts available in the right place to fix things quickly when they break to keep their businesses up and running and successful.

The Service Supply Chain is Different than Other Supply Chains

Many people think about supply chains and imagine manufacturing or retail supply chains. At the beginning of the COVID-19 pandemic in early 2020 when you couldn’t buy toilet paper or hand sanitizer, the words “supply chain” were all over the news. There was unprecedented demand for (and significant hoarding of) these items. This created unique stress on the manufacturing and retail supply chains for these products that those supply chains were not built to handle. Toilet paper usage is generally consistent, and the supply chain was set up for that consistency. There’s not a lot of flexibility or excess capacity in the toilet paper manufacturing and distribution supply chain, so when everybody bought extra toilet paper all at once at the beginning of pandemic lockdowns, the shock was felt throughout the supply chain, from the retail distribution chain back to the manufacturing and raw materials supply chains.

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.

3PLs

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

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

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.

Reverse Logistics

Reverse logistics is another common aspect of the Service Supply Chain. Some parts that fail can potentially be repaired and reused. When a technician takes an expensive, but repairable broken part out, the service company can send that broken part back to the main warehouse. The main warehouse collects these broken units and periodically sends them off to the original manufacturer or a repair supplier to be repaired. Those refurbished parts go back into the main warehouse to be used for future service calls as a refurbished spare part. This saves significant money because repairing something is a lot cheaper than buying new, complicated, and expensive parts. It’s also green to repair and reuse these assets rather than simply throwing them away.

supply chain inventory optimization

The Service Supply Chain is Unique

In summary, the Service Supply Chain is different from your typical retail supply chain. It’s not nearly as well known, but service parts are everywhere! Based on these unique challenges, there are unique solutions that have been specifically built to support Service Parts Planning, like the 3PL providers and Service Parts Planning solutions.

There are many other unique aspects to Service Parts Logistics, but we can’t cover them all in one blog. You can however watch one of our college presentations here. We hope you enjoyed this peek into the Service Supply Chain! To learn more about our Service Parts Planning Software, contact us today!

Fun Fact: Wyoming only has two escalators in the entire state!

Mike Ross
Director of Product Strategy

Mike Ross is one of our primary subject matter experts. He has been on the Baxter Planning team since 2000, currently as Director of Product Strategy. Mike works on new feature conceptualization, requirements, and product design.

For more than 20 years Mike Ross has designed, developed, implemented, and supported off-the-shelf solutions for service parts planning that have been used at over 100 companies in a broad range of industries, including telecommunications, medical equipment, energy, imaging, printing, and aerospace. Mike has led many service-parts implementation and consulting projects and maintains solid client relationships focused on continuing education and process improvement. And in 2014, he was named as a Supply Chain “Pro to Know” by Supply and Demand Chain Executive magazine.

Mike lives in the Rochester, NY area with his wife and three amazing kids, as well as a dog, three fish, a leopard gecko, and a hedgehog. Mike and his wife enjoy running 5Ks (slowly) in their spare time.