Total Cost Optimization Part 1:  Stockout Costs
The costs of NOT having the right part at the right place at the right time

This is part one of a three-part discussion on Total Cost Optimization, Baxter Planning’s unique, proprietary optimization approach to service parts planning.

In this article, we’ll discuss the often-overlooked cost of service parts logistics, the costs a company incurs when a part is not in the right place at the right time, which we call Stockout Costs. I’m sure you’re all saying to yourself, “we don’t overlook this, I get weekly/monthly reports from my logistics team of how much we’re spending on expedited shipping, such as Next Flight Out (NFO) deliveries and overnight deliveries from my DC.”

That’s a great start!  Every service parts logistics organization should be tracking this and looking for trends or unexpected changes in operational expenses. Perhaps you have even started creating groups of parts and locations where you have manually adjusted target service level goals to minimize these costs by trying to balance the expense of inventory with a reduction in these operating costs.

Wait, did I just say “manually adjusted” in a document about service parts planning?

If you are MANUALLY adjusting or arbitrarily setting service levels targets in your planning tool or spreadsheet for groups of parts, locations, or for key customers in an attempt to balance operational costs and inventory costs, then you really aren’t really optimizing! That’s the topic for the final article in this three-part series –when we’ll bring together all of the aspects of Total Cost Optimization.

The key point here is that even if you are tracking expedited shipping costs, that’s only part of the total cost of not having the right part in the right place at the right time.

Let’s discuss the costs your company may be incurring when a part is unavailable and needs to be expedited before a service call can be completed. Not all of these will apply to all service parts organizations. For example, some organizations use field service technicians and some don’t, but if any of these costs apply to your organization, you need to understand and track these costs of broken service events.

  • Expedited shipping: We’ve already introduced this above. If you have same-day service SLA commitments to your customers and the part needed isn’t in the local branch or 3PL warehouse, or in the tech’s van, your options to provide the committed service cost significantly more money:
    • Next Flight Out shipping: Ah, NFO… it’s the transportation mode we love to hate!  It’s expensive, you’re at the whim of commercial airlines, and there’s so many touches along the way that can go wrong.  It’s just not as reliable as we’d expect such an expensive service should be. But if a customer is down and the equipment absolutely needs to be back up ASAP, then sometimes the only option is to get the part on the next available flight.
    • Overnight shipping: If you replenish your local warehouse via less expensive shipment methods such as two-day or ground, then sending it overnight or especially overnight with early AM delivery is much more expensive.
  • Expediting personnel time: This is often overlooked. If your planners are really spending most of their time expediting, you need to ask: are they planners or are they expeditors? This is a double-edged sword, it’s common to find planning organizations that will say, “we don’t have time to make the plan better because we’re too busy expediting!” But if the plan were better, they wouldn’t be expediting as much
  • Technician wasted time: If a tech goes onsite for a service event and discovers they need a part that’s not immediately available to them, either in their van inventory or an FSL/local warehouse to be delivered quickly, then they are going to need to make a return visit. Every broken call is extra drive time and on-site time for a tech. Take your fully loaded per-hour tech cost, multiply it by the number of repeat-visit calls due to missing parts over the last year, and you’ll see this is a surprisingly large expense!
  • Equipment downtime costs: If your product is offered in a servitization model, then downtime means the equipment may not be billable or making revenue. Even if you don’t pay directly for downtime of the equipment you service, your customer does! A semiconductor manufacturing facility with a key tool down isn’t making wafers. An ice cream machine in a fast-food restaurant that’s down is directly causing lost sales. If your company has uptime commitments to your customers with penalties if these uptime goals are not achieved, these penalties are really stockout costs.
Total Cost Optimization

There are other stockout costs in addition to the common ones mentioned above. Understanding stockout costs is key to the realization that not having the right part available in the most cost-effective location to provide service to meet a committed level of service to your customer can be expensive, and your service parts planning methodology must consider these stockout costs to truly create an optimized plan.

Please follow the Baxter Planning Blog for the next posts in this three-part series!

  • Total Cost Optimization Part 2: The Cost of Inventory & Plan Instability
  • Total Cost Optimization Part 3: Total Cost Optimization for Service Parts