Critical Shipments: If I Only Had a Part

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Somewhere Over the Rainbow: The Future of Spare Parts Logistics

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Bad things happen when systems break down. Flights get canceled. Production lines stop. Wireless devices can’t connect.

It usually takes more than a service engineer to get operations running again; it also takes hardware. "Between 50 and 70 percent of on-site service calls require a part," says Vele Galovski, vice president of research and field services for the Technology Services Industry Association. "Spare parts availability is the single biggest reason why companies can’t hit their first time fix rate numbers."

Critical spare parts logistics is a discipline all its own. Like logistics for just-in-time manufacturing, critical spare parts logistics demands both precision and speed. But companies that manage critical replacement parts also wrestle with unpredictability. While it’s possible to forecast demand, you never know what will break next.

The nature of service contracts also complicates spare parts logistics. A product’s service level agreement (SLA) might demand a repair in 24 hours, four hours, or sooner. And a contract might stipulate different SLAs for different products.

Cost factors complicate service logistics, too. When calculating inventory needs, it makes a difference whether the parts in question are $20 keyboards or $20,000 industrial components. Service organizations must constantly balance the urgency of repairs against inventory and transportation costs.

A fourth complicating factor is the need for reverse logistics. When a technician replaces a part, the failed unit often needs to be shipped to a facility to be repaired and redeployed, or scrapped.

Challenges that service organizations face, and strategies for meeting them, vary greatly. Here are some of the many scenarios.

lions and tigers and spares, oh my!

A "critical spare part" might mean a computer motherboard, or it might mean a heart valve to Network Global Logistics (NGL), a Broomfield, Colo.-based third-party logistics provider offering mission-critical transportation and logistics services for a range of service operations. NGL maintains more than 500 multi-client stocking facilities worldwide, including about 300 in the United States.

Along with providing storage in distribution centers and forward stocking locations (FSLs), NGL operates its own transportation between storage locations and repair sites. "Operating our own transportation enables us to provide same-day courier moves," says Scott Riddle, NGL president and chief executive officer. "We can drive a part across town in one or two hours, 24 hours a day." NGL can also put a part on a commercial airline, or tender it to a package carrier.

One big challenge in critical parts logistics is developing inventory strategy. "The goal is to optimize and balance the cost of providing the service with compliance to the end customer’s expectations," says Paul Gettings, senior vice president, sales and marketing at NGL. If the contract requires a fix in four hours, field engineers in multiple geographies must be able to get their hands on parts fast enough to meet that deadline.

One factor in determining the optimal strategy is the value of the replacement part. "Replicating a low-cost part across 150 sites is not a big deal," Riddle says. But if the part costs $1 million, that’s another story. "We have to balance the desire to have every part exactly where it may be needed when a failure occurs against the cost of the part," he adds.

If the million-dollar part rarely breaks, the customer might decide to store it in just a few locations and then, if it’s needed in another market, expedite it. It costs less to occasionally use air service than to keep 150 million-dollar parts in stock. "The customer is optimizing for the combination of cost of inventory and service level of that part," Riddle says.

Transportation obstacles also pose challenges. "Logistics can be interrupted by events as trivial as heavy traffic, to those as rare as a terrorist attack or major hurricane," says Gettings.

It’s not unusual for weather to shut down an airport that NGL was relying on to move a part. Then the company must find an alternative. "We’ve faced circumstances where we were bringing parts into areas affected by hurricanes, and we were traveling in the wrong direction—right into the hurricane—because we had to deliver a critical part to keep a generator running," Gettings says.

there’s no place like home

On one occasion, NGL nearly booked an employee on a commercial flight from Los Angeles to Munich to hand-deliver a replacement device for a customer. "Just as we were about to put him on the plane, the customer in Germany found another solution," recalls Al Morris, director, global supply chain at TERiX in Sunnyvale, Calif. Nothing in NGL’s contract required that level of service, he adds.

An independent hardware support company, TERiX repairs and maintains electronics made by IBM, Cisco, HP, Dell, and other manufacturers. Its customers are large and mid-sized companies in industries such as telecommunications, banking, and healthcare. TERiX currently uses NGL’s services in the United States and Singapore; it works with DHL in India.

TERiX offers 20 service levels, but most of its SLAs stipulate a four-hour response. The company aims to have technicians arrive at customers’ sites with the correct part in hand more than 95 percent of the time. "We are currently between 96 and 98 percent," Morris says.

When TERiX started working with NGL seven years ago, it stored parts in just two of the 3PL’s locations. Since then, TERiX has expanded its forward stocking strategy. It currently maintains 54 regional stocking locations, including 39 with NGL in the United States, and one in Singapore, six in India with DHL, several in Canada and Europe with other 3PLs, and three TERiX-owned facilities in Japan.

That extended forward stocking strategy has vastly reduced the need to ship parts from one city to another when field engineers require them. It has yielded other benefits as well. "An extended forward stocking strategy got us away from on-site stocking locations at customer facilities. It got us away from trunk inventory—the inventory that engineers hold on to. And it got us into more controlled growth," Morris says.

One big supply chain challenge that TERiX faces is staying on top of new products as computer manufacturers roll them out, or TERiX adds them to its service contracts. To make sure TERiX’s buyers understand the parts involved, when field engineers get trained on new products, buyers take those classes, too.

When determining how many of which parts to keep in each stocking location, Morris’s team considers the replacement parts and the geographies covered by each of its contracts. It also considers the age of each machine the contract covers.

Say, for example, a computer has been in service for 15 years. "Most of the parts will be difficult to locate," Morris explains. "But we also know that drives, memory, and power supplies will cover about 73 to 75 percent of all failures, because of the usage and the mechanical movement or heat of those parts." Such knowledge helps the supply chain team estimate how many spares it needs to keep in easy reach of those machines.

if i only had a plane

Choice Logistics and its customers also put great effort into weighing inventory and transportation costs against service requirements. "The inventory plan is based on the service level agreements and looking at how much of the service is two-hour, four-hour, same-day, or next-day," says James Adams, the company’s senior vice president, global sales and client services.

Based in New York, Choice provides 3PL solutions, including help with global trade, for service operations run by high-tech original equipment manufacturers (OEMs) and third-party providers. For some clients, Choice coordinates and manages the activities of multiple service providers.

The inventory plan is never perfect, Adams says. That’s because a company that promised to fulfill its SLAs 100 percent of the time would have to tie up a great deal of money in inventory for every stocking location. "To go from 99 percent to 100 percent might double the cost," he says. "It comes down to what level of service the client is willing to pay for."

When deciding where to store parts, Choice and its clients also consider all available transportation modes. "We look at the tradeoff between how much we are paying for the linehaul to get the part into the field, how much we are paying for local delivery, and how those costs compare to a same-day or next-flight-out delivery," Adams says.

For example, a company might decide to keep a certain kind of part in Chicago, then fly it to any location in North America that needs it. "The question to ask is: How does the next flight out compare to less- than-truckload or truckload moves to service that SLA?" Adams says.

Choice and its clients don’t usually make those decisions case-by-case. Rather, they build the transportation strategy into the logistics plan. But if demand for a certain part suddenly spikes, and there aren’t enough units in local storage, the plan might not work. "That’s when you shift into scramble mode," Adams notes.

Adams recalls a situation when a service organization couldn’t find a mission-critical replacement part in storage near a particular oil rig in Canada. "We knew we had one part in Edmonton," Adams says. "So we had to scramble a jet and get it going. We got the part there in six hours."

Companies that maintain IT equipment see fewer parts emergencies these days, because so much computing occurs in the cloud, or in data centers with full redundancy at other locations. "When a system goes down, it doesn’t really go down," Adams notes. "It just pops up somewhere else." With those safety nets to ensure business continuity, many SLAs have switched from same-day to next-day service.

For many service customers of aviation manufacturer Rockwell Collins, proximity guarantees speed. Some customers keep crucial spare parts on their own premises. "As soon as a part fails, they replace it with a spare unit, then send the part to a service center," says Thierry Tosi, the company’s vice president and general manager of service solutions. Once the failed part is fixed, it goes back into the customer’s inventory of spares.

Because a spare is generally available immediately, Rockwell Collins doesn’t need to worry about same-day or four-hour repairs. Most contracts give the company 10 to 14 days to fix a part and return it to inventory.

Rather than keeping spares on site, other customers contract with Rockwell Collins for access to a pool of Rockwell-owned spares. When they return failed parts, the vendor fixes those units and sends them back to the pool.

The Rockwell Collins Service Solutions division repairs Rockwell products, provides new Rockwell components to customers that do their own repairs, and sells used parts for products made by Rockwell and other manufacturers. Customers worldwide include aircraft manufacturers, commercial airlines, business jet operators, and military agencies. Rockwell Collins stores and repairs parts at one dozen service centers located around the globe.

The ratio of customers that want to keep their own spares on site to those that prefer pools has changed in recent years. In the past, about 60 percent of contracts called for customers to buy and store their own spare parts. "That trend is shifting the other way around," Tosi says. "Forty percent of customers still like to buy everything, and 60 percent prefer to subcontract all the maintenance."

Because those maintenance contracts are long-term relationships, Rockwell Collins often finds it easier today to forecast parts requirements, Tosi adds.

One function that’s not so easy is managing logistics for replacement parts after Rockwell Collins modifies a component. The company might make such a change to correct a flaw or to meet a new customer requirement. If the part in question is already in service in the field, and aircraft OEMs are also using it on production lines, that puts a great deal of pressure on the logistics organization.

"We have to manage the logistics on both sides—satisfying the aircraft manufacturer so it can still have a high production rate, and satisfying the customer that flies the unit and might need a quick repair," Tosi says.

The change triggers a spike in demand for that component, surpassing the original forecast. Then, not only Rockwell Collins, but its own suppliers as well, must step up production.

follow the yellow brick road

While Rockwell Collins provides repairs and parts replacement services, some of the manufacturers that use its components run substantial repair and maintenance businesses of their own. One example is the Logistics and Sustainment organization of Lockheed Martin. It provides a range of post-production support services for U.S. and foreign military agencies that buy the company’s aircraft, missiles, and other aerospace and defense systems.

Those systems are crucial to customers’ national security, and most of their replacement parts come with a high price tag. "The demand forecast is exceptionally important," says Lou Kratz, vice president, logistics and sustainment, corporate engineering, technology, and operations at Lockheed Martin in Bethesda, Md.

In some cases, a military agency uses its own engineers to make repairs. In others, Lockheed Martin provides the technicians.

To maintain optimal parts inventories, Lockheed Martin works closely with its customers, who generally own their replacement parts. "They will buy ahead, consistent with the demand forecast," Kratz says. "Then we place the material in a government or commercial warehouse, depending on their request."

Lockheed Martin also shares forecasts with its own suppliers, enabling them to buy materials and plan their production two or three years in advance. "That helps us shrink lead times and be more responsive to the customer," Kratz says.

One strategy Lockheed Martin uses to produce accurate forecasts is to station employees at customer sites, where they monitor system performance. Lockheed Martin also equips systems with sensors that continually measure their health to help technicians predict failures.

"The data is downloaded after the system is used, then fed back through a fleet management system," says Kratz. If a part is starting to deteriorate, the fleet management system provides an early warning.

Lockheed Martin takes those alerts into account when producing demand forecasts, giving suppliers an integrated demand signal for parts used in both production and replacement.

While it manages inventories of high-tech spares, Lockheed Martin also provides logistics support for day-to-day replacement items. For instance, as part of a contract between the company’s Global Supply Chain Services Group and the U.S. Defense Logistics Agency (DLA), Lockheed Martin supplies Michelin tires for every aircraft owned by the U.S. Navy.

Within five years of taking over the contract, Lockheed Martin boosted the tire supply chain’s efficiency. "We increased supply availability from 81 percent to 98 percent," Kratz says. "We reduced inventory on hand from 365 days to 90 days. And we reduced delivery time to the ultimate user from 60 days to an average of 58 hours, anywhere in the world."

Under another contract with the DLA, Lockheed Martin also provides consumable materials—such as nuts, bolts, fasteners, and lubricants—to all motor pools in the Army, Navy, Air Force, and Marine Corps.

When it put the contract out to bid, the DLA had asked vendors to consider using three regional warehouses in the United States. Lockheed Martin improved on that plan. "By using our network simulation capability, and the demand patterns the DLA supplied to us, we were able to show that we improved service and reduced capital cost by using two warehouses instead of three, placed regionally in the United States," Kratz says.

Whether the goal is to keep a fighter plane in the air or simply to keep a laser printer in service, people who manage service parts must keep time, location, and cost in equilibrium to stay ready for whatever needs fixing.

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Somewhere Over the Rainbow: The Future of Spare Parts Logistics

The business of servicing high-tech products is evolving in ways that will make logistics more important than ever, according to Vele Galovski, vice president, research, field services at the Technology Services Industry Association (TSIA).

Based in San Diego, TSIA is a membership organization that conducts research, sponsors conferences, and provides other services to technology companies. As head of the field service discipline, Galovski observes that some member companies no longer send technicians to customers’ sites for repairs.

“For many of our members, the Holy Grail is to understand which parts of the equipment will fail, and turn those into customer-replaceable units,” Galovski says. The customer removes the failed part, ships it to the service company, and receives a replacement. That scenario places increased emphasis on reverse logistics.

Some companies have gone one step further. “They have remote monitoring, where they can do diagnostics, and even become predictive on a failure,” Galovski says. “The equipment phones home and says, ‘I’m about to fail.'”

The call creates a service request and triggers the shipment of a replacement part. “Customers are able to do the installation themselves, then they have a return merchandise authorization (RMA) that sends the defective part to a depot for repair,” he adds.

For some companies, customer self-service is already the norm. “For some members in the telecommunications field, upward of 90 percent of what they do does not require a technician,” Galovski says.

Another trend with implications for logistics is the move toward outcome-based services.

Historically, technology companies have sold hardware—computers, networking equipment—plus services to maintain and fix those systems. Today, some companies offer a broader range of services to help customers gain more value from their technology. For example, a medical device manufacturer that sells hardware for the operating room might help educate users about new tools, techniques, and enhancements to help them use the hardware more effectively, and in more situations.

For vendors that adopt this strategy, part of the package they sell is a guarantee that the equipment will stay up and running. “So the pressure increases for spare parts to be available quickly,” Galovski says. The pressure comes not from the customer asking for parts to arrive in one day or sooner, but from the extremely high levels of uptime in the new service level agreements.

Among other things, this model creates pressure to get failed parts to repair depots quickly. It’s simply too expensive to stock enough new parts to guarantee that the right part will be available wherever and whenever needed. “Companies are getting to the point where anywhere from 30 to 50 percent of their spare parts inventory comes from remanufactured product,” says Galovski.