Feeling Like A Spare Part

Jun 06, 2019 • Features3D printingfuture of field serviceParts Pricing and Logistics

Spare parts, once the lifeblood of company’s service-centred ethos, is being challenged by the sector’s move to servitization. Will the next 12 months see firms cannibalise their spare parts programme or will the supply chain management see a new framework that combines a selection of cost-models? Mark Glover finds out more... 

How do you deliver the right part, at the right time and at the right price? If you work in supply chain management, then you’ve probably seen and wrestled with these questions. Historically, the spare part transaction was a simple one: a customer needed a component that had failed, they phoned up the company, ordered and paid for the part. Transaction complete.

However, the sector’s shift to a servitization model rather than the traditional transactional-based framework has seen many companies cut their losses and cannibilise their components to align with SLAs.

In the era of servitization, the cost associated with asset failure is having a substantial impact on balance sheets. Income from replacement part sales is now considerably less than the loss accrued from downtime. The priority now is to get an asset back running as quickly as possible and if parts are struck out in the process, then so be it; the numbers will eventually balance out.
It means that a cost-plus approach to spare-parts is losing validity.

The price of producing a part and adding the profit on top is being usurped by a more value-based approach - that is, a cost based on the ultimate value to the customer. Or as a firm enters another vertical – as is common in service – will they align with a different approach such as a market-based strategy?

In short, making money from selling parts is no longer the revenue stream it once was. As well as modifying itself to the shifting nature of the sector it serves, spare parts must contend with other factors that are disrupting the transactional sphere it has felt so comfortable operating in such as E-commerce and 3D Printing.

E-commerce, for example, works best in a market-based strategy. Here it can snuggle up to China, where parts are getting cheaper and the quality is getting better and provide credible components. Add to this the threat of online retailers such as Amazon entering the market and the future does look rather bleak. Meanwhile, looking hungrily into the arena, biding its time and waiting for the right moment, 3D printing could be the most disruptive threat to traditional supply chain management.

Also referred to as additive manufacturing, the ability to print components could quash the issue of time-affected delivery. Atanu Chaudhuri is Associate Professor of Operations and Supply Chain Management at Aalborg University and an expert in additive manufacturing and 3D Printing.

As a recent guest on The Field Service Podcast he told me that some industries have been quick to embrace the technology while others less so. “The forerunners of the adoption of these technologies have been the aerospace and automotive sectors,” he said. “However, there are a lot of other industrial manufacturers who are exploring this but are at different stages of adoption.”

Extolling its financial virtues, Chaudhuri affirmed why 3D printing is aligned with servitization and suggests those taking the long-view of the technology will see a positive return on investment. “If you take a more life cycle perspective,” he said, “and look beyond the cost on a part-to-part comparison or look at the usage of the part over a lifetime of the product, say 15 or twenty years, suddenly you will see a huge difference. You will not be having a lot of inventory, you reduce the inventory carrying costs and maybe the environment will benefit, you will use fewer materials and suddenly the business case looks much better.”

Another challenge the sector continues to face is counterfeit parts. Non-genuine components can compromise safety, the integrity of finished goods and bring reputational damage. It’s an issue that Chris Mitchell, Business Transformation Director at Software and Services company PTC, is all too aware of. He references outcome-based models as a contributing factor to the problem as firms try to gain an advantage in the market. “With industries becoming more service-orientated and more competitive, this issue of counterfeit parts from China, Turkey and other parts of the world creeps up more and more,” he says.

"Making money from selling parts is no longer the revenue stream it once was..."

OEMs spend heavily on research ensuring the quality of their parts, utilising specialist software to engineered products in the best possible way, making the components safe and durable. It’s the finances associated with asset upkeep that forces some firms to opt for a damaging short-cut. “When looking at the cost of individual repair or maintenance event, cost pressures and short-sightedness often lead to the wrong buying decision whereby the cheap counterfeit part is used,” Mitchell explains.

Storage and warehouse logistics remain a puzzle for firms. It’s commonplace to have one centralised hub where all stock is housed making it simpler for inventory management; while a collection of smaller, local warehouses allow for greater flexibility in regards to geographical logistics but requires careful management. Taking advantage of the malaise, initiatives around smart-IoT connected storage boxes, such as those offered by BT and ByBox are proving solutions to the logistics issue.

Strategically placed parts can be collected by engineers who through cloud-based software, can check where the nearest part to them might be. The very nature of field service is also having an affect on how firms place themselves in the sector. By this, I refer to the many verticals that service operates in. It means requirements round spare parts can differ from the medical sector, for example, which will have different behaviours and expectations than, say, the oil and gas market.

This has led to companies segmenting logistics depending on their customer silos. To elaborate, one industry may require a very rapid solution, so expectations will centre on availability and quick delivery meaning the provider’s logistic channel needs to be flexible enough to meet these expectations. Conversely, another industry could be more demanding of uptime and be more price sensitive when purchasing components. Unfortunately, there remains another factor that now firms can do very little about.

At the time of writing uncertainty with Brexit continues and urgent questions round its effect on the global supply chain remain unanswered. While the knock-on effect of political decisions remains out of our hands for now, perhaps it’s time to ask a question that we may have more control over. Will the transactional model disappear completely?

Going forward, I think there will be a place for all approaches and here the diversity of markets could be an advantage. There will always be customers who want to deal on a transactional basis. SKF and GE Healthcare for example, still have long-term contracts with clients who prefer to deal in this way. These are large multi-national corporations and their continued loyalty to traditional frameworks should offer encouragement to other firms.

Spare parts and supply chain management is broad enough to accommodate and embrace change, be it new technology, political uncertainty and a shift in customer buying habits. One far-reaching question however will always remain: How do you deliver the right part, at the right time and at the right price? Amidst the changing sands of supply chain management, it’s something we should continue to ask and also take comfort from.