Surviving the Spare Parts Crisis. Joel Levitt
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and timing is purchased.
You can specify a premium product, but you will have to write a convincing business case to get approval for spending the additional funds.
So far so good. The question is that if the OEM wants to make the sale, they will need a better price than the next guy. They are also not likely in business because of a love for pumps; they want to make a profit. But how can they make a profit if only the low bid gets the job? There are several strategies.
They could make a premium pump and hope to sell it for a premium price. Some major manufacturers have taken this tack to great effect — think of Caterpillar mining equipment or GE turbines. Both are premium product lines made available at premium prices. Both companies rely on the parts and service business to greatly enhance the profit picture.
If you read business news, you’ll see that Wall Street seems to like parts and service businesses because they produce profit with little capital investment. It is not costly to expand parts or service business (some training, tools, and small offices/warehouses). Compare that expense to expanding the fleet of haul trucks or adding jet engine assembly lines.
Outside of a few premium manufacturers, most OEMs take the easier route. By far, the most common strategy is to make the pump good enough and price it in order to win a chunk of the business. However, all the profit will then have to come through the parts counter or from the service business. This strategy is exactly the one used by most OEMs. You buy the pump on low bid and you now represent to the OEM a 15-year cash flow for spare parts.
Remember, those of us in maintenance and procurement created this environment and we feed it by buying on the lowest bid or price.
THE DIMENSIONS OF THE SPARE PARTS CRISIS
For want of a spare part, the company ground to a halt.
No matter how effective your reliability program is, you will need certain spare parts over the life of a physical asset. As a result of global factors, spare parts for maintenance repair are getting harder to obtain and inventories are harder to justify.
Already power plants have been idled, chemical plants silenced, and assembly lines stilled. Why? A critical spare part was not available when it was needed. It’s that simple and yet complex at the same time.
This problem has been developing for quite a while, but it is increasingly affecting output of production facilities globally. The competitive worldwide landscape has changed. Why did this change take place? The reasons are connected to changes in the competitive landscape. Protection of home markets along with freer trade and the simplification of global marketing started the process. The Internet pretty much finished it.
A combination of factors come into play: increasing competitiveness needed just for survival and the shortened time horizon of corporate managers (short-term decisions) who lead manufacturers, distributors, and consumers of spare parts. This combined drive for both competitiveness and short-term profit has cornered both producers and consumers of spare parts into the supply chain environment in which we now live.
Several factors have contributed to this complex problem.
• The manufacturing and competitive landscape of the OEM along with their attempt to squeeze more profit from their parts business and reduce the capital tied up.
• Distributors of the spares also optimizing their own supply chain as well as the disintermediation (buying direct from manufacturer and bypassing distributers) enabled by the Internet.
• Reducing end user inventory levels in an attempt to cut costs.
• Nature of the spares themselves. With new product lifecycles getting shorter and with OEMs reducing the costs in their supply chains, machines are supported for fewer years in terms of how long parts are available. This increased pace is driven by both technology changing at increased rates and competition being more aggressive.
Each factor, in its own way, has amplified the crisis. In historical terms, when one of the domains had supply problems, the slack was taken up by one of the other domains.
The master enabler: computerization and the ability to optimize all inventories along the supply chain
A less obvious, but important driver is the more widely available computer capability to analyze parts sales patterns, analyze turns, calculate sales per square foot, and mine the parts sales data to make more sophisticated stocking decisions. Optimization is now very popular and, whether it is appropriate or not, everyone seems to be promoting it.
OEMs
After World War II, the manufacturers were returning from military to commercial production. Spares were hard to get. The entire Allied world had to retool and make this transition. In the Axis nations, entire cities, factories, and transportation infrastructure had to be rebuilt from the ground up.
The OEMs built up deep capabilities to duplicate, repair, and reverse engineer any spares they needed. Large manufacturers developed these same capabilities. Most large maintenance departments had extensive machine shops, fabricating bays, and people skilled in a myriad of trades. If the part was too expensive or had a long lead time, the shop would either repair the one that was broken or build a new one.
This capability was kept in place until well into the 1980s. At that time, the company machine shops were no longer essential as parts supply loosened up. The few machine shops left started to close and their work was outsourced. In more remote parts of the world that have tenuous supply chains and older equipment, you still see deeper capabilities to repair, patch, build, and reverse engineer spares.
OEMs today maintain fewer SKUs (stock keeping units or part numbers) with lower quantities on hand. This is good business! If you have 10,000 SKUs, you know that probably 2000 are your best sellers. You also know that the other 8000 SKUs consist of the bulk of your business’s costs associated with spare parts. Over the years, many businesses decided to not stock those 8000 SKUs, and instead produce them only to firm orders (rather than to sales forecasts, which are used for the more popular spare parts).
Faster innovation cycle times result in faster obsolescence. In turn, OEMs keeps stock levels low to prevent write offs, resulting in lower service levels. Companies have become lean. LEAN also means low stock levels. After lean came Agile. AGILE means the company is fast to respond to signals in demand. The fast response is related to future products, not to past products.
Perhaps someday we might convince the OEMs to combine the two and create: LEAGILE — a hybrid of lean and agile — keeping long lead time stocks on hand while being quick to provide the final item.
Intermediaries (Dealers and Distributors)
In many cases, the OEMs do not sell directly to the part user. There are one or more intermediaries between them and the end customers. For example, you might buy construction equipment or mining equipment from a dealer, who provides significant service as well as local, site, and climate specific support. The dealer may also stock and sell the spare parts.
Due to the same factors impacting the OEMs, the dealers / distributors are reducing the number of SKUs they stock and the quantity on hand of the ones that remain. As a result, the traditional first lines of defense are getting weaker in their ability to mitigate the destocking of the OEMs.
In other times and places, the dealers might have stepped up their stocking to reduce the issues for their customers. However, optimization and efficiency enabled by more sophisticated computer systems have driven down the stock levels for the dealers in the same way it did for the OEMs. It is entirely logical to think that the same 8000 SKUs were eliminated for the same reason — slow or infrequent turnover.
Another force is making the business environment less profitable for dealers. The Internet has caused disintermediation. This is a fancy word that means end users, enabled by the Internet, can now buy directly from the OEM, bypassing the dealer or distributer. Before, some of the higher volume spare parts supplied the profit to the dealers to support the slow-moving stock.