Different industries have very different focuses in terms of service parts. Much of it has to do with the attributes of the products themselves. Some of these attributes are listed below:
- The length of life of the supported product (i.e. heavy equipment has much longer service part lifetimes over consumer electronics)
- The expense of the supported product
- The complexity of the supported product
Generally the larger, longer lived, more complex and more expensive the product the large percentage of overall revenues are derived from service parts. Airplanes are an example of where revenues in the form of service parts can come 25 years or more after the initial sale. The major industries for service parts are the following:
- High Tech: (primarily for the manufacturing machines, such as semiconductor equipment)
- Construction and Industrial Earth Moving Equipment: (the largest service part organization and now service part third party, Cat Logistics, was originally an internal organization to Caterpillar, which was setup to service Caterpillar tractors and other earthmoving equipment)
- Consumer Durable Goods: Many consumer items are long lived such as washers, heaters and refrigerators.
The Challenging Environment of Service Parts
These features combine to create a very challenging environment for service parts planning. The emphasis here is planning. The execution of the plan is not very much different from the execution of original production items. This is why the requirements (planned production, transport and new buy orders) can be effectively executed through and ERP system, but can not be effective planned by most ERP vendor planning systems. However, regardless of this fact, most companies are still planning their service parts with a combination of ERP system with external planning spreadsheets.
One of the best articles on the importance of service parts planning is (Winning in the Aftermarket, HBR May 2006, Cohen, Agrawal, Agrawal.). In this article the following are mentioned.
According to a 1999 AMR Research report, businesses earn 45% of gross profits from the aftermarket, although it accounts for only 24% of revenues.”
“On average whopping 23% of parts become obsolete every year.”
“Indeed, third-party vendors have become so price competitive that OEMs lose most of the aftermarket the moment the initial warranty period ends.””Each generation has different parts and vendors, so the service network often has to cope with 20 times the number of SKUs that the manufacturing function deals with.”
“Aircraft manufacturers, for instance, can reap additional revenues for as long as 25 years after a sale. The longer the life of the asset, the more opportunities companies will find down the line. Each generation has different parts and vendors, so the service network often has to cope with 20 times the number of SKUs that the manufacturing function deals with.” – AMR
Chicken or Egg?
The question of whether purchasing companies or software companies were what retarded the market is an interesting question and could be the topic of a separate article. This shortage of systems for service parts management has left the majority of service parts networks managed by manual means. Paradoxically, due to the more complex nature of service part planning, it is even more difficult for a human planner to compete with a computerized solution than for a human planning to approach the quality of original product planning. While more complex planning systems are required for service planning, the desire of companies to spend money on service parts infrastructure and software is lower. What results is a seriously sub-optimized sector of the economy. This is why we have proposed a 4PL model for service parts management, which is described in this post.