How MCA Solutions Should be Remembered

What This Article Covers

  • What are some of the important MCA Solutions contributions to supply chain planning software?
  • What will happen to the MCA product?
  • What can other companies learn from MCA?

Background

Servigistics recently acquired MCA Solutions. This is an important development as the two companies were the top two software vendors in the service parts planning space. A number of articles will certainly cover the strategic angle of what this merger means for the service parts planning software market, however, in this article I wanted to focus on some of the important contributions for which MCA Solutions should be remembered.

My Exposure to MCA Solutions

I first attended MCA training in 2007, which was just a month or so after my first introduction to the company. After attending training at their headquarters in Philadelphia, I worked on an MCA implementation for a year. During that year I learned quite a bit about their application, and used their software, read through their documentation and interacted with MCA consultants.  My interaction with MCA’s people and product was how I first became educated in inventory optimization and multi echelon planning (MEIO), a topic on which there is also an SCM Focus blog, and for which I have a book coming out which highlights several important features in MCA’s product that helps demonstrate concepts related to MEIO (MCA screenshots are included in the book, but they will now be described as Servigistics screenshots).

What Will Happen to MCA’s Application? 

The MCA Solutions product will eventually be discontinued, and some of the functionality will be ported to Servigistics’ service parts planning product. Because the MCA application will not exist as a product far into the future, I wanted people who had not worked with the product to know some of the important contributions of MCA Solutions.

A Sampling of Their Ideas and Contributions

MEIO Innovation

MCA was one of the first MEIO applications. MCA was founded by Morris Cohen, a highly regarded academic and sometimes consultant, and along with the people they brought in, they were able to implement in a commercial product something that had previously been primarily of academic interest.

A High Degree of Control Over the Supply Plan

MCA developed one of the most powerful supply planning applications, either in service parts planning or in finished goods planning, that I have used (MCA’s solution was also a forecasting in way specifically customized for service parts). A few of the reasons that MCA’s application was so powerful are listed below:

  1. By leveraging MEIO, which is more powerful and controllable than other supply planning methods (MRP/DPR, heuristics, allocation and cost optimization), the application was able to control the supply plan very precisely.
  2. The application interface was compact, with easy access to different screens.
  3. The application’s parameter management was one of the easiest to review and change of any application that I have worked with. Parameter maintenance is one of the most underrated areas of supply chain application usability, and a major maintenance headache with many applications, however MCA made it look easy to develop a straightforward way to adjust configuration data. It was actually very simple, and I have wondered several times why more companies don’t copy it.

MCA’s solution had an excellent combination of a mathematically sophisticated backend, with an easy to use frontend. This is one of the main goals of advanced supply chain planning software generally, and it is infrequently accomplished.

Alerts and Recommendations in One View

MCA developed an ability that I had never seen before, which was the Network Proposed View. In this view, which is shown in the upcoming book, sorted the recommendations by their contribution to service level. It is a combined straight analytical view on the application recommendations (Procurement Orders – so-called “New Buys,” Repair Orders, and Stock Transfers, so-called Transshipments and Allocations) as well as alert system — in that it told planners where to focus. It also required no configuration, and was literally an out of the box capability.

Redeployment

MCA had mastered redeployment, something which all service parts planning clients need, and many finished goods companies also need (but often refuse to admit, the comment on this topic often being “we just need to improve our forecast, and we won’t need to redeploy“). MCA’s redeployment was also highly customizable, and could be very specifically tuned.

Simplified Simulation

MCA’s application was an excellent simulation environment. It displayed two planning runs results right next to each other in the user interface. This allowed a planner to keep one result, and then make adjustments, and rerun the optimizer with new service level or inventory parameters. The planner could then perform a direct comparison between the old and new runs. If the new run was not an improvement, a few changes could be made, and then the optimizer could be rerun and the simulation would be overwritten. This provided simulation capability in the same screen as the active version, and made it very easy to use. This is another area which many vendors have hard time making user friendly, and which MCA had mastered.

Optimizing Service Level or Inventory Investment

The MCA MEIO optimizer could be run bi-directionally. That is it could maximize service level and cap inventory investment, or minimize inventory investment and cap service level. While inventory optimization is generally known as controlling service levels, by capping inventory investment, MCA allowed companies to stock their network based upon their budget.

Clear and Highly Educational Documentation

MCA’s documentation on its solution was top-notch. Through accumulating research papers, books and other sources, I have a large library of MEIO documentation, and MCA’s Principles of Operation in particular may be my favorite MEIO document. In fact, I still frequently refer to MCA documentation when I have a question about how MEIO or service parts concept can be implemented in software. MCA had both functional and technical documentation, and all of it was extremely helpful and was written with a high attention to detail. Many vendors could learn from how MCA documented their product.

Synopsis

From any angle one would wish to view these items, these are important contributions, and this is not even the full list.
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Conclusion
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Things change. However, I will miss MCA Solutions. They were a true innovator, and had a great vision and executed on this vision extremely well. MCA showed the benefits associated with focusing on one area. Many of their consultants were not only expert in MCA software, but they also knew service parts planning inside and out. Their software and their people got me to think about things differently on a variety of topics than I had before. While MCA did not exist as an independent entity for that long (although software companies tend to have shorter lives that most other companies), their innovation should be remembered.
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References 
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Fill Rate Versus Backorder as a Service Measurement

Background

The vast majority of articles on this website that discuss service level tend to focus on fill rate, as this is the most popular service level measurement method in business. However, the majority of early work on inventory optimization and multi echelon planning that began in the late 1950s, and now drives the best of breed service parts planning software applications, was in fact designed around backorders. This is because the research was primarily paid for by the Air Force and carried out by the RAND Corporation, and the focus was squarely on solving the problem of managing military service parts networks. Therefore, it is interesting to compare and contrast two quotations from research papers that focused on minimizing backorders. This first is from Craig Sherbrooke and his METRIC (an acronym for Multi-echelon Technique for Recoverable Item Control) paper written in 1966. This is how Sherbrooke explains his use of backorders over fill rates in in his paper.

Fill rate — defined as the fraction of demands that are immediately fulfilled by supply when the requisitions are received — concentrates nearly all stock at the bases. The result is that when a non fill occurs, the backorder lasts a very long time. Similarly fill rates behaves improperly in allocating investment at a base when the item repair times are substantially different. Consider two items with identical characteristics except that one is base-reparable in a short time, and the other is depot reparable with a much longer repair time. Assume that our investment constraint allows us to purchase only one unit of stock. In that case, the fill rate criterion will select the first item, and the backorder criterion the second.

The fill rate possesses an additional defect. A fill is normally defined as the satisfaction of a demand when placed. But if we allow a time interval T to elapse, such as a couple of days, on the grounds that some delay is acceptable, the policy begins to look substantially different. As longer delays are explored, the policy begins to resemble the minimization of expected backorders.

In summary, the backorder criterion seems to be the most reasonable. The penalty should depend on the length of the backorder and the number of backorders; linearity is the simplest assumption. This is the criterion function most often employed in inventory models. – Craig Sherbrooke

Sherbrooke explains that he considers backorders superior for his purposes due to the following:

  • Fill rates tend to concentrate stock at the bases (bases in Sherbrooke’s papers would correlate to DCs in industry-speak, with the depot being the regional DC or (RDC))
  • Fill rates measure the satisfaction only at the point of initial delay, and do not measure how late a fulfillment actually occurs.

Therefore Sherbrooke designed an algorithm as part of METRIC a penalty which multiplies the length of the backorder by the number of backorders.

Leanard Laforteza states a similar reasoning in his paper for selecting backorders as a measurement for his paper designing a multi echelon system for supplying Marine military deployments.

Fill rate is the percentage of demands that can be met at the time they are placed, while backorders are the number of unfilled demands that exist at a point in time. In commercial retail, if customer demand cannot be satisfied, a customer either goes away or returns at a later time when the item is restocked. the first case can be classified as lost sales while the second case creates a backorder on the supplier or manufacturer. In military applications, especially in most critical equipment, any demand that is not met is backordered. The backorder is outstanding until a resupply for the item is received, or a failed item is fixed and made available for issue. These two principle measures of item performance – fill rate and backorders – are related, but very different. Commercial retailers are more interested in fill rate than in backorders because fill rate measures customer satisfaction at the time each demand is placed. Not only is fill rate easy to calculate, but it also helps retialers form a picture of how well they are meeting customer demand. Experience may tell them that a 90% fill rate on an item is not acceptable and will create customer complaints. On the other hand, backorders are not easy to compute as fill rate. Unlike commercial retail business, the military is not concerned with lost sales. The military measures performance not in terms of sales, but in terms of equipment availability.

In terms of supply support measurement, we recommend tracking backorders. Although fill rate tends to have clearer meaning to commercial suppliers, the rate does not have the same meaning in militar applications. Using the concept of backorders, a unit can determine the status of its supply support not just when the order is placed, but up to the time the item was received. – Leanard D. Laforteza

Here Laforteza does a good job explaining why backorders are more relevant for military application than fill rates. However, as the greater market for MEIO applications is civilian, vendors added fill rates and fill rates are not the dominant method of MEIO implementation. MCA Solutions, a service parts planning vendor with a substantial military client base can measure service level by fill rate or by availability (i.e. the uptime of equipment). However, while it does not measure fill rate by backorder as do Sherbrook’s METRIC or Laforteza’s approach, MCA allows for the flexible setting of backordering for different locations. MCA allows for the following settings:

  1. All locations to be backorderable
  2. Only the root locations to be backorderable
  3. No locations to be backorderable (which is the default).

MCA describes its management of backorders in the following way:

A Location is called backorderable if the unmet demand at that Location gets backordered at that Location and waits until the inventory is available at that Location. A Location is not backorderable (also referred to as lost-sales) if the unmet demand is passed to another Location or outside the supply chain. In backorderable models, preference is given to destinations that do not have enough inventory position to meet their child Location needs. – MCA Solutions

Conclusion

The service level measurement must fit the application. The early MEIO research papers were centered around military application, and thus used backorders, and backorder which is often the number of backorders times the average backorder duration serves as a common service level measure. However, civilian applications require fill rate as the service level measure.

References

“METRIC: A Multi-echelon Technique for Recoverable Item Control,” C.C. Sherbrooke, RAND Corporation, 1966

“Inventory Optimization of Class IX Supply Blocks for Deploying in U.S. Marine Corps Combat Service Support Elements,” Leanard D. Laforteza, Naval Postgraduate School Monterey, California, June 1997

Principles of Operation, MCA Solutions, 2007

Interviews with Tim Andreae SVP of MCA Solutions

Introduction

These interviews are with Tim Andreae, SVP of Marketing for MCA Solutions. Tim has extensive experience in strategic work and has been with MCA for over 8 years. His longevity in the planning and service parts space makes these interviews particularly relevant. In these interviews I asked Tim both about the history of MCA as well as exiting things happening at MCA currently.

Title: Tim Andreae Introducing MCA Solutions


Here Tim explained that MCA Solutions came out of academics after Dr. Morris Cohen had spent considerable time consulting in the service parts industry. He also explained many of the important challenges in service parts planning, and which MCA has been designed to handle. Furthermore, because service parts are counter cyclical, MCA has continued to receive demand for its software even with the difficult economy. Costs are one part of the equation, but excellent service organizations must be in stock in order to meet service agreements, and this is where MCA can really improve service organizations.

Title: Tim Andreae on How to Plan Service Parts


Here the multi use aspects of MCA Desktop were described. This is a low-cost way to get access to MCA technology for simulation, and to test the software for a possible future full implementation. This is a low risk way to test the fit of software, allowing companies to become comfortable with it, and then to prepare a plan for how the software should be rolled out. On the other hand, the company can simply continue to use MCA Desktop in a more limited way, and get all the benefits of performing simulation in a top offering.

Title: Tim Andreae on How to Plan Service Parts


Tim discusses what I believe is a very important topic for service parts improvement. That is the fact that the majority of service companies out there are still using systems that were never designed to manage all the complexities of service parts. This causes all types of problems as the assumptions of finished goods planning systems are simply different from those of service systems. As Tim points out, companies doing this are probably struggling, and they are also carrying far too much inventory. Inventory savings from 10 to 50% can be expected depending upon the level of sophistication prior to the MCA implementation. And secondly, service levels correspondingly increase at the same time.

Title: Tim Andreae on Performance Management


In this video we learned that MCA has a new product called Performance Management creates a real-time dashboard with service management best practices built right into it. Every company I have consulted with has been extremely interested in knowing their metrics in real-time. There is also a strong connection to the MCA SPO planning tool, which allows those working in Performance Management to drill down into the planning tool to get to extra levels of detail.
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Conclusion

In these video interviews I learned quite a lot about both what has made MCA Solutions different from other vendors since its founding, as well as interesting things that MCA has recently introduced including MCA Desktop and Performance Management. I would like to thank MCA for allowing me to record the interviews and post them on this site.

SAP SPP Continues to Have Implementation Problems


The pathway is not clearing for SPP as the successes have been few and far between. However, there is a solution.

Bringing Up SPP in the Market

SPP has been a long haul for SAP. First of all, this product was an attempt to bring service parts planning into the mainstream. Rightly so, SAP identified service parts planning as a key underinvested in area in the enterprise. SAP thought it could grow this business and combined part of the code bases of SAP Demand Planning, SAP Supply Network Planning and then added service specific capability that had been sitting in other best of breed applications for a number of years. These include:

  1. Inventory Rebalancing
  2. Leading Indicator Forecasting
  3. Repair Buy Functionality
  4. Partial Service Level Planning (planning low on the service level hierarchy)

More details on the service level hierarchy at the post category link below.

http://www.scmfocus.com/inventoryoptimizationmultiechelon/category/service-level-hierarchy/

SAP even surprised me by coming up with in my opinion the best interface for planning in all of SAP SCM, the DRP Matrix. This helped address a historical weakness in the SCM modules, (at least for one module). However, the initial problems began when SAP approached clients and explained the SPP solution to them. Instead of focusing on just SPP, instead clients were shown a demo that included a smorgasbord of SCM functionality which brought many different modules into the solution (such as GATP) and even the SAP Portal. This was a mistake because even the biggest service organizations have a lot less money to spend on software, so getting them just to purchase SPP would have been a success. Furthermore, service organizations are far further down the capability totem pole than the finished goods side of the business, so their ability to even implement the solution that SAP presented to them would have been unlikely. I have spoken to SAP product management about this, and they have re-stated that this is their strategy and that they think it is gaining purchase with clients.

The Partnership with MCA

A second part of their strategy was to partner with best of breed service parts planning company MCA Solutions and created a “xApp” which combined the forecasting functionality of MCA SPO with the supply planning portion of SPP. I have written previously that I am very much opposed these types of arrangements for a number of reasons.

There are several thorny issues with these partnerships.

  • It’s unclear that vendors should be selecting vendors of clients. The large vendor many not select the smaller vendor that is best for clients vs. best for the larger vendors
  • These partnerships allow SAP to say they have functionality that they did not originate and are claiming extraordinary IP rights vis-a-vis the smaller software company
  • SAP’s partnership agreements require that the smaller vendor declare their IP and that IP that is undeclared can be taken by SAP. This was rather shocking and I think shameful that such an agreement would even be drafted.
  • Unequal partnerships like this are inherently inconsistent with the type of economy that a lot of Americans say they believe in. The Federal Trade Commission has a role, which they don’t seem to take very seriously anymore to prevent over concentrations of power in any industry, and that includes software.

I describe this more fully in this post

http://www.scmfocus.com/inventoryoptimizationmultiechelon/2010/01/its-time-for-the-sap-xapps-program-to-die/

However, as luck would have it, the xApp program is currently dying or dead (the xApp program includes something like 140 different applications vendors that SAP has “partnered with”) and by in large they have not caught on. MCA and SAP’s contract for the xApp program was not renewed.

Project Problems

Despite their missteps, SAP was able to get several companies to buy and implement SPP. However, two of the biggest implementation sites of SPP, which are Caterpillar Logistics and the US Navy, are after a number of years and significant expense not anywhere. Navy is not live with SPP, and unlikely to ever go live. This is something the folks over at Navy don’t like to talk about much, as a whole lot of US taxpayer dollars went to Deloitte and IBM for very little output. The blame does not squarely lie with SAP even though SPP does not work properly. I plan to write a future article entitled “I follow Deloitte,” which describes how every post Deloitte SAP SCM project I seem to work on is barely functional. However, Deloitte continues to get accounts somehow due to the fact that too many corporate decision makers are not performing their research. You can read more about the problems in hiring Deloitte to manage services parts projects here:

http://www.scmfocus.com/servicepartsplanning/2010/11/13/deloitte-writes-ok-paper-on-service-parts-but-would-you-want-to-hire-them/

How About Ford?

Another major implementation for SPP is Ford, but they have seen little value from their SPP implementation. The best predictions I receive from those that have worked on the project is that Ford will eventually walk away from SPP. However, they cannot publicly do this because they have invested at least 9 years and very large amounts of money into the implementation. Therefore, SPP now has no large reference accounts for SPP. A hybrid of SPP has been implemented at Bombardier, however this is the old SIO architecture where MCA Solutions performs most the heavy lifting. Therefore, it can also not be considered a live SPP implementation. None of this surprises me, as after working with SPP, it is not possible to take the application live without custom development work or combining with a functional service parts planning applications. This solution turns SPP into a shell, which can make some executives happy, as it means they are using SAP, but the work is done by a different application.

Reference Accounts?

This is a problem because they were to be used as the major reference accounts to selling into other accounts. The problems at Caterpillar are particularly galling as SPP was actually developed at Caterpillar. Caterpillar Logistics is plastered all over a large amount of SAP marketing literature and is the gold reference account for the solution. Here there is not much to reference, unless as a potential client you are willing to wait that long to bring a system live. And secondly, the degree to which Cat is live is a matter for dispute. Cat will do what it can to continue the impression that they have at least some functionality live, because to walk away would mean a PR problem for them. What would be interesting is to see if SPP can be implemented without a large consulting firm as neither IBM nor Deloitte have had success with SPP. SAP should consider backing a smaller firm or doing it themselves as they need a success in the SPP space. At this point the biggest reference-able account for SPP is Ford.

Where Do We Go From Here?: The Blended Approach

SAP’s Product Management Approach with SPP

Some decisions that have been made by SPP product management are very poor. I think the major consulting companies are out of their depth in implementing SPP, and it needs to be radically improved in order to make more if its functionality effective. A significant amount of functionality that is in the release notes simply is broken or does not work properly.

I have performed SPP consulting and would like to see the module, and service parts planning in general to become more popular and widely implemented than it is. However, its important to consider that SPP only introduced some of the functionality that brings it partially up to par with other best of breed solutions in the current version (7.0) (prior to 7.0, SPP was not really competitive) and it can take several versions for SAP’s newest functionality to work correctly. For this reason, including my personal experiences configuring SPP, it would be difficult for me to recommend relying upon SPP exclusively. I think the experiences at Caterpillar Logistics,Ford and the US Navy lend credence to the idea that going 100% with SPP is a tad on the risky side.

To fill in the areas of SPP that are lacking I would recommend a best of breed solution. Some things like leading indicator forecasting really need to be improved. Furthermore, if you want to perform service parts planning with service level agreements (SLAs) there is no way around a best of breed solution. There are a number of very competitive solutions to choose from, and it all comes down to matching the way they operate vs. the company needs.

Simulation Capability Enhanced with Best of Breed

I will never be a fan of performing simulation in SCM entirely. The parameters in SAP SCM are too time consuming to change and the system lacks transparency. However, several of the best of breed service parts planning solutions are very good at simulation. While it may be conforming to use a single tool, it’s generally a bad idea to try to get software to do something it’s not good at. For simulation I would recommend going with a hosted solution and a best of breed service parts planning vendor. (for those looking for an excellent prototype environment for finished goods, I recently have had a lot of success with Smoothie by Demand Works)

http://www.scmfocus.com/demandplanning/2010/07/using-demandworks-smoothie-for-forecast-prototyping/

As few companies want to make the investment to staff a full-time simulation department (planners are often too busy, and lack the training to perform simulation), it makes a lot of sense to have the application with the vendor. As they are experts in the application, they can make small tweaks to the system and provide long-term support to the planning organization. All of this can be built in at a reasonable rate to the hosted contract.

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Conclusion

It only makes sense to use the history of an application to adjust future implementations. In doing so, it is most advisable to pair SPP with a best of breed vendor that best meets the client requirements. The additional benefit of this approach is that you get access to consultants who have brought numerous service parts projects live. And those consultants primarily reside in the best of breed vendors. We were recently contacted by a major consulting company to support them in a client which is looking at SPP (we don’t work for consulting companies), and the consulting company was simply focused on getting the client to implement SPP, so knowing the company, it is not difficult to imagine the stories that were told, and what was covered up to get the client to sign on the dotted line. Companies interested in the full story on SPP’s functionality and how it compares to what else is available can contact us by selecting the button below.

References

My service parts planning consulting offering.

http://www.scmfocus.com/consulting/areas-of-specialty/service-parts-planning/

Discussing the underinvestment in parts.

http://www.servigistics.com/solutions/parts.html

On the precise date the SPP initiative was kicked off at Catepillar Logistics.

http://logistics.cat.com/cda/components/fullArticle?m=115228&x=7&id=382143

 

What is The Target Stocking Level?


What is a Target Stocking Level?

The first time we heard of Target Stocking Level was on an MCA project. This is the actual output of the Strategy module of MCA SPO. We have listed a short definition from MCA’s SPO Glossary.

“TSL is the quantity available to meet demand within the lead time and thus becomes the basis for computing the customer service levels. The TSL for each Location part is determined on the impact of what the TSL will have on the service level.” – MCA Glossary

TSL in Common Usage

A search through the web shows that this term is not very common. However, it is not hard to find it listed in books through Google Book Search.


We found a formula for it in the book Best Practices in Inventory Management by Tony Wild which we have listed below.

TSL2
TSL in SAP

We had never run into the concept of TSLs in SAP until we did a search for it in SAP Help. We found it in the following area:

  • SAP ERP SOP
  • SAP ERP – The concept exists as a “range” within purchasing
  • SAP SCM Forecasting and Replenishment
  • SAP SCM SNP

TSL in Dead Modules or Functionality

Interestingly, of the four areas we found it, two of the areas – S&OP and SAP Forecasting and Replenishment are “dead” areas within SAP, in that they are only extremely rarely implemented in companies (see our next post for more details). The range concept of TSL in purchasing is infrequently implemented and instead the vast majority of clients we would guess use the requirements plus lot size to drive replenishment.

TSL in SNC

The one area where TSL is both used and used in a module that is actually alive is in Supply Network Collaboration or SNC. Interestingly, it is not called a TSL but instead is called minimum and maximum stock levels. We quote from the book Supplier Collaboration with SAP SNC..

“The projected stock and actual stock on hand are compared with the minimum and maximum stock levels agreed upon by customer and supplier for a location product. If the threshold values are not reached, or are exceeded, alerts are generated.”Mohamed Hamedy and Antia Leitz

SNC3
SNC is not a planning engine like SAP SNP or MCA SPO. Instead it is a collaborative software add-on to SAP SCM that communicates, in this case, inventory information between SAP SNC (in most cases) and suppliers or customers. Most likely SNP (Supply Network Planning) is producing the TSL range, while SNC is gathering actual inventory levels, and then comparing the two to send our requests for bringing in more inventory on specific dates.

Conclusion

Target stocking level is not yet a common term in industry, but does have a number books which both cover it and work with the concept. The concept is a powerful one in that is manifests all of the complex inputs of stock determination into a single number, or a number range. This number(s) can be then compared to actual stock values, in order to develop stock transfers, unserviceable item repairs (for service parts) or can be communicated to suppliers or customers using a collaboration tool like SAP SNC.

Why Auto Parts Distribution is So Inefficient



Big Problems in Automotive Service Parts Networks

In our previous post we discussed the problems with how automotive service parts websites are dominated by dealers. We also discussed how this is inefficient and why these web sites should be centralized and either managed by the manufacturer, or simply outsourced to a company that has this as a focus.

http://www.scmfocus.com/servicepartsplanning/2009/05/14/auto-service-parts-websites-a-problem/

However, after further research it turns out automotive service networks have even bigger problems than this. This quote is from the HBR article called Winning in the Aftermarket:

Some years ago, when we studied the after sales network of one of America’s biggest automobile manufacturers, we found little coordination between the company’s spare parts warehouses and its dealers. Roughly 50% of consumers with problems faced unnecessary delays in getting vehicles repaired because dealers didn’t have the right parts to fix them. Although original equipment manufacturers carry, on average 10% of annual sales as spares, most don’t get the best out of those assets. People and facilities are often idle, inventory turns of just one to two times annually are common and a whopping 23% of parts become obsolete every year. – HBR

Improper Parts Planning

When consultants for service parts planning software company MCA Solutions goes into an account and uses its SPO software to perform inventory re-balancing, they often find that parts are kept too low in the supply network. This is often because fill rates are only being locally managed and local managers are attempting to move parts to where they will eventually be consumed. The problem with this is that transferring parts from a forward location to another forward location is less efficient than moving parts from the parts depot to the forward location. Secondly, there is no reason to move a part to a forward location unless there is a high probability of consumption, or unless transportation lead times are particularly long. This analysis of where parts in the field should be located goes by a number of names including multi-echelon inventory optimization, redistribution and inventory re-balancing.

See the diagram below.



See these posts for more on part redistribution.

http://www.scmfocus.com/servicepartsplanning/2008/04/23/drp-vs-multiechelon-planning/

http://www.scmfocus.com/sapplanning/2009/04/23/inventory-balancing-in-spp/

Generally, the independent dealer model continues to work against rational inventory pooling. AMR Research (now part of Gartner) does have a good point when they bring up this point in their paper Service Parts Planning and Optimization.

During the course of this research, we found SPP applications tended to be very tacticalin nature, solving specific inventory, fill rate, or service-level goals. Oftentimes service is still being viewed as a cost center, and SPP applications are not necessarily viewed as the keys to a greater world of service nirvana.
One explanation is that the buyers of SPP software tend to be planning managers ordirector-level planners who have no jurisdiction over service and repair or other areas of the SLM model. Other reasons include outsourcing, where OEMs have outsourced the service process but retain the planning aspects, or the fact that the company was never in charge of service in the first place—think of an auto OEM and the dealers that actually provide the service.

During the course of this research, we found SPP applications tended to be very tactical in nature, solving specifc inventory, fill rate, or service-level goals. Oftentimes service is still being viewed as a cost center, and SPP applications are not necessarily viewed as the keys to a greater world of service nirvana.One explanation is that the buyers of SPP software tend to be planning managers or director-level planners who have no jurisdiction over service and repair or other areas of the SLM model. Other reasons include outsourcing, where OEMs have outsourced the service process but retain the planning aspects, or the fact that the company was never in charge of service in the first place—think of an auto OEM and the dealers that actually provide the service. – AMR Research

Better Service Parts Planning Begins with Cooperative Planning

Rather than having every dealer attempt to manage its inventory, a much more rational and effective setup is for the dealers to pool their parts at a local depot and for the depot to manage the parts for them. Daily local “milk runs” would ensure part flow to the dealers, and would reduce the poor inventory turn of parts at the dealer location. A series of these depots can then be large enough to be electronically connected and to have their inventory represented in a web order fulfillment system that can better match supply and demand than can a series of disconnected dealers all trying to manage a smaller amount of inventory locally. Honda (for instance) could manage this themselves, or instead could outsource the management to a company like Amazon.com, that really knows how to produce transactional web sites and knows how to match supply and demand. This solution would be vastly superior to the current one where small dealers attempt to manage their own service parts websites (and where it took us 2 hours searching various dealer sites to find that we would have to call in to order a part)

Rick_Wagoner_GM_Looking_Sad
What is happening in the dealerships is a disinterest in making changes or becoming more flexible in order to adopt new technologies. Companies can make a lot of money in the short-term by simply living off of monopoly power. GM was the poster child for inept management, inward thinking, abusive supplier relations and unresponsiveness to customers. A good catchphrase for management consultants could be “Don’t be Like GM.” While Honda quality is much better than GM’s ever was, Honda’s dealer network with respect to their service parts management is not all that much different. In fact most manufacturers seem to employ the same inefficient system. This demonstrates the restrictive influence of the dealership system that no matter how good the car company, the dealer system remains anachronistic.

It seems often that the large American car companies have little interest in their service operations. Instead they prefer to spend their money on advertising. They have lost the battle for the aftermarket, and this reflects in their new sales, although they are unable to make the connection.

To quote again from the HBR article Winning in the Aftermarket:

In the automobile industry, for example, there’s a distinct correlation between the quality of after sales service and customer intent to repurchase. Brands like Lexus and Saturn inspire repeat purchases by providing superior service, and, consequently, they have overtaken well established rivals like Ford and Chrysler. – HBR

Conclusion

The current dealer centric automotive service distribution system is an anachronism and is probably one of the reasons that dealerships have such high costs. Instead of attempting to reduce these costs, dealers are simply passing on their inefficiency to the consumer. However, dealers should be wary. While they have used political finagling to prevent web-based car purchases, this will eventually come to pass. The only thing that the dealers are really necessary for is for providing local service. They should do what they can to make their service operations, which includes service parts planning and management as efficient as it can be. A big part of the answer to this is to begin cooperatively or centrally planning and pooling inventory.

Parts Hub

The parts hub concept has also been proposed by John Snow, at Enigma, which is a software company focused on parts procurement decision support. The post on this topic can be found here.

http://www.uptimeblog.com/aftermarket/how-fewer-dealers-can-sell-more-parts/2009/05/

Reference

Service Parts Planning and Optimization, ARM Research 2007

Post-Reference

After this post was published, we found that auto dealers have a considerably poorer track record on customer service for repairs than independent shops. This promoted us to write this article that questions the validity of dealerships generally and proposes a dealer-less model.

http://www.scmfocus.com/servicepartsplanning/2009/05/18/automotive-dealers-mostly-useles/

John Snow has some interesting things to say about this concept at the link below.

http://www.uptimeblog.com/electronic-parts-catalogs/simplifying-parts-sales-make-it-easy-for-the-customer/2009/05/


How the Bill of Material, MTBF and the Product Structure All Tie Together

MTBF and the Product Structure

In our previous post we discussed the different vendors and services offered for reliability testing and prediction. One of the important issues with relation to MTBF management is the product structure. The product structure is the hierarchy (or at least at first glance) of materials that make up an overall product. This has different names depending upon the application. In SAP ECC it is referred to as a Material BOM or an Equipment BOM. In MCA it is referred to as the product indenture network. This survey conducted by Arena Solutions on this topic is quite interesting.

BOM vs. PLM Software

Being able to deal with the BOM in a flexible and distributed manner is increasingly a capability with what is referred to as PLM software. However, that is not right. BOM management is actually a subcategory of the broader term PLM or life-cycle management. Lifecycle management exists in a number of applications in supply chain, as the article below explains.

http://www.scmfocus.com/supplychainmasterdata/2010/10/how-distributed-plm-functionality-in-planning-systems-differs-from-bom-management/

Eric Larkin, Chief Technology Office at Arena Solutions, has some interesting things to say about PLM vs. BOM management.

 

Having powerful and collaborative BOM management software is important for many reasons that include improving the efficiency of product development and building quality into products as well as product costing for contract development. However, it is also important for service parts planning and MTBF. MTBF calculation integrates with the BOM.

ERP for BOM Management

There is increasing evidence that BOM management greatly benefits from specialized software. ERP software manages how the BOM relates to execution and planning, but does not tend to have advanced capabilities with regards to BOM management. (of course Oracle purchased Agile in 2007, a leader in PLM, however, software mergers often kill the aquired company’s innovation and product. Look how little Oracle has done with the PeopleSoft functionality). Here is an interesting quotes regarding ERP for PLM from Arena Solutions.

There is a misconception that Enterprise Resource Planning (ERP) systems can be used to manage all product information after design, including changes and communication. Unfortunately, even though the final production BOMs, the Item Master, and costing information are ultimately loaded into ERP systems, these systems do not have integral processes for ECOs or file management. Therefore they cannot be used to control BOM or item changes or manage associated files. Furthermore, as a tool primarily for internal groups, ERP systems cannot be used by external partners and suppliers to obtain product information. – http://www.arenasolutions.com/images/pdf/rc_docs/whitepapers/Arena_Turning_Great_Designs_Into_Great_Products_Whitepaper.pdf

ERP systems are not designed to be change control or file managementtools, and must be manually updated to reflect approved productchanges. To update and change product information across electrical andmechanical CAD tools and ERP systems, many companies employ spreadsheetsoftware, such as Microsoft® Excel, to manage part changes, SOPs andBOMs and to communicate them to project teams.” – http://www.arenasolutions.com/images/pdf/rc_docs/whitepapers/Arena_WP_Med_Device_Doc_Control.pdf

Reinforcing this statement is the poor track record of SAP PLM. We personally analyzed this “solution” several times only to find that it did not involve new software as much as simply leveraging the old structures with a few bells and whistles added in.

http://www.sap.com/solutions/business-suite/plm/index.epx

(in the past several years, SAP product management and marketing is increasingly following the Oracle model of presenting vapor or stretching pre-existing functionality to fit new solutions)

Spreadsheets for BOM Management

Exporting BOM information to a spreadsheet and managing it there for MTBF and other purposes is not a very competitive solution with the other alternatives that are present. In fact, even using an on line spreadsheet like Google Spreadsheets, while better than using Excel with its isolated files, is still not really capable of managing the complexity of BOMs. Furthermore with the rise of contract manufacturing and distributed product development and manufacturing, islands of data created by Excel are even less useful. Amazingly PLM software is still lightly implemented out in the marketplace.

Graphic from Arena Solutions – taken from an online webinar – not a formal study.

As far as ERP systems, while ERP systems have BOM functionality, it is not the functionality offered by Arena. Rather ERP BOM management was developed in order to support transaction processing. This is quite a bit different from what specialized BOM management software does.

Arena Solutions

Arena Solutions’ website is quite good and for anyone interested in PLM and BOM management we recommend a visit. It is of course selling a service, however it is also very educational and most the statements made on the site are reinforced by our consulting experiences.

http://www.arenasolutions.com

In one of their white papers we found a very good explanation of the needs of modern BOMs.

“As the design progresses toward production, the part-list-like engineering BOM must transition into a detailed manufacturing BOM that includes all the items required to make sub-assemblies and the final product. During this process, numerous project teams contribute to the BOM and item changes (Figure 2). The resulting manufacturing BOM is highly relational and includes various associated data and files, such as design drawings, software files, item files, costing information, compliance status, specification data, and supplier information.” –

http://www.arenasolutions.com/images/pdf/rc_docs/whitepapers/Arena_WP_Beyond_BOM_101.pdf

The Relational Model for BOM Management

One easy way of understanding this is that one sub-component often is part of more than one parent component. Therefore, by using a relational BOM configuration (which is different from a relational database, you can use a relational database, but still follow a restricted hierarchical model in your BOM configuration.), when the sub-component is changed once in one location it affects all parent components immediately. This is the desired end state, that all parent products be instantly updated when a change to a sub-component is rolled out. This relates to all life-stages of a product’s existence. This updated part data is then sent over the planning system where a flag is changed that tells the planning sytem this part should no longer be planned. Having this data updated is as important as the algorithms you use to produce a forecast.

This complexity really requires a software specialized software solution. Furthermore, this is perfect application for a hosted application. (we increasingly wonder why companies continue to ask for software they have to install and manage, particularly when the application is shared.) With hosted applications, as long as the software provides a standardized feed of some type (such as RSS), application integration can be managed completely on line, so a BOM Management – PLM service provider like Arena could be integrated with an on line version of a transaction processing system and the service parts planning system.

Application Screen Shots

Arena has a nice interactive demo on their website, so we decided take a few screen shots. This screen shows the different status of notifications.


Below we have a listing of notifications for particular BOM numbers. We also see the people (users) that have the ability to view or edit or comment on the BOMs.

Below we see the view for Monica Williams, and the materials for which she has notifications. You can see that each of the materials has an event code attached to it.


When we select one of them we get taken into the detail.


Here we can see who is part of the notification distribution list.


Here we have a flowchart of the process status.


Here we can see that suppliers are involved in this process and can log in.


Also, the individual products that make up the BOM are listed as well.


For each product, there is a coding for the items compliance requirements as well whether the prase of the item (if its in production, obsolete, etc..)

If we select the files, we can see all the attachments to each product.


In conclusion, we find this software very compelling. Furthermore they offer a fully hosted solution which they call on-demand. In our consulting experience, Arena is providing answers for a lot of problems that plague BOM management at many a company.

Open Question

One of the questions we do have is where an MTBF value is located. For the purposes of service parts planning, Arena just needs to feedone number per part. Both SAP SPP and MCA can perform their forecasting(if the option is selected) from a simple MTBF value associated withevery product record. This is called leading indicator forecasting inSPP and causal forecasting in MCA. At least MCA has some involved ways of calculating the overall service level, and one ofthe inputs is the MTBF of the underlying items – related to theinventory coverage for each item.This is something that should naturally be maintained in Arena. How this value is obtained is a different topic and is covered here.

http://www.scmfocus.com/servicepartsplanning/2008/12/09/vendors-and-software-for-determining-mtbf/

However as far as how Arena holds the MTBF, we will update this post when we find out.

References

Wikipedia on PLM Arena Solutions

 

Service Parts and MTBF Forecasting

Service parts for this products can be predicted based upon installed base and usage. The forecasting is a subset of causal forecasting as can be seen in the graphic below.

What Type of Demand?

All service part demand is dependent demand. That is the demand for service parts is based upon purchases that have already been made. Service parts can be forecasted using simple demand history, as with finished goods, or they can take advantage of the installed based and usage of the equipment that is in the field. For some things just the population information is available (population information is obviously much easier to attain, generally only large and expensive equipment like airplanes or construction and heavy industrial equipment has the usage tracked.)

The bigger and more expensive the asset, the easier it is going to be to get usage information. However, usage data would not generally be available for consumer items.

How Does the Mean Time Between Failure Fit In?

MTBF is one particular modality of causal forecasting. Most causal forecasting simply uses one or many independent variables to predict the future dependent variable. However, causal forecasting with MTBG in service parts uses a developed failure rate for the in the field item.

This is a simple example, but it captures how MTBF forecasting generally works.

Combining MTBF and Other Methods

Often the different forecasting categories are thought of as only being used independently. That is if you one for a product or group of products you cannot also use another. MCA Solutions actually allows you to use both a time series and an MTBF forecast. They call this the composite forecast and this forecast has the ability to give different weights to each forecast type. For instance you could weigh the MTBF at 70% and the time series forecast at 30% or any other set of percentages that you wanted.

Prevalence of MTBF Data and the Usage of This Type of Forecasting

Many companies talk about forecasting using MTBF data, but few of them are interested in doing the work to maintain the data. What is unfortunate here is that the data is not that difficult to maintain. There is not one level of granularity that companies have to drive to in order to use causal methods. They can get benefits from using just a basic high level value of their installed base. This should be available for even consumer items by taking previous sales data and applying degeneration percentages (for items that fall out of service) in order to develop a very basic installed base number. Once this number is attained it can be used for MTBF forecasting.

Some basic mathematical estimation can get companies close to the real values. Once these basic installed base numbers are generated, it opens a new opportunity to begin managing the service forecasting process differently.

It would be nice to report that causal methods on only underused in service organizations. However, this is not the case. It also extends to most supply chain organizations. See this post for details.

http://www.scmfocus.com/demandplanning/2010/10/the-missed-opportunity-of-causal-forecasting/

Obviously, there can be no causal forecasting without causals. This type of data should be elementary to maintain, but it is often not maintained. John Snow, in his Uptime Blog, which is associated with Engima, provides some good insight as to why below. It seems that the natural inclination of many service departments is to focus on quickly getting equipment back in service, with less concern for proper equipment maintenance and calibration. During a break-fix event (unscheduled maintenance) this is a rational response: the equipment is down, revenue generation has stopped, so get the machines working again. However, even during scheduled service events mechanics can become overly focused on speed. This is an example of reacting to the urgent rather than resolving the important. The problem is that service departments are often measured more on productivity than on quality.

See the full article here.

http://www.uptimeblog.com/tag/mtbf/

 

Performance Based Logistics, Rolls Royce and Power by The Hour

PBL1.jpg

PBL and Alternatives

Performance Based Logistics is a strategy for system support. Instead of goods and services a supplier is paid for a guaranteed level of performance and system capability. The supplier often has to guaranty the performance at lesser costs but has more control over all logistics elements. The performance is declared in Performance Based Agreements.- Wikipedia

Performance Based Logistics can be in the commercial area of A and D or in the government/military. A quote from the 2006 Quadrennial Defense Review Report indicates the orientation of the Department of Defense regarding PBL.

There is a growing and deep concern in the Department of Defense’s senior leadership and in the Congress about the acquisition processes. This lack of confidence results from an inability to determine accurately the true state of major acquisition programs when measured by cost, schedule and performance. The unpredictable nature of Defense programs can be traced to instabilities in the broader acquisition system. Fundamentally reshaping that system should make the state of the Department’s major acquisition programs more predictable and result in better stewardship of the U.S. tax dollar.

PBL has become a strong trend among the management class of companies in the aerospace and defense environment. This paper discusses PBL and makes some educated guesses as to where PBL might be in 5 years from now.

Basis for PBL

PBL is introduced as a way to improve service levels and increase the responsibilities of supplier service parts management and in some cases service part service operations. In this way it may be viewed as a form of outsourcing where the part planning and management is moved from the client to the suppliers. In cases where the military is the customer, it can be seen as a light form of military privatization.

Supporting Case Studies

The outstanding case study for PBL in the aerospace and defense environment is Rolls Royce. While not called “PBL,” Rolls’ TotalCare engine service program is in fact a long term service contract where Rolls controls the engine service parts inventory and in a way goes beyond PBL by offering direct guidance and instruction when certain parts are due for maintenance. Rolls actively monitors over 3000 engines aggregating a strong level of service intelligence about engine maintenance. Rolls has by most accounts leveraged this capability to grow its market share, take business from larger competitors and reinforce the premium reputation of its industry leading engines.

Deviations Between the Strong Case Study and Other Projects PBL Clients and Environments

It would be a mistake to assume that the success at Rolls can be duplicated to every aerospace and defense supplier or can be generalized to other areas outside of engines. By comparison there were certain organization differences between Toyota and US manufacturing firms as well as geographic differences between the location of supplier base in Japan vs. the US that prevented other companies from ever duplicating Toyota’s success with JIT, regardless of decades of attempts across probably thousands of factories. What this means is that the case for PBL with Rolls must be observed in terms of how Rolls as a company, and Rolls business is different than other companies that want to implement PBL type programs. Some of differences are listed below:

  1. Rolls is only managing a small proportion of the overall service parts of an airplane. They are providing 100% of the parts for the engines under the TotalCare program. This means that a 95% availability actually does mean a 95% availability for the engine as there are no other suppliers. However, this is not true with companies that provide the entire airplane. Therefore it must be considered that Rolls is solving a much more simple problem than a supplier that supplies the entire airplane would be.
  2. Rolls appears to be on the outward edge of competence within the industry. Secondly, this is not a new philosophy for Rolls. Their “Power by the Hour” program, which is essentially similar to the TotalCare program dates at least back to the 1930’s. This means that Rolls has been organizationally oriented towards service for generations. This is not necessarily the case for other A&D suppliers.

The Expertise Required

Developing a PBL contract requires more than the capability to run an advanced service parts planning system like MCA or Servigistics. It also requires a way to cost the PBL contract. This is so the firm can determine the profitability of each contract and can use this information to adjust future contracts. SAP Project Systems is an SAP’s software solution to cost the transactions associated with a contract. The difficulty comes in tying the specific transaction to the specific contract in question. To understand SAP Project Systems more, see this post.

http://www.scmfocus.com/sapplanning/2009/05/03/planning-with-project-systems/

The Data Side Service Parts Planning – MCA SPO

ServicePartsData.jpg
The data side of any type of planning system, and by extension service parts planning is quite important. Planning data is aggregated from transaction data and is usually much lower in volume than the data held in transaction systems. Planning systems need to be run in simulation mode or off line, in addition to being connected to execution systems to make decisions.

DataLink

SPO is very flexible from the perspective of data management. MCA distributes a program called DataLink (as of 2008) which allows non-database administrators to effectively load the SPO database from Access tables. DataLink is very good for making changes when running the software in “What-If” mode (i.e. when it is not connected to a production system).


New Load

New Load

However, when porting over an entire dataset, DataLink is not the best way to do this. Instead, a “dump” can be taken from another database and uploaded into MCA in one stroke. The following bullet points list the steps to performing this task.

Steps

Perform the dump from the extracted SPO system

Create a database on the system hosting the receiving SPO instance using the SPO scrips included in the SPO installation.

Upload the dump to SPO. It will end in .dmp

Conclusion

MCA Solutions has a nice tool for loading SPO directly from Access, which is great for non-database admins to populate the application.