Aftermarket supply chain should not be an afterthought

Managing the supply chain for spare parts and accessories effectively can bring competitive advantage for businesses,

Cathy Humphreys. - עדכון אחרון: 22/11/2011 23:28:55

The economic climate and change in market requirements has seen supply chain management move up the business agenda. This has led to many manufacturers improving process efficiency, smartening up performance metrics, and investing heavily in technology to increase the effectiveness of their supply chain.

In recent years supply chain management teams have continued to evolve and started to look at risk evaluation. This helped to position organisations so they could better manage risks such as failure to supply, higher costs, negative impacts on service levels or significant firefighting.

While a strong understanding of the efficiency of a standard supply chain operation is commendable, many have forgotten the aftermarket, which includes spare parts, accessories, product upgrades and support. With product lifetimes lengthening, companies are seeing changes in demand patterns. Now is the time for aftermarket supply chain to be at an optimum, rather than being treated as an "also-ran" division.

Demand volatility

A major characteristic of an aftermarket business is the large range of parts that have to be stocked. If demand volatility increases, the effect on the amount of inventory required can have a major impact on cashflow and bottom line profit.

By improving the performance of a spare parts division, profit can be driven into the company through increased revenue in the after-market and lower wasted cost. This can potentially increase revenue in the mainstream business via increased customer loyalty. The length of time a company spends doing business in the aftermarket is often far greater than the initial sale. This creates an opportune time to sell more - if the customer is happy.

The key is continuous improvement. A few years ago it was fine to have a spare parts division whose focus was to identify those existing production parts which may be required in the aftermarket and to keep a few to one side for later. Then, when required, the appropriate part is sourced at a higher price.

This is no longer the case, and the requirement is to accurately predict what parts may be required during the lifecycle of each product and to efficiently source and stock these items.

Although it is common practice for companies to utilise sophisticated software for the new-build market, many still use spreadsheets for the management of spare parts. With the pressures of high service level requirements and high demand volatility, isn't it the latter part of the business that needs the support of sophisticated software and not the other way around?

Predicting demand

Improving demand accuracy is the single most effective action that will cascade through all other supply chain metrics, improving revenue, profit and reducing costs. If aftermarket parts are inherently difficult to forecast, then this is where businesses should look at getting help.

Advanced planning software, catering specifically to aftermarket products, can have a significant impact on demand accuracy. By automatically applying the appropriate algorithms to the historical consumption of each and every item, as well as combining known demand such as scheduled maintenance or predicted failure rates, accuracy will increase.

It is also essential businesses understand potential changes in the product mix as well as overall volumes, so the right parts can be stocked. The cost of having the wrong parts could be a business' breaking point. A lack of product availability will lose customers and increase the cost of expensive emergency shipments. Excess stock ties up capital, incurs unnecessary storage costs and impacts cashflow.

Businesses then need to review what parts they will need to keep in stock to ensure a smooth aftermarket service for products being kept for longer periods of time. It's also important to be aware that the greater instability in the demand of new products, as people hold on to products for longer, affects the supply chain dramatically as it becomes far more difficult to manage the all important aftermarket.

Effective planning is the key

Businesses prepared for future changes in demand of spare parts will strengthen their market position. Predicting future requirements, and planning proactively, will create greater visibility and the opportunity to enable a more efficient (and profitable) supply chain.

The business benefits will be evident if it can better manage the aftermarket supply chain and achieve optimal stock levels to satisfy service level agreements. Benefits include a release of cash tied up from excessive stock, improved process efficiency and fewer emergency costs from firefighting as well as the potential for increased revenue from happy customers.

Aftermarket supply chain management is complex, but the rewards are big for getting it right. The key is not to use systems created for the mainstream business and try shoe-horning them into a completely different environment. Instead, it is paramount to have the right tools for the job and to use sophisticated systems to manage the complexity, thus helping managers make the right decisions.

* Cathy Humphreys is UK country manager at INFORM.