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How Service-Parts Makers Are Coping With Recession

How has the recession affected the service-parts end of manufacturing? Depends on whom you ask. Software vendor MCA Solutions (http://www.mcasolutions.com), a specialist in that area, recently canvassed its customer base on the topic and got a variety of answers - including some disagreement over when economic recovery is due to kick in.

The survey, conducted earlier this year, reached out to virtually all of MCA's accounts, targeting both senior executives and operations personnel. High-tech and semiconductor manufacturers reported the most dramatic impact from the downturn. Their new-product sales were down so sharply that service parts were accounting for more than half their total revenues. In normal times, that share would be less than 20 percent, says MCA chief executive officer Bob Salvucci. With a drop in the demand for microchips, the sale of new machines was down by 50 to 80 percent, depending on the individual company surveyed. (Keep in mind that service parts traditionally account for a hefty portion of the revenues of big manufacturers such as Boeing and Lockheed, as well as automakers.)

Less of a change was seen by makers of medical equipment, although customers are hanging on their machines for a longer period of time, Salvucci says. A unit that might have been replaced in three or four years is now staying in service for four or five.

In the aerospace industry, spare-parts consumption was down due to a big drop in flying hours. That trend, of course, leads to less wear and tear on capital equipment, hence less of a need for parts. So manufacturers in that sector, unlike those in high-tech, saw their spare-parts revenues decline.

One way or another, just about all of MCA's customers are experiencing dramatic impacts from the slump. Semiconductor executives said the situation "is the worst they've seen it," says Salvucci. "That industry is typically an early indicator. They're forecasting an uptick in the third or fourth quarter."

Others weren't so optimistic. Based on feedback from their own customers, some survey respondents didn't expect any meaningful improvement in sales until 2010. Prospects for some automakers could be even bleaker, although Volkswagen saw first-quarter sales that were larger than those of Toyota. Salvucci credits the company's relative success to its early entry into China and other Asian countries, where demand for new automobiles remains strong.

Across the board, manufacturers are struggling to maintain service-level agreements (SLAs) with their customers while streamlining the service-parts supply chain as much as possible. They're analyzing where they can close depots and warehouses without impacting their customers. They're also examining how to cope with a rise in demand when business recovers.

When that finally happens, it won't be business as usual. Even now, Salvucci says, manufacturers' customers are making new demands for better service. The U.S. Department of Defense has instituted a formal process known as performance-based logistics. DOD is mandating the creation of strict SLAs between its own agencies, as well as with primary suppliers like Boeing. In turn, those suppliers are making new demands on their own vendors, asking for stronger commitments on performance and component reliability.

"We're seeing a lot more activity - more collaborative types of planning between OEM [original equipment manufacturers] and Tier 1 and 2 suppliers," says Salvucci. For those companies, a recession is no excuse to lie down on the job.

- Robert J. Bowman, SupplyChainBrain

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How has the recession affected the service-parts end of manufacturing? Depends on whom you ask. Software vendor MCA Solutions (http://www.mcasolutions.com), a specialist in that area, recently canvassed its customer base on the topic and got a variety of answers - including some disagreement over when economic recovery is due to kick in.

The survey, conducted earlier this year, reached out to virtually all of MCA's accounts, targeting both senior executives and operations personnel. High-tech and semiconductor manufacturers reported the most dramatic impact from the downturn. Their new-product sales were down so sharply that service parts were accounting for more than half their total revenues. In normal times, that share would be less than 20 percent, says MCA chief executive officer Bob Salvucci. With a drop in the demand for microchips, the sale of new machines was down by 50 to 80 percent, depending on the individual company surveyed. (Keep in mind that service parts traditionally account for a hefty portion of the revenues of big manufacturers such as Boeing and Lockheed, as well as automakers.)

Less of a change was seen by makers of medical equipment, although customers are hanging on their machines for a longer period of time, Salvucci says. A unit that might have been replaced in three or four years is now staying in service for four or five.

In the aerospace industry, spare-parts consumption was down due to a big drop in flying hours. That trend, of course, leads to less wear and tear on capital equipment, hence less of a need for parts. So manufacturers in that sector, unlike those in high-tech, saw their spare-parts revenues decline.

One way or another, just about all of MCA's customers are experiencing dramatic impacts from the slump. Semiconductor executives said the situation "is the worst they've seen it," says Salvucci. "That industry is typically an early indicator. They're forecasting an uptick in the third or fourth quarter."

Others weren't so optimistic. Based on feedback from their own customers, some survey respondents didn't expect any meaningful improvement in sales until 2010. Prospects for some automakers could be even bleaker, although Volkswagen saw first-quarter sales that were larger than those of Toyota. Salvucci credits the company's relative success to its early entry into China and other Asian countries, where demand for new automobiles remains strong.

Across the board, manufacturers are struggling to maintain service-level agreements (SLAs) with their customers while streamlining the service-parts supply chain as much as possible. They're analyzing where they can close depots and warehouses without impacting their customers. They're also examining how to cope with a rise in demand when business recovers.

When that finally happens, it won't be business as usual. Even now, Salvucci says, manufacturers' customers are making new demands for better service. The U.S. Department of Defense has instituted a formal process known as performance-based logistics. DOD is mandating the creation of strict SLAs between its own agencies, as well as with primary suppliers like Boeing. In turn, those suppliers are making new demands on their own vendors, asking for stronger commitments on performance and component reliability.

"We're seeing a lot more activity - more collaborative types of planning between OEM [original equipment manufacturers] and Tier 1 and 2 suppliers," says Salvucci. For those companies, a recession is no excuse to lie down on the job.

- Robert J. Bowman, SupplyChainBrain

Comment on This Article