Speed is increasingly a key supply-chain differentiator, but nowhere is that more true than in the business of supplying critical parts. In this sector, customers expect delivery within hours, not days.

Two primary forces are driving development of this service niche. First and foremost, original equipment manufacturers have warranty contracts with their end users and must be able to meet those contractual obligations, which frequently include protections against downtime losses. In an increasingly litigious society, companies risk severe financial consequences - both from lawsuits and damage to reputation - for failing to live up to their promises.

Another driver stems from the fragmented nature of many parts supply operations as companies generally have multiple service territories and often select different service providers for each. Faced with pressures to reduce inventory levels and associated investments, OEMs and other companies need greater visibility not only to parts availability but also to pipeline contents - a difficult challenge when responsibilities are spread across numerous networks.

"OEMs are always looking to improve their service to their end users, and having a service parts network with a high parts availability and rapid response time to their field engineers enables them to improve system uptime," says Scott Collins, vice president of service parts logistics for Sonic Air, a division of United Parcel Service. Keeping contract warranty terms and other service commitments also protects hardware investments and minimizes business disruptions from hardware failures.

Throughout the last decade Sonic Air, in conjunction with UPS, has focused on designing a service network to specifically meet the needs of these OEMs. "We give the OEMs a single point of contact, we use our own network, and we have systems connectivity across that entire network," Collins says.

	"Having a service parts network with a high parts availability and rapid response time to their field engineers enables [OEMs] to improve system uptime." -Scott Collins of Sonic Air

It is a large and potentially lucrative market. Research recently conducted by Sonic in conjunction with Bain & Company, found that in 1999 the service parts segment of high-tech hardware alone represented about $16.7bn globally, of which the U.S. portion was $6.8bn. Canada and Europe together accounted for $5.2bn, while Asia and the rest of the world represented the remaining $4.7bn. And the sector is growing at a 6 percent average compounded rate. Included in the survey were manufacturers of computer hardware, semiconductor equipment, telecommunications and networking equipment, medical products and the aerospace industry.

In addition to high-tech, Sonic focuses on Fortune 1000 companies in the medical industry as well as third-party service providers. The company owns a central parts distribution center with more than 1 million square feet of space within three miles of the UPS air hub in Louisville, an arrangement that enables Sonic to provide late-night processing of orders with delivery guaranteed by 10:30 a.m. the next day, or even earlier if customers use premium services.

From that DC, Sonic replenishes to its network of more than 400 field support bank locations worldwide: 188 in North America, 148 in Europe, 74 in Asia, 15 in the Middle East and Africa and five in Latin America. That number rises each month; Sonic recently opened facilities in Puerto Rico; El Paso, Tex.; and Hollywood, Fla. With the exception of a few dedicated sites, the field support banks are multi-client facilities.

Orders can come in to Sonic from customers by EDI, internet, fax or via one of several call centers Sonic operates, as late as 1 a.m. for next-day availability. Orders are routed to the appropriate dispatcher, who then alerts the respective branch operations that the particular part has to be pulled and dispatched for delivery. Parts can be sent overnight directly to certified engineers (CEs) in the field. Another option is a hold-for-pickup service at any of the 1,430 UPS service centers - 1,000 in the U.S., 330 in Europe - designated as sites where CEs can snag the parts as early as 7:30 a.m.

The Sonic strategy is to locate field support banks close to the end user population of their customers in order to minimize the time from order entry to delivery. "Our network runs 24x7, and right now we can serve 68 percent of the U.S. business population within an hour, 88 percent in two hours, and 99 percent within four hours," says Collins.

Sonic uses its Louisville DC to provide repair and refurbishment services as well, and maintains a staff of more than 300 technicians to provide rapid turnaround of equipment such as laptop computers, hard drives, monitors, and telecommunications devices, including the programming of cell phones.

For example, Sonic performs approximately 8,000 repairs a month on mostly impact and thermal printers for Intermec, usually on an overnight basis.

Another high-tech customer, Getronics (formerly Wang Getronics) currently is in the ramp-up phase of a new service program signed in January. Sonic technicians now perform 1,100 repairs a month for Getronics on a wide array of computer parts, peripherals and point-of-sale equipment and expects to see that number rise from 6,000 to 8,000 as the program comes fully online.

Although Getronics has undergone a number of corporate incarnations, the body of the company has been a Sonic client for more than 10 years, primarily using Sonic's stocking locations to support the Getronics customer base with time-critical service parts needs. Getronics had maintained their parts support operation among several different organizations; the new agreement consolidates those activities with Sonic in a move that will provide Getronics with greater inventory visibility as well as parts being located closer to its customer base.

Sonic also now is providing Getronics with end-of-runway central warehousing, which improves Getronics' efficiency and gives the company the ability to reduce some of the fixed and variable costs associated with the parts operation.

"The Sonic/UPS relationship has allowed Getronics to enhance our overall logistics services to our customers by consolidating our freight services - ground, air and next-flight-out, warehousing, and repair - in one central facility," says Richard Fogarty, vice president of service delivery for Getronics. "This allows us to take advantage of freight savings and enables us to reduce our investments in parts by cutting the cycle time for returning defective parts to a serviceable condition. Getronics can also offer a higher level of logistics consulting services to our customers by using the Sonic nationwide network of parts distribution centers, which provide four-hour parts delivery in major business areas for our client base."

On the IT side, says Collins, Sonic recently converted to a Vantive order entry and dispatch system and is in the process of revamping its other systems, improving their scale and integrating them globally. Sonic is developing an Oracle platform for order management and already has in place Oracle billing and financial systems. Sonic also is installing WMS programs to better manage the quality and productivity levels in its warehouses. It will use EXE in the larger facilities and the Oracle WMS in facilities with 20,000 or fewer square feet.

"By the first quarter of next year, we are going to have a fully integrated service parts system that ties together order entry, dispatch, order management, repair, inventory management, billing and financials," says Collins.

Having an inventory management system throughout the network will help identify which parts to store at particular locations, based on the frequency of failures experienced by the end-user population. "Hopefully, this visibility across the entire network will enable customers do a better job at planning and thus be able to reduce the total cost of the inventory in the pipeline," he adds.

Sonic provides much of this information on the web. Using a browser, customers can pull tracking information on parts shipments and confirm deliveries, giving them visibility of a part from order entry through to delivery. "On the reverse side, where we have recovery operations for monitors and hard drives and laptops, the customer can track the reverse flow of those units through the pipeline and check the status of a particular repair as it moves through the shop floor in Louisville," says Collins.

On Command
On Command Corp. dominates a very different kind of industry that also needs extremely fast delivery of critical parts. Based in San Jose, Calif., On Command provides television entertainment and high-speed data access to more than 3,300 hotel properties and 950,000 guestrooms worldwide. When a television is on the fritz or a modem doesn't work, the people staying in those rooms are not happy.

On Command Corp. earlier this year turned to MSAS Global Logistics to establish a worldwide network of forward stocking locations to provide time-critical delivery of service parts for the company's entertainment and communications systems. The network initially will focus on U.S. operations, eventually expanding to include regional supply centers in North America, South America, Europe and Asia.

In the U.S., MSAS intends to stock parts at 13 designated logistics centers, beginning with locations in the Washington, D.C. area, Denver, Chicago and Orlando. By the time the network is fully operational, more than 55 percent of On Command's U.S. hotel rooms will be able to receive service and installation parts within four hours via "will call" and courier services, according to Allan Goodson, chief operating officer for On Command.

"Each regional supply center is integrated through an internet-based virtual private network to our Oracle system," says Goodson. "Our hotel customers can be assured that orders from field service technicians will be processed and delivered using the most advanced and cost-efficient system currently available and with complete coordination, from part ordering to delivery confirmation." This applies regardless of whether the customer places the order via an 800 parts-support service line, the web-based system or direct entry into On Command's Oracle applications system.

Goodson adds that this program culminated a yearlong effort by his company to study, prototype and develop the worldwide supply network.

The decision to use the Oracle system for the network initially was problematic for MSAS.

"We originally proposed to handle the 13 stocking locations here in the U.S. by utilizing our proprietary warehouse management system (WMS)," recalls Jerry Levy, director of strategic alliances for MSAS. "We intended to receive EDI feeds from the On Command Customer Management Center, download that information to the appropriate location where the parts were available, and our people would fill that order and either fax or send by electronic message a confirmation."

	"Our hotel customers can be assured that orders from field service technicians will be processed and delivered using the most advanced and cost-efficient system currently available." -Allan Goodson of On Command

But On Command was seeking a web-based system. Though MSAS was beta testing a web-enabled version of its WMS, it wasn't quite ready for market at the time of the On Command negotiations.

However, On Command had just implemented the Oracle ERP system and wanted MSAS to use that system. MSAS initially balked. "At first we said no," says Levy. "The last thing you want at each of your logistics centers is to have every one of your clients' systems - a system for Kodak, a system for Nokia, it would be a nightmare. But they brought us in to see Oracle's web-based WMS, and when we looked at it closely, we realized that we could almost manage the operation by wire." Instead of considerable investments in systems and software, "all it entailed was getting a robust printer and a dedicated Pentium II PC at each location - less than $3,000 per location," he adds.

Consequently, MSAS was able to bring all 13 stocking locations online within four months of the Jan. 20 announcement, using the Oracle system. "We've had a few problems, but we've been really pleased," says Levy. "We managed to achieve a lot of efficiencies with this system with very little IT investment."

There were some interesting issues, largely due to the newness of the Oracle implementation. "Part of the problem, and a valuable lesson we learned, was that On Command gave us this system before they had worked out all the bugs and completed all the training," says Levy. "Sometimes our people had questions or problems, but the people at On Command didn't have an immediate answer because they were new to the system as well."

The Oracle people were very responsive, which helped mitigate the disruptions, he adds. "When you shut down a 1,000-room Marriott in downtown Detroit for a day, there's a lot of revenue being lost."

Levy explains that not only does On Command provide the movies shown in the rooms, it also provides the televisions, the remote controls, game controllers, and high-speed data access. And instead of a satellite feed from a remote location to each hotel, On Command maintains the infrastructure - the racks of VCRs, tapes, etc. - in storage areas at the individual hotels.

"In the older times, if the Sheraton Boston had a connector that failed, that part would have been flown next-flight-out at excruciating cost from On Command's facilities in San Jose," says Levy. Now, the On Command technician can in some cases drive over to the MSAS stocking location, pick up the part and install it.

The vast majority of parts go out next-day service via UPS, while approximately 10 percent of the deliveries move by critical courier, with MSAS using its Sky King North American Logistics subsidiary. MSAS does no installation and currently has no burning desire to get into that segment of the business.

One of the quandaries facing logistics companies today is when to say no, he admits. "When you try to be all things for everybody, you risk becoming nothing for anybody."

Sonic Leverages Parts Expertise With New Service Offerings

While the emphasis is on getting critical parts to the customer, this market also has a reverse logistics component that deals with returning damaged or unusable parts. When market research revealed the need for a service in this area, Sonic Air developed a program to help customers consolidate the reverse flow of damaged or unusable parts and shrink the amount of inventory in the reverse pipeline. This offering, developed in conjunction with UPS's authorized return service, is centered at Sonic's Louisville distribution center. "When CEs [certified engineers] perform repairs at a customer site, they generally end up with parts that either are defective or otherwise inoperable, and often these parts are highly valuable," says Scott Collins, vice president of service parts logistics for Sonic Air. Rather than the CE spending time arranging the repair or disposal of the faulty parts, they can attach an authorized return label to the part and give it directly to a UPS road vehicle, or drop it at any of the UPS service centers or authorized shipping outlets. Another option is to leave the part at any of the 1.7 million corporate accounts where UPS makes regular stops. "This enables the CE to get the part on its way the same day and into the pipeline for refurbishment," says Collins. The customers pre-determine specific parameters for deciding which parts are repaired and which are disposed, and Sonic follows the established repair and disposal instructions. One of the advantages to this arrangement, Collins adds, is that often an engineer, who hasn't had the opportunity to actually diagnose the specific problem, will bring an array of replacement parts to the customer site. The return service allows the CE to get those unused replacement parts back into available stock the next day, which helps reduce the amount of safety stock needed at the DC or stocking location, thereby improving inventory turn time and carrying costs. Sonic also operates a smart courier service that involves non-technical repair/replacement services on-site for customers, performing swap-outs of monitors, keyboards, and certain peripherals, for example. The smart courier personnel are Sonic employees, Collins adds. "The customer tells us what they want us to do and provides us with the processes they want us to follow, and we then train our couriers on a customer-specific basis to perform these tasks." Another projected growth area involves inventory finances. "We have started to offer inventory financing services to certain clients where we finance and own the inventory until it is delivered to the customer," adds Collins. "This enables the customer to remove the assets from their books and support that inventory with a reduction of working capital." The financing is provided through UPS Capital Corp.