EMC Corp. sells data-storage units the size of a refrigerator, or bigger. They play a critical role in the operations of large multinationals, banks and airlines. So when it comes to servicing these complex machines, EMC must get parts and technicians to the site as quickly as possible.
EMC promises to have a technician on the job within four hours of a customer's call. That means providing the necessary parts within just two hours of the technician's request. Yet a few years ago, strong growth was threatening to undermine the $7bn company's ability to keep its service commitments.
Based in Hopkinton, Mass., EMC manages a spare parts network out of 300 locations worldwide. It also does most of its own repairs. What it wanted, says Mark Deitemeyer, director of logistics for global services, was a way for planners to handle the dramatic expansion in parts numbers and products being serviced. Spreadsheets and notepads could no longer do the job. The time was ripe for automation.
EMC was more prescient than the average high-tech company with an intensive service operation. Most have given short shrift to the critical parts and service side. In terms of corporate investment in time and technology, manufacturing has garnered nearly all of the attention.
According to a new report by AMR Research, companies spend 60 percent less on information technology for their service businesses. Says AMR: "What is affectionately deemed the 'aftermarket' becomes synonymous with 'afterthought.'" The result has been unhappy customers, and even lost accounts.
But a sluggish economy can have interesting side effects. One is a boom in the service business. Strapped for cash, companies are holding on to their hardware longer, opting for repairs over new equipment.
Fortunately for manufacturers, the service function turns out to be far more remunerative than making the stuff in the first place. AMR notes that aftermarket services represent approximately 24 percent of manufacturers' revenues. Yet they frequently contribute between 40 percent and 80 percent of profits.
Making something that breaks turns out to be pretty good business strategy. The trick lies in fixing it fast. Says Mike Landry, chief executive officer of Servigistics Inc.: "Customers remember how you handled the problem, rather than the problem itself."
EMC chose Servigistics' parts planning system to optimize its entire network. It wanted to devise parts-stocking plans for each location. The company first used the product, now known as Servigistics 7.0, to help make basic decisions about the network, including what to stock, where to stock it and how to replenish. But the software is also a tactical tool, helping to balance stocks on a day-to-day basis. Deitemeyer especially likes the option to view only exceptions - situations deviating from the norm - rather than the mass of data about all parts.
EMC combines Servigistics' software with that of Clarify, a customer relationship management (CRM) vendor that was acquired by Amdocs Ltd. from Nortel Networks just under a year ago. Clarify manages the dispatching of engineers, while recording time, labor, travel and parts usage for each event. The information is then transferred to the Servigistics tool, where it serves as a basis for planning. Deitemeyer says the two systems integrate smoothly.
Results have been significant. EMC's inventory accuracy for service parts stands at 99.9 percent. The vendor is able to minimize downtime of faulty units - even with the increasing participation of third-party technicians. The key, Deitemeyer says, was creating a single network of parts, along with the requisite data, that could be accessed both by EMC and its outside repair vendors.
Landry cites benefits for other Servigistics customers as well. Subaru reduced its parts inventory from $14m to around $6m, while Cray Computers went from $29m of inventory to $18m. Axcelis Technologies, a silicon-chip producer, increased on-time delivery of service parts by 175 percent. Other industries making greater use of critical-parts strategies include medical equipment, office equipment and aviation.
Slashing Parts Inventories
Baxter Planning Systems, Inc. has seen similar improvements within its customer base. Parts inventories can drop by between 35 percent and 60 percent, although most clients see reductions of around 50 percent, says Bryan Scott, chief executive officer of Austin-based Baxter. "We achieve a 98-percent service level with half the inventory in many cases," he claims.
Such results are taking place against the backdrop of increasing demands for speed. The aftermarket business has changed dramatically since Greg Baxter, former manager of worldwide service-parts planning for Texas Instruments, started his company 10 years ago. Then, says Scott, next-day service was perfectly acceptable. "All you'd need was a big central warehouse."
More recently, manufacturers have gravitated toward regional stocking locations as an extension of their central facilities, in response to demands for two- to four-hour service. Many have distributed key spares to individual repair technicians, who squirrel them away in lockers, garages and car trunks. Customers get their parts faster, but suppliers get the headache of managing inventory scattered among multiple sites.
The pendulum, says Scott, is now swinging away from "trunk stock" and toward better control of parts inventories at centralized and regional locations. That, of course, requires a better means of planning than the legacy or enterprise resource planning (ERP) systems that manage the aftermarket side of many businesses.
Most of Baxter's customers are direct manufacturers, but around 10 percent are third-party logistics providers (3PLs), and their number is growing. In the spring of this year, UPS Logistics Group named Baxter its preferred provider of parts-planning software. UPS uses the Baxter product known as Prophet to calculate inventory levels, optimal stocking locations and expected demand. Baxter also has an arrangement with Choice Logistics, and DHL has expressed an interest in some form of partnership, Scott says.
In addition to selling software, Baxter performs parts planning for a number of manufacturing clients, include Network Appliance Inc. and Lucent Technologies. In the case of the latter, a Baxter employee in England manages the customer's entire planning operation for Europe.
Parts Are Spreading Out
Stan Beal, executive vice president of marketing for Rochester, N.Y.-based Xelus, Inc., agrees that the trend in service parts is toward greater dissemination of stocks. Ten years ago, he says, 80 percent of inventories might be held at a central location. Today, it's closer to 20 percent, with the rest in regional distribution facilities, lockups, technicians' trunks, even on site at the offices of big customers.
At the same time, says Beal, the very nature of the repair business has changed. Xelus began life 30 years ago as a small consulting firm for Xerox and Eastman Kodak. Back then, office copiers might take a technician hours to repair. Now it's often just a matter of swapping out a subassembly. The era of easy parts substitution has driven companies like Kodak to fashion entirely new strategies for stocking, moving and controlling the units that circulate throughout their networks.
There are key differences between the fulfillment of finished product and critical parts, says Beal. In the case of the latter, "you buy what breaks, not what's on sale." The service world consists of huge numbers of small shipments to individual customers, along with the challenge of reverse logistics for the return of spares and defective units. Unable to afford the storage of all possible parts, companies must determine what they're most likely to need. The practice, says Beal, is something of a logistical chess game.
The Xelus suite of software consists of four products: Xelus Plan, for tactical parts planning; Xelus Extend, for optimizing stocks at remote and forward locations; Xelus Trade, to evaluate the cost and availability of parts on the sourcing end; and Xelus Link, for collaborating with sales people in the field. An increasing number of companies are using those tools for managing parts on a global scale, Beal says.
Aftermarket software sales have remained strong in the down economy because they yield results in the form of hard numbers, says Beal. In the first year following implementation, Xelus customers have reported inventory reductions of between $10m and $50m, while the lifetime value of the product has ranged between $50m and $270m. And all that, he claims, has occurred "with no drop in customer service. Sometimes, it's improved."
Proper planning has become an essential element in critical-parts management. As Landry puts it, "If you have the wrong plan, it doesn't matter how good your execution processes are." Still, once their best-laid plans are in place, companies must be able to store and move parts expeditiously. For that, they are coming to rely on third-party specialists such as Atlanta, Ga.-based UPS Supply Chain Solutions.
UPS's resources include some 8 million square feet of warehousing space, at 603 facilities on six continents. The network was built up over the last decade through acquisitions and in-house resources, says Paul Gettings, vice president of high-tech and telecommunications. UPS's capabilities include the physical movement of parts, field stocking locations, reverse-logistics management, and value-added services, including repair depots in the U.S., Europe and Latin America.
The unit's 250 clients hail from multiple industries, including computers, networking equipment, medical systems, capital equipment for manufacturing, printing and office equipment. Without question, says Gettings, their demands are getting more and more intense. Same-day service has become the standard, and two to four hours is common. Customers aren't willing to wait for the repair of standard office machines, let alone units whose failure can stop a production line. "There's a heightened sensitivity to having it repaired faster," Gettings says.
Aftermarket providers face the challenge of controlling costs while providing top-notch service. Some kind of optimization tool is therefore essential. "Inventory level versus service requirement - it's a constant, ever-changing daily battle," says Gettings. Many companies are pushing for centralization of parts stocks at multiple levels - metropolitan, national and global. Yet they can't afford to let customers wait for a part. An order might come in as late as 1:00 a.m. Eastern time, for delivery anywhere in the U.S. by 8:30 the following morning. Even high-value, low-usage parts, best suited for storage at a single facility, must be dispatched within 48 hours to locations throughout the world.
Execution vendors such as UPS aren't stopping with that capability. Hence the company's adoption of the Prophet by Baxter suite. UPS set up a full-fledged planning business earlier this year, to match optimization services with global visibility and management of parts inventories. Gettings says the company is seeing more demand for a single provider that can provide multiple aspects of a parts-management program, from strategy to execution.
FedEx Gets Critical
Federal Express has always been in a hurry - it was born 30 years ago as an overnight courier - but it, too, has seen a growing impatience on the part of customers in the aftermarket sector. The explosion of high-tech products has caused a corresponding growth in the installed base of mission-critical computers and other types of equipment, says Dave Kevern, vice president of worldwide services for electronics, commerce and supply chain within the FedEx Services business unit in Memphis. The company's spare-parts delivery windows have shrunk from 24 hours to eight, supported mostly by end-of-runway facilities. Now it takes a whole network of depots, each consisting of less than 2,000 square feet, to satisfy the two- to four-hour commitment within many contracts, Kevern says.
Like archrival UPS, FedEx favors a "soup-to-nuts" strategy on servicing the aftermarket. It combines its own extensive physical network with various alliances to provide supply-chain design and optimization. Kevern says manufacturers are awakening to the fact that a reliable parts and service network can be an important means of market differentiation. "We see them driving more and more every day to a pure availability of product," he says.
With its original network of parts banks, FedEx could be considered one of the pioneers of modern-day aftermarket services. But those end-of-runway facilities must now be supplemented by a chain of depots for many customers, Kevern says. He sees some customers centralizing inventories, while others push parts into the field. "It almost comes down to which seminar they went to last," he says.
Wherever they choose to stock parts, customers will demand more round-the-clock service, with tighter delivery windows, Kevern says. Their priority will be removal of the "black holes" that bedevil so many supply chains today - especially in the handoff between couriers and commercial airlines, and in the "final mile" of delivery. All are places where providers can lose visibility and control of critical parts.
A similar sense of urgency is being felt on the manufacturing side. FedEx Custom Critical, based in Akron, Ohio, handles shipments of parts to the assembly line. Joel Childs, vice president of marketing, says emergency moves are often required in that sector. For many, they have become part of the mix of anticipated services. Customers are willing to pay an occasional premium for transportation, if it means saving more through the maintenance of a just-in-time, low-inventory supply chain.
Focus on Reliability
In a service-intensive environment, reliability may be more important than the underlying mode of transportation. So Akron- based Roadway Express offers several choices, based on when the shipment is needed and how far it must travel. Roadway's nationwide less-than-truckload operation often is sufficient to move time-critical shipments. The trucker claims to be the first major LTL carrier to offer a time-critical service, beginning in 1991.
Roadway beefed up the offering in 1996, with a money-back guarantee of expedited, on-time delivery. Response times are on a case-by-case basis, says marketing manager Mike Younkin, but same-day is typical, and less than eight hours isn't uncommon.
At the beginning of this year, Roadway set up an airfreight forwarding operation under the name Roadway Air. For the big carrier, the move represented yet another option for time-critical shippers. Customers get preferential treatment from underlying air carriers.
For physical movements by air, Roadway shares assets with its airline partners in the joint venture known as Integres Global Logistics, which also includes several advanced technology companies, according to Ferenc Relle, marketing manger of Roadway Air. "In the replacement parts area, the expedited mode is normal," he says. "It's the way a person competes in that industry."
Still, for an expedited carrier, it's not just about parts. In addition to more emergency shipments, Roadway is seeing a general decrease in cycle times, says Younkin. One customer, a restaurant, provides a one-hour window for delivery of promotional and retail merchandise in the morning, before it opens for business. Dated materials, such as magazines and items with pre-planned obsolescence, are also strong candidates for a time-critical service, Relle says.
Younkin says some customers are reducing the number of their distribution centers and turning to time-critical delivery to make up for the greater distance in transit. They end up saving money, he says. Yet many companies are unable to take that step because they can't measure productivity and savings across their supply chains.
That should change as more businesses embrace performance metrics and adopt a broader view of their supply chains. At the same time, they'll be demanding better management of critical parts.
Customers used to talk about minimizing equipment downtime, says Deitemeyer. Now they won't tolerate any downtime at all - not even for system maintenance. Vendors must respond with the ability to conduct remote diagnostics while providing even faster service. "That's the road we're on," he says. "That's what we do best."
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