Based on the results from our benchmark survey, we found that on average, 51.5 percent of all on-site incidents require spare parts to resolve the issue. Furthermore, over half of the members we surveyed identify spare parts availability and delivery as the number one reason why an on-site incident is or isn’t repaired in one visit, while also recognizing that a “one and done” resolution is a key driver of customer satisfaction. When it comes down to it, if your ability to satisfy your customers is dependent upon the availability and delivery of spare parts, there’s no doubt it is an incredibly important part of your overall operation that deserves attention.
Before I can fully explain expenses, I feel I should first talk about benchmarking. Benchmarking is not just a number and how you compare to that number. The real purpose is to identify where you’re different, why you’re different, and what you can learn as a result. So, rather than just give you a single number representing spare parts & logistics as a percent of revenue, I’ve chosen to share this metric on a box-whisker diagram.
(Click image to enlarge.)
What we can see is that the median spare parts cost is 6.2 percent of revenue. The blue box represents the 25th and 75th percentile of performance for that metric. Companies that have a pure cost focus have actually achieved spare parts and logistics costs at less than 3 percent of revenue, but when we start to look at companies with costs greater than 10 percent, we notice that many actually increase their spending with forethought and feel they’re receiving a greater return on this investment.
For example, of the TSIA members surveyed, those that had a spare parts and logistics cost as a percent of revenue over 10 percent said that they had done the analysis and it had positive results. The additional investment they had to make in terms of inventory to ensure a 99 percent first-pass fill rate and to establish same-day fulfillment capabilities was offset by the thousands of dollars in additional revenue that they got each and every day as a result of the investment . In other words, when it comes to the big picture of satisfying your customers and increasing revenue, the incremental cost is worth it.
When it comes to managing the supply chain, you’re not simply looking at “supply and demand” at the product level. You have to look at individual parts and sub-systems with different failure rates and costs. Furthermore, a developing sophistication on the part of the customer has created a growing list of service-level criteria that also needs to be managed. One thing worth noting is that the relationship between part criticality and top customer support and logistics area (SLA) criteria is tied very closely with customer outcomes.
Further complicating matters is that each SLA criteria is tied to different response times, and they all need to be connected to network-established delivery windows. Simply saying “next business day” can actually mean three different delivery windows. Each delivery window also has a different cost implication, each with its own impact on business outcomes. The end result is that management of spare parts is becoming more and more specialized. Nearly 60 percent of the TSIA members surveyed replied that they now report up through the service organization rather than the supply chain organization.
For the past few years, TSIA has focused on trends impacting the technology industry, and our latest book, B4B, notes some significant trends that will have an impact on the management of spares.
While the previously product-focused business model of “make, sell, ship” has served manufacturers well for many years, customers are now becoming more concerned with achieving their desired business outcomes and are making sure they receive the ROI that was promised with the original sale of the product.
As suppliers move from being primarily product-focused to outcome-focused, the key to revenue growth is about finding ways to help customers save money and improve their business outcome, which means suppliers have to take more responsibility for performance. We’re seeing these trends manifest as customers establish penalties for missed SLA’s, like equipment availability and uptime, and the trend becomes even more pronounced with outcome offers that tie supplier payment to actual business outcomes delivered.
There’s obviously so much more to the B4B story, but to help you get to thinking along the right track to improving your current process, your company should always be considering the question “If I don’t get paid until my customer achieves their business outcomes, what would we do differently?” What investments would I make in my product, and what changes do I need to make in my supply chain to better support my customers and help them achieve their outcomes? Once you start keeping this mantra in mind, you’ll be able to lay the groundwork to improving your spare parts fulfillment and delivery process.
Watch my On-Demand webinar “Spare Parts Logistics: The Pony Express to Same-Day Delivery” for a more in-depth explanation of the topics listed above. If you have any thoughts on what companies can do to better improve their spare parts and logistics program, feel free to leave a comment.
Post Date: December 19, 2014
Vele Galovski is vice president of research, Field Services, for TSIA. Using his nearly 30 years of industry experience, he has consistently helped companies both large and small drive double-digit top-line growth with a proven retain, gain, and grow strategy. Vele has also written a book, The Perpetual Innovation Machine, which describes a holistic approach to management based on ambitious goal setting, data driven analysis, skillful prioritization, inspiring leadership, and the lost art of employee engagement.
The Technology Services Industry Association (TSIA) is dedicated to helping services organizations large and small grow and advance in the technology industry. Find out how you can achieve success, too. Call us at (858) 674-5491 or we can call you.