Service Matters from MCA Solutions

Traditional Supplier collaboration is transaction-based.  As the article "Enabling Collaboration," in Aviation Week describes, supplier collaboration in its basic form is a valuable tool for communicating orders and forecasts to suppliers and receiving a commitment, shipment notification or exception back from the supplier.  However in the aftermarket supply chain space, are traditional collaboration tools sufficient to meet the unique challenges of collaborative planning in this environment which is much more challenging than finished good production planning?

What are the critical attributes of collaboration platform for the aftermarket supply chain? 
Some of the challenging characteristics of the service supply chain to be addressed by a prime service provider and its suppliers include: demanding contracts with performance-based service level commitments, large numbers of parts with intermittent demand driven by unpredictable product failures, and global supply networks that must be highly responsive to restore product uptime. 

In response to the needs of key aftermarket service leaders, MCA has developed a process and next generation platform for customer collaboration that addresses these challenges.  Here are some key elements of a successful aftermarket collaboration framework:

• Shared incentives:  Aftermarket service contracts may specify a demanding customer-focused metric such as part fill rate, response time to repair, or equipment uptime.   If the prime's supplier has incentives for performance that are aligned with the objectives of both the prime service provider and the end customer, it is possible to create a "win-win" outcome where the supply chain moves towards an optimal solution.
• Secure information sharing: Information to enable advanced collaboration goes beyond orders and shipments and must include detailed product information such as failure rate observed in the field, supersession data, , customer forecast and causal data  that can help achieve mutual objectives.  Maintaining security and partitioning data to the appropriate suppliers is critical to a successful relationship.
• Coordinated decision making:  When each supplier optimizes its sub-set of the supply chain in isolation there are material flow and information lags which lead to a "bullwhip effect" across the supply chain.  To help alleviate this, the prime supplier must coordinate optimization across all of the suppliers and allocate metrics, appropriate service levels, and planning priorities through a global view of the supply chain and with the end customer objectives in mind.
• Supplier asset ownership:   The trend of Performance Based Logistics contracts has been to shift ownership away from the end customer and closer to the service provider and, by extension, onto its suppliers.  Determining who should own what level of inventory and providing the appropriate information to facilitate effective management of this is a critical decision that requires cooperation and trust.
• Closed loop performance management:  Appropriate performance metrics that monitor compliance to the contract terms are required across the extended supply chain.  The mechanism not only to monitor exceptions to performance, but to act upon and correct them on a real time basis, must be tightly integrated with the planning process.

Going from "combative" to "super collaboration" requires more than a "transaction-focused" collaborative IT tool.  MCA's planning and collaboration solution includes a consistent set of models to support planning, allocation, and execution decisions.   This platform allows sharing of information that includes the product structure and location hierarchy; and coordinated decision making across a complex network in different planning horizons, ranging from long term strategic and medium term tactical to short term event planning.

To ensure success, the collaborative process and platform must share risks and rewards across all of the parties to create a "win-win," with clearly defined outcomes for performance with a long-term view that generates an atmosphere of trust among all of the parties.

Last week, Supply Chain Brain featured an insightful article titled "Service Parts Management-Delivering Value in a Topsy-Turvy Market," by Will McNeill, an AMR Research (now a division of Gartner) analyst who does great coverage of service lifecycle management topics.  The article was bullish on the potential of the market, stating "We continue to see companies adopting service parts management software successfully, saving millions of dollars in inventory costs."

AMR says that the service parts management market weathered the storm better than most software markets in 2009, but still saw a 6 percent to 8 percent downturn.  MCA actually did see an upturn in revenue in 2009 and an increasing interest in aftermarket service and suspect the market downturn may be due to consolidation of some of the players in the market.  We do agree with the AMR statement that the industry suffered the downturn better than most because of the "quantifiable benefits delivered through the use of service parts management software." 

McNeill highlights two notable trends in the market.  The first is tighter integration of service parts management functionality with order management. As spares forecasting is driven by an understanding of customer demands, it's certainly true that a service parts planning solution must be tightly integrated with order management..  Equally important from our perspective,  is that customer service and order fulfillment strategies are aligned with service parts planning as follows:

• The expectations set in customer contracts for service levels may vary by customer, location and product group and should drive the stocking levels in the planning process
• The logic for fulfillment of customer orders and for positioning parts must share a common view of the customer.  This means that the assignment of the customer forecast in the planning process must use the same information as in the fulfillment process, both for the primary assignment, and for the emergency fulfillment in case of stockout.

This approach to customer-driven planning was described in our recent Service Matters entry "Inventory Optimization and Service Level Planning from SP Plan"

The second trend is the incorporation of service parts management into performance-based logistics.  McNeill notes that the incorporation of service parts logistics into performance-based contracting is extending past its origin of A&D into automotive, high tech, medical devices, and other verticals where contracts that sell the use or uptime of a product are increasingly common.  MCA has been working with Boeing Integrated Defense Systems since 2002 and Lockheed Martin Aeronautics since 2004 and is helping to support some of the largest military PBL programs.  Capabilities developed specifically for MCA's A&D customers are now being used by our customers in a broad range of industries. These capabilities include:

• The ability to optimize inventory to product uptime, fill rate, customer wait time, and budget constrained objectives
• The ability to perform rapid what-if scenario planning to understand the cost to support a new contract, and to test the impact of changing service level, lead time, and product reliability on inventory level and support cost

While many manufacturers have incorporated performance-based contracting (PBC) into their support offering, the results have been kept confidential and the benefits are often anecdotal.   As discussed in another Service Matters post, research done by MCA founder Morris Cohen at Wharton has helped to demonstrate the positive impact of PBC and the shared benefits for support providers and their customers.

Investment in service parts management solutions has shown tremendous return. As thought leaders such as AMR publicize the opportunity for saving and better customer service in articles like this one, we will likely see acceleration in the adoption by corporate executives who are increasingly recognizing the potential of aftermarket service. 

In his article "Inventory:  Getting more from less with inventory optimization" in Modern Materials Handling, Bob Trebilcock provides a great overview of inventory optimization software and how it's delivering rapid payback to companies who implement it.

According to a recent inventory optimization study done by IDC's Manufacturing Insights, inventory optimization is among the top three priorities for many supply chain organizations as they seek to increase efficiences during the continued global recession.

Bob writes that the service parts industry was one of the first adopters of multi-echelon inventory optimization.  He notes some of the unique challenges in service parts planning that include long product support lifecycles, unpredictable demand, and requirements for rapid delivery of service to delivery to contract requirements. 

Because of this, the decision of what to stock is critical and by doing it well, users of inventory optimization software can reduce inventory by 15% to 40% over traditional planning approaches.  Equally important, inventory optimization automates the planning process, making planners much more productive than those doing the extensive manual analysis that traditional techniques require.

Included in the article is a description of MCA's perspective on how inventory optimization can work in a service environment :

A multi-echelon optimization tool allows maintenance organizations to balance financial considerations and service-level requirements, says Andreae, by factoring in the variability and unpredictability associated with service parts into the inventory planning equation. They do this by looking at everything from the design of the network to the parts required for scheduled maintenance programs to a multi-year history of unscheduled maintenance for every part. In addition, the system can be tied into a product lifecycle management system (PLM) to factor in any changes to the product or to be notified when a new part can be used to replace a prior part. "The system takes all of that information in to set stock levels for every part, and to determine where in the supply chain to locate those parts," says Andreae.

I must add that inventory optimization is a critical and high value added capability, but is only one component of a service parts planning platform.  Other integrated components include forecasting and demand management, tactical planning & execution, and infrastructure for what-if scenario analysis and analytics/performance management, which are tightly integrated into an ERP & service management transactional systems such as SAP or Oracle.