Business runs on parts. Even in a service economy business runs on parts because all companies need technology to provide service, and technology runs on parts.
But parts don’t last. They break. They wear down. They can be defective. They are consumable. Whatever the reason, the need to replace parts is a certainty for business on par with the pull of gravity from the center of the earth.
But don’t underestimate the value of those broken-down, worn-out, defective parts. And don’t let them languish in the field or sit forgotten in remote repair depots. And most of all, don’t assume that every part a field tech returns is in some way tainted. Don Blumberg of Don Blumberg and Associates estimates that 30 to 35 percent of the parts returned by field techs are perfectly good. The return depot, when handled as a strategic part of the supply chain, is a repository of valuable inventory and insight that can accelerate repairs, drive down costs and fine tune inventory control no matter how geographically dispersed your customer base may be.
Extracting value from returned parts is called reverse logistics, and to master reverse logistics is to master, once and for all, the supply chain.
Reverse Logistics Comes of Age
The Supply Chain Counsel legitimized reverse logistics about two years ago. “When the Supply Chain Counsel was originally formed they created the SCORE model—supply chain operations and reference model,” says Larry Lapide, VP of supply chain management at ARM Research. “The SCORE model included four major processes: plan, source, make and deliver. About two years ago they added ‘return’ as a fifth process. SCORE is one of the only vendor-neutral models around. So people became worried about this fifth element.”
Another reason that reverse logistics is so important now is the general maturing of the service industry. “Early on companies that were trying to gain visibility into the delivery process focused on getting rid of paperwork,” says Jim Quigley, director of business development at Aether Systems, a producer of mobile and wireless systems in Owens Mills, Md. “So they collected electronic signatures and improved driver productivity. Now that those kinds of solutions are out there, companies are refining their financial models. Today, with the focus on just-in-time inventory, knowing exactly what’s out there is critical. If you can control the return process you can reduce inventory off the shelf and reduce the days outstanding on your financials.”
Most logistics vendors, such as Xelus, V3, Servigistics and Baxter Planning Systems, have extended their functionality to include the reverse flow, which seeks to effectively close the supply chain loop, making for a tighter, more efficient organization.
Forecasting Demand in Field Service
The success of logistics in field service comes down to a question of how many parts to keep at a regional warehouse or in the hands of field techs. The old model of basing demand on orders from field reps is wholly inadequate. Basing demand on orders works in manufacturing environments but not in service because parts must be ordered in advance of demand. You can’t assume that orders reflect failure rates either, because the field rep’s order may reflect only his or her comfort level in having parts in the truck. “If you use a field rep’s order to predict demand, you’re going to be way off in your forecasting,” says Blumberg.
Unless advanced remote diagnostic systems are in place, equipping field technicians with mobile communication devices is the first step to getting a handle on reverse logistics. “The service tech needs to communicate several things,” says Blumberg. “First, which parts he’s sending back and why. Then which parts he’s ordering and, finally, when he actually uses the parts he ordered. Then you begin to get an accurate representation of the failure rate for each part.”
Servigistics, which focuses on the parts aspect of central field stocking, supports wireless networking. “We can push out through the Web so that any user can log on from anywhere,” says Shawn Lane, Servigistics’ director of product marketing. “This enables reverse logistics that is more than just getting the part back. It’s the whole loop of getting the part back, completing the disposition and planning the repair to get accurate stock levels at the right locations.”
Achieving seamlessly integrated reverse logistics, especially in global operations, goes far beyond harnessing the knowledge of the field tech and bringing it home with wireless applications. It must be systemic and far-reaching, bringing the tiniest and most remote field outpost into line with the broadest aspect of the logistical framework.
And it must be based on accurate predictive forecasting.
Predicting demand in a field environment requires a complex analysis of four factors:
•Customer installed base
•Service agreement terms
Vendors who succeed in this space have solutions that can acquire and analyze this information. “We can do the granular, grassroots transactions that large organizations have a hard time tracking,” says Xelus’s director of product marketing, Michelle Sherwood. “We do it by optimizing the exact mix of parts that should be in a field tech’s truck given the installed base being serviced, the predicted failure rate and the requirements of the service contract,” she adds. “Predictive capabilities are very important because it all comes down to time: having that part in the right place at the right time.”
Xelus took on service inventory for NCR, the Dayton, Ohio-based giant that supplies hardware and software for financial transactions. NCR had outgrown its legacy systems and was facing increasing complexity in managing growing worldwide inventories. The implementation of XelusPlan from Xelus’ Enterprise Management Service Solutions suite resulted in inventory asset reductions of $300 million, purchase spend reduction of $100 million annually, a 20-percent improvement in customer service levels and a 30-percent increase in the usage of repairable parts. “Quantifying ROI was not a problem,” says Sherwood.
Bringing the Outpost into the Fold
V3 Systems, located in Charlotte, N.C., has among its clients some of the largest third-party logistics (3PL) providers in the world, including TNT in Asia, which claims Cisco Systems and Nokia among its clients. “TNT uses our technology to handle both reverse and service logistics,” says Philip Walton, V3’s director of product management. “It’s a bi-directional network to manage component inventory for field mobile repair and return activities.
TNT provides Cisco with the physical network facilities plus technology, which is where we come into play.” TNT handles Cisco’s inventory, the distribution of that inventory out to the regional locations, the operation of the field locations, the exchange point and the inventory within that exchange point.
Cisco’s customers, through either a Cisco or TNT system, place orders for replacement parts. TNT manages the delivery of these parts and the collection-for-value recapture for the part that’s being replaced. “It’s a complete closed loop,” says Walton.
The most common problem in the field, according to Walton, is extending execution capability out to the extremities of the supply chain. “Some of Cisco’s locations in Southeast Asia are literally in the corner of a post office or out of a van,” he says. “We can push just the necessary pieces of functionality out to a Web browser or a handheld PDA, which gives the most remote field person access to the full breadth of functionality necessary to optimize the execution of the inventory movement, to ensure the recapture value of returned parts and to conform to the customer’s SLA.”
In the end service is the name of the game. As service has matured, companies are pushing more and more inventory out to the field to take advantage of the revenue stream from service contracts. “If you’re going to promise 2-hour service,” says Sherwood, “you’ve got to able to deliver the part in 1 hour and 55 minutes.”
Marianne Cotter is a freelance writer based in Santa Monica, Calif.
In 1996, SGI seemed to have parts everywhere—in offices, in car trunks, at customer sites, at its stockroom in nearby Sunnyvale, Calif. The problem was that no one knew how many of which parts were where, especially the field support engineers (FSEs)—who all too often ended up shouldering the responsibility of logistics as they scrambled to track down the parts they needed to complete a repair job.
And as a provider of high-performance computing solutions, Mountain View, Calif.-based SGI was committed to providing 2- and 4-hour response times to its customers. But to do so the company had to overcome considerable problems. “Our visibility into inventory was limited, our inventory accuracy was in question and we were asking our FSEs to do a lot of logistics work,” says Steve Herbenson, SGI’s director of global logistics. “We knew that to fulfill our service agreements we had to strategically outsource our logistics.”
UPS Supply Chain Solutions provided the answer. “Service parts logistics—the storage and deployment of critical parts—is one of our specialties,” says Lynette McIntire, director of UPS Supply Chain Solutions. In addition to a central warehouse in Louisville, Ky., UPS has 58 field stocking locations around the country that operate 24/7. “These are small facilities located close to urban centers that have a high concentration of field engineers who do repairs.”
First, to help SGI honor its warranty commitments, UPS advised SGI to move its central warehouse from Sunnyvale to the UPS central facility in Kentucky, an idea that made considerable sense to SGI. “It was much cheaper to have a major stockroom in Louisville than Sunnyvale,” says Herbenson. “And the later cutoff time for shipments helped us get parts out the same day.” The cut-off time for UPS shipments in Louisville was midnight to 1 a.m. In the Bay area it was 5 p.m. “With the warehouse in Louisville, if a customer calls in at 9 p.m. on the East Coast, we can still send the order to Louisville or any of the depots. Louisville dispatches the part in two hours or ships it overnight to arrive the next morning. When we were warehoused in Sunnyvale and we missed the cutoff time, we’d have to put the part on a commercial flight and it probably wouldn’t ship until the next morning.”
SGI has the advantage of several diagnostic options that are capable of determining the problem and initiating the part shipment without the involvement of an FSE. One is the customer support line, which is manned by knowledgeable engineers. “We have several customer support centers in the U.S. that act as a single center,” says Herbenson. “They can do diagnostics on a customer support call and can order the part through logistics.” This is how most problems are diagnosed.
A second option is remote diagnostics via the Internet if the system is not completely down. “We have a proprietary support tool called the electronic service partner,” says Herbenson. “It monitors system activity to give us error messages, fault conditions and other things that are going on in the machine. We absolutely try to diagnose it to a single part, two at the most.”
A third diagnostic situation comes into play with large clients whose service agreements call for the on-site presence of an SGI field engineer. These are customers with mission critical situations like airlines. In these cases, parts are kept on-site and the FSE is equipped with a laptop containing diagnostic tools. If a part is needed, the customer has an accelerated response contract and a UPS delivery person shows up with the part.
But Herbenson emphasizes that the majority of SGI’s parts are not on-site, nor in the engineer’s car. “They’re in the local depot or in Louisville,” he says. “That’s a dramatic change from five or six years ago when there were parts all over the place.”
Thanks to state-of-the-art diagnostic tools and the UPS supply chain system, SGI’s FSEs are able to work very efficiently without the aid of wireless devices. When SGI dispatches a part from a UPS location, it is shipped with a return envelope with an open airway bill. At the end of the day the FSE drops the envelope off at the depot or at a UPS store (thanks to UPS’s recent acquisition of Mail Boxes Etc., all of which are now UPS stores). “As soon as UPS scans the package, we know it’s in transit,” says Herbenson. “We track very closely what’s outstanding in the field so that we don’t get good parts back unless we sent out two parts and only
one was needed. The good parts are routed back to UPS and the bad parts are routed to our repair supplier.”
Most of the FSEs work out of their homes and carry only mobile phones. They communicate via the Web from the customer’s site or from the local UPS depot, which have computers where FSEs can log into SGI’s Clarify system.
UPS is responsible for controlling inventory levels in Louisville and in the local depots. “Lots of predictive work goes into inventory control,” says UPS’s McIntyre. UPS Supply Chain Solutions’ software includes a planning module from Baxter Planning Systems’ Prophet software suite, which allows UPS to optimize inventory levels.
Outsourcing its logistics to UPS has helped SGI accomplish many organizational goals. It now enjoys enhanced national coverage, reduced inventory costs, consistent accuracy and visibility and improved customer service, all while meeting stringent turnaround times. The relationship between the two companies can best be described as a collaboration in which each party does what it does best to the ultimate benefit of the customer.