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March 5, 2024

Optimizing Costs in Spare Parts Supply Chains

Explore how optimizing spare parts supply chains with Holocene boosts efficiency and cuts costs
Romain Fayolle

In the world of maintenance, repair, and operations (MRO), the availability and management of spare parts play a critical role. Most companies still apply the same supply chain strategy for the spares as they do for their finished goods. Then, they suffer from missing spares, delayed repairs, obsolescence, and unhappy customers, which are common problems.

The right MRO planning strategy and tools to apply it will enable getting the right spare at the right time. It will improve handling downtime, equipment life, supply chain resilience, and operational efficiency from manufacturing to services. New supply chain optimization strategies for spare parts have become sharper and more data-driven. Businesses want to reduce costs while not sacrificing service quality.

This article dives into the spare parts supply chain to determine unique challenges and costs and describes how businesses can overcome these to maximize efficiency and enhance customer experience.

Understanding the Spare Parts Supply Chains

MRO planning is different from planning for the finished goods. Based on the item, the spares can vary from a couple to thousands. And even one spare could make all the difference to the entire service operation. Hence, it is important to know the challenges of spare supply chains and their cost implications.

Unique Challenges

Spare parts supply chains are associated with special challenges not present in the supply chain of other traditional items, such as:

  1. The complexity of Inventory: Choosing proper inventory management systems for a wide range of spare parts for different finished goods in different stages of lifecycles is difficult.
  2. Demand Unpredictability: Demand forecasting is harder to predict because demand depends on finished products’ failures or service schedules.
  3. Rapid Response Need: Parts must be available immediately to prevent long downtimes, requiring a very responsive supply chain.
  4. Technical Developments: Updating inventory with spares for next-generation products will make some spare parts obsolete.

Cost Implications

These challenges have enterprise cost implications. Holding expenses related to excessive inventory include storage, capital costs, and insurance. Conversely, understocking could result in lost sales, unhappy customers, and increased expedited delivery rates to meet urgent demands.

  1. High Holding Costs: Holding excess inventory will inflate costs like warehousing, insurance, and obsolescence, eventually impacting the company's cash flow.
  2. Obsolescence Risk: Parts become unusable before use, resulting in financial loss and possible write-offs.
  3. Lost Sales & Customer Dissatisfaction: Stockouts might hugely impact the after-sales and the customer experience while pushing shipping costs to meet last-minute demands.
  4. Operational Disruptions: Costs related to operational downtime while waiting for crucial spare parts.
  5. Complex Logistics: Costs of handling logistics for quick delivery, particularly for geographically spread operations of service centers.

Cost Optimization Strategies for Spare Parts Supply Chains

The cost optimization of the spare parts supply chain is a crucial parameter to balance along with higher service levels. Here are the strategies to achieve this balance:

1. Inventory Management/Control

The key to cost optimization is efficient inventory management efforts. If inventory optimization is overlooked in spares, it can quickly get out of hand. For this, advanced forecasting methods can predict the demand for spare parts and their phase-in and phase-out plans to reduce the chance of overstocking or stockouts.

ABC classification, Just-In-Time (JIT) inventory, and Economic Order Quantity (EOQ) models are utilized to enhance inventory management. But the idea that runs across all these models is to keep only the right amount of spares and order them less but frequently while being aware of phase-ins and phase-outs. You can also achieve this with inventory management software.

2. Updated Bill of Materials

This is the biggest differentiator and can be the reason for the success or failure of spare supply chains. The Bill of Materials (BOM) is the blueprint for creating a product. Hence, ensuring that your BOM is always current is crucial for avoiding issues with inventory discrepancies and shortages of spare parts. It is essential for the effective planning of maintenance or repair and service.

3. Logistics & Distribution

Transportation Management Systems (TMS) are used to optimize transportation routes and provide spare parts efficiently to the service centers. Working with third-party logistics (3PL) providers can offer access to enhanced distribution networks and volume-based shipping discounts. Hub-and-spoke distribution can also reduce supply chain disruptions, transportation costs, and delivery times when setting up a distribution network for spares.

4. Reverse Logistics Management

Spares are the heartbeat for providing the service of any product. An intelligent reverse logistics plan enables businesses to track returns effectively and repair, refurbish, and recycle components. This is also excellent for sustainability since it lowers the company's carbon footprint. An excellent returns management system can simplify the process and reduce returns handling and processing costs.

5. Strong Supplier Relationships

Establishing strong supplier relationships increases supply chain tenacity and cost-effectiveness. Continuous supplier performance management ensures dependability and quality, while multi-sourcing strategies spread risk and improve bargaining power. Long-term contracts with important suppliers can get you much better rates and help you concentrate when supplies are limited. For such long-term partnerships, sharing the details of your new launches and phase-out plans is important so your suppliers can adjust their raw material purchases and capacities accordingly.

Building a Great Customer Experience Through Operational Efficiencies

According to a recent survey:

  • More than 60% of Re-Order Points or ROPs were found to be incorrect
  • More than 80% of Re-Order Quantities or ROQs were incorrect
  • About 97% of lead times used for planning were incorrect

All these factors impact the supply chain's agility and efficiency. Concentrating on building effective supply chains constantly leads to improved customer experience. A simplified and effective supply chain guarantees fast access to spare parts, reduces downtime on machinery, perpetual inventory system, and provides operational continuity. Cost optimization and advanced logistics will help companies offer competitive pricing, quicker response times, and better customer satisfaction.

Business processes focusing on operational efficiencies meet customers' immediate needs and establish trust and loyalty. In service, where expectations are higher since something is stuck due to a broken machine, offering quality service at competitive prices differentiates businesses and builds loyalty with consumers. It all boils down to having the right spares in the right place and time.

With data analytics, AI, and productivity in mind, businesses can create a spare parts supply chain that meets industry demands and is ready for future opportunities and challenges. This holistic approach allows operational excellence and keeps customer satisfaction at the center of supply chain approaches.

Power of Data Analytics and AI in Spare Supply Chain Management

Data analytics and AI are leading in redefining spare parts supply chain management. Predictive analytics and machine learning algorithms provide companies with unparalleled insights into operational dynamics and demand trends. This predictive ability also includes maintenance forecasting, making a more proactive approach to inventory management and service provision possible.

AI's power to discover opportunities, anomalies, and patterns provides decision-makers with actionable intelligence they could not attain manually. It becomes even more critical for spares as the number of SKUs is usually much higher than the finished goods supply chain. Hence, AI helps in better forecasting, inventory control, and strategic supplier relations, leading to a much more resilient supply chain.

Holocene Spare Parts Supply Chain Optimization

Holocene offers an extensive selection of solutions to optimize spare parts supply chains. With cutting-edge technology, data analytics, and deep industry knowledge, Holocene helps companies manage their spare parts logistics. Our strategy utilizes intelligent analytics and AI for demand forecasting, inventory management, and logistics scalability. Holocene provides companies with the technology, roadmap, and expertise to turn supply chain problems into competitive benefits.

As companies attempt to keep up with continuously changing industry demands, optimizing spare parts supply chains becomes a crucial success factor. Holocene helps businesses achieve these optimization strategies with the insights and resources they need to achieve operational excellence and superior customer experience. Contact Holocene today to transform your spare parts supply chain into a streamlined, effective, and customer-focused operation.
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