RL Magazine
Edition 45
3 Strategies for Better Managing Your Spare Parts Inventory
by Frank Cavallaro, CEO, Fronetics Strategic Advisors

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In the management of spare parts inventory in the high-tech space, the balancing act between maintaining control over your slow or seldom used SKUs and ensuring spares get to the right place at the right time can be a daunting task. Too often a high number of these spares are used only infrequently but may be needed on short notice when the turnaround time to get spares to your customer becomes critical. The pressure of providing a consistent and timely customer repair experience coupled with shorter product lifecycles and component manufacturer end of life windows, can quickly increase inventory levels and tie up precious cash flow in the form of inventory of unnecessary replacement components.

Any spare parts management strategy that you put in place will need to keep the customer experience in the forefront and the cost to deliver this experience a very close second. Transportation expenses, multiple hand-offs, geography, regulation requirements of defective disposal, and over-all efficiency can add to your returns management costs and apply even more pressure to product margins.

In a perfect world, customers would have a repair experience that is fast, traceable / visible and consistent. You would have a low cost repair model with an efficient and optimized spare parts network that eliminated “touches” and a spares inventory model that would reduce the capital expenses associated with holding seldom used inventory. Combining these two would ultimately grow your business in a more profitable way. Since we do not live in that perfect world, how do you get there? Here are three strategies to implement in your model that will deliver immediate results for you and improve your customer’s experience.

First, you need to think about your field returns and spare parts inventory collectively instead of separately. That’s different from what you may be used to and here’s why you need to change that paradigm. It is fairly intuitive that companies in the high-tech space with a significant installed user base and robust field repair operations will find over 20% of replaceable parts to be returned during the product life-cycle. What’s not so intuitive is that over 30% and in some cases up to 70% of these product returns will be No Fault Found (NFF). Typically, returns are accepted, processed and then piled up for test and warrantee credit “after” or more appropriately, when time allows you to get to it. This historic process leads to additional capital expense in spares inventory for replacement as well as a reduced return on investment for the inventory that has been purchased, returned, and now is sitting on your shelf. By thinking of this inventory collectively, front ending and prioritizing the screening process to the initial receipt, and returning No Fault Found inventory to “available” spares inventory quickly, you not only reduce your re-purchase expense as well as initial purchase ROI, you also decrease your turn around time leading to a better customer experience.

Once you have this first process up and running, it’s time to implement the next step, using your new found and timely product failure knowledge to make your purchasing and engineering network smarter. Here’s how. Using the above method, you will begin to develop data on how certain components in your product platforms perform under certain conditions, with each other, and with certain software applications. You will also begin to discover which component types in your product platforms are more likely to trigger a No Fault Found (NFF) and which will truly have a higher failure rate. Let’s look at the latter first. Products that truly have higher failure rates now should be the focus of your purchasing team’s efforts and your engineering team’s scrutiny. These will be the ones that everybody (yes your competitors) will be looking to source more frequently, thus driving price points and product availability issues. Purchasing focus here will increase your turn around time and is a better use of inventory dollars since these are truly problem parts. From the engineering prospective, focus on eliminating the device from future builds as well as approving replacements spares that will be more compatible in your product platforms. Finally, items that typically trigger a No Fault Found (NFF) designation need less purchasing focus and more process focus. This is because your data is telling you that you can spend less time on sourcing new spares since you should have a steady supply of these products from your own returns streams.

The last step involves your overall procurement methodology. Once you develop and analyze your data, you will find components in your returns supply chain that (a) fail often, (b) are returned and are No Fault Found (NFF), and (c) components that never enter your return stream. We have developed strategies for (a) and (b), but what about (c)? This is where you need to get your engineering, procurement and finance teams involved to make this strategy work, and here’s why. In this case, you have components that have a fractional percentage of failure or at least return rate. When you procure these components the price is comprised of the actual cost to manufacture the component, the cost of providing you with a warranty, and the product mark-up. If you have strong data that these products will stay in filed, how about negotiating with your vendor to remove or lower the warranty piece of the component cost. Or maybe you procure a limited or catastrophic failure warranty instead of full return. It’s a method of self-insurance based on your actual usage patterns and return rates. You save on the per piece cost up front that would only purchase a catastrophic failure clause that is typically in place anyway. If you do not opt for this more deliberate cost saving strategy, at the very least, use it with your vendors to feel around for positive price variances. You’ll be amazed at the results.

Using these strategies will drive cost down and service levels up in your component spares process. The results will lead to more satisfied and more profitable customers for your organization as well as a smarter spare parts supply-chain.
Frank Cavallaro is the CEO and founder of a high-tech supply chain and reverse logistics strategic advisory firm, Fronetics Strategic Advisors. With over 25 years of experience in the global technology distribution, supply chain, reverse logistics, aftermarket services and electronic asset disposal (EAD)industries, Frank has a proven track record of successful growth, restructuring, and turnaround performance, resulting in superior organizational and shareholder results.

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