26 Apr How Aftermarket Impacts the Supply Chain Triangle

Today at the ‘Dag van Inkoop & Logistiek’ of VIB in Antwerp, I came across Timmy Thijs, who is teamleader inventory management at Atlas Copco for the aftermarket operations. The challenges for managing aftermarket inventories are multiple, so I thought it was worthwhile listing some of them and linking them to the supply chain triangle.

Let me start by sharing some of my experiences with aftermarket inventories: they are slow movers, or even non-moving over longer periods of time. Many companies have automatic rules to write-off inventories based on when the inventory last moved, which makes spareparts a major cause of write-offs. Looking at the supply chain triangle, this implies they are heavy on the cash side of the triangle, and via the write-offs also weighing on the cost side of the triangle or the EBIT in the P&L. That easily makes them a thorn in the eye of the CFO or the BU president.

Cleaning up this inventory in general is a difficult and tedious process. As the inventory is moving slowly, any attempts to rightsize inventories, for instance by improving the calculations of inventory parameters like safety stocks, will take a lot of time, and may have a limited impact. Killing SKU’s and reducing the number of parts may be difficult, as throughout the years, sales has been promising high service and immediate response over a 10 to 15 year period. Many aftermarket supply chain managers are squeezed between the inventory reduction targets pushed by finance and the service promises made to key customers that seem to be cast in stone.

Is there a quick fix? Well the best I have seen is pushing sales to sell off part of the inventory. Much of it seems unsellable unless sales people start focusing on it. If you are manufacturing equipment, their primary drive will be selling the equipment. It will be hard to get to your target by selling off spares. If you want this to happen, it will have to be a top-down initiative and you may have to adapt bonus schemes. If you are in need to deliver short term benefits, try to get this running.

A second option might be trying to upsell new machinery, or even proposing customers switching to a newer product for free. If the aftermarket costs are excessive, the only way to stop the cost may be to create incentives for customers to switch to newer technologies.

While these two options help, it remains ‘after the facts’. The real fix, as often, is on the longer term. In my experiences, people selling equipment are after the quick money. If I need to promise some service to get an expensive machine sold there are little obstacles to do so. First the full ‘life-cycle cost’ is unknown so nobody will be challenged, second, the excessive cost of servicing the machine over a 15 year period, will only pop up only long after the sales person has moved on. There is work for aftermarket people to quantify and visualize the cost of service proposals and make sure they are accounted for in the evaluation of the margin of the sales proposals.

What will also help is the gradual shift to leasing models instead of purchasing models. Assume you’d lease the same machine to that same customer over a 15 year period. Would you make a fixed price contract for 15 years? Most probably not. Though in many cases it seems impossible to confront customers with the excessive cost of for instance keeping parts for 10-15 years in this world of fast changing technologies.

Linking this to the triangle, we could say that when selling the product, some of the life cycle effects such as expedited shipments and slow moving spare parts inventories are not taken into account, leading to an unfair judgment of the resulting margin over the resulting capital employed. As we’ve seen with other examples, for instance when talking about growth, it is not that the triangle doesn’t play in these circumstances, on the contrary, we should use the triangle to challenge the sales people and ensure we reveal the true life cycle margin over the true life cycle inventory or more generally capital employed.

3 questions to Timmy Thijs, teamleader inventory management at Atlas Copco, for the aftermarket operations

• Which elements of the above ‘aftermarket struggle’ do you recognize?

“For sure our organization also struggles with slow or non-moving aftermarket inventory and yes, this weighs on the cost side of the triangle, making it visible in management reports. Another struggle lies in the fact that 2 pillars in my team’s mission might seem conflicting. On one hand we have the service factor where part availability is key, on the other hand we have the inventory value which needs to be kept below target. Third attention point are our colleagues from Equipment, who continuously launch new innovative machines, which is a good thing, but increases the spare part portfolio and so the inventory level.”

• How have you tried to tackle them at Atlas Copco?

“We actively work on reducing our slow and non-moving stock, by investigating most optimal way forward. This is a time-consuming effort and should be evaluated continuously to which extent it makes sense to do so. Must admit we did realize good results by dedicating time to this.”

“Balancing part availability with inventory value is a continuous process, where it is key to adjust inventory parameters based on demand patterns and stage in the life cycle to avoid ending up with non-moving stock”

“Within our organization we also involve aftermarket in the design of new equipment, making sure new machines are not only easy to service, but also make use of existing parts to limit increase of the part portfolio.”

• Will you be using the concept of the supply chain triangle in the future and how?

“The fundamentals of the Supply Chain triangle are embedded in our group’s Vision and Mission. We are a customer focused, Product driven organization, securing high service, low cost and an optimal use of capital. Off course we need to keep focus and make sure all departments stay aligned. As there’s always a better way, we continuously try to improve our business and the concept of the Supply Chain triangle can assist us in that.”