The Aftermarket Distribution Of Spare Parts

Published Date: 02 Nov 2017

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C09617817

Darren Hughes

Designing a Distribution network

The role of distribution in the Supply Chain

Meindl (2010) defines Distribution as being "the steps taken to move and store a product from the supplier/manufacturing stage to a customer stage within the supply chain". He comments on how distribution occurs between every set of stages in the supply chain and how raw materials are moved from suppliers to manufacturers, whilst finished goods are moved from manufacturing to the end customer. Distribution is considered to be a key factor/driver of overall profitability of a company because not only does it affect supply chain costs but it also affects the end customer directly. (Meindl, 2010, p86)

Whilst Meindl describes distribution within the supply chain as the movement of the product from a to b, Christopher M (2003) discusses how the role of distribution has moved away from the conventional view of distribution as being "solely concerned with transport and warehousing". He suggests that the key to successful distribution today is the model of demand management. Demand management is regarded as "the process of anticipating and fulfilling orders against defined customer service goals". In order to optimize the process of demand management, it is essential that a firm has a well-integrated ICT (Information Communication Technology) system in place, as information is vital to its success. Information from the marketplace, from customers regarding usage/consumption, production schedules and inventory statuses are all accounted for. (Christopher, 2003, p27).

Although this can be overcome by successful forecasting accuracy, Christopher explains that "while forecasting accuracy is always to be sought", it is in fact very rarely achieved. Instead the aim should be for a firm to reduce its dependency on forecasting, by improved information demand and also by implementing systems that enable quick response or agility towards demand. (Christopher, 2003, p27)

Quick response logistics has become top priority for many organisations, as it enables them not only to achieve cost reduction but also allows them to provide service enhancement. The idea of ‘quick response logistics’ is based upon a replenishment model within demand management. When simplified, as goods are consumed, the usage information is transmitted to the supplier/vendor, and this instantly triggers a response. This may result in faster, smaller consignment deliveries and although it may cost the supplier more, the benefits are visible through reduced inventory in the pipeline and whilst improved service in terms of responsiveness.

Zylstra K (2006) shares similar thoughts with Christopher, as he recognizes how the traditional approach to improving distribution and reducing its costs revolve around "technology-enabled optimization and automation". These cost strategies are visible in within the total cost of distribution. Warehouse management systems (WMS), Transport management systems (TMS), route planning, automated storage and retrieval systems (AS/RS) and wireless data collection to name but a few. Automation may significantly reduce warehouse labour and overall distribution costs, but may be beyond the reach of many companies due to the significant capital investment required and its implication to fixed costs. (Zylstra, 2006, p34)

The task of implementing an effective distribution system in a modern firm is often linked with reducing operational costs. As customers drive down prices and increase service requirements, there is tremendous pressure on all parts of the business to "Do more with less" (Zylstra, 2006, p34). With that in mind, there have been various surveys made regarding the relative costs of distribution in industry, and according to Christopher (1990); their findings seem to suggest that on average, distribution costs represent about 15% of sales turnover for a typical company. He also comments on how averages can be misleading in some cases, as results vary depending on the nature of the business/industry (Christopher, 1990, p6).

If a company can clearly identify the specific sources of total distribution costs, they may benefit by making it easier to identify potential ‘trade-offs’. "A trade-off occurs where an increased cost in one area is more than matched by a cost reduction in another area" (Christopher, 1990, p8). For example if a distribution system has 5 regional depots with high warehousing and stockholding costs is compared with a system of 2/3 depots, the savings on haulage and reduction of stock-outs could possibly outweigh the extra costs involved in the 5 depot system. For benefits of such trade-offs to be achieved, it is necessary for managers to think in terms of total systems rather than of narrow functional areas.

Whilst total distribution cost can primarily be the focus for firms, it is also important for a firm to develop a framework that allows them to achieve such operational excellence, in terms adapting a distribution network that is suited to their strategic goals. Christopher (2003) explains how todays customer is increasingly seeking added value and how logistics management can provide that value is to do with the ‘Three R’s’.

Reliability

Responsiveness

Relationships

(Christopher, 2003, p28-30)

Reliability

With the current economic climate, it is especially apparent how customers across most markets and commercial environments are seeking to reduce their inventory holdings. For example Just In Time (JIT) practices can be found in many industries ranging from car manufacturing to retailing. Such practices mean that it is essential that suppliers can guarantee complete order fulfilment whilst delivering goods at agreed times. With such an emphasis on reducing inventory whilst adding value, a prime objective of any logistics/distribution strategy must be reliability.

Responsiveness

Zylstra K (2006) and Christopher (2003) both emphasised the importance of ‘quick response’ in today’s marketplace, and again this is very closely linked with the customer’s demand for reliability. Essentially this means the agility of a firm, and its ability to respond in ever-shorter lead times with the greatest possible flexibility must be integrated in such strategies. Companies must focus on developing a logistics strategy that allows them to ship smaller quantities, more rapidly, direct to the point of consumption.

Relationships

The concept of single sourcing has been of trend lately, where customers are seeking to reduce their supplier base, allowing them to benefit with improved quality, innovation sharing, reduced costs and integrated scheduling of production and deliveries. The fundamental objective of this idea is to create a buyer/supplier relationship based upon a partnership. A good example of a logistics partnership is the growing use of Vendor Managed Inventory (VMI). This allows the supplier to be responsible for the flow of product into the customers operations. In order for such systems to operate effectively, there must be a mutual understanding of each other’s goals and a strong relationship is the key to its success.

The role of Network design in the supply chain

Supply Chain Network design for many firms include, the assignment of facility role, manufacturing location, storage or transport-related facilities, and the allocation of capacity and markets to each facility. A framework must then be established and the various solutions and methodologies must then be discussed. Supply chain network design decisions can be classified as follows.

Facility role: this refers to the part each facility plays, and what processes are performed at each facility.

Facility location: where should the facility be located

Capacity allocation: how much capacity should be allocated to each facility

Market and supply location: this refers to what markets should each facility serve and which supply sources should feed each facility.

Meindl (2010) describes how network design decisions have a significant impact on the overall performance of a firm, as it not only develops the structure of their supply chain, but sets its constraints, which can then be used to increase supply chain responsiveness and reduce overall costs.

1.3 Factors influencing Distribution Network design

The structure of a distribution channel is described by Visser & Van Goor as "the pipeline system through which goods have to flow before being at the right time and in the right place for the customers"(Visser & Van Goor, 2006, 62). It is particularly important for a firm to define the structure of their distribution system/infrastructure, as well as the choice of physical distribution channel and network.

According to Visser & Van Goor, (2006), the most important factors within the structure of a distribution network are the primary process, location of inventory points and the flow of goods. They also recognize how a distribution network generally consists of a number of consecutive inventory points (i.e. the factory, central distribution centre, and national/international distribution centres), and that it is vital that a distribution network can co-ordinate the different activities along the chain (i.e. sales forecast, inventory and transport).

Meindl, 2010, explains how there are a number of vital factors that must be taken into consideration before a company can effectively and efficiently design a network, for example strategic factors. A company’s competitive strategy has a significant impact on network design decisions within the supply chain, firms that focus on cost leadership tend to find the lowest-cost location for their manufacturing operations, not taking into consideration their distance to market. Comparing a company that focuses on responsiveness, their location to market is a key component of their strategy, thus meaning they will have a totally different distribution network design. A good example of this can be seen within the fashion industry, where some firms avail of cheap labour in Asia-Pacific due to low cost, others like Zara the Spanish apparel manufacturer has a large proportion of its production capacity in Portugal and Spain despite the high cost. The local production facilities allow Zara to react quickly to emerging fashion trends in Europe. (Meindl, 2010, p127)

Other factors that must be taken into consideration include: Technological factors, Macroeconomic factors, Tariffs and incentives, Exchange rate and demand tax, Political factors, Infrastructure, Costs and customer response time. The goal when designing a supply chain distribution network is to maximize the organisations profits while satisfying customer needs in terms of demand responsiveness.

Spare parts logistics

(Wagner, Jonke & Eisingerich, 2012)

Firms with a well-aligned spare parts logistics strategy can add value for their customers beyond primary product benefits, thus building longterm customer loyalty and achieving high profit margins.1 Firms across different industries now recognize spare parts supply not only as a legal obligation, but also as a chance to offset stagnating or declining revenues

and to increase profits in their primary product markets. For instance, the aftersales business in the machine and plant construction industry accounts for

approximately 25% of total sales (with two-thirds from selling spare parts and

one-third from services) and up to 50% of total profits.2

Drawing on Christopher’s definition of logistics,3 we define spare parts

logistics as follows: Spare parts logistics of the manufacturer contains the market-

orientated planning, design, realization, and control of the spare parts supply

and distribution, along with associated information flows within a firm and

between the firm and its network partners. Therefore, spare parts logistics aims

at a demand-driven, cost-minimal provision of the required spare parts for the

defective or preventive maintenance of primary products to ensure an optimal

level of availability or reliability of the product.

Lean Philiosophy

"Lean is the concept of efficient manufacturing and operations which grew out of the Toyota Production System (TPS) in the early 20th century"

(Wilson L, 2010, p7)

Lean philosophy has its beginning in the post second world war, Japan, to provide automotive

solutions with scarce resources. The most influential actor in this aspect is Toyota and the

Toyota Production System (TPS). The TPS derive from practices and principles applied by

Henry Ford in the beginning of the 20th century and were influenced from the mass production (Hines, Holweg & Rich 2004). This idea was developed to organize an efficient

manufacturing operation with high volumes and low variety in mature, stable markets.

Defining the essential bricks in the giant puzzle of lean is difficult but there are several

researchers which has investigated the core and fundamental pillars in lean philosophy. The

two fundamental pillars determining TPS are just-in-time (JIT) and autonomation. JIT is

defined as executing activities at the right time, at the right place and in the right quantity

(Ohno 1988). Autonomation refers to the productivity of employees in the organization and

differs from the common view upon productivity as optimizing the system. Another

perspective by Shingo (1989) is to identify waste and increase the productivity through

continuous improvement and elimination of waste.

Lean is based on the philosophy of understanding value from the customer’s viewpoint, and continually improving the way in which that value is delivered, by eliminating every use of resources that is wasteful, or that does not contribute to the value goal. This continual improvement of processes requires the involvement and empowering of every member of staff at every level (Wilson L, 2010, p7). 

The term ‘Lean’ is often interpreted in many ways, and is often misunderstood, where it is based on the idea that it is simply to do with eliminating waste, and how it is often understood as, reducing employees through redundancies. However, "the successful implementation of Lean is likely to result in more staff being required, due to an increase in the number of orders" (Brines D Jr. 2011). In some cases it can often be used as a reason for cutting down on expenditure, to achieve cost savings. If this is done without true value increase as the goal, it will certainly be counter-productive. "If a firm wishes to start implementing Lean, it is essential first to understand the principles and philosophy behind it" (Zylstra K, 2006, p38).

The Goal of Lean

Connor G (2004) comments on how the goal of Lean operations or manufacturing "is to provide the customer with just what they want, just when they need it, with no excess costs". This has to be done by empowering every individual worker to achieve their full

potential and so to make the greatest possible contribution. Various tools can be utilized as a help towards these aims.

Five Principles of Lean

Womack & Jones argue that a lean way of thinking allows companies to "specify value, line up value creating actions in the best sequence, conduct these activities without interruption whenever someone requests them, and perform them more and more effectively. "

From this statement, the five principles of lean thinking can be understood:

Value

Value stream

Flow

Pull

Perfection

(Womack & Jones, p15, 1996)

.

Value

Womack & Jones define Value as a "capability provided to customer at the right time at an

Appropriate price, as defined in each case by the customer." They also describe Value as being the critical starting point for lean thinking, and how it can only be described by the end customer and that the ultimate end customer/user of the product, is differentiated with interim customers. Value also is product-specific, and Womack & Jones argue it is only significant when expressed in terms of a specific product. (Womack & Jones, p15, 1996)

Similarly, Brines D Jr. describes how value involves identifying exactly what is meant by the value goal. The essential requirement is that "value is defined by the customer’s perception, not defined internally by the organization." (Brines D Jr. 2011)

Value Stream

Once the term value is understood and defined, the second principle is derived, and again the aim is for each product, to identify the value stream. Brines D Jr defines this as, "the entire process from raw materials to the possession of the customer." The investigation and analysis of this flow creates transparency within the flow almost certainly revealing waste: this includes processes within the flow that are non-value adding. This is known as process re-engineering. (Brines D Jr. 2011)

Womack and Jones define a value stream as "specific activities required to design, order, and provide a specific product, from concept to launch, order to delivery, and raw materials into the hands of the customer". Similarly to Brines D Jr, Womack & Jones comment that in order to create a value stream, you must describe what happens to a product at each step in its production, from design to order to raw material to delivery.

There are three types of activities in the value stream – one kind adds value, and the other two are "Muda" (the Japanese word for waste)

Value-Added: Those activities within a process that create value.

Type One Muda: Activities that create no value but seem to be unavoidable with current technologies or production assets.

Type Two Muda: Activities that create no value and are immediately avoidable.

Flow

The third principle is, having eliminated wasteful processes, to create a continuous flow for the product, instead of the traditional way, where processes are grouped in stages based in different departments, with bottlenecks at each stage

The lean principle of flow is defined as the "progressive achievement of tasks along the value

stream so that a product proceeds from design to launch, order to delivery and raw materials into the hands of the customer with no stoppages, scrap or backflows." This translates as a directive to abandon the traditional batch-and-queue mode of thinking that seems common sense to most. Ways to foster flow include enabling quick changes of tools in manufacturing, as well as rightsizing machines and locating sequential steps adjacent to one another.

The fourth lean principle of pull is defined by the authors as a "system of cascading production

and delivery instructions from downstream to upstream in which nothing is produced by the

upstream supplier until the downstream customer signals a need.6" This is in contrast with

pushing products through a system, which is unresponsive to the customer and results in

unnecessary inventory buildup.

The fifth and final lean principle is perfection, defined again by the authors as the "complete

elimination of muda so that all activities along a value stream create value.7" This fifth principle

makes the pursuit of lean a never-ending process, as there will always be activities that are

considered muda in the value stream and the complete elimination of muda is more of a desired

end-state that a truly achievable goal.

After describing their concept of the five lean principles in the Part I of Lean Thinking, the

authors then present five case studies in Part II of applying lean thinking concepts to companies

that were in trouble. The case studies cover a pallet stretch-wrapping company, the Wiremold

Company, Pratt & Whitney jet engines, the specialty automobile manufacturer Porsche, and a

Japanese radiator and boiler manufacturing company. Each of the case studies meets with

different types and level of success in implementing a lean system and deriving benefits from it.

The authors then conclude their book with an outline for an "action plan" a company could use

to begin their lean transformation (a summary chart is given on page 270), a brief discussion of

integrating multiple firms into a trust-based lean enterprise, and a quick look at applying lean to

traditional non-manufacturing sectors of the economy.

Working towards lean manufacturing is based on five main principles:

The third principle is, having eliminated wasteful processes, to create a continuous flow for the product, instead of the traditional way, where processes are grouped in stages based in different departments, with bottlenecks at each stage

The fourth of the five principles is that of Pull, one of the distinctive concepts of Lean manufacturing. When continuous flow is introduced, there is a dramatic reduction in lead times to the customer, and consequently customer demand becomes more stable. This means that demand can pull production, rather than making the products first and pushing them at the customers, trying to persuade them to buy.

The fifth principle is the drive towards perfection through Kaizen, which means continuous improvement in productivity and quality.

http://www.lean.org/images/5stepslean.gif

(Pascal D, 2002). 

Tools for Implementing Lean

There are a number of specific concepts, which mostly originated in the Toyota production system, and which companies have adapted for their own use, to help in implementing Lean. These are often referred to as the tools of Lean, and contribute towards the process of ‘Kaizen’ or continuous improvement. One of the best-known is the five-step method known as 5S, because each of the five steps is called by a Japanese word beginning with S.

Each step forms part of creating a visually well-organized workplace. The aim of this tool is not simply to tidy up, but to identify problems, and to eliminate everything that leads to wasted or unnecessary effort. Another well-known tool is known as the 5Whys. The idea is

that when a problem is identified, the question is asked as to why the problem occurred, then when the cause is identified, asking in turn why this occurred. This is repeated five times, with the aim of getting to the fundamental cause of the problem. A third tool is known as visual management. This is based on the principle that it should be possible for every worker, whether on the shop floor or the office, to use visual data to manage every stage of the flow at a glance (Zylstra K, 2006).

Another distinctive tool is ‘Jidoka’, which is sometimes known as ‘autonomation’, because it is seen as the humanized side of the process of automation. The idea of this is that "automation does not become an end in itself, which rules all other processes, but can be stopped for correction at any stage if somebody notices a problem". A further tool which has been widely adopted in efficient operations is Kanban. This is the process of using a signal to request a part from the upstream, or supply, process that is needed in the downstream, or customer, process, for immediate supply. The idea of this is to create a clear connection between customer and supplier (A.R Van Goor, M.J Ploos van Amstel, 2003, p433). 

The main point of these tools is not that they should be adopted in a mechanical way, with the idea that bringing them into the workplace is an instant way to improve production. They can only be effective if seen as ways to implement the whole process of Lean, and if the underlying philosophy is understood and taken on board. For example, if 5S is simply introduced as a clean-up exercise, it is not likely to be effective. It has to be seen as a contribution to the whole process of getting people to work more efficiently, and of eliminating anything that obstructs this. (Likker k. J, 2004, p27)

Benefits of Lean

For many firms the changeover to lean has not been straight forward , with workers being forced to leave their comfort zones, and to change ways of working to which they may have become accustomed over many years. However, once the process is under way, provided it is done correctly and quickly, it is found that it brings many benefits, as waste is eliminated, costs of production, as well as costs of plant and premises, are substantially reduced, leading to much higher return on investment (ROI).

Along with this should go a significant increase in sales. This results from two main factors. One is that there are far fewer errors in production, leading to better quality products and fewer product recalls. The other is greatly reduced production times, meaning customer orders are fulfilled promptly. Because the customer is defining value at every stage, the company’s reputation will greatly increase. Once these benefits begin to come through, worker satisfaction will increase and the whole company becomes a ‘happy place’. (Wilson L, 2010, p7). 

http://www.excellence.mdina.com.mt/img/uploads/competencies/benefits_of_lean_1341767179.jpg

(Mdina Partnership. 2013)

Lean application in distribution

The distribution function within an organisation shoulders responsibility for successful customer service while being under pressure to reduce costs and inventory. It can become an even greater responsibility as the organisation grows and as the supply chain spans the globe.

There is a substantial amount of cost and inventory involved in distribution. Therefore it is always a target for profitability improvement efforts. With products being moved over great distances, supply chains become ‘Long’, and with global sourcing taking a firm hold on the modern marketplace, distribution is still under pressure to reduce costs and inventory. (Zylstra K, 2006).

Longer supply chains require accurate forecasting, and good supplier relationships are essential. Commitments must be made to vendors/suppliers for long supply chains much further into the future than for suppliers located closely. Such long commitments mean that customer orders forecast are also required much further into the future. However longer forecasts may not be accurate enough in order to maintain stable supply, causing continual updates and changes. As a result it is very difficult for firms to see how costs can be reduced.

In order to break this Forecast and Cost driven approaches, Lean techniques can be employed.

By improving product flow and implementing practices such as Pull replenishment, allows an organisation to reduce inventories whilst improving service. By applying Lean thinking to an organisation can help reduce variability, resulting in more accurate planning and scheduling. This is where it is evident within distribution and can be thought of as taking a Lean approach to distribution. . (Zylstra K, 2006).

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