The Covid-19 lockdowns have been brutal on supply chain. In Europe, closed borders have resulted in longer lines at border-crossings than many of us have seen in decades. Many senior executives that I spoke to, have confided to me about their challenges in keeping their operations running when they are running short of critical spare parts and supplies. Business models that had been built around cash-efficient Just-in-time models have broken down or have been severely stretched as a result of supply-chain disruptions. We foresee a shift from just-in-time to just-in-case buying for spare parts and supplies. In this post, I will focus on some of the things we are doing at MachIQ to help our machinery customers adapt to the changes in customer behaviour.
In the best of times, executing a cashflow-efficient spare parts business has the challenge of anticipating customer demand. Without access to customers’ spare-parts inventory levels in real-time, every customer purchase order is a balancing act, between optimising pricing, availability, shipping methods and costs while managing customer satisfaction at acceptable levels. The Covid-19 lockdown and the reopening is showing machinery companies everywhere that historic data is no indicator of future demand. Demand models built on historic annual cycles have broken down during the lockdown. They will break down even further as customers stock up with a vengeance to prepare for potential disruptions from potential Confinement 2.0’s and Trade Wars X.0.
It is increasingly clear that most suppliers will not be able to produce parts fast enough to keep up with demand spikes. This is due to their own supply chains also being intensely strained by the current situation, and the social distancing measures implemented in their own production plants. At the other extreme is the risk that suppliers may build up stock for items based on the demand spike and then the demand suddenly falls off a cliff. (To illustrate my point, you’d only have to look at the pile of pasta and tomato cans that you bought at the beginning of the lockdown that you haven’t consumed yet). To clearly articulate the challenge ahead, it is: How can machinery companies and OEMs offer availability assurance for spare parts without pricing themselves out of the market and without risking over-stocking on parts for a demand that may not materialise?
Consignment stocks services
Some machinery companies already offer consignment stock contracts. These contracts enable them to maintain a safety stock of critical spare parts, often at their customers’ sites. The benefit for customers is that the suppliers absorb the cash impact of maintaining inventories and only pay for parts when the consume them. While this is great for customer retention, the resulting cash inefficiency on the suppliers makes such contracts expensive and unpopular with CFO’s. We see emerging digital technologies being able to play a bigger role in making such contracts much more cash efficient for suppliers.
Towards more collaborative spare parts logistics models
Many suppliers adopt defensive strategies like obscuring OEM references. The goal here was to prevent customers from ordering parts directly from the original manufacturer. In the era of 3D printing and emerging data standards like eCl@ss and ETIM, these practices will not be sustainable. Instead, we believe that vendor managed inventory (VMI) with Availability Service Contracts is a much more defensible, win-win business model for the future. It can be deployed at scale in the process industry, implementing digital technologies. Aggregating spare parts inventory data from multiple customer sites in a region is now technically feasible on systems like MachIQ’s Seva. Doing so would also achieve two significant benefits for suppliers over traditional VMI service models.
- Achieve lower costs for both customers and suppliers
- Enable machinery companies to serve more customers
Having permanent visibility of customer inventory levels and aggregating such data with the supplier inventory enables machinery OEMs to merge the best of both “Just in time” and “Just in case”. They can design inventory strategies based on algorithms that take in to account historic demand and remote condition monitoring data that gives helps them anticipate failures that may necessitate parts replacements. But there is a bigger opportunity that remains untapped. What if the excess and often obsolete parts in the inventory of one customer can actually enable another customer to run their machines for longer? During recessions, such services will not only be appreciated by customers but will even generate additional cash with minimal investments for OEMs.
For OEMs to make such a transformation however will not not be simple, it will need a profound mindset shift. OEM’s will need to see themselves as orchestrators of equipment uptime for their customers instead of mere suppliers of parts. Are they ready for such a transformation? Some definitely are, and we have the most innovative among them driving our product development efforts on MachIQ Seva.