2.a proposed

A proposed framework formanaging service parts

in automotive and aerospaceindustriesRobert de Souza

The Logistics Institute Asia Pacific, National University of Singapore, Singapore

Albert Wee Kwan TanCenter for Corporate Learning, Singapore Manufacturers’ Federation,

Singapore, and

Hafidzaturrafeah Othman and Miti GargThe Logistics Institute Asia Pacific, National University of Singapore, Singapore

Abstract

Purpose – The purpose of this paper is to study the process, network, skills and practices of serviceparts logistics organizations in the Asia Pacific region. Specifically, it attempts to propose a newframework for service parts logistics management based on interview inputs from several leadingautomotive and aerospace companies. This paper also seeks to identify the trends and opportunities forservice parts logistics in Singapore.

Design/methodology/approach – Companies from aerospace and automotive industries involvedin service logistics activities were involved in the study. Data were obtained primarily throughinterviews with key executives of the company.

Findings – This paper summarizes some of the industry findings on service parts logistics in theAsia Pacific region. To succeed in the service logistics business, companies should not focus on costfactors alone. Instead, companies should adopt the proposed framework and look into other factors.

Research limitations/implications – The research is limited to companies in the aerospace andautomotive industries only.

Practical implications – This framework was drawn from industry inputs and can be easilyapplied in decision making.

Originality/value – The paper provides a new framework to assist decision makers in decidingwhere a company should locate its service part logistics hub.

KeywordsAerospace,Automotive, Service logistics, Spare parts,AsiaPacific,Distributionmanagement

Paper type Research paper

1. IntroductionService parts logistics is becoming an important aspect of supply chain management(SCM). The size of service parts market has grown significantly in the last decadeestimated to reach $150 billionworldwide and is increasing at 5-9 percent annual growth

The current issue and full text archive of this journal is available at

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This article is part of the special issue: “Supply chain networks in emerging markets” guestedited by Harri Lorentz, Yongjiang Shi, Olli-Pekka Hilmola and Jagjit Singh Srai. Due to anadministrative error at Emerald, the Editorial to accompany this special issue is publishedseparately in BIJ Volume 19, Issue 1, 2012.

A frameworkfor managingservice parts

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Benchmarking: An InternationalJournal

Vol. 18 No. 6, 2011pp. 769-782

q Emerald Group Publishing Limited1463-5771

DOI 10.1108/14635771111180699

rate (Patton, 2006). According to Deloitte research, service revenuesmake up an averageof 25 percent of company’s total business (Anon, 2008). Firms have begun to benchmarktheir service parts logistics operations against best in class operators and third partiesspecializing in this field have seen an increase in the demand for their services.More companies are recognizing the strategic value of having an excellent service partslogistics system to ensure part availability and shorter customer response time.

With that realization, more companies these days are providing good after-salesservice, which will help to extend the lifecycle of products and extract the maximumvalue from high-value equipments. After-sales service is a high-margin business andaccounts for a large chunk of corporate profits. Thus, companies are being triggered topay more attention to their after-sales costs and service level. After-sales services havebecome a unique selling point, especially for the automotive and aircraft industries.Since lifecycle of product in these industries are long, companies will find moreopportunities in after-sales service down the line. In addition, increasing sales of serviceparts cost businesses far less than finding new customers (Cohen et al., 2006).

“Service parts logistics” or the management of service parts for after-sales serviceencompasses planning, fulfillment and execution of service parts through activities likedemand forecasting, parts distribution, warehouse management, repair of parts andcollaboration processes with all the relevant parties in the after-sales service supplychain. It has been attracting more attention recently as companies strive to overcomeincrease competition and attain a sustainable competitive advantage by offering theircustomers better after-sales service. With a desire to retain existing customers, theaircraft and automotive industries are exploiting new solutions to provide cost-effectiveand efficient after-sales service to their customers.

This paper provides a literature review of service parts logistics and presentsa framework consisting of key factors when setting up a service parts logistics hub.Interviews from companies are included, highlighting opportunities and challengesfaced by companies in setting up their regional logistics hub in Singapore.Recommendations are proposed for companies interested in setting up a regionallogistics center (RLC) for service parts management in Asia Pacific.

2. Research methodData were obtained primarily through interviews with key executives working in theautomotive and aircraft industries. Interviews were conducted with three automotivecompanies, two aircraft companies and one logistics provider over a period of twomonths involving three researchers from The Logistics Institute – Asia Pacific andtwo researchers from Nanyang Technological University Center for SCM.

The objectives of this research were:

(1) to understand the various service parts logistics practices in automotive andaircraft industries in the Asia Pacific region;

(2) to understand the process flow for service parts logistics in the two industries;

(3) to develop a framework for the efficient SCM of service parts; and

(4) to identify trends, challenges and opportunities for service parts logisticsbusiness in Singapore.

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3. Literature reviewIndustries measure service quality by means of response time, defined as the time ittakes for a technician to arrive at the customer site with a service part to fix the machineafter the customer reports a failure. To provide high-quality service, manufacturers aimto keep response time to each customer short by stocking parts at their warehouse.

However, service parts are expensive and components have high depreciation andobsolescence costs. Therefore, it is imperative that manufacturers maintain theirinventory level at the central warehouse and field depots at the lowest level possible.

Multi-echelon service parts inventory systems have been analyzed quite extensivelyin the literature (Diks et al., 1996). One of the earliest works in this area was Sherbrooke’sMETRIC model. In his classical paper, Sherbrooke (1986) considered a two-echelonservice parts inventory system for repairable items. Other related works that studymulti-echelon resupply systems with budget considerations include Muckstadt andThomas (1980) and Hausman and Erkip (1994).

The ability to meet the response time constraint depends mainly on inventory policiesemployed at the field depots and central warehouse. If the required service part is in stockat the field depot, the customer is served immediately and the response time is negligible.On the other hand, if the requested part is not available at the fielddepot, the response timeincludes the repair time as well as the travel time to and from the central warehouse(to obtain the part).Thus, it is a tradeoff between service level and inventoryholding costs.

Mathematical models are usually aimed at optimizing the tradeoff between inventoryinvestment and service levels, while considerations of administrative efficiency have ledto different types of classifications of inventory items. While efficient computers makecomplex modeling possible, activities such as choosing control parameters, allocatingcontrol resources, making purchasing decisions, and thinking about different policiesfor different types of items still need to be done manually. For this purpose, itemclassification is an important aspect.

Numerous inventory models have been developed in the area of service partinventory management (Silver et al., 1998). Service part inventory management is oftenconsidered as a special case of general inventory management with specialcharacteristics such as low and sporadic demand volume. However, the objective ofboth is synonymous, that is to achieve the desired service level with minimum cost.

The automotive and aerospace industries are characterized by hundreds of serviceparts and customers, low part failure rates, tight response times, numerous servicecenters and a base stock policy for each part at each warehouse. To control the qualityof service, companies prefer to keep their average response time to each customerbelow a threshold level, say 24 hours. But with globalization, it becomes morechallenging to maintain below this threshold level.

There are a few researchers who have considered multi-echelon service partsinventory systems with service constraints. Cohen et al. (1990) developed andimplemented optimizer to determine inventory policies for IBM’s periodic review,multi-item, multi-echelon service parts inventory system. They solved the problem byusing level-by-level decomposition of facilities and by assuming infinite supply at thereplenishment sources. Huiskonen (2001) illustrates distinct operating policies fordifferent types of parts in the service parts supply chain.

Benchmarking has been described as a structured process which can help toidentify performance gaps of benchmarking partners (Pfohl and Ester, 1999). Hokey


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and Seong-Jong (2009) identify the key goals of benchmarking while Carpinetti andMelo (2002) suggest a new methodology for benchmarking.

As most of the past researchers focus on specific areas in service parts logistics, it isuseful to examine the various factors affecting the service levels and proposed aframework that give a holistic view of service parts logistics (Cavalieria et al., 2008).

4. Proposed framework for managing service parts logisticA new framework is proposed for an efficient service parts supply chain (Service partslogistics framework) based on inputs from the companies as well as from the latestresearch works which are shown as follows:

(1) customer service objectives and goals;

(2) supply chain network:. network configuration.

(3) enablers:. technology;. measurements; and. air and sea connectivity.

(4) processes:. transportation;. warehousing;. reverse logistics;. order processing; and. distribution.

(5) people:. skill sets;. knowledge; and. training.

(6) infrastructure, government regulations and incentives.

Each of the components provides a foundation that ultimately delivers the customerservice goals. Although the framework applies to bothmature and emergingmarkets, it isespecially critical in mature markets given the importance of efficiency in a price-drivenenvironment. The novelty of the framework lies in bringing together different factorscritical for efficient reverse SCM from literature and the practical sphere into a simplestructure. It will provide a stepwise decision-making path on how to pragmatically handlethemanagement of service parts in a company.Companies’ inputs from the interviewswillbe presented to support the proposed framework and interviewed companies.

A short description of these companies and their activities are listed below:. CompanyA.ABrazilian aircraft company specializing in private jets. It has become

one of the largest aircraftmanufacturers in theworld by focusing on specificmarketsegments with high growth potential such as commercial, defence and executiveaviation. Company A established their support center in Singapore in 2001.

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Company A has established its reputation as a leading manufacturer in the globalaerospace industry supplying to private clients as well as commercial and budgetairlines.

. Company B. This company, a subsidiary of (European Aeronautic, Defenceand Space company one of the three largest aerospace groups in the world),was set up in 1977. ESEA is responsible for the sales and customer supportactivities for the entire range of Company B helicopters for 15 territories in theregion. There are three main pillars of the organization – sales (new, usedhelicopters, repaired and services), finance and supply and services. Company Bhas over 180 collaborators servicing clients across Asia.

. Company C. A German manufacturer of luxury automobiles, buses, coaches andtrucks. Singapore is the regional hub for service parts of car brands under theparent group in Asia.

. Company D. This company, motor corporation, is a multi-national corporationheadquartered in Japan. It is the world’s largest automobile makers by sales andproduction. BetweenMay 2008 andMay 2009 Company Dmanufactured and soldover 7,051,000 cars worldwide. By following its guiding principles and adoptingthe just-in-time (JIT) and 7S principles, Company D has overcome the challengesfaced in the highly capital and labor-intensive automotive industry.

. Company E. This company is one of the major representatives of the German carindustry founded in 1937. Its Singapore regional office serves importers and dealersin the Asia Pacific region. The headquarters is located in Wolfsburg, Germany.

4.1 Customer service objectives and goalsThe goal for any service parts business is to create value for the company’s customersand shareholders. That goal is both the starting point for service parts strategy, andthe ultimate objective for operations. In addition, companies should design a portfolioof service products (Cohen et al., 2006) as each customer segment demands a differentlevel of service. Customer will decide their preferred level of service by weighing thelevel of response they need against the prices they are willing to pay.

The amount of time it takes to restore a failed product is often seen as a keyperformance indicator. Most customers demand fast response time with nearly70 percent requiring less than 48 hours of response time. Since profits, especially in theaerospace industry is dependent on utilization rate, any part unavailability translatesinto 100,000 dollars of incurred loss.

In general, both automotive and aircraft companies offer three different level ofservice. Tables I and II summarize the types of service each industry provide to theirimporters and dealers. The different level of services offered is in close relation to thecriticality of the service parts. Criticality of a part is defined as the consequencescaused by the failure of the part in case a replacement is not readily available(Huiskonen, 2001). A practical approach to measure criticality of a part is to relate it tothe time in which the failure has to be corrected. If the levels of services are based oncriticality, these levels can be characterized by:

. Level 1. Failure need to be corrected and supply of replacement parts should takeplace immediately.


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. Level 2. Failure can be tolerated for a short duration of time while waiting for thereplacement parts to arrive.

. Level 3. Failure does not affect other processes and repair can be done when theparts arrive (no urgency).

Customers are aware of the tradeoff between fast response time and high repair cost.In fact, “power by the hour” concept (Cohen et al., 2006) is gaining popularity inaerospace industry in balancing the tradeoff. The key feature is that it undertakes toprovide the airlines with a fixed maintenance cost over an extended period of time.Airlines are assured of an accurate cost projection, thus avoiding the high costsassociated with breakdowns.

4.2 After-sales supply chain networkCompanies should set up a distinctive after-sales service supply chain that differs fromthe manufacturing supply chain (Saccani et al., 2007). This supply chain should becontinuously optimized for speed and efficiency as the industry is transforming itself.

A typical after-sales supply chain network constitutes four entities namely the partssupplier or OEM, the RLC, the importers or country warehouses and the dealers. The

Type of service Lead time Processes and cost

Aircraft on ground (AOG). an AOGsituation occurs when the aircraft problemis serious enough to prevent it from flying.Since this would cause the company toincur great loss, special arrangement willbe made to deliver parts on-site; often RLChas its own private fleet to cater for thispurpose

Within 12hours

Most costly. To avoid the hassle and costsinvolved in AOG, companies recommendthat airlines keep some spare parts onhand to minimize delay. However, someairlines prefer not to invest in expensiveparts

Critical. airlines need the parts soonestpossible but can allow half day of delaytime

24-48 hours Less costly

Ordinary. parts that are normally used forservicing

One week oras promised

Least costlyTable II.Service level in aerospaceindustry

Type of serviceLeadtime Processes and cost

Vehicle off road (VOR): customers requiretheir vehicle to be fixed as soon as possible.Parts are ordered on a daily basis. VORshipment is done as a packaged delivery

Within24 hours

Highest cost and transportation mode is byair

Emergency: customers require a part soonbut can afford some delays

Two tofourdays

To decrease shipment cost, parts requisitionfrom the same warehouse are consolidated atthe RLC first before shipping out. Maintransportation is via air

Regular Sevendays

Least cost. Orders are consolidated andshipped out via sea

Table I.Service level inautomotive industry

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companies in this study adopt one of the three network configurations, namelycentralized, decentralized and hybrid.

Centralized. In this configuration, parts from suppliers will be stored in RLC anddelivered directly to the dealers whenever demand arises. Company D has a policy thatall service parts are kept centrally at their warehouse as part of their JIT philosophy.They tend to buy small lot sizes frequently from the manufacturer (as opposed to largelot size). The warehouse has an average of six stock turns per year.

There are, however, some products that move slowly and others that are fastmoving parts, such as filters, which are purchased on a daily basis. Company D’sdistributor in Singapore has a program in place to manage these parts. Service partsfor car models manufactured less than ten years ago are held centrally in Singapore. Ifan older car needs a part, the distributor will verify with Company D in Japan todetermine whether the part is still available. This will help decrease the number ofservice parts type stored in the warehouse.

Decentralized. Most companies adopt this configuration. Parts from supplier will beforwarded to RLC first. RLC usually follows the “break-bulk” strategy; breaking thelarge shipments received from suppliers/OEM and then sending the smaller shipmentsto various warehouses in other countries in the region. Some of these warehouses areowned by the company while others are outsourced to 3PL providers. These countrywarehouses are also called importers. Company E acquires all their genuine partssupplies directly from a parts centre in Germany. Parts are delivered regularly by oceanor airfreight to the warehouse in Singapore and subsequently re-distributed to theimporters/dealers in the region. Orders are placed with suppliers once a week unlessserious shortages arise. From Singapore, parts are shipped directly to countries in Asia(e.g. India, Malaysia, andThailand). Batteries are exception, where they are sent directlyto dealers from suppliers because they require special handling.

Hybrid. This configuration combines the two networks and is shown in Figure.For Company C, the RLC adopt a “break-bulk” strategy; receiving large shipments fromGermany and then re-distributing smaller shipments to other countries. Each countryhas its ownwarehouse, some are outsourced and others are owned by Company C. Afterthe parts arrive at the warehouse, they are usually forwarded to a network of privatelyowned dealers. Company C feels that it is easier to have the importer/country warehouseas an additional part of the supply chain because if the RLC dealt directly with dealers,that it may create too much complexity and twice as much work for customs.

Inventory pooling of parts is possible at the regional distribution center. The regioncovers a large area and demand tends to balance out over a time. For example, in Japan,snow tires are in demandat year endwhile it is summer inAustralia. Sixmonths later, theseasons are reversed and snow tires are in demand in Australia. Furthermore, differentvehicles have different popularities in different parts of the region. For example, theS Class is particularly popular in China, the toughest country in the region to service.In Singapore, in addition to their general consumer market, they also supply armytrucks to armed forces in Asia that may be customized. In Australia, where the highestnumber of Company C vehicles is sold, consumers tend to prefer lifestyle vehicles (SUV).

4.3 EnablersTechnologically, supply chain applications should be fully integrated with otherenterprise systems with the flexibility to adapt to changing conditions. Many of today’s


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systems are standalone applications that have been rigidly coded to a particular supplychain structure. In addition, most available packaged software is only able to matchservice logistics companies’ requirements up to 80 percent (Patton and Feldman, 1997).Service parts management system should be able to aid management in executing thefollowing tasks:

. Inventory tracking in the warehouse – how many and what parts are located inthe warehouse, knowing where are the parts located on a real-time basis.

. Monitoring repair operations – which parts are sent to which repair center, whenwill the repaired parts be delivered back to the warehouse.

. Generate reports – to reflect consumption of parts, to display figures reflectingperformance indicators.

All companies involved in this study utilize application packages such as ERP such asSAP in their daily operations of managing the service logistics processes. Some, such asCompany C, has developed their in-house IT system. Most of these systems arestandalone applications; hence it does not provide visibility to other players in theafter-sales supply chain network. Information such as inventory level needs to be sharedwith the RLC to aid inventory planning. Realizing this, Company A, customized its SAPsystem to provide more visibility to their 3PL while restricting other confidentialinformation such as pricing. Reverse logistics is a heavily IT-driven process because ofthe need to provide for and improve visibility of goods in motion throughout the reversesupply chain (Li and Olorunniwo, 2008).

With customer expectations continuously increasing, companies need to measureand monitor their performance of after-sales service (Gaiardelli et al., 2007).Subsequently, they need to compare themselves to other players in the service partsbusiness, make a commitment and strive to improve from their current position. Servicelogistics’ companies often used the following indicators to measure their performance(Patton and Feldman, 1997):

. First pass fill rate – this measures availability of parts in the stoking locationnearest to the customer whenever a part request arises.

. Logistics service level – percentage of time that a requested part is delivered to acustomer location within the promised time period.

. Response time – the amount of time needed for the part to reach a customerlocation; calculated from the time service center receives a repair request fromthe customer.

. Required investment – amount of financial investment needed to provide thedesired performance level of the above three metrics.

In addition, metrics such as waiting time for delivery of parts or technical assistance canbe used to gauge howwell companies create values for its customers while those such asfill rates or parts obsolescence cost can quantify the way companies use their assets(Cohen et al., 2006).

CompaniesAandDmeasure their service logistics performance as shown inTable III.

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4.4 ProcessesInventory management, order fulfillment, distribution, transportation and reverselogistics are common supply chain processes for service parts logistics. In order toconcentrate on their core business and tap on 3PL expertise, it is common for companiesdealing with service logistics to outsource their warehousing and distribution activities.Moreover, collaborating with 3PL create opportunities for generating synergies,pooling risks and achieving economies of scale. Table IV summarizes the activities thatsome companies in this study outsourced to their respective 3PL.

On the other hand, Company D believes in managing their warehouse in-house.Employing various techniques such as Kaizen and Company D 7S principles, the

company achieved 80 percent utilization of warehouse space which translates to highwarehouse efficiency.The 7S techniqueprovides a guideline onhowparts should be storedin the warehouse to allow easy and fast access to required parts whenever demand arises.

Grouping similar parts together, storingheavy items on the lower shelves, segregatingparts according to their numbers and ensuring that parts are stored within easy reach ofworkers are among the rules of the 7S technique. In addition, fast moving goods areplaced closer to the entrance of the warehouse, while slower moving goods are placed atthe rear. Palletized goods are positioned such that they are easily accessible to forklifts.

Kaizen, a Japanese term for continuous improvement is a large part of JITphilosophy pursued at Company D. A Kaizen team was set up and has the daily task ofrelocating items in the warehouse, depending on how fast their turnover is.

4.5 PeopleService parts management is a people business. All the technology of computers,sophisticated equipment and models cannot accomplish much if good people are not

Key performance indicatorsCompany A Company D

Delivery performance (fill rate, ability to deliveras promised)

Stock turn (this figure was recently at 2.27 monthsto turnover products)

Warehouse performance (inventory turn,obsolescence cost)Quality of inspection processTime needed to move a part out of the warehouse

Logistics cost and profitabilityNumber of errors per 10,000 lines pickedNumber of deliveries missedHousekeeping performanceWorker performance (including absentees andsickness)

Table III.Activities outsourced

to 3PL

Company Outsourced activities

Company C Outbound logistics – distribution from Singapore RLC to various importers inSouth East Asia

Company E Entire service parts operations – warehousing: storage, picking and packing –customer service: procurement, shipping, order processing and invoicing – outboundlogistics: shipment via air, sea and/or courier from Singapore to various importers anddealers in Asia

Company A Warehousing activities – storage, quality inspections, certificate issuance and packing

Table IV.Activities outsourced

to 3PL


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involved. The abilities andmotivation of logistic personnel is of vital importance. Hence,a service parts business requires top-notch people with the skills, experience and theright attitude to run the business. Putting the right people in a few key positions can helpboost a company’s overall performance.

Forecasting, inventory control, repair and warehousing management are among theessential skills required to manage a service parts business. Applying forecastingtechniques and selecting the best inventory policy can be a challenge when dealing withservice parts. Traditional averaging-or smoothing-type forecasting methods frequentlyproduce inaccurate results since a relatively high percentage of service parts experienceirregular demand. Unreliable forecast creates problems in deciding inventory policyvariables such as howmuch to order and when to place an order, since determination ofsuch variables must be based on some estimates of the future requirement.

Continuous training and learning to think in newwayswill providemore benefit thantechnological advances when talking about service logistics. Company leaders mustmotivate employees in service parts business to consider new ways to approach serviceparts. Improving service parts management will positively influence corporate profits.

According to most of the companies interviewed, recruiting a pool of knowledgeableand skillful employees in the service parts business is not much of a problem. However,employing experienced individuals is a challenge since the service parts business inSingapore is a small one. Companies also highlighted that it is not easy to recruitwarehouse employees in Singapore as it is considered as a physically demanding job.

The role of technicians has changed over the years. In the past, technicians werethoroughly trained in all aspects of repair and services. They are able to troubleshootalmost any fault on-site. Recently, with the increasing importance of fast response time,technicians have become part changers on-site, while the faulty items are brought backto service center for repair.

4.6 InfrastructureCustom duties, tariffs, and government incentives are important consideration inconfiguring the service logistics network. For example, Singapore free trade zone is ahuge incentive for the industry. As of April 2009, Singapore has introduced a GSTsuspension scheme for qualifying aircraft parts. Under the scheme, approved traders inthe aerospace industry are exempted from paying GST when importing certain aircraftparts into Singapore.

Regulatory drivers exist in several nations such as Europe, USA and Japan(Kumar and Putnam, 2008). Every process has to be in strict compliance with therequirements of national and international authorities (e.g. FAA for USA and EASA forEurope). In addition, existing airports and seaports, road conditions are some of thebasic infrastructures that have an impact on the service delivery for service partslogistics. Better infrastructures will attract more airlines and shipping lines to transit inthe country, giving rise to higher connectivity.

5. Opportunities and challengesWith Singapore’s reputation for efficiency, ease of business, and network, choosingSingapore as a regional logistics hub was an easy choice for companies such asCompanies A and B. Singapore is ahead of the region in terms of logistics infrastructure.The port of Singapore is linked to over 600 parts in 123 countries and over 200 shipping

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lines call at the port. It handles the world’s largest volume of containers which exceeded30 million TEU in 2008 (World Port Ranking, 2008). In addition, Changi Airport, isranked one of Asia’s top ten in air cargo volume in 2008 (ACI, 2009). It has 4,000 weeklyflights connecting 182 cities in 57 countries. The airport and logistics infrastructureof Singapore is stable and not affected by political issues as compared to other countriesin South East Asia.

Conversely, companies who intend to set up a logistics hub in Singapore need to beaware of some challenges. Among which are the tedious customs process according tosome companies. Each transaction ofmoving parts in and out of the port requires permitswhich could cost up to S$30 per permit. Over time, import and export documentation costmight constitute a significant fraction of companies cost.

The process of obtaining safety licenses for import, handling and storage ofdangerous goods such as oxygen generators, fire extinguishers, explosive cartridgesand batteries proved to be a challenge too. As much as service logistic providers wouldlike all their suppliers and OEM to set up repair capabilities in Singapore, the return oninvestment is low as the current repair volume in this region is not large enough tojustify the cost of establishing a repair center.

Furthermore, aircraft industry is an over-regulated one in terms of safety with a lot ofemphasis on training. There is a large gap in talent since the technical employees areeither in their 20s or 50s. It is difficult to send the experienced employees for off-site visitswhile it takes a long duration to train the new employees and this is a costly process.

6. TrendsThe four major issues below are prevalent in handling of service parts especially in theaerospace industry:

(1) Margins are lower, leaving less money to spend on inventory.

(2) High capital investment is needed to put all parts on the shelf. For example,wheels and brakes can cost US$4 million.

(3) High cost of test equipments. With a limited number of customers, there are fewunits coming through the repair shop to justify investing in these equipments.

(4) High obsolescence cost. This has led some companies to move towards “powerby the hour” concept.

Customers are now trying to sell back and lease service parts in the region. Therefore,the 3PL distribution model needs to be ready for such trend. The companies aremoving away from a traditional “just-in-case” model to the current “just-in-time” ( JIT)model. This means that the 3PL needs to be flexible to adapt to the JIT model. 3PL canalso target the low-cost carrier sector which is emerging in this region.

Most of these companies are operating on “power-by-hour” concept to reduce cost.Customers and suppliers of mission-critical products, such as commercial aircraft andmilitary weapon systems, are recognizing that the acquisition of world-class products isnot sufficient, it is also imperative to provide superior, cost-effective maintenance andsupport services throughout the after-sales phase of the customer-supplier relationship.A major focus of these efforts involves re-designing the contractual and implicitrelationships between customers and suppliers in the service support supply chain.


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3PL should also consider AS9120 accreditation in order to enter the aircraft industry.The accreditation is only awarded to facilities that comply with the stringentrequirements of aerospace companies worldwide, in addition to the enhanced regulatoryrequirements for aerospace distributors.With the increasing aerospace logistics businessin the region (Venkatesh, 2010), demand for aerospace logistics services are expected togrow in the coming years.

Airlinesmay need to reorganize their supply chain to improve coordinationwith theirfreight forwarders. As airlines tighten their budgets, there will no longer be as manyparts on their shelves to support repair activities. Theywillmove to operate based on theJIT concept. Companies will need to determinewhich set of service parts ismost likely tobe required and have the highest transactions to stock in their warehouse. Technologycalled Aircraft Communications Addressing and Reporting System (ACARS) will beused for “health monitoring” of aircraft (ARINC, 2010).

During flight, the central maintenance computer in the aircraft ensures that theaircraft is working as it should be. If there is any error, a message will be sent to theground and to the aircraft. This message allows the company to troubleshoot andpredict which part may be needed. This is not necessarily accurate but is sufficient topre-empt various parties to prepare the necessary parts and manpower needed for therepair operations. In adopting such technology, aircraft companies hope to becomemore proactive and improve their preventive maintenance.

7. ConclusionsIn this study, we have proposed a framework for managing service parts logistics thatfocuses on a few key components. The most significant thing to take note of the proposedframework is to quantify the customer service level for different customer segments, andprovide the necessary processes, enablers and supply chain network to meet each servicelevel. The proposed framework is highly dependent on infrastructures provided by eachcountry and their constraints imposed for export and import. Based on the responsegathered from the companies interviewed, it is useful to apply this frameworkwhen settingup the service part logistics hub in Asia instead of solely focusing on cost factors alone.

7.1 Managerial implicationsIn addition to providing a theoretical framework which can be adopted to structure areverse supply chain, this paper sheds light on the current best practices adopted bydifferent companies in the automotive and aeronautical industry sectors.By benchmarking the best practices of five companies in these two sectors gatheredfrom in-depth interviews, it attempts to provide a practical hands-on operational view ofsupply chain for service parts. In this paper, emphasis is laid on understanding thenuances of SCM for service parts for these sectors. The framework provides a summaryof factors that are required for attaining the goal of effective reverse SCM. It also shedslight on the service parts supply chain practices in Singapore, an establishedlogistics hub.

7.2 Contribution to the research communityAs noted by several researchers, research in reverse SCM lags behind research inforward SCM. This paper contributes to both reverse logistics and benchmarkingliterature, providing a theoretical framework derived from interviews with leading

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industry players and a practical perspective to reverse supply chain practices inSingapore. In conclusion, the papers key insight is that cost alone should not be thedeciding factor when setting up a reverse logistics hub in a region. Rather a plethora offactors must be considered before designing the reverse supply chain for service parts.

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Further reading

Patton, J.D. (2007), “Service parts balance”, APICS Magazine, available at: www.apics.org/Resources/Magazine/Past/

About the authorsDrRobert de Souza is the Executive Director and Chief Executive of The Logistics Institute – AsiaPacific. Dr de Souza is also a Professor at the Georgia Institute of Technology in the USA and aSenior Fellow at the National University of Singapore. He has published extensively and is amember of the Editorial Boards of the International Journal of Computer IntegratedManufacturing and the International Journal of Logistics Research and Applications and SMBNet.

Dr Albert Wee Kwan Tan has research interests in reverse logistics, process modelling andreengineering, and information technology to coordinate the supply chain. He holds an MBSfrom the National University of Ireland and a PhD in Supply Chain Management from theNanyang Technological University. His research works have been published in the InternationalJournal of Physical Distribution & Logistics Management, the International Journal of LogisticsSystems and Management, the International Journal of Logistics Management and the AsiaPacific Journal of Marketing and Logistics. Albert Wee Kwan Tan is the corresponding authorand can be contacted at: [email protected]

Hafidzaturrafeah Othman received her Master of Science (Logistics) and Bachelor ofEngineering degree from the School of Mechanical and Aerospace Engineering, NanyangTechnological University. Prior to joining TLI-Asia Pacific, she was working as a ResearchAssociate in the Division of Systems and Engineering Management, NTU. Among the projectsthat she has done are designing and simulation of service networks. Her current researchinterests are in the field of reverse logistics, air and sea cargo, simulation, optimization andre-engineering of supply chain network.

Miti Garg graduated with MSc (Management) by Research from the NUS School of Businessin 2006. She obtained her Bachelor’s in Architecture (BArch) from the School of Planning andArchitecture, New Delhi, India in 2001. Her industry experience includes working with the Retailand Leisure Advisory team for Jones Lang LaSalle Ltd, New Delhi, India. She is actively involvedin industry and academics-related research. Her current research interests are in the field ofglobal supply chain management, reverse logistics, growth and innovation in logistics andsupply chain management, green IT and integration of multimodal transport networks. She hasseveral conference paper acceptances in conferences including ICSSSM, POMS, IAENG and ISL.

To purchase reprints of this article please e-mail: [email protected] visit our web site for further details: www.emeraldinsight.com/reprints

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