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Original Date: 08/30/2004
Revision Date: 01/18/2007
Best Practice : Spare Parts Level of Support
In a contract-manufacturing environment, building inventory in advance of the order is usually something to avoid. However, RB Tool & Manufacturing Company developed an approach to identify candidate parts for special customers when it is a win-win decision to build some inventory in advance of anticipated demand. This process minimized customers’ downtime and risk, while providing RB Tool & Manufacturing Company a premium price and increased flexibility to level shop load.
A significant part of RB Tool & Manufacturing Company’s (RB Tool’s) metal fabrication business is for relatively low-volume spare parts to support customer manufacturing/operational processes. These metal parts eventually wear and need replacement. In the past, customers relied on the heroic efforts of RB Tool to machine and assemble replacement parts as quickly as possible to minimize the downtime they experienced for lack of a critical part. This was a problem when RB Tool had raw casting components with six-month lead times. At the same time, as a low- volume contract manufacturing facility, RB Tool was constantly faced with uneven peaks in demand, often causing the need for overtime or the risk of missing delivery dates.
In 2001, RB Tool analyzed seven years of history with key strategic customers and the repair parts they purchased on a consistent basis. Backed with this kind of usage data and knowledge of the impact the lack of a repair part had on its customers' operations, RB Tool defined and proposed a slightly different business model for its strategic customers. Critical spare parts with lead times measured in months would now be provided within 24 hours. In return for this higher level of service, the customer agreed to pay a reasonable premium knowing that costly delays caused by spare part replacement would now be avoided.
RB Tool’s history with its strategic customers and their agreements to pay a premium for 24-hour replacement, enabled the company to build up to six months of inventory prior to receiving an order. This gave RB Tool a ready supply of work when production volume was low, and allowed the company to build inventory at a more economical lot size. RB Tool orders raw materials in larger quantities and out-sources more economic quantities of plating/coating. This work is more repetitive than other prototype work and relatively well suited to second shift, where there is less management support available. Following are RB Tool's criteria for providing this level of support:
Strategic customers must have a history of good relations and anticipation of growing business
Products must be repair parts that require replacement due to consistent wear
Orders had to exceed 200 pieces annually or extensive sub-tier supplier lead times were associated with casting
RB Tool also extended the process into its supply chain. The company asked its suppliers to agree to staggered delivery of larger order sizes. The unit price of supplier parts was based on the larger quantity, but invoicing was staggered at a certain predefined quantity per month (regardless of how the supplier scheduled actual production). As a result of the higher level of service and partnering, RB Tool realized a 30% increase in sales from 10 strategic customers. Despite additional inventory costs, the combined premium price and reduced manufacturing costs have doubled the profit margin for the spare parts portion of RB Tool’s business.
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