Improving After Market Supply Chain: A Top-Down Approach A Case Analysis from Automotive Industry

Deepak Bartwal*, Abhishek Skariah*, Sachin Juyal*, Ashok K. Pundir** * Final Year Student, Post Graduate Diploma in Industrial Engineering, NITIE, Mumbai ** Professor (Operations Management), NITIE, Mumbai

1. Introduction:

No matter how big an organization is, more smart people are going to work outside its walls than inside. Hamm, Steve. Radical Collaboration, Business Week Supply chain does not end up with delivering the products to the customer, but the new kind of activities start even after the sale of product. Customer buys the product discovering out commitments and assurance about the life and quality of the product. But what if our commitments do not meet the reality? This is more crucial in Automotive, White goods, Computer business etc. The support provided by the manufacturer after the sales of the product to the customer is known as After-market activities. Aftermarket support refers to activities associated with products (e.g. Service parts) and services (e.g. engine overhauls) after the initial sale of a product. We can say that the AfterSales services for manufactured goods encompass the set of activities taking place after the purchase of the product, devoted to supporting customers in the usage and disposal of goods. There are many differences in the working principles of Manufacturing Supply chain and After-Market Supply chain. Cohen et al. (2006) have made a summary of these differences.

Table: Difference between Manufacturing Supply Chain and After- Market Supply Chain

Manufacturing Supply Chain

Nature of Demand Required Response Product Portfolio Predictable, can be forecast

After-Market Service Supply Chain

Unpredictable, Sporadic

Standardized, can be Scheduled As soon as possible Largely Homogeneous Always Heterogeneous

Inventory Management Aim Performance Metric Inventory Turns

Maximize Velocity of resources Fill Rate Generally more than 6 a year

Pre-Position Resources Product Availability One to four a year

2. Potential of After Market Supply Chain

Automotive, White-goods manufacturer or Computer manufacturer always look for better customer satisfaction and good profit share. Although, After-market does not provide great revenue base but it is great contributor of profit in the balance sheet. A study shows that After Market yields up to 50% profit for the OEM and Supplier where as the revenue contribution is up to only 5 %. This simply reflects the huge potential of after-market support.

Figure 1: After Market Profitability

For some industries, the initial sale of a product is just the beginning of a product's ability to generate revenue. In fact, revenue and profit opportunities may be greater for aftermarket support (e.g. parts and service) than for the initial sale of the product.

3. Lean Vs Agile: Where are the pain Points

Service Supply Chain comprises of various activities. It starts since the sale of the products until it ends. If we see the whole Service function, we can classify the all service supply chain activities in these two major categories:

Figure 2: Activities classification for After-Sales Service We can see the wide gap in achieving our goals. Henceforth, we have to do trade-off between two policies to frame the After Market Supply Chain. Before making After-Market Supply chain more efficient and Lean, we need to have look into the characteristics of Lean and Agile Supply Chain. If we see the Agile and Lean Supply Chain, we find that: Attributes

Lean Supply Chain

Agile Supply Chain

Products Demand Product Life Cycle Product Variety Customer Drivers Profit Margin Average Forecast Error

Functional Predictable Long Low Cost 5%-15% 5%-10%

Innovative Volatile (Unpredictable) Short High Availability 20%-60% 30%-50%

It simply shows that the After Market Supply Chain is Agile Type of Supply Chain. Hence to solve the pain points in the supply chain, we need to look into the all processes. But any supply

chain can neither be complete Lean nor Agile. There will be an optimum mix of Lean and Agile. What we need to do is just to find the Decoupling Point.

3.1 Decoupling Point:

This point differentiates the Lean Activities and Agile Activities. As we know that in after-market supply chain needs the agility in the front areas, hence the later part always would be Agile. But the back-end activities and after-replacement activities can be Lean. This is how we can improve the supply chain by reducing the waste and saving the total cost.

4. Making Process Lean: Improving the Process

The Parameter Diagram (P-Diagram) takes the inputs from a system/ customer and relates those inputs to desired outputs of a design that the engineer is creating also considering noncontrollable outside influences. The P-Diagram is a useful tool in brainstorming and documenting. It includes: Signal Factor(s) Response Variable or Ideal Function Control Factors Noise Factors Error States (or the failure modes)

Signal Factor (inputs) pass through the design of the product and is output into measured Response Variable (also called the Ideal Function). Signal Factor is transformed via the Control Factors to convert the input to the desired output. Control Factors are typically elements such as design, materials and processes that the operator has 'control' over. Error States are the failure modes or effects of failure as defined by an end user when using the product. Noise Factors are things that can influence the design but are not under the control of the engineer, such as environmental factors, customer usage, interfaces with other systems, degradation over time, piece-to-piece variation, among others.

Control Factor

Signal Factors

System

Response Variables

Noise Factor

Error States

4.1 Forward Planning: Distribution Strategies

This includes the inventory stocking at various locations in whole Supply Chain as well as the structure of Supply Chain. Network structure designing is very tedious job in after-market supply chain as there are many performance indices to decide upon. After an extensive study, we come to conclusion that After-Market Supply Chain can be measured on following parameters: Cost Quality Lead Time Service Level/Availability

There are some basic network structures followed in current industry scenario:

A1

Supplier

Warehous e

Local warehouse

Dealer

Customer

Supplier

Warehous e Warehous e

Local warehouse Dealer

Customer

A2

Supplier

Customer Customer

Supplier A3

A4

5. Case Study: Automobile Industry

ABC (name is kept not disclosed to hide the confidential data) Service Supply chain consists of Auto OEMs, their Dealers and Final Customer. The most important factor here is CES doesnt directly interact with the final consumer. The routing passes through always OEMs. And hence it becomes very complex to optimize as it is difficult to keep everyones interest intact and maintain the high customer satisfaction level but not impossible. OEM Dealers location is the place where service action will take place.

5.1 Distribution Network: Application of AHP

As discussed above that there are four basic types of distribution network. Now selecting the optimum way on the basis of performance parameters is very complex problem. Hence we used AHP (Analytical Hierarchy Approach) to get the most suitable and optimum result. *The Calculation for AHP is not included in the paper.

Parameter Matrix

Cost Cost Quality Lead Time Availability Column Sum 1 1 0.5 3 5.5

Quality 1 1 0.5 2 4.5

Lead Time 2 2 1 5 10

Final Weightage Availability 0.33333333 0.5 0.2 1 2.03333333 0.18336 0.22397 0.0998 0.49286

Final Weightage A1 0.266845

A2 A3 A4

0.214139 0.283948 0.235068

Service Flow Material Flow

Supplier

OEM Warehouse

OEM Dealers

Customer

Money & Information Flow

Fig. The Optimum Distribution Network Structure for the Company

5.2 Forward Planning: Service Parts Distribution and Inventory Allocation

To improve this activity demand process is needed to be known. But we know, Service parts are of highly erratic demand. And without accurate demand, it is very difficult to manage the inventory levels at each echelon of supply chain partner. Hence, before going for the inventory level, we have to divide all the items in some specified categories for simplification of the policies.

a) Classification with respect to Cost: Classifying inventory items with respect to their
cost is usually achieved with ABC analysis, which is a commonly applied technique based on Paretos law. Sr. No. 1 2 3 4 5 Cost (In Annual dollar) Usage $X $Y $Z $M $N 10 40 50 50 100 Usage Value $10 X $40 Y $50 Z $50 M $100 N Cumulative Value 10 X 10 X + 40Y -------------Cumulative %

Item Name ALPHA Beta Gama Gama 2 Zeta

Rank 1 2 3 3 4

% value

24.44987775 24.44987775 68.4596577 92.90953545

1.833740831 94.74327628 1.833740831 96.57701711 3.178484108 99.75550122

6 Total

Omega

$O

50

$50 O $40,900.00

-----------

0.244498778 100 100

Figure: ABC Classification for SCR-Items SCR-Items

Figure: ABC Classification for

CLASSIFICATION ITEMS ALPHA Beta Gama Gama 2 Zeta Omega

Figure: Classification of Items

CATEGORY A A B B B C

b)

Classification with respect to Criticality: It is related to the consequences caused by the failure of a part in case replenishment is not readily available. Parts are usually classified in terms of their criticality using qualitative criteria.
1. Highly Critical (class H): Absolutely essential for the operation of the equipment. 2. Moderately Critical (class M): Moderate effect on the operation of the equipment. 3. Low Critical parts (class L): Parts that hardly affect the operation of the equipment

CRITICALITY COST H ALPHA BETA & --------ZETA ------------GAMA 1& 2 OMEGA M L

A B C

Figure1: Classification on the basis of Criticality and Consumption

c) Classification with respect to Demand/ (Failure Rate): Demand pattern for the service items is highly erratic for each individual item. Hence it is necessary to have a classification on the basis of demand rate. As we are only considered with the Service parts, so the demand depends on Failure Rate of the items.
High RPH (High Medium Demand) Demand) CRITICALITY COST H M L RPH (Medium Low RPH Demand) CRITICALITY L H ALPH A M L (Low

CRITICALITY H M

BETA

--

--- ---- ---- --

-----NOZZEL

-----GAMA 1& 2

--

--

------

--

-----

--

--

------

--

------

OMEGA

-----

--

--

Figure: Classification with respect to Demand Rate, Criticality and Consumption

SELECTION OF INVNETORY SYSTEMS: After the classification of Inventory items, control policies can be established associated with each group of items.

ITEM

CATEGORY (Cost/Criticalit y/Demand) A/H/HD

POLICIES

Beta

Tight Control, Continuous Replenishment System Tight Control, Continuous Replenishment System (S1, S) Periodic replenishment System Periodic replenishment System kept in Stock, Cost-based Stocking

ALPHA Zeta Gama Omega

A/H/LD B/M/MD B/L/LD C/L/LD

Figure 2: Policy Decision for the Items with respect to Classification

5.3 Inventory management for Low Demand item: METRIC Model

Generally Low Demand item posses a great problem to us during maintain the inventory at different echelon. So here only the case of Low Demand Item is discussed. In our specific case, we have one OEM warehouse and many OEM-Dealers. One-toOne Replenishment System says as soon as an item is sold to the customer at Dealer Location, simultaneously an item is ordered from Warehouse. This is called S-1, S System. Here, S is the level of Inventory we need to maintain. As soon as one unit is sold and inventory level becomes S-1, one unit is ordered from the Warehouse. If for any product, mean demand rate at Dealer Location is i (i is Dealer Location and = 0, 1, 2,), then it is assumed that the demand follows the Poisson distribution. And if there are N

Dealers, then the Demand Rate (w) at OEM-Warehouse will also follow the Poisson distribution with Mean Demand Rate:

For One-to-One Replenishment, if stock level at Dealer Location is si then orders one unit from OEM-Warehouse each time. If warehouse has the stock then it will replenish the demand and say the time to replenish item from warehouse to Dealer is i. And if Warehouse does not have the item, it orders to CES: Supplier of the Item. Say the time to replenish the item from CES to Warehouse is w. Now, if the Demand Rate at Dealers Location is and mean time to replenishment is then the number of units in order mi is Poisson Distributed with parameter . If the stock level at dealer location is si, then the Probability of a stock-out is

And the Expected Back-orders (EBO) will be:

At the OEM-Warehouse, the Demand Rate is , the Mean Replenishment time is Stock Level is sw. Then the Stock-out probability at Warehouse will be:

and the

Backorders at the Warehouse do not necessarily reduce the service level at the Dealers Location, as long as stock remains at the Dealers Location. However, if Backorders accumulate at the Warehouse, it becomes more likely that the Dealers will be affected because the replenishment time at the Dealers Location becomes longer. The average additional waiting time at the Dealers Location is:

Wo= (Expected Numbers of Backorder at Warehouse)/ This is an application of Littles Law. Hence the expected replenishment time from warehouse to dealer will be:

And new probability will be:

METRIC Model Demonstration:

The inputs needed are: INPUTS Mean Transit time from CES to TML (In months) Mean Demand Rate (say monthly)

Table: Input data for product Availability

Gama 1 1i OEM Warehouse Dealer 1 i=0 i=1 5 2.5 1i 0.50 0.01

Gama 2 2i 5 2.5 2i 0.50 0.01

Beta 3i 10 5 3i 0.50 0.01

Zeta 4i 7 3.5 4i 0.50 0.01

Zeta seat 5i 5 2.5 5i 0.50 0.01

ALPHA 6i 2.5 1.25 6i 0.50 0.01

Item No. 0 1 0.917915 2 5

Table: Stock Quantity at warehouse 8 10 15 1.06924E20 4.06897E-

0.4561869 0.042021038 0.0011403 6.16269E-05

08 2 0.917915 3 0.9932621 0.875348 4 0.4561869 0.042021038 0.0011403 6.16269E-05 1.06924E08

13 4.06897E13 8.10925E08 1.86906E10 4.06897E13

6.90082E0.384039345 0.0680936 0.013695269 05

9.18386E0.9698026 0.6791528 0.142386447 0.0098737 0.001019394 07 1.06924E08 5.22249E13

5 0.917915 6 0.7134952 0.1315323 0.001838085 6.711E-06 9.318E-08 0.4561869 0.042021038 0.0011403 6.16269E-05

Figure: Backorder Quantity at OEM Warehouse

Quantity in Stock at Dealer Location Item No 0 1 2 3 4 5 1.2916667 1.2916667 2.5833333 1.8083333 1.2916667 2 0.0142781 0.0142781 0.3301208 0.0771035 0.0142781 5 1.93765E-10 1.93765E-10 1.94224E-05 4.55557E-08 1.93765E-10 8 0 0 7.358E-14 5.248E-16 0

0.6458333

0.000218

1.54548E-13

Figure: Backorder Quantity at OEM Dealer

5.4 Process Improvements: Removing the Waste

After market Supply Chain activities, as discussed earlier, can be classified into two major groups: Forward Planning and backward Planning. Forward Planning includes mainly the Parts Distribution Strategy across the supply chain while the backward planning include part Return process (if Company wants to get its part back to its premises), Warranty management, Information and Money flow etc.

5.4.1 Backward Planning: Part Return Process

Briefly, Part Return Process takes care of all the processes related to replacement, service and incident reports. Since the replacement of part at OEM Dealers Location till failure Analysis and warranty claim settlement, if any, are covered in this process. P-diagram is one of the best ways to design the robust process. So we take the help of P-Diagram to design the part Return process. This simply clarifies the input and output for the process with possible error states. This helps us in taking the Preventive Maintenance to escape the error states. Figure below shows the P-Diagram for the Part Return Process. CONTTROL FACTORS INPUT PARAMETERS Intimation of replacement Condition of failed part and Location Schedule of the dispatch from dealer Details of part Part Return Process Control over scheduling Information integration among partners Continuous tracking DESIRED OUTPUT Safely and timely Part Return

NOISE FACTORS ERROR STATES No timely intimation of replacement Unable to identify

5.4.2 Backward Planning: Warranty Management

For the parts covered under the warranty claim, the company has to follow the very careful procedures. The true claim should be met while the fraud one should be rejected. Again, P-Diagram for the Warranty Management can give us some warning bell in advance to correct the process.

5.4.3 Backward Planning: Information Integration

Visibility and traceability are two technology-related issues that are driving forces in supply chain improvements. Visibility allows an organization to track a part or order as it passes through the supply chain. Traceability, on the other hand, allows firms to trace individual components. Enterprise Resource Planning (ERP) encompasses the different activities into a company and can be considered as the backbone of IT infrastructure. Nowadays ERP systems should organized an enterprise completely according to customer needs, regarding the business environment of the enterprise as a supply chain including, repair vendors, manufactories, 3PLs network, OEM logistics networks and customers.

6. Conclusion
Once the supply chain and the services are operating, dynamical metrics (Keep Performance Indicator KPIs) should monitor the customer and supply chain performance. From a customers perspective, service quality is defined by delay of the part request and from the OEM supply chain perspective there are various measurements involve associated with the availability of the service. The principal is part fill rate, the fraction of demand for parts that is available in stock at the site receiving the demand.

References:
Bruce, M., Daly, L., Towers, N., 2004. Lean or agile: A solution for supply chain management in the textiles and clothing industry? International Journal of Operations and Production Management 24 (2), 151170 Cohen, Moris A., Agarwal Narendra, Agarwal Vipul, Winning in the aftermarket, Howard Business Review, May 2006 Christopher, M., & Towill, D. (2001). An integrated model for the design of agile supply chains International Journal of Physical Distribution & Logistics Management, 31 (4), 235246 Hammant J., Disney S.M., Modelling the consequences of a strategic supply chain initiative of an automotive aftermarket operation, International Journal of Physical Distribution & Logistics Management, Volume 29 issue 9 Womack, J., Jones, D., Roos, D. (1990), The Machine that Changed the World, HarperPerennial

About the author

Deepak Bartwal National Institute of Industrial Engineering (NITIE), Mumbai E-mail id: deepakbartwal.nitie@gmail.com

Mobile No. : +91-7666236135