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Based solely on the science of predictions, inventory planning for the service parts industry is notoriously difficult. But, as Subaru of New England finds, having the right software in stock can make all the difference.

[From iSource Business, April/May 2002] It's happened to all of us. You have a problem with your car, so you take it to the dealership to get fixed, only to find out that it will take a week to get the needed part. Now you're stuck without a car, which is quite a headache.

The supplier of those service parts to that dealership might have an even bigger headache, though. Imagine trying to predict how many cars will be brought in with a problem that month and what service parts will be needed at all of the dealerships to which you supply.

That's a problem that Sean Perry, lead planner at Subaru of New England, an independent distributor of Subaru cars and parts to 60 dealers in the New England area, has faced for many years. Subaru of New England, like all other independent Subaru distributors in the United States, purchases its cars and parts from Subaru of America, located in Cherry Hill, N.J. In order to do that, and to estimate needed inventory, individuals like Perry have had to rely on the hard-copy data from Subaru of America's suggested stock orders. As Perry explains, For inventory buying, we actually did it with paper and pencil. [Subaru of America] would overnight us a suggested stock order, and we would look over it an amend it. It was usually around 300 or 400 pages long.

Sell-service Planning

Then, in late 1999, Subaru announced that it was moving to a new computer system, which would include online purchasing capabilities. And, in order to be compliant with the new system, all of its distributors would either have to upgrade their systems to buy from Subaru online, or not buy at all. Relieved at the prospect of throwing out the pencil-and-paper method, Perry welcomed the change, but did not welcome the added fees that Subaru's software provider, (which all of Subaru's distributor's had the option of switching to), was going to tack on.

So, being an independent company, Subaru of New England began shopping for an e-business software provider of its own. Because the majority of the distributor's business involves making sure it has the right parts in stock so that its dealers have the right parts in stock, Subaru of New England began looking at inventory planning systems, which is when they found Servigistics. Servigistics was not exactly a strange choice for Subaru of New England, considering that, unlike other inventory planning software providers like i2 or Manugistics, it is focused exclusively on the vertical market of service parts inventory planning.

Based solely on the science of predictions, inventory planning is a notoriously difficult segment of the supply chain, and building software to facilitate this process is no less complex. In fact, performing inventory planning processes, such as forecasting demand, predicting lead times and optimizing inventory for manufacturing companies, can be completely different than performing those same processes in the service parts industry.

According to Mike Landry, president and CEO of Servigistics, companies like Subaru stock inventory in a just-in-case environment as opposed to manufacturing's just-in-time environment. As Landry explains, there are major differences between the two, such as reverse logistics, part-location pairing and parts-relationship analysis. For example, if you are replacing a certain part in an automobile, you must determine if the old part can still be used. Can a bad old part be fixed to be a good new part? Can you use the good old parts before buying more good new parts? This replacement part dynamic, or replacement logic chain plays a major role in the optimization of service parts inventory and is often overlooked by software designed for manufacturing companies.

Service with a Smile

Perry can attest to the fact that these seemingly small industry nuances can make big differences for business when factored into planning analysis. Since the implementation of the Web-based Servigistics system, Subaru of New England has been able to increase its first-pass fill rate drastically, which means that when one of its dealers requests a part, they have that part in stock. In most businesses, when a customer orders a part from a company and that company doesn't have it, it goes on back order, Perry explained. With us, if one of our dealers orders a part that we don't have, we automatically refer that order to Subaru of America where it goes out into a network of other regional distribution centers that ships the part we don't have. The bottom line of all this: in the service parts industry, if you don't have the part in stock, you don't get the business, and you lose money. There was a lot of that going on before Servigistics, says Perry. Now we refer a lot less orders than we did before. To be exact, Subaru of New England's fill rate was around 60 percent before Servigistics and stands at over 90 percent today.

So, with the ability to have so many more needed parts in stock all of the time, how is it that Subaru of New England has also succeeded in reducing its inventory by 52 percent? More parts and less inventory? As it turns out, it is possible. With more specified algorithms and more precise analyses being performed by Servigistics, Subaru of New England was not only able to determine what parts were needed in stock, but also what parts could be eliminated or greatly reduced. According to Perry, when Subaru of New England first began working with Servigistics, they ran a test analysis on a type of oil filter, which Perry says is their fastest-moving part. At the time, they were carrying over 100,000 of that part number in stock, but the Servigistics system kept bypassing that part number, never queuing Perry to reorder. Perry admits being startled by this, especially when the stock of that part number got down to 24,000. But, as it turns out, that is just as much as Subaru of New England needs in stock at any given time. Perry, needless to say, is amazed. We have almost doubled the amount of part numbers that we carry, so that our fill rate has gone up, he explains, but our inventory level has gone down.

Full-service Industry

At a time when many market players are striving for differentiation within the supply chain arena by catering to vertical markets, it should not be forgotten that this is still an emerging strategy that has yet to prove successful in this industry. However, it appears as though Servigistics has tapped into something very well suited for such vertical marketing. The numbers themselves are impressive: $700 billion was spent on service parts last year, which constitutes 8 percent of the gross domestic product. And it is possible that this number will grow over the next year. According to Servigistics' Landry, the service parts industry may grow because of the current economic slump. In today's economy, businesses are having to look to the service side to generate revenue growth, he explained. While people will put off buying the computer or the piece of equipment or the car, they won't put off fixing them.

Subaru's Perry agrees that the industry is doing well, and knows that enabling technology will only help it to do better. In fact, Subaru of New England is currently in the process of piloting a system which would get each of its 60 dealers on the Servigistics system in an effort to achieve Virtual Managed Inventory (VMI). He believes the system will do just as much good for them as it has for Subaru of New England, improving customer satisfaction, optimizing inventory and, most importantly, driving savings to the bottom line.