A strongly customer-focused organization may feel that it must keep large quantities of service parts on hand, so that it can fill its customers' service requirements at once. This can lead to a considerable investment in inventory, as well as large obsolete inventory write-offs. The accountant may find it helpful to use a set of analysis tools to assist management with the calculation of the best possible investment level for service parts. Here are some tools to consider:
- Throughput per customer. Know which customers generate your cash flow. This requires a knowledge of exactly which products each customer purchases on an annualized basis, as well as the throughput (revenue minus totally variable costs) of those products. It is entirely possible that a high-volume customer may generate such an insignificant amount of cash that it is not worth an excessive level of servicing, so there is no need to maintain a large inventory of specialized service parts for it.
- Customer quality standards. Ever notice how some customers are pickier than others? Some customers will require replacement of parts that would be considered well within the quality specifications of other customers. If these customers are the same ones with low throughput levels (see last item), then you need to question not only your stocking levels, but also why you permit them to be customers. Consequently, be sure to review the proportion of inventory returns by customer.
- Customer complaints. Which inventory items do customers actually want you to have on hand for immediate delivery? Management may be surprised to find that only a few items are "hot buttons," and those hot buttons may not even be overly expensive to keep on hand. It makes sense to spend a few hours combing through the customer complaints log to see which stock-outs actually caused a problem. If you don't have this information, set up an inexpensive on-line survey through an on-line surveying service such as Survey Monkey ($20/month for a 1,000-response survey) and ask your customers.
- Call the user. Notice that the header for this point was, "call the user," not "call the customer." There is a specific person within the customer's organization who is waiting for your service part to arrive. Find out who it is, and ask them how soon they need parts from you. Not only is this a great way to maintain customer contact and build repeat business, but you can also obtain an excellent view of precisely how your product is used, and therefore how rapidly your system needs to fullfill any orders for it. For example, if a service part is needed by the customer on a key piece of manufacturing equipment that will bring down the customer's entire assembly line, then pre-positioning the part in a nearby warehouse or on-site may be the level of servicing inventory required. Alternatively, if the part is only used on backup equipment that is rarely used, then a week-long delay may be entirely acceptable.
Please note that not one of the items I've listed in this toolkit is one of the more common metrics, such as fulfillment rates, service levels, demand accuracy, or the percentage of obsolete inventory. Determining the appropriate level of service parts inventory is extremely difficult to determine when using such aggregate measures, because service levels can vary so dramatically by different types of service parts.
The typical service parts warehouse may contain several thousand different service parts, so conducting an analysis with the preceding toolkit for each individual item would be prohibitively expensive. Instead, aggregate the service parts by customer, to see which parts are only used by low-throughput customers, and then assign them a low level of stocking priority. Next, aggregate the service parts by type, and determine the level of customer need for each inventory type by using the direct contact or customer complaint tools. This quick aggregation approach greatly reduces the effort required to determine the correct stocking levels needed for different types of service parts inventory.