August 30, 2010

Shortest Path To Recovery

For every batch of service spares that go out the door, a portion of them is bound to return, usually under less than ideal conditions.

No matter how well managed the forward-facing segment of a service parts supply chain may be, it’s often hard to predict exactly what will come back from the field. Will it test as good? If yes, will the organization still have demand for that tested good component? If it does not test as good, will it be covered by warranty, or will it simply be labeled as scrap? If it’s covered in-warranty, how long will it take for the organization to recover credit back from the device manufacturer?

All good questions that seem to be frequenting the desk of any supply chain director in almost perpetual fashion. It’s relatively easy to outsource the forecasting, planning and fulfillment of a service spares inventory, but what to do about this unpredictable returns stream? It represents an element of risk that is quite difficult to quantify until tough questions concerning the end-of-fiscal-period inventory reports are pushed out to inventory control teams by CFOs.

The answer lies within a complete turnkey service parts management solution that includes a buy-back model. The buy-back model has the potential to reduce the time it takes to recover all credits tied to field return product streams from months down to mere weeks or days. It’s the recovery equivalent of just-in-time access to service spares.

In fact, in today’s complex supply chain, no spare parts management solution is complete without a buy-back component. The buy-back model is based on sophisticated analysis of mountains of data concerning the field returns. The data is used by the inventory manager to build a profile of what the returns stream looks like for the organization in question. What is the product mix? What is the error margin within the product mix assumptions? What have the historical yields been for each SKU? How much has the organization recovered from device manufacturers as part of RMA claims concerning in-warranty failures? Does the scrap product carry an intrinsic value of any kind?

Once these questions are answered, a mathematical model is built that predicts the value of field return streams with manageable error margins. Our organization currently builds models that are sustainable for up to five months ahead of analysis date – with some margin of error, of course. The model is utilized to buy back inventory from our partners as soon as that inventory hits their dock doors – condition unknown.

As the underlying data evolves, the model evolves with it. The upside is near-instant gratification for our partners when it comes to recovering value from their field returns instead of managing accounts receivable reports for extended periods of time. And often, the buy-back model prevents good inventory from going stale and bad inventory from ending up in a dumpster somewhere.

While evaluating a buy-back model for your organization, the most important point to consider is picking the right partner for the right commodity mix. Once successfully on-boarded, a properly executed buy-back model will reduce total spend on inventory and will contribute positively to your organization’s lean planning practices.

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