Jan 2010 By Michael Jiang and George Sun, PricewaterhouseCoopers China
China is slowly throwing off its role as "factory of the world" and becoming an important market in its own right. The new demand for after-sales service can open up major opportunities to differentiate products, create competitive advantages and increase margins. However, with more and more products being sold in China, businesses have to deal with new service management difficulties. As China poses particular challenges in terms of managing service parts or spares, it is crucial to keep a business running through effective plans ensuring rapid repairs and maintenance.
Whether it is a customers' business or your own, spare parts have to be stocked at appropriate locations in the supply chain to guarantee a high service level. As most of these parts are expensive, this requires large amounts of investment capital. For instance, one of our clients, a large wireless services provider had US$600 million in parts inventory for its China business. Other industries also have large inventories: One airline company alone spends up to US$500 million in Maintenance, Repair and Overhaul (MRO) capabilities and one heavy equipment manufacturer invests up to $70 million in spares. The value of spare parts inventories for these businesses is large and often a significant determinant of overall capital utilization and cash flow. If not managed rigorously both the financial and service performance of these spare parts inventories can suffer.
Management personal from all industries also face questions of availability, obsolescence, and limited network visibility. Local and international control barriers and the risks of violating governmental policy controls are also major concerns. As several enterprises are now seeking to establish China as a "repair centre of the world." Enterprises are growing beyond simple "temporary importation for repair" of self-made goods and now wish to drive repair operations that are "large scale and routine" as fully-fledged MRO centers.
Unique characteristics of spare parts management Generally, spare parts are divided into the category of "repairables" or "non-repairables." In China, the smooth repair services are not only related to the normal inventory management and supply chain efficiency, but also are limited to China unique customs and trade compliance boundaries. There are two types of repairable parts in China.
Repairable parts are divided into two categories, self-made and non self-made. Enterprises located within special customs supervised bonded zones or engage customs handbook processing trade operations are permitted, subject to approval, to conduct the repair of self-made finished goods and goods of Chinese origin. Limitations in respect of product coverage have applied to products like mechanical and electrical goods that were previously exported from China. In most instances however, repair of goods of non-Chinese origin or capital equipment parts are still prohibited.
The regulatory basis for the bonded repair of non self-made and non-Chinese goods is less developed. One approach may be to establish global repair operations for non self-made goods in selected bonded zones and under the auspices of a pilot program.
Non-repairables parts are removed and replaced by a new item if they become defective. China customs generally allows enterprises to dispose non-repairable parts for bonded manufacturing operations. For parts replacement, a "consignment warehouse" model could be taken into consideration to enjoy the free exchange of the parts with duty / value added tax (VAT) exempt to maximize the supply chain efficiency and cost saving. The return of non-repairable parts generally face more supply chain costs, customs and trade compliance issues: For instance, it is sometimes compulsory for a US company's subsidiary in China to return the US export control parts back to US due to the trade compliance requirement even the dysfunctional parts has not commercial value at all.
Solving your issues When controlling spare parts, managers face complex problems: spare parts are expensive, demand is erratic and hence hard to predict and delivery times are long and erratic. Customers often demand their spare parts quickly, but companies are stuck facing difficult local government customs, trade, foreign exchange markets and tax boundaries. Consequently, these unique characteristics have forced companies to fine ways to proper manage parts inventories and improve parts logistics cost efficiency and delivery performance.
We have helped our clients address their spare parts management issues. We observed that our clients often suffer from some typical parts management issues and actively looking for assistance to address them. Some of these typical issues include: low availability and limited network visibility due to local control barriers, parts obsolescence, risks of violations of governmental policy control, customs and trade compliance level challenges and repair and manufacturing operation integration difficulty.
How to get started to improve your spare parts management? Effective spare parts management could bring significant positive impact on capital utilization and cash flow for the overall business, reduce cost and improve customer services. The first step is to assess your current service parts strategy and operations to identify opportunities. For instance, one of our clients, an electronic manufacturer, wants to improve its customer service. They performed a service parts benchmarking study to show them where their business was strong and weak, and what they could do to strengthen the business. PwC assessed their customer service and cost of delivery. The result of threat analysis revealed opportunities for them to be more competitive.
We developed a self-survey questionnaire and normally recommend out client to assess their spare parts operations at the initial phase. Some basic questions are:
- Is customer service dropping while inventory investment is growing?
- Does obsolete inventory account for 5% or more of gross inventory?
- Does the business struggle with answering questions such as, "what should my service levels be?", "how much inventory do I need to support that service?", "where should parts be stocked in the network?" and "what should we value the recovered parts"
- Has the business adopted a mindset that parts forecasting is too difficult to accomplish, and therefore has given up on a demand planning capability?
- Does the business lack of confidence to ensure the local regulatory environment and changes to meet your business requirements?
If you answer "yes" to any of the questions above, you will have real opportunity to deliver benefits to your business by improving your spare parts management. An opportunity assessment could then be launched to confirm opportunities and benefits, define direction and investment roadmap.
Summary China is taking some steps towards becoming the "repair centre of the world". Bonded MRO operations are gradually taking shape. As of now, bonded repair is more advanced for self-made goods rather than non self-made goods. In most instances, repair of goods of non-Chinese origin is still prohibited. Establishment of a bonded repair centre in a Customs supervised zone and operating under the auspices of a "pilot program" is a potential way forward. Parallel repair and manufacturing operations outside of a bonded zone may be possible, but these bring their own unique challenges.
Overall, whilst international repair centres are complex from a supervision and control perspective, there is possibility to establish an MRO that is cost and supply-chain efficient.
This article is reproduced from its original publication entitled "Don't get caught on you heels: Why spare parts matter" in the January/February 2010 issue of CHaINA Magazine, the magazine for global supply chain leaders. Copyright 2010 by China Supply Chain Council Ltd. (Hong Kong). Reprinted with permission.
