The Internet of Things Changes the Equipment Manufacturer’s Spare Parts Supply Chain

Suppose you’re in logistics for an equipment manufacturer or a maintenance manager in an operating plant, and a geek in your office keeps talking about the Internet of Things (IoT). Here is why you should listen:

• The underlying technologies are available with no needed breakthroughs.

• The potential business benefits are strong. The technology could help end users improve equipment reliability and reduce spare parts inventories.

ARC Advisory Group defines Industrial IoT as connecting intelligent physical entities (sensors, devices, machines, assets, and products) to each other, to internet services, and to applications. IoT-connected devices enable end users and/or original equipment manufacturers (OEMs) to remotely monitor sensor data (like vibration, temperature, pressure, etc.). In this manner, the IoT improves product and equipment uptime through remote diagnostics, troubleshooting, and predictive maintenance. Asset health involves the monitoring of the condition of an asset and detection of an issue before failure occurs. An alert from a health monitoring application notifies a maintenance planner to have someone inspect the equipment and schedule the repair prior to a failure.

This has significant impact on the maintenance function; a failure of a component can cascade into a much larger issue. For example if your car engine runs out of oil, the bearings will seize and the engine will have to be replaced. In this case, $25 dollars of oil cascades into a $5,000 repair.

But it also has substantial implications for the logistics supply chain. Currently, many spare parts supply chains are constructed in such a manner that inventory is held centrally, perhaps in a manufacturing plant or a centrally located warehouse in a particular region. This central stocking location sends inventory to a network of depots that can provide a quick response to customers’ needs. Often, warehousing and shipping services are outsourced to a third-party logistics (3PL) service provider, particularly the large 3PLs that have specialized in parcel deliveries (FedEx, DHL, TNT, UPS,) and have an infrastructure in place to respond quickly.

Some types of spare parts are not critical in the sense the customer will not lose substantial amounts of money for downtime if the delivery is delayed a few days. An example would be automotive parts or large household appliances parts. However, the ability to deliver quickly to local dealers is a competitive advantage for the manufacturer.

For critical spare parts (such as expensive parts used in production machinery), the customer may have a service contract that requires delivery within a set time period after a service failure occurs. Customers pay more if they require very quick service within a few hours of a part failure. The customer may also pay to install the spare part. If installation services are required, the local depot serving that customer is more likely to be run by the manufacturer, rather than a 3PL.

Clearly if the customer is using a “run to failure” maintenance strategy, which is often the case, the pressure for a satellite depot to respond quickly after a part failure is greatly increased. Critical parts absolutely need to be in inventory in the local depot for the equipment manufacturer to be able to respond within a few hours.

For less critical parts, it is often impossible for OEMs to store all inventory locally. In automotive, for example, customers may have cars that are decades old, involving potentially hundreds of thousands of different parts. To support dealers, equipment manufacturers would have to use expensive overnight shipments from the central warehouse directly to the dealer or to the depots that support the dealer network.

In the future, as parts become intelligent and connected — enabling failures to be predicted days or even weeks in advance – equipment manufacturers will be able to reduce the amount of spare parts inventory they need to hold both centrally and in local depots, since the central site will be responding to planned maintenance, not crises. OEMs will have more opportunities to consolidate shipments to depots and switch to slower and less expensive transportation modes. In short, remote condition monitoring of connected devices and equipment through IoT will allow equipment manufacturers to improve customer service while reducing their own costs.

Ralph Rio is the Enterprise Software Director at the ARC Advisory Group whose focus areas include Enterprise Asset Management (EAM), Field Service Management (FSM), Global Service Providers (GSP), and Continuous Improvement Programs (Lean Manufacturing & Six Sigma).  He collaborated with Steve Banker on this article.

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