A Strategic Framework for Spare Parts Logistics

A Strategic Framework forSpare Parts Logistics

Stephan M. WagnerRuben JönkeAndreas B. Eisingerich

Strategically aligned and efficiently implemented spare parts logistics can differentiate a business from itscompetitors, lower costs, increase revenues, and thus help firms generate greater value for customers andultimately increase profits. Based on multiple case studies with manufacturers in the machine and plant con-struction industry, this article examines the key components of a superior spare parts logistics strategy. Thestudy suggests that an efficient spare parts logistics strategy can be developed with a three-step model thatconsists of nine components. (Keywords: Distribution channels, Inventory management, Supply chain, Spareparts, Logistics, After-sales management, Strategy, Strategic alignment)

F irms with a well-aligned spare parts logistics strategy can add value fortheir customers beyond primary product benefits, thus building long-term customer loyalty and achieving high profit margins.1 Firms acrossdifferent industries now recognize spare parts supply not only as a

legal obligation, but also as a chance to offset stagnating or declining revenuesand to increase profits in their primary product markets. For instance, the after-sales business in the machine and plant construction industry accounts forapproximately 25% of total sales (with two-thirds from selling spare parts andone-third from services) and up to 50% of total profits.2

Drawing on Christopher’s definition of logistics,3 we define spare partslogistics as follows: Spare parts logistics of the manufacturer contains the mar-ket-orientated planning, design, realization, and control of the spare parts supplyand distribution, along with associated information flows within a firm andbetween the firm and its network partners. Therefore, spare parts logistics aimsat a demand-driven, cost-minimal provision of the required spare parts for thedefective or preventive maintenance of primary products to ensure an optimallevel of availability or reliability of the product.

Spare parts customers have high expectations in terms of the delivery of ser-vice and long-time availability of spares. Manufacturers are expected to fulfill these

CALIFORNIA MANAGEMENT REVIEW VOL. 54, NO. 4 SUMMER 2012 CMR.BERKELEY.EDU 69

requirements during each of the three product lifecycle phases: R&D, production, and utilization ofthe primary products. To do so, phase-specific char-acteristics have to be considered by the manufac-turers. Furthermore, the primary product market ischaracterized by longer technical product life cycleson the one hand and by shorter cycles for productinnovation and production on the other. The conse-quence of these developments for spare parts supplyis the escalating complexity of spare parts assort-ments. Furthermore, the legal and facultative spareparts delivery commitments of the manufacturersexceed the production phase by multiples.4

The demand for spares is characterized by fluctuations and volatility. It isaffected by stochastic factors, such as intensity of product use, wear behavior, fail-ure rates, or type of maintenance.5 Manufactures can achieve a competitive advan-tage if their spare parts strategy is aligned with the specific situation of the firm.A strategic planning and alignment of spare parts logistics is thus necessary forthe following reasons:

§ changes in the primary product markets (global competitive pressure, tech-nical equalization of products);6

§ rising cost awareness (low capital lockup, more efficient inventory man-agement);7

§ unutilized potentials (high profit margin, long-time customer loyalty);8

§ intensive competition in the spares markets (many market actors, sparesimitations);9 and

§ rising customer expectations (short lead times, long-term availability ofspares)10

Although strategic alignment is a top management concern, to our bestknowledge no strategic framework has been developed for spare parts logisticsso far. Given the challenges and potential benefits of spare parts management,the goals of this research are: to analyze the spare parts logistics of firms withvarying levels of spare parts management professionalization; to identify anddescribe the main components of an effective spare parts logistics strategy in orderto present a practical three-step model that allows after-sales managers to developa spare parts logistics strategy for their firm; and to present archetype scenariosof a well-aligned spare parts logistics strategy. To address these points, we conductedan in-depth case study analysis, using detailed interviews with 10 different firmsfrom the manufacturing industry.

Theoretical Background

Strategic alignment is the adjustment of an object in relation to otherobjects so that the arrangement can lead to the optimization of results.11 Aligningan organization to its external environment requires forethought and action. The

Stephan M. Wagner is Professor, holdsthe Kuehne Foundation-sponsored Chair ofLogistics Management and is Director ofthe Executive MBA at the Swiss FederalInstitute of Technology Zurich.<[email protected]>

Ruben Jönke is a Ph.D. Candidate at theChair of Logistics Management at theSwiss Federal Institute of TechnologyZurich. <[email protected]>

Andreas B. Eisingerich is AssociateProfessor of Marketing at Imperial CollegeBusiness School, Imperial College London.<[email protected]>

A Strategic Framework for Spare Parts Logistics

70 UNIVERSITY OF CALIFORNIA, BERKELEY VOL. 54, NO. 4 SUMMER 2012 CMR.BERKELEY.EDU

concept of strategic alignment recognizes the need for any strategy to address bothexternal and internal conditions. As part of strategic planning, strategic alignmentensures that products, processes, organizational structures, systems, and humanresources support the business and organization goals. The fit between externalpositioning and internal arrangement is critical for maximizing economic perfor-mance.12 Strategic alignment also goes by the terms “fit,”13 “integration,”14

“bridge,”15 and “linkage.”16 However, in all cases, it concerns the integration ofstrategies in relation to the business and its environment.17 We use the conceptof strategic alignment as a theoretical framework for this research and apply itto the development process of a spare parts logistics strategy, which should bematched not only with corporate strategy, but also with company-specific andenvironmental factors. Alignment is operationalized in this study using nine keycomponents of a spare parts logistics strategy. Figure 1 shows the different levelsof a firm’s strategy and the arrows in the Figure symbolize the need for strategicalignment. A spare parts logistics strategy constitutes a functional strategy.

Prior research has focused mainly on adequate service portfolios for particu-lar products, customers, or phase of a product life cycle.18 Indeed, research on spareparts logistics strategies and the components of these strategies is limited. Excep-tions are the works by Huiskonen19 and by Cavalieri et al.20 The former analyzesthe optimal supply chain structure for different spare parts characteristics (such ascriticality, specificity, demand pattern, and value of parts) and concludes that spareson the continuum between standard and user-specific parts require different net-work structures, positioning of materials, responsibility of control, and control prin-ciples. Hence, different spares require different spare parts logistics strategies.Cavalieri et al.21 present a five-step decision-making model to develop a spare partslogistics strategy and then test its applicability with a case study. A comprehensiveliterature review reveals that most prior research discusses a few specific issues and

FIGURE 1. The Concept of Strategic Alignment

Corporate strategy

Envi

ronm

ent

influ

ence

s

Competitive strategy by business segments

Functional strategy

Cost leadership Differentiation Focus on key aspects



concentrates mainly on a single component. Nine aspects in particular havereceived considerable attention. However, no prior research deals with all of thestrategy components that are relevant for spare parts logistics and the strategicaspects of spare parts logistics have been studied primarily in isolation. Table 1presents an overview of the literature in the field of service management, after-sales services, after-sales logistics, maintenance management, and spare parts logis-tics. A holistic approach to strategy components of spare parts logistics that considersinterdependencies among the components is just beginning to emerge, emphasizingthe need for additional research in this area. The present study develops a frameworkthat includes the strategy components of spare parts logistics.

TABLE 1. Overview of Literature (continued on next page)

StrategyComponents

Important Publications Main Focus of thePublications

Spare Parts Market B. Ashenbaum, Designing the Supply Chain for Productionand Aftermarket Needs (Tempe, AZ: Critical Issues Report,2006); P. Baake, Accidents, Liability Obligations andMonopolized Markets for Spare Parts: Profits and SocialWelfare (Berlin: German Institute for Economic Research,2008); N. Stoate and C. Smith, “A Nice Little Earner: TheAfter Sales Market in the Automotive Industry,” CopyrightWorld, 155 (2005): 16-18.

§ Restriction andmonopolizationtendencies

§ Competitive conduct

Product Characteristics(Primary Product/Spare Parts/)

K. Goffin and C. New, “Customer Support and NewProduct Development,” International Journal of Operations& Production Management 21/3 (2001): 275-301;Johansson and J. Olhager, “Industrial Service Profiling:Matching Service Offerings and Processes,” InternationalJournal of Production Economics, 89/3 (2004): 309-320;P. Johansson and J. Olhager, “Linking Product-ProcessMatrices for Manufacturing and Industrial ServiceOperations,” International Journal of Production Economics,104/2 (2006): 615-624; M. Lele, “How Service NeedsInfluence Product Strategy,” Sloan Management Review,28/1 (Fall 1986): 63-70; C.M. Rose, K. Ishii, and K. Masui,“How Product Characteristics Determine End-of-LifeStrategies,” paper presented at the IEEE InternationalSymposium on Electronics and the Environment (ISEE),Oak Brook, Illinois, 1998; N. Saccani, P. Johansson, andM. Perona, “Configuring the After-Sales Service SupplyChain: A Multiple Case Study,” International Journal ofProduction Economics, 110/1-2 (2007): 52-69.

§ Influence of primaryproduct characteris-tics on spare partssupply

§ Influence of spareparts characteristics(criticality, specificity,demand pattern andvalue of parts) onspare parts supply

§ Product-service-frameworks

Maintenance Strategyof the Customer

P. Gopalakrishnan and A.K. Banerji, Maintenance and SpareParts Management (New Delhi: Prentice-Hall of India,2002); A.K.S. Jardine and A.H.C. Tsang, Maintenance,Replacement, and Reliability: Theory and Applications (NewYork. NY: CRC Press Taylor & Francis, 2006); S.-H. Kim,M.A. Cohen, and S. Netessine, “Performance Contractingin After-Sales Service Supply Chains,” ManagementScience, 53/12 (2007): 1843-1858; S.-H. Kim, M.A. Cohen,and S. Netessine, “Reliability or Inventory? Analysis ofProduct Support Contracts in the Defense Industry,”working paper, Yale University and University ofPennsylvania, 2009; D.K. Orsburn, Spares ManagementHandbook (New York, NY: McGraw-Hill, 1991).

§ Pros and cons ofdifferent maintenanceapproaches

§ Operator models



TABLE 1. Overview of Literature (continued from previous page, continued on next page)

StrategyComponents


Spare PartsObligations

P. Baake, Accidents, Liability Obligations and MonopolizedMarkets for Spare Parts: Profits and Social Welfare(Berlin: German Institute for Economic Research, 2008);B. Kim and S. Park, “Optimal Pricing, EOL (End of Life)Warranty, and Spare Parts Manufacturing StrategyAmid Product Transition,” European Journal ofOperational Research, 188/3 (2008): 723-745; D.K.Orsburn, Spares Management Handbook (New York,NY: McGraw-Hill, 1991).

§ Optimal warrantyperiods

§ Components whichshould be includedor excluded froma warranty

Primary Product LifeCycle

C. Armistead and G. Clark, “A Framework for FormulatingAfter-Sales Support Strategy,” International Journal ofPhysical Distribution & Logistics Management, 21/9 (1991):22-29; J.C. Aurich, C. Fuchs, and M.F. DeVries, “AnApproach to Life Cycle Oriented Technical ServiceDesign,” CIRP Annals—Manufacturing Technology, 53/1(2004): 151-154; U. Dombrowski, J.K. Wrehde, andS. Schulze, “Efficient Spare Part Management to SatisfyCustomers Need,” paper presented at the IEEEInternational Conference on Service Operations andLogistics, and Informatics, Philadelphia, PA, 2007;A.C. Shapiro, “Creating Value for Shareholders,” paperpresented at the Value Based Management Conference,Victoria, 1992.

§ Evaluation of sparessupply alternatives indifferent life-cyclephases

§ Alignment of thespares provision tothe primary productlife-cycle phase

Forecasting Methods J.D. Patton and H.C. Feldmann, Service Parts Handbook(Bath: Solomon Press, 1997); J.D. Patton and W.H. Bleuel,After the Sale: How to Manage Product Service for CustomerSatisfaction and Profit (New York, NY: Solomon Press,2000); T.R. Willemain, C.N. Smart, and H.F. Schwarz,“A New Approach to Forecasting Intermittent Demandfor Service Parts Inventories,” International Journal ofForecasting, 20/3 (2004): 375-387.

§ Predicting sparesdemand by applyingdifferent forecastingmethods

§ Classification andevaluation of differentforecasting methods

Goals of the SpareParts Business

M.A. Cohen, N. Agrawal, and V. Agrawal, “Winning in theAftermarket,” Harvard Business Review, 84/5 (May 2006):129-138; M.J. Dennis and A. Kambil, “Service Management:Building Profits after the Sale,” Supply Chain ManagementReview, 7/1 (January/February 2003): 42-48; T. Knecht,R. Leszinski, and F.A. Weber, “Making Profits after theSale,” The McKinsey Quarterly, 4 (1993): 79-86; S.M.Wagner and E. Lindemann, “A Case Study-Based Analysisof Spare Parts Management in the Engineering Industry,”Production Planning & Control, 19/4 (June 2008): 397-407.

§ Insufficientcapitalization of theafter-sales businesspotentials

§ Approaches to betterutilize the benefitsof the spare partsbusiness

Supply Options(Production Phase/Utilization Phase)

M.M. Amini, D. Retzlaff-Roberts, and C.C. Bienstock,“Designing a Reverse Logistics Operation for ShortCycle Time Repair Services,” International Journal ofProduction Economics, 96/3 (2005): 367-380;U. Dombrowski, J.K. Wrehde, and S. Schulze, “EfficientSpare Part Management to Satisfy Customers Need,”paper presented at the IEEE International Conference onService Operations and Logistics, and Informatics 2007,Philadelphia, PA, 2007; L. Fortuin, “The All-TimeRequirement of Spare Parts for Service After Sales–Theoretical Analysis and Practical Results,” InternationalJournal of Operations & Production Management, 1/1 (1980):59-70; L. Fortuin, “Reduction of the All-Time

§ Analysis of supplystrategies

§ Optimal final orderquantities



TABLE 1. Overview of Literature (continued from previous page)

StrategyComponents


Requirement for Spare Parts,” International Journal ofOperations & Production Management, 2/1 (1981): 29-37;C.M. Rose, K. Ishii, and K. Masui, “How ProductCharacteristics Determine End-of-Life Strategies,” paperpresented at the IEEE International Symposium onElectronics and the Environment (ISEE), Oak Brook,Illinois, 1998; R.H. Teunter and L. Fortuin, “End-of-LifeService: A Case Study,” European Journal of OperationalResearch, 107/1 (1998): 19-34; R.H. Teunter andL. Fortuin, “End-of-Life Service,” International Journalof Production Economics, 59/1-3 (1999): 487-497;R.H. Teunter and W.K. Haneveld, “The Final OrderProblem,” European Journal of Operational Research,107/1 (1998): 35-44.

Inventory Options S. Axsäter, “Continuous Review Policies for Multi-Level Inventory Systems with Stochastic Demand,”in S.C. Graves, A.H.G. Rinnooy Kan, and P.H. Zipkin,eds., Handbooks in Operations Research and ManagementScience (Amsterdam: North-Holland, 1993): 175-197;P.L. Chang, Y.C. Chou, and M.G. Huang, “A (r, r, Q)Inventory Model for Spare Parts Involving EquipmentCriticality,” International Journal of Production Economics,97/1 (July 2005): 66-74; K. Cobbaert and D. VanOudheusden, “Inventory Models for Fast Moving SpareParts Subject To ‘Sudden Death’ Obsolescence,”International Journal of Production Economics, 44/3 (1996):239-248; R. Dekker, M.J. Kleijn, and P.J. de Rooij, “A SpareParts Stocking Policy Based on Equipment Criticality,”International Journal of Production Economics, 56/1-3 (1998):69-77; W.J. Kennedy, J. Wayne Patterson, andL.D. Fredendall, “An Overview of Recent Literature onSpare Parts Inventories,” International Journal of ProductionEconomics, 76/2 (2002): 201-215; D.K. Orsburn, SparesManagement Handbook (New York, NY: McGraw-Hill,1991); J.D. Patton and H.C. Feldmann, Service PartsHandbook (Bath: Solomon Press, 1997); C. Pinçe andR. Dekker, “An Inventory Model for Slow Moving ItemsSubject to Obsolescence,” European Journal of OperationalResearch, 213/1 (2011): 83-95; R. Sarker and A. Haque,“Optimization of Maintenance and Spare ProvisioningPolicy Using Simulation,” Applied Mathematical Modelling,24/10 (2000): 751-760; C.C. Sherbrooke, OptimalInventory Modeling of Systems (New York, NY: John Wiley& Sons, 1992); R.H. Teunter and W.K. Klein Haneveld,“Inventory Control of Service Parts in the Final Phase,”European Journal of Operational Research, 137/3 (2002):497-511; B.E. Tysseland and H. Halskau, “Spare PartsInventory: A Literature Review with Focus on InitialProvisioning and Obsolescence Management,” paperpresented at the 19th Annual NOFOMA Conference,2007; P.H. Zipkin, Foundations of Inventory Management(Burr Ridge, IL: McGraw-Hill, 2000).

§ Mathematical modelsto determine optimalstock-keeping levelsand ordering policies

§ Analysis of storageoptions for spareparts

§ Obsolescencemanagement



Methodology

This research uses a multiple-case-based research approach.22 Case studyresearch is particularly appropriate where “research and theory are at their early,formative stages”23 as is the case for holistic spare parts strategies. We followedthe five-stage case study research process proposed by Stuart et al.24, consistingof: the research question; instrument development; data gathering; data analysis;and dissemination.

The purposive sample consists of ten German machine and plant manufac-turers. Machine and plant construction is one of Germany’s largest employers(~900,000 employees) and contributors to the country’s GDP (~5%). We followedthe suggestion of Eisenhardt25 to study four to ten cases in order to achieve satu-ration. The firms in our case study range in size from SMEs to large enterprises.Table 2 provides an overview of the case study firms.

We conducted semi-structured interviews with one or more spare parts orafter-sales managers per firm, which enabled deep insights into the spare partsbusiness, spare parts strategy, the development process of those strategies, andthe strategy components considered.26 In some cases the CEO took part in theinterview, depending on his/her responsibility for the development of the spareparts logistics strategy. Each expert interview lasted approximately two hours.

TABLE 2. Case Study Firms

Firm Main Product Revenues(million €,

2009)

Number ofEmployees

Spare PartsRevenues(million €,

2009)

Length ofthe SparesProvisionPeriod(years)

T1 Laser CuttingMachine Tools

2,000 7,200 ~500 (all after-sales services)

30–40

T2 Paper Machines 550 2,600 20 60T3 Compounding and

Extrusion Systems300 850 65 25–30

T4 Packaging Machinery 20 150 ~2 20B1 Machines for Asphalt

Conditioning150 450 n.s. 5

B2 Water andWastewater Valves

70 220 3.5 30

B3 Weighing andPositioning Systems

34 230 3.5 10

B4 Leveling Machinesand Turnkey CoilPreparation Lines

28 100 ~2.2 15–20

B5 ConveyorTechnology andFactory Equipment

22 200 0.8 5–10

B6 Bandsaws 4 20 ~1.2 15

Note: T1-T4 signify “top-performers”; B1-B6 signify “bottom-performers”.



The interview guideline consisted of open- and closed-ended questions. Eachinterview was transcribed. In order to ensure internal consistency of the data, sec-ondary data in the form of observation (e.g., company tours) and the analysis ofsecondary sources (such as company documentation, annual reports, corporatewebsites, specialized press) was obtained for each interviewed firm and these datawere used to triangulate the interview data. That is, data triangulation was accom-plished by having multiple respondents from different firms and through differentsources of data, such as interviews, observation and documentation.27

Data was analyzed employing an interpretative, hermeneutic examina-tion.28 Benefits of this technique are the consideration of circumstances, enablingan understanding of the situation within its own context. The process of datainterpretation consisted of three activities: data reduction—selecting and aggregat-ing raw case data; data display—systematic and accurate assembly of the collectedinformation; and conclusion drawing—building constructs and logical chains ofevidence.29

Spare Parts Logistics of the Case Study Firms

In the selection of case studies firms, we chose firms with highly profes-sional spare parts logistics and others with underdeveloped spare parts logistics.Specifically, the underlying criteria for the classification of the firms were theexistence of a well-aligned spare parts logistics strategy and the consideration ofa spare parts logistics strategy’s nine key components. Hence, we clustered ourcase study firms into the two categories: “top-performers” and “bottom-performers.”In so doing, we sought to examine which components of a spare parts logisticsstrategy are taken into account by the top-performers and which shortcomingsbottom-performers have, and to identify critical components that make up asuccessful spare parts logistics strategy. All top-performers considered all ninecomponents (however, with different priorities) and provided an aligned spare partslogistics strategy, whereas the bottom-performers did not have a spare parts logisticsstrategy at all or the strategy was misaligned and firms did not consider all relevantcomponents.

The Top-Performers

Four of our case study firms (T1-T4 in Table 2) belonged to this category.All of these firms have a dedicated after-sales department. The objectives of thespare parts logistics are clearly defined and the high attractiveness of this businessis signified by an expansion of the spare parts business. Overall, the developmentof the spare parts logistics strategy is a well-planned process in which differentscenarios are considered and reviewed.

“Customer needs have a high priority and customers can rely on an excel-lent spare parts service,” stated most of the interviewees in this group. The man-ufacturers practice intensive communication and consultation with customersregarding machine status, maintenance options, and intensity of utilization. “Weare the partner of our customers throughout the life cycle,” commented one



interviewee. Customer satisfaction surveys are carried out and customers’ willing-ness to pay is determined. A categorization of spare parts lists regarding criticalityand wear characteristics is created for each customer (cost, benefit, and risk con-sideration). Spares demand forecasting is realized using historical data, weighted-moving average, or future population trends. One interviewee put it as follows:“Based on the current situation, we try to anticipate future developments andalign our spare parts logistics strategy onto these analyses.” Production costs ofdifferent spare parts supply options are calculated considering customer require-ments and supply periods. Often manufacturers practice a selective supply strat-egy depending on the product life cycle and use an equal parts strategy. All ofthe informants insisted that “the supply strategy should be aligned to the productlife cycle and customer requirements. Thus, it is often necessary to change thesupply option in the course of product life cycle.”

Supply and inventory options are coordinated with each other (e.g., whatstorage capacity is needed for final stockpiling, and which costs are associated withspecific storage capacities). The manufacturers also calculate the availability andthe costs of different inventory options, where availability has a high priority.The top-performers often have central storage and only fast-moving items areavailable at service locations and subsidiaries. Some customers also have sparestorage space, primarily for frequently required wear parts. Selective storage isrealized by criteria failure criticality and part value. The manufacturers try tomanage long-term service contracts because they facilitate planning and a steadyincome flow. As one informant noted, “we always prefer a good and long-termcustomer loyalty to short-term profit opportunities.”

These top-performing firms possess a good knowledge of the spare partsmarket, competitors, and their strengths. “We observe the market very accuratelyand know the strengths and weaknesses of our competitors and the needs of ourcustomers,” asserted one interviewee. The manufacturer points out competitiveadvantages such as high quality, knowledge, parts availability, and experience.The greatest threats are spare-pirates and suppliers directly selling spares to cus-tomers. “In recent years, the competition has increased dramatically in the spareparts business, especially since our suppliers often sell parts directly to the cus-tomer and inferior copied parts are offered in the Asian markets,” complainedone after-sales manager who was interviewed. The manufacturers attempt tocreate market entry barriers through the incompatibility of parts and specialknowledge.

The Bottom-Performers

The case study firms (B1-B6 in Table 2) that fall into this category have notdefined clear objectives for their spare parts business and have no spare partsstrategy or their strategy is incomplete (because not all relevant components areconsidered) and misaligned. The potentials of the spare parts business are insuffi-ciently exploited. A group of managers put it this way: “We are not satisfied withour spare parts business, because we recognize that we do not capitalize on hugeprofit opportunities.”



The sales and distribution department is often responsible for the spare partsbusiness and there is no separate after-sales department. The spare parts business ishandled partially by dealers. In most cases, customers initiate changes and storecritical spares themselves to ensure availability. “Most of our decisions are madeon the basis of intuition and gut feeling,” admitted most of the interviewees. Onlylimited preventive maintenance and service contracts are offered and often are notadapted to the customer’s specific needs. Spare parts demand forecasts are rarelyrealized, and detailed knowledge of the market and competitors is lacking.

All of the interviewees in this group claimed that “I think that we have nospare parts strategy that is aligned to our firm’s situation. Usually, we just respondto customer inquiries.” The spares portfolios of the include many parts that areeasy to copy due to their low complexity and primary products are often low-maintenance. Overall, the optimization potential regarding the spare partslogistics of the manufacturer in this category is large. “Due to the absence of anadequate spare parts logistics strategy, our competitors can easily gain marketshare,” stated one interviewee.

Three-Step Model to Develop an Effective Spare PartsLogistics Strategy

Spare parts logistics strategies determine long-term decisions. Hence, theknowledge and analysis of strategy components of spare parts logistics is essentialto align the strategy to a firm’s specific situation and to ensure adequate sparessupply during all phases of the primary product life cycle. Figure 2 depicts thekey components of a spare parts logistics strategy in a three-step model. The ninecomponents have been identified through the literature review and the case studyresearch. As noted previously, top-performers in our sample considered all com-ponents, whereas low-performers considered only some of the components. Wedeveloped the three-step model based on our case study analysis. That is, no firmin our sample is currently using the exact same approach and the proposed modelwas established based on the combination of case study data from the variousfirms. The identified three steps and nine components enable a holistic approachto the development of a spare parts logistics strategy. Each component will beanalyzed in further detail in the following sections.

Step 1: Identifying the ConditionsSpare Parts Markets

For many years, the provision of spares was a profitable business of theoriginal equipment manufacturers with little direct competition. However, asfirms begin to recognize the attractiveness of spares markets (which, especiallyin the field of fast-moving wearing parts, is emerging as a competitive indepen-dent sector), the primary product manufacturers are encountering mountingcompetition. However, due to the distinctive specificities and varieties of eachmanufacturer’s parts, the entry barriers remain high. The specificity of parts, theturnover rate, and the profitability of the spares business determine the numberof competitors and the intensity of competition in these markets. Spare parts



FIG

URE2.

Three-Step

Mod

el:K

eyCom

ponentsof

aSparePartsLo

gisticsStrategy

Ste

p 1:

Ide

ntify

the

co

ndit

ions

Spar

e pa

rts

mar

ket

Prod

uct

char

acte

rist

ics

Spar

e pa

rts

oblig

atio

ns

• Ec

onom

ic s

ituat

ion

• Pr

ofita

bilit

y of

the

spa

re p

arts

busi

ness

• M

arke

t en

try

barr

iers

• N

umbe

r of

mar

ket

play

ers

• C

ompe

titio

n in

tens

ity

• T

urno

ver

rate

of s

pare

s

Prim

ary

prod

uct

• In

stal

led

base

• Pr

oduc

t lif

e tim

e

• O

pera

tion

inte

nsity

• C

onst

ruct

ion-

cond

ition

ed

prod

uct

stru

ctur

e

• R

elev

ance

of a

pro

duct

for

all

of

the

cus

tom

ers’

bus

ines

s

activ

ities

• D

eliv

ery

com

mitm

ents

(le

gal/v

olun

tary

obl

igat

ion)

• Se

rvic

e/m

aint

enan

ce c

ontr

acts

• Sp

are

part

s po

rtfo

lio/

as

sort

men

t

Fore

cast

ing

met

hods

Mai

nten

ance

str

ateg

y of

the

cu

stom

er

Prim

ary

prod

uct

life

cycl

e

• Su

bjec

tive

estim

atio

ns

• In

dica

tors

and

coe

ffici

ents

• St

ocha

stic

met

hods

• M

odel

-bas

ed m

etho

ds

• Fa

ilure

-bas

ed m

aint

enan

ce

• C

ondi

tion-

base

d m

aint

enan

ce

• T

ime-

base

d m

aint

enan

ce

• Se

lect

ive

mai

nten

ance

• R

&D

• Pr

oduc

tion

• U

tiliz

atio

n

Goa

ls o

f the

spa

re p

arts

busi

ness

Supp

ly o

ptio

nsIn

vent

ory

optio

ns

• R

even

ue/p

rofit

• C

usto

mer

loya

lty

• D

iffer

entia

tion

• Im

age

• D

iver

sific

atio

n

Supp

ly in

the

pro

duct

ion

phas

e

• Sp

ares

out

of r

egul

ar s

erie

s

prod

uctio

n

• Sp

ares

pur

chas

ing

• R

econ

ditio

ning

of u

sed

part

s

• D

egre

e of

war

ehou

se

cent

raliz

atio

n

• V

ertic

al/h

oriz

onta

l sto

rage

st

ruct

ure

• Lo

catio

n ch

oice

• In

vent

ory

leve

ls

• C

osts

(st

orag

e co

sts/

inve

ntor

y

infr

astr

uctu

re c

osts

/tra

nspo

rt

cost

s)

• R

eact

ivity

/effi

cien

cy o

f spa

res

pr

ovis

ion

Spar

e pa

rt

• N

ew p

art

or r

eman

ufac

ture

d

part

• R

epar

able

par

t or

exp

enda

ble

pa

rt

• W

ear

beha

vior

of s

pare

s

Supp

ly in

the

util

izat

ion

phas

e

• In

tern

al p

rodu

ctio

n or

ext

erna

l

prod

uctio

n

• Se

para

te w

orks

hop

• U

tiliz

atio

n of

com

patib

le p

arts

• Fi

nal s

tock

• R

econ

ditio

ning

of u

sed

part

s

• R

eutil

izat

ion

of u

sed

part

s

Ste

p 3:

Alig

n th

e ke

y co

mpo

nent

s o

f a b

usin

ess’

spa

re p

arts

logi

stic

s st

rate

gy t

o id

enti

fied

cond

itio

ns a

nd a

ntic

ipat

ed fu

ture

dev

elo

pmen

ts

Ste

p 2:

Ant

icip

ate

futu

re d

evel

opm

ents



might be provided by primary product manufacturers, by bounded parts pro-ducers/dealers that have a contract with the manufacturers, and by independentparts producers/dealers.30

All case study firms belonging to the top-performer group maintain an in-house marketing team, which conducts market analyses regularly. Those firms arewell informed about the portfolio and market shares of competitors. Furthermorefirms T1 and T2 frequently conduct benchmarking analysis and integrate best-practice solutions into their day-to-day spare parts business. The low-performersB1, B3, B5 and B6 have an insufficient knowledge about their spares market.They do not know their market share and the market share of the main compet-itors. They are also not able to identify all their competitors in the spare parts busi-ness. However, good knowledge about the market is an important requirement tosuccessfully align one’s spare parts logistics strategy.

Product Characteristics

Most manufacturers use synergy effects between their primary productsand spares business, for instance through shared use of production resources,pooling of parts purchasing, or utilization of the same distribution channel. Thesedependencies between primary product and spare parts should be consideredwhen spare parts strategies are being designed. From the expert interviews, wewere able to characterize and describe spare part and primary product character-istics in more detail.

Primary Product Characteristics

Spare parts logistics should be aligned with manufacturers’ primary prod-ucts requirements.31 Different primary products have varying requirements forspares provision, delivery time, and the quantity of spares demand. The betterthe manufacturer’s knowledge of the primary products sold, the better the strate-gic alignment of spare parts logistics. The installed base of primary products is thestarting point for the planning of spares provision. The case study firms T1-T4have data about the products they sold in the past. The case study firms B1 andB3 do not receive information about shifts, capacity utilization, and the operatingcondition of machines from their customers. Other bottom-performers in oursample make at least a basic effort to gather this data.

Primary product parts are the templates for spare parts. Later adjustmentsor modifications of spares to diverge from the design and specification of primaryproduct parts are costly and difficult to execute. Since the strategies available tospare parts managers are predetermined by the primary product design, the top-performers take spares requirements into consideration as early as possible. Forinstance, a final stock of high value spares leads to capital lockup for long periodsof time. This could either be avoided by choosing a different supply option or byconstructing a low-cost primary product part. Another way to lower the costs ofproviding spare parts are primary products that have a modular design so thatthe same parts can be used for various products. In contrast, the bottom-performersdo not display such foresight.



Spare Part Characteristics

Spare parts—“parts and equipment that are completely interchangeable withlike items and can be used to replace items removed during maintenance”32—areonly demanded after primary products have been sold. Thus, spares are subject toa derivative demand. The function of spare parts is the reestablishment or preserva-tion of the primary products’ operability.

Firms differentiate wearing parts from parts that should last through thelifetime of the primary product. The former can be predicted with regard to timeand quantity, whereas the latter suffers from unpredictable random defects, forexample as a result of accidents or production defects. Especially the bottom-performers B2 and B6 mentioned that they lost the lucrative business of fast-moving wearing parts to competitors that offer the spares cheaper and with abetter delivery service.

Maintenance Strategy of the Customer

Maintenance consists of the procedures for the retention and regenerationof a nominal condition of machines and plants, as well as the determination andevaluation of the actual condition of technical systems. Maintenance strategiesdetermine decisions regarding the temporal process, intensity, and kind of main-tenance procedures used to achieve particular goals. These goals can be theenhancement of machine reliability or cost minimization. Maintenance tasksinclude inspection, service, and repair work, all of which can be carried out duringoperational status or during machine and plant downtimes. A failure-based,condition-based, time-based and selective maintenance can be distinguished.33

The costs of maintenance in relation to downtime costs are decisive in theselection of a maintenance strategy. Safety aspects and the specifications of a com-pany in the form of expected machine lifetime, required availability, product port-folio, and the market situation should also be taken into consideration. Theselected maintenance strategy directly influences the total demand for spares bythat company. All top-performers try to manage long-term service contracts,including preventive maintenance, whereas the firms B1 and B5 do not offer ser-vice contracts at all. The customers of the firms B1, B2, B5, and B6 follow solely areactive maintenance strategy.

Spare Parts Obligations

Machine and plant manufacturers are obligated to supply their customerswith spares. Legal and voluntary obligations determine the duration and extentof spares provision. “Legal obligations” are triggered by the customer’s rights inthe event of a defect, and “voluntary obligations” are triggered by contractualagreements or warranty obligations.

The spares provision beyond legal obligations is mainly done to differenti-ate the spares provision efforts and periods’ lengths from competitors to generatestrong customer loyalty and to acquire new customers. The consequences areoften long-time spares provision periods. Our case study research shows that the



top-performers offer their customers significantly longer voluntary obligationperiods (in average 36 years) in comparison to the bottom-performers (in average14 years) to achieve a long-term customer loyalty. Each new product generationadds spare part assortments to the manufacturer’s spare part portfolio and, as aconsequence, increases spare part obligations. The composition of the spare partassortments is mainly determined by the legal and voluntary obligations, as wellas by the installed base of primary products. The spare parts obligations influenceconsiderably the appropriate supply and inventory options.

Step 2: Anticipating Future DevelopmentsPrimary Product Life Cycle

Figure 3 shows how spare parts (repairable and wearing parts) are soldthroughout the three product life cycle phases (R&D, production, and utilization).This life cycle perspective is the basis for the planning and alignment of spare partslogistics strategy in the primary product life cycle.

The case study firms confirmed that 60% to 95% of all life cycle costs aredetermined by the product development phase. Therefore, the specific require-ments of spares should be considered at the beginning of the R&D phase, wherethe technical characteristics of the primary products are specified, and which irre-versibly influences after-sales services.

The start of production point constitutes the transition to the productionphase, where the manufacturing cycle starts. Primary products are manufacturedand the provision of spares begins. The service cycle starts with the distributionof the first primary products. Options for the provision of spares during the utili-zation phase are analyzed and selected at the end of this phase.

FIGURE 3. Product Life Cycle Model for Spare Parts

Salesvolume

Time

Development cycle

Manufacturing cycle

Service cycle

Market cycle

Removal cycle

Primaryproduct sales

Wearingparts sales

No wearingparts sales

R&D Production UtilizationSOP EOP EDO EOS EOL

SOP: Start of productionEOP: End of productionEDO: End of delivery obligationEOS: End of serviceEOL: End of life



The end of production point is where the utilization phase of the primaryproducts starts. The market cycle extends into the utilization phase, because man-ufactured products are still being sold at this point. The service cycle continuesuntil the end of service point. The legal obligation to provide spares (end of deliv-ery obligation point) is often followed by a voluntary provision of spares (end ofservice point). After the end of service point, some products remain in use, whichcan be supplied with remaining spares until the end of life point. The removalcycle ranges from the production phase to the end of life point. An increasingnumber of manufacturers take advantage of the possibility to reutilize and recon-dition parts.

A life cycle approach helps to improve the delivery service while decreasingthe cost of spare parts logistics. Life cycle costs can be calculated with some preci-sion. On average, the case study firms allocate only two-thirds of their total coststo the price of a primary product and allocate the remaining one-third to after-saleservices. Thus, in the machine and plant construction industry, the initial price atpurchase represents only a portion of the entire life cycle costs of a product. As theprevious section (spare parts obligations) has shown, the top-performers havea longer utilization phase than the bottom-performers. Hence, accurate sparesdemand forecasts for each life cycle phase have a higher priority for the top-performers than for the bottom-performers in our study. Furthermore, all top-performers as well as firms B2 and B5 consider the dependencies between thepoint of time within the life cycle and the selection of an appropriate forecastingmethod.

Forecasting Methods

In the machine and plant construction industry, the spare parts business ofmanufacturers is subject to fluctuations and uncertainty because the forecasts ofdemands are affected by stochastic factors. Demand forecasts for wear parts canbe made more accurately than those for breakdown parts because the instancesof failure are more easily determined for wear parts. Breakdown parts are, in con-trast, characterized by unscheduled failures. The maintenance strategy (preven-tive or reactive) selected by a customer determines whether the demand forspares will be deterministic or stochastic for both spares categories. Firms try toovercome forecast difficulty by applying different forecast methods (such as sub-jective estimations, indicators and coefficients, stochastic methods, and model-based methods) and by anticipating the wear behavior patterns of parts.34 Anoptimal strategic alignment of the parts logistics necessitates a reliable demandforecast for spares. Otherwise, the risk of obsolescence (overstocking) or cost-intensive of custom manufacturing (under-stocking) is unavoidable.

Nevertheless, the demand forecasts of the case study firms T4 and B2 arebased on values of past demands, which are extrapolated onto the forecastinghorizon. The forecasts of the firms B5 and B6 are based only on intuition and thefirms B1, B3, and B4 do not conduct any forecasts. However, the top-performersT1-T3 use a combination of forecast methods aligned to the specific spare partssupply requirements and to the product life cycle phase (resulting in the bestpossible solution), and they conduct frequent revaluations. Hence, the firms



T1-T3 try to anticipate future developments as well as possible and align their strat-egy on these forecasts. The firms T4 and B2 as well as B5 and B6 try also to get anidea about future developments, however with less effort (which might lead tostrategies that are built on wrong assumptions). The firms B1, B3, and B4 achievewell-aligned strategies only randomly, because they do not anticipate futuredevelopments at all.

Step 3: Aligning the Key Components of a Business’ Spare PartsLogistics Strategy to Identified Conditions and Anticipated FutureDevelopmentsGoals of the Spare Parts Business

Spare parts logistics offers competitive advantages for manufacturers. Espe-cially in times of stagnating or decreasing revenues and profits in the primaryproduct business, manufacturers attempt to take advantage of this potential. Allof the interviewees (and in particular the top-performers) concurred that “longspare part supply periods are not only a legal obligation for us, but also offer vari-ous benefits.” Eight of the ten case study firms aim for more than one goal (B1and B6 pursue only the goal “profits”). Nine of the ten case study firms pursuerevenue and profit goals (firm B3 pursues no revenue and profit goals leadingto a misaligned strategy). A high customer loyalty is pursued by six of the casestudy firms (T1-T4, B2, and B3) and four (T2, T4, B3, and B5) try to differentiatethemselves from competitors through spare parts services. Image (T1, T3, and B4),diversification (T2 and T4) and diffusion (T2 and T4) are rather infrequent goals ofthe spare parts business of the case study firms.

Supply Options

Spare parts supply for primary product customers during the whole prod-uct life cycle can be achieved with different supply options.35 Figure 4 depictsthe three phases of the spares supply planning and implementation in the productlife cycle model, with the possible supply alternatives.

The life cycle-specific selection and, if applicable, combination of differentsupply alternatives, amount to a supply strategy. A combined or successive appli-cation of different supply alternatives is possible. The deliberate selection of onlyone supply option can likewise be a supply strategy.

Supply in the Production Phase

The sales date of the first primary product defines the beginning of thespares supply period. This first phase is characterized by uncertainty and forecastdifficulties because of the absence of experience on the required amount of sparesover time. The spare parts demanded after early failures can be taken out of theregular series production. Hence, there is no sales risk and there is no need forstorage capacity for spares.

The spare parts supply during the series production phase is uncompli-cated. Experience has accumulated on the spare parts demand in the past andspares can be picked out of the regular series production (all case study firms



pursue this option). A flexible reaction to fluctuations in demand is possible. Inaddition, eight case study firms (T1-T4 and B2-B5) purchase spares from suppliers(the manufacturers prefer the same suppliers for a primary product part and sparepart if possible) and five (T1, T3, B2, B4, and B6) obtain spares by reconditioningused parts during this phase. The latter alternative requires a system for returnsand a sufficient stock of returned primary product parts. Hence, this option ispracticable only after a certain amount of time and in combination with othersupply alternatives.

Supply in the Utilization Phase

The planning of the spares supply in the utilization phase is the most chal-lenging part of the product life cycle, because the supply of spares must beensured over a long period, and it is no longer possible to pick them out of theregular series production. Furthermore, the selected supply option determinespartly the required inventory options. Consequently, the planning of the sparessupply in the utilization phase should ideally be initiated during the productionphase and should be arranged with the inventory options. A spares supply inthe utilization phase can be ensured with the seven different supply alternativespresented in Figure 4. Nine of the ten case study firms (T1-T4 and B2-B6) changethe supply option during the utilization phase depending on the product life cycle.An internal and external spares production (each pursued by eight firms; exceptT3 and B2 (internal); except B6 and B1 (external)) as well as a reconditioningof used parts (T1-T4, B1, B4, and B6) are the supply options pursued by mostof the case study firms. The supply option reutilization of used parts is only

FIGURE 4. Spare Parts Supply Options along the Product Life Cycle

Utilization AbandonmentProductionR&D

SOP EOP EOLEDO EOS

Spares supplyplanning initialproduction lot Purchased parts

Taking spares out ofregular seriesproduction

Reconditioningof used parts

Final stock

Internal production

External production

Spares production inseparate workshop

Reutilizationof used parts

Reconditioningof used parts

Utilization ofcompatible parts

SOP: Start of productionEOP: End of productionEDO : End of delivery obligationEOS : End of serviceEOL : End of life

Supply options

Spares supplyinitial

production lot

Spares supplyplanning

production run

Spares supplyproduction run

Spares supplyplanning

utilization phaseSpares supply utilization phase



pursued by firm B1. The remaining supply options are pursued by half of the casestudy firms.

Inventory Options

Spares inventory options contain decisions that influence stock levels,warehouse locations, degree of storage centrality, make-or-buy warehousing,and storage equipment.36 Inventory strategies determine the two componentswarehousing structure and inventory management, whereas the warehousingstructure is the basis for the inventory management. The inventory strategydepends on the spares supply strategy selected by the manufacturer. For instance,the supply alternative “final stock” requires different warehousing structures fromthose used by “continuous spares production.” Furthermore, the manufacturersshould consider the goals of the spare parts business when selecting an appropriateinventory strategy. For example, if the focus is just on profits, they should centralizetheir spares warehousing to lower storage costs and avoid overstocking and obso-lescence of parts. If customer loyalty and image are the main goals, a high availabil-ity and fast delivery of spares during the entire supply period should take a highpriority so that spares are stored locally with a tendency of overstocking.

Five case study firms (B1 and B3-B6) have a central spares warehouse.Firm T2 has a local spares stock keeping; the remaining case study firms have alocal and central warehousing structure. All case study firms pursue a selectivestorage, insofar as using different order patterns, inventory levels, safety stocks,and spares availabilities for different spares categories. Most of the bottom-performer firms do not adequately coordinate their supply and inventory strategyleading to a misaligned spare parts logistics strategy and inefficient structures.For instance B4 and B5 meet the conditions (Step 1 of our model) of pursuingthe spare parts logistics strategy of a service leader. That is, a proximity to custom-ers with a local warehousing structure and a high availability of spares (e.g.,achievable with the supply option final stock) leads to an aligned strategy andsuperior performance results. However, both firms have implemented different(suboptimal) supply and inventory options.

Archetype Scenarios of Well-Aligned Spare Parts Strategies

A superior spare parts logistics strategy can be developed on the basis of ourthree-step model. In doing so, the steps should be followed in the sequencedescribed above and all nine identified components should be considered. Figure 5shows two examples of the suggested three-step model, one illustrating a well-aligned spare parts logistics strategy (case study firm T1) and another illustratinga misaligned strategy (case study firm B3).

Figure 6 depicts four scenarios of a successful, well-aligned strategy, eachwith different characteristics of the components. These constellations have beenidentified based on the knowledge that we gained through the case study research(which included analyses of the top- and bottom-performers) and constitute typi-cal archetypes of aligned spare parts logistics strategies. The archetypes do not rep-resent the status quo of the case study firms, rather they serve as guidance and



present prime examples (however, some of the case study firms fit into one of thearchetypes). We tried to select typical scenarios that occur often among machineand plant manufacturers. Other companies can take these constellations as exam-ples, because the scenarios in Figure 6 represent well-aligned spare parts logisticsstrategies leading to a superior performance in the spare parts business. Neverthe-less, the spare parts logistics strategy of a firm should always be developed (Step 3of our model) based on a firm’s individual conditions (Step 1 of our model) andthe anticipated future development (Step 2 of our model).

Cost Leadership in Competitive Markets

Firms belonging to this group offer products and parts in highly competitivemarkets. The main reason for customers to choose a particular spare parts pro-vider is price. The case study firms B1, B3, and B6 belong to this category regard-ing the conditions of Step 1. However, firms B1 and B6 do not adequately takecare of their spare parts business, and they supply spares only on customerrequest. Similarly, firm B3 does not follow the recommendation of the archetypein Figure 6, leading to a misaligned spare parts logistics strategy. In particular, thefirm tries to sell long-term service contracts to its customers—with moderate suc-cess, however, because customers do not want to be tied to a single provider for along period of time. In general, providers of fast-moving wear parts often belongto this category. On the one hand, they face an intensive competition and lowmargins. On the other hand, a spares supply is easily realizable without the riskof over- or under-stocking due to a very long production phase and the provision

FIGURE 5. Examples of Aligned and Misaligned Spare Parts Logistics Strategies

Long production and utilization phase (spare partslogistic strategy is aligned with the particular life cyclephase)

Market

Product/partcharacteristics

Maintenancestrategy

Spare partsobligations

Long delivery obligation (maintenance contracts withmany customers)

Oligopolistic (limited competition); knowledge aboutthe market situation and competitors

Complex; good information about the condition of theinstalled base (intensive information exchange withcustomers)Preventive (intensive contact between firm T1 and itscustomers)

Life cycle

Forecasting

Goals

Ste

p 1

Ste

p 2

Ste

p 3

Supplyoptions

Accurate forecasts using indicators and coefficients(based on maintenance contracts)

Inventoryoptions

Case study firm T1 (well aligned strategy)

Local and central storage (spares inventories nearimportant customers; “intelligent stockkeeping”)

Firm T1 concentrates mainly on image and customerloyalty (customers require a long-term relationshipwith a spare parts provider)

Supply options are aligned with the specific life cyclephase and requirements of customers (firm T1 uses allthree available supply options during the productionphase and all available supply options except“reutilization of used parts” during the utilization phase)

Customers demand only short delivery obligation(however, firm B3 offers long-term service contracts)

Firm B3 does not conduct forecasts

Competitive; no market analysis, insufficientinformation about competitors

Simple; no information about the condition of installedbase

Reactive (customers demand low-cost spares mainlyafter breakdowns)

Long production phase (spare parts logistic strategy isnot adequately aligned with the particular life cyclephase)

Case study firm B3 (misaligned strategy)

Central storage (oftentimes over- or under stocking ofspares during the utilization phase)

Customers require low-cost spares without beingbound to a provider; firm B3 tries to sell long-termservice contracts

Spares are stored during the production phase(however, a sole supply out of the regular seriesproduction could avoid storage costs and overstocking)Final stock during the utilization phase (which is notbased on a forecast)



of spares out of the regular series production. The long production phases resultfrom infrequent technological changes of the products. The spare supply in theutilization phase is normally conducted with a final stock based on low-cost fore-casts and stored in a central warehouse.

Service Leadership in Competitive Markets

Most of the case study firms belong to this group (T2, T4, B2, B4, and B5)regarding the conditions of Step 1. Customers expect excellent after-sales servicesand a fast provision of spares during all product life cycle phases. They can choosebetween various competitors offering spares and after-sales services, resulting in acompetitive market condition. The products are complex, however the number ofunits sold and hence the installed base are large. The spares providers face thechallenge of long utilization phases and the need for accurate forecasting, whichare difficult to manage. The case study firms T2 and T4 follow the recommenda-tion for this archetype and reduce uncertainty about future spares demand byconcluding service contracts with customers and significant forecasting efforts

FIGURE 6. Archetype Scenarios of Aligned Spare Parts Logistics Strategies

Short delivery obligation

Forecasts are possibledue to the shortdelivery obligation

Subjective estimationsand indicators andcoefficients

Forecasts are hardlyrealizable due to longutilization phase

Stochastic and model-based methods

Accurate forecasts arepossible due to a goodknowledge about thecondition of installed base

Indicators and coefficients

Long production andutilization phase

Market

Product/partcharacteristics

Maintenancestrategy

Spare partsobligations

Highly competitive

Simple

Reactive

Long delivery obligation(some maintenancecontracts)

Competitive

Complex, huge number ofunits (large installed base)

Selective

Long delivery obligation(maintenance contractswith many customers)

Limited competition(oligopolistic situation)

Complex, differentiated

Preventive

Delivery obligation for thewhole product lifetime(maintenance contractswith most customers)

Regulated, certificationrequirements

Complex

Preventive (never failpolicy)

Life cycle

Forecasting

Goals

Supplyoptions

Long utilization phase(long lifetime of theproduct)

Accurate forecasts arepossible due to the hugeamount of maintenancecontracts

Indicators and coefficients

Long production phase,no information flowabout the condition ofinstalled base

Long R&D phase(intensive cooperationwith customers during allphases)

Inventoryoptions

Cost-efficient centralstorage

Profits (major goal)

Due to long productionphase uncomplicatedsupply out of the regularseries productionFinal stock during theutilization phase

Local, proximity tocustomers (extensiveservice network)

Differentiation (majorgoal), customer loyalty,diversification, profitsInternal production,utilization of compatibleparts, reconditioning ofused parts

Local and central

Image (major goal),customer loyalty, profits

Internal production,separate workshop, finalstock

Local, very responsiveservice network

Customer loyalty (majorgoal), reputation, profits

Utilization of compatibleparts, separate workshop,final stock

Cost leadership incompetitive markets

Service leadership incompetitive markets

Long-term partnershipin regulated markets

Niche strategy inmarkets with limitedcompetition

Archetype scenarios

Ste

p 1

Ste

p 2

Ste

p 3



with a team concentrating on this particular task. The selected spare parts supplyoptions should aim for a high availability. The firms have a comprehensive servicenetwork, provide fast reaction in case of spares demand, and achieve high cus-tomer loyalty as well as differentiation, which lead to superior profits based ontheir well-aligned strategy. Furthermore, these firms pursue the goal of a betterprimary product diversification with their excellent spare parts business. Thebottom-performers B2, B4, and B5 do not adequately forecast future sparesdemands, leading to under- or oversupply of spares and consequently to dissatis-fied customers and a decreasing customer loyalty. Furthermore, firms B4 and B5do not have a local service network. This misalignment of the spare parts logisticsstrategy leads to diminishing margins in the spare parts business.

Niche Strategy in Markets with Limited Competition

Firms belonging to this group offer complex niche products and face lim-ited competition due to an oligopolistic market structure. The case study firmsT1 and T3 have a strategy that is well aligned to the requirements of this category.They conclude service contracts with their customers, conduct regular informa-tion exchange about the conditions of the installed base, and tie them to theirspare parts business. Most customers have a preventive maintenance strategy,which enables the spares providers to forecast demands accurately based on indi-cators and coefficients. How these firms manage their spare parts business reflectsback on the image of these firms. All decisions regarding the spare parts businessand the alignment of the strategy are based on a well-balanced compromisebetween costs and service levels. Firms in this category should use different supplyoptions to ensure high spares availability and flexibility, while also considering thespare parts production costs. Based on the chosen supply options, rarely requiredspares should be stored centrally whereas often required wear parts should beprovided in decentralized warehouses.

Long-Term Partnership in Regulated Markets

Machine and plant manufacturers belonging to this group (regarding thecondition in Step 1) often operate in the medical engineering, aviation, or militaryindustry. None of our case study firms fulfill the condition of Step 1 and hence nocase study firm belongs to this category. However, this archetype constitutes avaluable guidance for firms operating in these industries to align their spare partslogistics strategy. The number of competitors is limited due to statutory regula-tions and certification requirements. Customers have a very high demand fortrouble-free operation of their machines and hence conduct preventive mainte-nance. Manufacturers should establish long-term partnerships with their custom-ers through intensive cooperation and information exchange regarding theconditions of the installed base—leading to strong customer loyalty. Forecastsare important to achieve an all-time availability of spares. Parts should beproduced in a separated workshop or compatible parts might be used in theutilization phase of the primary product life cycle. The supply option final stockin this archetype normally requires an overstocking because a shortage of spares



should be avoided. Most of the spares are stored locally to guarantee a shortresponse time.

Conclusions and Implications

The goal of this study was to analyze the key components of a superiorspare parts logistics strategy and to present a model for the development of sucha strategy. We analyzed the main determinants of spare parts logistics holisticallyand offer a three-step model (with nine strategy components) that guides manag-ers through the process of strategy development. Furthermore, we present fourarchetype scenarios of a well-aligned spare parts strategy using our model.

As one of the interviewed managers noted: “Our business with spares,including the entire after-sales field, will notably increase. We have to react to thisgrowth and align our current spares provision.”While spare parts logistics has beenrecognized as a success factor, many firms have inadequate knowledge of the strat-egy components of spare parts logistics and of strategy development in this field.

An important managerial implication of our research is the necessity ofstrategic planning and alignment of spare parts logistics. This strategic alignmentis possible with the model proposed here. The individual spare parts logistics strat-egy of each manufacturer should contain all components with different character-istics. During the selection of the components’ characteristics, manufacturersshould consider interdependencies among strategy components and coordinatethe characteristics of the strategy components accordingly. Furthermore, restric-tions on the characteristics of each strategy component should be considered.A professional approach, based on detailed knowledge, enables the use of the var-ious types of business potential and their future growth. The systematic gatheringand analysis of knowledge about their holistic system remains for many of thecase study firms a novel task, one that results in the failure to take full advantageof business potentials. Past experience and intuition are often the basis for align-ment in spare parts logistics. All case study firms belonging to the “bottomcategory” base their decisions mostly on subjective estimations. A method of eval-uating the strategy components that is used by manufacturers belonging to the“top category” is the analysis of lists of spare parts in cooperation with customersand suppliers. Each spare is classified in terms of its relevance to the machine orplant operation, value, ability of storage, and life cycle of the primary product,and then it is categorized as a wearing or failure part.

Notes

1. P. Johansson and J. Olhager, “Industrial Service Profiling: Matching Service Offerings and Pro-cesses,” International Journal of Production Economics, 89/3 (June 2004): 309-320; N. Khandpurand L. Laub, Delivering World-Class Technical Support (New York, NY: John Wiley & Sons, 1997);N. Saccani, P. Johansson, and M. Perona, “Configuring the After-Sales Service Supply Chain:A Multiple Case Study,” International Journal of Production Economics, 110/1-2 (October 2007):52-69; M.W. Toffel, “Contracting for Servicizing,” Working Paper No. 08-063, Harvard Univer-sity, 2008.

2. R.G. Bundschuh and T.M. Dezvane, “How to Make After-Sales Services Pay Off,” The McKinseyQuarterly, 4 (2003): 117-127; M.J. Dennis and A. Kambil, “Service Management: Building Profits



after the Sale,” Supply Chain Management Review, 7/1 (January/February 2003): 42-48; T. Knecht,R. Leszinski, and F.A. Weber, “Making Profits after the Sale,” The McKinsey Quarterly, 4 (1993):79-86; T.A. Minahan, Service Parts Management: Unlocking Value and Profits in the Service Chain(Boston, MA: Mercer Management Consulting, 2003); R. Wise and P. Baumgartner, “Go Down-stream: The New Profit Imperative in Manufacturing,” Harvard Business Review, 77/5 (September/October 1999): 133-141; M.A. Cohen, N. Agrawal, and V. Agrawal, “Winning in the Aftermarket,”Harvard Business Review, 84/5 (May 2006): 129-138.

3. M. Christopher, Logistics and Supply Chain Management: Creating Value-Adding Networks, 3rd edi-tion (Harlow, England: Prentice Hall, 2005).

4. “Ford Saves $1 Million with Parts Inventory System,” IIE Solutions, 28/7 (1996): 51.5. L.V. Tavares and L.T. Almeida, “A Binary Decision Model for the Stock Control of Very Slow

Moving Items,” Journal of the Operational Research Society, 34/3 (March 1983): 249-252; R.B.Watson, “The Effects of Demand-Forecast Fluctuations on Customer Service and InventoryCost when Demand is Lumpy,” Journal of the Operational Research Society, 38/1 (January1987): 75-82.

6. See, for example, S.M. Wagner and E. Lindemann, “A Case Study-Based Analysis of SpareParts Management in the Engineering Industry,” Production Planning & Control, 19/4 (June2008): 397-407.

7. See, for example, A. Saaksvuori and A. Immonen, Product Life Cycle Management, 4th edition(Heidelberg: Springer, 2010).

8. See, for example, Cohen, Agrawal, and Agrawal, op. cit.9. See, for example, D.W. Carlton and M. Waldman, “Competition, Monopoly, and Aftermar-

kets,” Journal of Law Economics & Organization, 26/1 (April 2010): 54-91.10. See, for example, E. Legnani, S. Cavalieri, and S. Ierace, “A Framework for the Configuration

of After-Sales Service Processes,” Production Planning & Control, 20/2 (March 2009): 113-124.11. A.H. Van de Ven and R. Drazin, “The Concept of Fit in Contingency Theory,” in B.M. Staw and

L.L. Cummings, eds., Research in Organizational Behavior (Greenwich, CT: JAI Press, 1985): 333-365; N. Venkatraman, “The Concept of Fit in Strategy Research: Toward Verbal and StatisticalCorrespondence” Academy of Management Review, 14/3 (July 1989): 423-444.

12. Y.E. Chan, S.L. Huff, D.W. Barclay, and D.G. Copeland, “Business Strategic Orientation, Infor-mation Systems Strategic Orientation, and Strategic Alignment,” Information Systems Research,8/2 (June 1997): 125-150; B.H. Reich and I. Benbasat, “Measuring the Linkage between Busi-ness and Information Technology Objectives,” MIS Quarterly, 20/1 (March 1996): 55-81.

13. M.E. Porter, “What is Strategy?” Harvard Business Review, 74/6 (November/December 1996):61-78.

14. P. Weill and M. Broadbent, Leveraging the New Infrastructure (Boston, MA: Harvard BusinessSchool Press, 1998).

15. C.U. Ciborra, “De Profundis? Deconstructing the Concept of Strategic Alignment,” Scandina-vian Journal of Information Systems, 9/1 (1997): 67-82.

16. J.C. Henderson and N. Venkatraman, “Strategic Alignment: A Model for Organizational Trans-formation through Information Technology,” in T. Kochan and M. Useem, eds., TransformingOrganizations (Oxford: Oxford University Press, 1992): 97-117.

17. N. Venkatraman and J.C. Camillus, “Exploring the Concept of ‘Fit’ in Strategic Management,”Academy of Management Review, 9/3 (July 1984): 513-525.

18. See, for example, C. Armistead and G. Clark, “A Framework for Formulating After-Sales Sup-port Strategy,” International Journal of Physical Distribution & Logistics Management, 21/9 (1991):22-29; R.T. Frambach, I. Wels-Lips, and A. Gündlach, “Proactive Product Service Strategies:An Application in the European Health Market,” Industrial Marketing Management, 26/4 (July1997): 341-352; V. Mathieu, “Service Strategies within the Manufacturing Sector: Benefits,Costs and Partnership,” International Journal of Service Industry Management, 12/5 (2001): 451-475; M. Lele, “How Service Needs Influence Product Strategy,” Sloan Management Review, 28/1 (Fall 1986): 63-70; A.P.S. Loomba, “Product Distribution and Service Support Strategy Link-ages: An Empirical Validation,” International Journal of Physical Distribution & Logistics Manage-ment, 28/2 (1998): 143-161; H.T. Tsai and A.B. Eisingerich, “Internationalization Strategiesof Emerging Markets Firms,” California Management Review, 53/1 (Fall 2010): 114-135; Cohen,Agrawal, and Agrawal, op. cit.

19. J. Huiskonen, “Maintenance Spare Parts Logistics: Special Characteristics and StrategicChoices,” International Journal of Production Economics, 71/1-3 (2001): 125-133.

20. S. Cavalieri, M. Garetti, M. Macchi, and R. Pinto, “A Decision-Making Framework for Manag-ing Maintenance Spare Parts,” Production Planning & Control, 19/4 (June 2008): 379-396.



21. Ibid.22. K.M. Eisenhardt, “Building Theories from Case Study Research,” Academy of Management

Review, 14/4 (October 1989): 532-550.23. I. Benbasat, D.K. Goldstein, and M. Mead, “The Case Research Strategy in Studies of Informa-

tion Systems,” MIS Quarterly, 11/3 (September 1987): 369-386, p. 369.24. I. Stuart, D. McCutcheon, R. Handfield, R. McLachlin, and D. Samson, “Effective Case

Research in Operations Management: A Process Perspective,” Journal of Operations Management,20/5 (September 2002): 419-433.

25. Eisenhardt, op. cit.26. J.T. Mentzer and K.B. Kahn, “A Framework of Logistics Research,” Journal of Business Logistics,

16/1 (1995): 231-250.27. J.M. Morse, “Approaches to Qualitative-Quantitative Methodological Triangulation,” Nursing

Research, 40/2 (1991): 120-123. A.B. Eisingerich, G. Rubera, and M. Seifert, “Managing ServiceInnovation and Interorganizational Relationships for Firm Performance: To Commit or Diver-sity?” Journal of Service Research, 11/4 (May 2009): 344-356; A. B. Eisingerich and S. J. Bell,“Managing Networks of Interorganizational Linkages and Sustainable Firm Performance inBusiness-to-Business Service Contexts,” Journal of Services Marketing, 22/7 (2008): 494-504.

28. L.M. Ellram, “The Use of the Case Study Method in Logistics Research,” Journal of BusinessLogistics, 17/2 (1996): 93-138.

29. M.B. Miles and A.M. Huberman, Qualitative Data Analysis: An Expanded Sourcebook, 2nd edition(Thousand Oaks, CA: Sage Publications, 1994).

30. P. Baake, Accidents, Liability Obligations and Monopolized Markets for Spare Parts: Profits and SocialWelfare (Berlin: German Institute for Economic Research, 2008); D.W. Carlton and M.Waldman,“Competition, Monopoly, and Aftermarkets,” Journal of Law Economics & Organization, 26/1 (April2010): 54-91.

31. K. Inderfurth and K. Mukherjee, “Decision Support for Spare Parts Acquisition in Post ProductLife Cycle,” Central European Journal of Operations Research, 16/1 (March 2008): 17-42; P.Johansson and J. Olhager, “Linking Product-Process Matrices for Manufacturing and IndustrialService Operations,” International Journal of Production Economics, 104/2 (December 2006): 615-624; C.M. Rose, K. Ishii, and K. Masui, “How Product Characteristics Determine End-of-LifeStrategies,” paper presented at the IEEE International Symposium on Electronics and the Envi-ronment (ISEE), Oak Brook, Illinois, 1998.

32. J.D. Patton and W.H. Bleuel, After the Sale: How to Manage Product Service for Customer Satisfactionand Profit (New York, NY: Solomon Press, 2000), p. 36.

33. P. Gopalakrishnan and A.K. Banerji, Maintenance and Spare Parts Management (New Delhi:Prentice-Hall of India, 2002); A.K.S. Jardine and A.H.C. Tsang, Maintenance, Replacement, andReliability: Theory and Applications (New York, NY: CRC Press Taylor & Francis, 2006); K. Mobley,L.R. Higgins, and D.J. Wikoff, Maintenance Engineering Handbook, 7th edition (New York, NY:McGraw-Hill, 2008).

34. J.E. Boylan, A.A. Syntetos, and G.C. Karakostas, “Classification for Forecasting and Stock Con-trol: A Case Study,” Journal of the Operational Research Society 59/4 (April 2008): 473-481;A.H.C. Eaves and B.G. Kingsman, “Forecasting for the Ordering and Stock-holding of SpareParts,” Journal of the Operational Research Society 55/4 (April 2004): 431-437; J.D. Patton, ServiceParts Management (New York, NY: Instrument Society of America, 1984).

35. U. Dombrowski, J.K. Wrehde, and S. Schulze, “Efficient Spare Part Management to SatisfyCustomers Need,” paper presented at the IEEE International Conference on Service Opera-tions and Logistics, and Informatics 2007, Philadelphia, PA, 2007; Gopalakrishnan and Banerji,op. cit.; D.K. Orsburn, Spares Management Handbook (New York, NY: McGraw-Hill, 1991);

36. N. Altay and L.A. Litteral, Service Parts Management: Demand Forecasting and Inventory Control(London: Springer, 2011); Orsburn, op. cit.; P. Slater, Smart Inventory Solutions: Improvingthe Management of Engineering Materials and Spare Parts, 2nd edition (London: TransatlanticPublishers, 2010).

California Management Review, Vol. 54, No. 4, pp. 69–92. ISSN 0008-1256, eISSN 2162-8564. © 2012 byThe Regents of the University of California. All rights reserved. Request permission to photocopy orreproduce article content at the University of California Press’s Rights and Permissions website athttp://www.ucpressjournals.com/reprintinfo.asp. DOI: 10.1525/cmr.2012.54.4.69.



Documents

A Strategic Framework for Spare Parts Logistics