Inventory Turns Are Irrelevant

Remember the Maytag repairman commercials? He lives in a perfect field service world. Your Maytag repairman has nothing to do because the product never breaks. He hangs out, is bored, and hopes the phone will ring so he can fix something.

In this perfect imaginary field service world, inventory turns are zero. Inventory sits on the shelf and gathers dust. But in the real world, equipment breaks, and customers don't want to wait days or weeks to get service. Consider your last experience at the auto dealer/repair shop. If you had your car repaired the same day, chances are the dealer stocked the parts needed or they were delivered from a nearby depot.

There is significant value for customers in minimizing equipment downtime, and that value is directly proportional to the cost and criticality of the equipment. For example, at one of our client's semiconductor chip manufacturing plant, downtime for just one critical machine can cost the company $30,000/hr in lost revenue. Think of the customer reaction to waiting for 24 hours to receive the $20 infrequently used repair part from a regional distribution center.

Once customers understand the true cost of equipment downtime, they are generally willing to pay for the insurance of locally stocked parts. There are many ways to make inventory payments nearly painless, including vendor-managed inventory.

Field service software such as Astea, Servigistics, SAP, and Oracle use mathematical models of inventory parts and service levels, based on variables such as the following:

• Goals for parts response time (from request to delivery)
• Product installed base locations
• Product installed base configurations
• Part usage history, by product and by location
• Part lead times for procurement and repair
• Warranty delivery goals
• Meantime between failure of parts histories
• Repair volumes

On the other hand, no amount of modeling and investing strategies will make your customers loyal fans of your business. If you are looking for great customer loyalty, what you must do is focus on inventory to support your customer's requirements for response times, not inventory turns.

In the airline industry, if you are part of the ground maintenance crew, you know that a flight delay may result when parts are needed for repair. While airlines stock many parts at airports, unusual or very expensive parts are stored at regional hubs. This means that some repair parts must be shipped from another location when a plane is grounded or the airline must substitute another plane to meet the schedule. The airlines call these emergencies "AOG" or aircraft on ground. Now, consider customers upstairs in the departure lounge. They have places to go, people to meet, and things to do. And they expect minimum flight delay due to maintenance. They don't care about inventory efficiency. Paying customers want the repairs done fast so they can continue on their way. If they have to wait, they will choose another airline with better on-time performance.

Remember this airline example when you are dealing with a customer who must wait for your repairs. Optimizing inventory by minimizing investment and maintenance costs may appear to be the right business financial decision, but it rarely builds customer loyalty. Your company financial managers may argue for less investment in inventories, but you need to help them understand that this may significantly impact customer service and loyalty. If it's easy for your customer to switch to a competitor (such as airlines), they will.

So there is an important trade-off between inventory levels and locations vs. customer service and response times. Which is more important to your company?

© 2013 Laura Lowell