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1.spare parts

  1. 1. The current issue and full text archive of this journal is available at www.emeraldinsight.com/1463-5771.htmBIJ18,6 Spare parts logistics for the Chinese market Heiko Gebauer748 Innovation Research in Utility Sectors, Eawag: Swiss Federal Institute of Aquatic Science and Technology, ¨ Dubendorf, Switzerland Gunther Kucza School of Management and Law, Winterthur, Switzerland, and Chunzhi Wang College of Economics and Management, Dalian Nationalities University, Dalian City, China Abstract Purpose – This paper aims to offer recommendations to increase spare parts logistics performance. Recommendations have been rare despite the proven benefits of high-performing spare parts logistics. The spare part business is the profit pool of the capital goods industry: creating about 17 percent of the industry’s total revenue. The margins involved in spare parts revenue are, on average, 25 percent compared to 2-3 percent of the capital goods. Design/methodology/approach – The authors conducted an extensive benchmarking project with a variety of firms (focus group and single case study) to gain a better understanding of spare parts logistics in China. By reviewing the first benchmarking findings with a single company that struggled to achieve sufficient spare parts logistics performance, additional insight was gained. Findings – The paper attempts to provide a better understanding of the necessary changes for improving logistics performance in the Chinese market. It analyzes the necessary changes to achieve a cutting-edge logistics solution, and shows how companies can implement the solution. Research limitations/implications – The qualitative nature of the research. Practical implications – Managers can develop a procedure to initiate logistics projects that lead to cutting-edge logistics performance. Originality/value – The paper develops a cutting-edge logistics solution for China and Asia based on two main pillars: companies should try to develop logistics solutions for Asia that consider existing Asian and Chinese constraints rather than adapting the logistics practices used in mature markets and the development of the logistics solution should be in intensive collaboration with the logistics providers. Keywords Services in manufacturing companies, Spare parts logistic, China, Logistics solution, After-sales services, Spare parts, Distribution management Paper type Research paper The authors would like to thank the Swiss National Science Foundation (SNF) for supporting Heiko Gebauer’s research. They would like to express their deep gratitude to Maureen SondellBenchmarking: An International for her language editing services.JournalVol. 18 No. 6, 2011 This article is part of the special issue: “Supply chain networks in emerging markets” guestpp. 748-768 edited by Harri Lorentz, Yongjiang Shi, Olli-Pekka Hilmola and Jagjit Singh Srai. Due to anq Emerald Group Publishing Limited1463-5771 administrative error at Emerald, the Editorial to accompany this special issue is publishedDOI 10.1108/14635771111180680 separately in BIJ Volume 19, Issue 1, 2012.
  2. 2. Introduction Spare partsThe recent strong growth of the Chinese manufacturing industry has increased the logisticsdemand for capital goods (e.g. manufacturing machines and equipment). China’smanufacturing industry continues moreover to mature. This, in turn, places morecomplex requirements on the spare parts supply chain for capital goods, including theavailability of spare parts in general and of spare parts for older installations (Zhu et al.,2007). The capital goods industry must modify not only manufacturing and supply 749chain strategy but also the logistics of procuring specific spare parts. Manufacturingand supply chain strategy has previously been discussed in the literature (Pyke et al.,2000) whereas spare parts logistics for the emerging Chinese market has been largelyneglected. Spare parts issues are either related to supply chain literature or areconsidered as being part of the service offered by manufacturers of capital goods. Supplychain literature related to spare parts discusses maintenance and reliability, productionand inventory control along with some strategic aspects such as warehouse locationsand service levels (Huiskonen, 2001). Literature on the service offered by manufacturersof capital goods assumes that spare parts are incorporated into repair or maintenanceservices (Gebauer et al., 2005; Oliva and Kallenberg, 2003). Neither of these researchfields provides any detailed concept of the design of spare parts logistics in China,offering instead some general recommendations. The literature thus rather neglects thearea of spare parts logistics pertaining to the emerging Chinese market. A cross-culturalcomparison between Western countries and China is, therefore, rather limited. The absence of spare part logistic concepts for China is nonetheless surprising,since the spare part business is the profit pool of the capital goods industry: spare partscreate about 17 percent of the industry’s total revenue. The margins involved in thisspare parts revenue are, on average, 25 percent compared to 2-3 percent of the capitalgoods. In addition, local manufacturers are increasingly copying spare parts and legalactions to prevent them doing so seem to be limited. More attractive response anddelivery times, along with reasonable prices, seem to be the only way to competesuccessfully with local part manufacturers. Despite the high margins of the spare partsbusiness and their strong contribution to the overall financial success of manufacturersof capital goods, it remains unclear how companies should approach the logistics ofspare parts in China or, in a broader context, Asia (VDMA, 2008). In collaboration with a European manufacturer of capital goods, a three-year effortto redesign the spare parts logistics of a European capital goods company was studied.It was difficult to frame the evidence found with existing theories in both servicebusiness development and supply chain management. The findings indicated variousbottlenecks, constraints and adjustments in supply chain networks that arisespecifically in China and, in a broader context, in Asia that differ in essence fromlogistic practices in mature markets. This paper is organized as follows: first, the literature regarding the factorsdetermining the logistics of spare parts is examined from a supply chain perspective,along with a description of how existing recommendations of service businessdevelopment influence the concept of spare part logistics. The research setting of thestudy is then analyzed and the results obtained are presented. This is followed by adiscussion on the way in which the findings complement existing theory and, finally,avenues of future research are identified.
  3. 3. BIJ Theoretical background18,6 Spare parts logistics The logistics of spare parts constitutes a minor research field of its own in the area of supply chains and includes topics such as maintenance, reliability, supply chain management, production and inventory control along with some aspects of strategic management, such as warehouse location and service levels (Huiskonen, 2001). With750 the exception of a few management publications (Lawrenson, 1986; Patton and Feldmann, 1997) research into spare parts has focused mostly on inventory modelling (Silver et al., 1998; Cohen et al., 1997). It is, however, beyond the scope of this paper to review all of these areas. The literature review concentrates on strategic choices pertaining to the logistics of spare parts relevant to their use in Asian markets. Huiskonen (2001) categorizes control situations and describes respective strategies and policies. The control situations can be described according to the criticality and specificity of parts, e.g. in the case of standard and high-value parts of high criticality, suppliers are required to either optimize the safety stock of the customer and define time-guaranteed supplies from established service company or else coordinate several customers to set up co-operative stock pools. Cohen et al. (1997) provide an overview of current industrial practice as well as emerging trends in the logistics of handling spare parts. Inventory investments and turnover have emerged as being critical internal metrics, the computation of which should consider the value of the parts and the speed at which they move through the logistics system. The classification analysis of the spare parts should therefore reach beyond traditional ABC methods. Industrial practices also reveal that companies often face a set of distribution network structures that have simply evolved over a period of time. Making the distribution system leaner and more efficient should not, however, only include the reduction of fixed costs for facilities that are eliminated but also the risk of pooling in multiple locations. Another research topic that is emerging in the field of spare parts logistics is the analysis of repairable items (Cohen et al., 1997). Since items can be returned from repair, the spare parts operation contains two independent processes: one with repairable and one with non-repairable items. The two processes differ in the consequences for both the replenishment process and the management of inventories (Kennedy et al., 2002). By benchmarking current practices in spare parts logistics, Pfohl and Ester (1999) argue that key performance metrics within the planning and controlling logistics processes of spare parts are not wide spread. Very few companies use metrics regularly. Even if companies use key performance metrics, companies rarely benchmark the obtained key performance indicators with other companies (Pfohl and Ester, 1999; Sueur Le and Dale, 1997). Spare parts as an integral part of developing the service business The literature relating to development of the service business has focused on service strategies (Mathieu, 2001; Gebauer, 2008), the organizational structure of the service business (Oliva and Kallenberg, 2003) and the service orientation in corporate culture and human resource management (Homburg et al., 2003), as well as measurement and reward systems (Matthyssens and Vandenbempt, 1998) and decision-making processes (Neu and Brown, 2005). These areas are all intricately linked to the logistics of handling spare parts.
  4. 4. The different requirements of the service strategies described as “after-sales service Spare partsproviders” and “customer support service providers” influence the logistics of spare logisticsparts (Gebauer, 2008). In the event of breakdown or failure, for example, after-salesservice providers react as quickly as possible to solve the problem. Customer supportservice providers, in contrast, do not react immediately to failures: they concentrate onpreventing breakdowns from occurring in the first place. From the perspective of spareparts logistics, after-sales service providers are confronted with unpredictability and 751high customer expectations regarding delivery times. Thus, spare parts logistics tend tofocus on shortening delivery times and having relatively high stock values in order tomeet availability requirements. Preventive maintenance contracts, on the other hand,include pre-defined exchange parts, leading to a relatively predictable demand.The spare part concept is thus centralized, with a relatively smaller stock value. Performance measurements also link the cost-effective spare parts logistics with theimprovements made in the after-sales service function. After-sales service providersreact as quickly as possible to machine failure, concentrating on minimizing the timespan from when the customer calls until the repair is complete and the machine is inoperation again. It is within this time span that after-sales service providers measure thepercentage of remote diagnoses and on-site diagnoses, i.e. “service response time”(Cohen et al., 1997). Customer support service providers emphasize instead theprevention of machine breakdown, focusing on monitoring the ratio between scheduledand unscheduled service activities. Scheduled service activities are measured by thenumber of on-site visits and remote diagnoses necessary to avoid machine failure,whereas unscheduled services involve performance measurements similar to those usedby after-sales service providers. Another factor pertaining to the logistics of spare parts and determinants in thedevelopment of services is the discussion regarding the separation or integration ofproducts and services (Gebauer et al., 2005; Oliva and Kallenberg, 2003; Neu and Brown,2005). Should companies separate services from products, then the service businesswill form a distinct strategic business unit with its own financial responsibility(Auguste et al., 2006). The service business is responsible, as a strategic business unit,for spare parts and is forced to maximize its profit contributions. This, in turn, placespressure on stock values for spare parts to improve working capital costs. Smaller stockvalues would decrease the availability of spare parts and, most likely, increase deliverytimes. The service organizations would face increasing pressure to improvetheir financial performance, since they are evaluated as independent profit centres;their returns on assets and inventory turnover levels are hence compared with thecorresponding values for the manufacture and distribution of the finished productswithin the company (Cohen et al., 1997).Issues pertaining to spare parts in the Chinese marketThe logistics of spare parts and the development of services in China are far from simpleissues (Gebauer, 2007). Despite observed improvements in highway, rail, water, and civilair transport, as well as warehousing and communication infrastructure, there remaingeneral logistic challenges (Goh and Ling, 2003). Although spare parts logistics facemany challenges (Pyke et al., 2000) there are two supply chain worlds in China: onefocuses on exports and the other on the domestic market. Export-focused supplychains currently enjoy a reasonable logistics infrastructure, low-cost production
  5. 5. BIJ and streamlined logistic networks. Supported by world-class companies such as UPS,18,6 FedEx and DHL the coastal free-trade zones have efficient and simple supply chains, enjoy high-quality logistic services and have strong logistic skills. Domestically focused spare parts logistics, on the other hand, is confronted with the difficulties of reaching the Chinese end-customers, which include underdeveloped transportation infrastructures, the insufficient skills of logistics providers,752 underdeveloped IT-interfaces and protectionist customs regulations. According to the latter, companies face difficulties in clearing customs and are confronted with a labyrinth of rules and regulations. Even through the lasted efforts to enforce standardization of customs regulations, various regions continue to make arbitrary decisions on goods categories and customs clearance procedures. Customs clearance times are reported to range between two days and two months. Such erratic customs clearance times make it extremely difficult to provide satisfactory spare parts delivery performances (Goh and Ling, 2003). The domestic supply chain comprises domestic players supplying small to midsize companies and is rather fragmented. This has led to complaints of high inventory costs and long delivery times for spare parts, and is aggravated by the bureaucratic restrictions surrounding the legal importation, selling and servicing of spare parts ( Jiang, 2002; Hong et al., 2006). Costs for domestic logistics are still on a low to moderate level, but companies face difficulties in identifying the components of logistics cost (transportation, warehousing costs and so on). Furthermore, research reports a lack of qualified logistics personnel, even in logistics service providers. Therefore, employee training and education is an imperative for the effective implementation of best-practice logistic solutions (Song and Wang, 2009). In order to respond to these challenges, companies cultivate relationships with appropriate parties (customs or logistics providers), hire logistics provider to monitor the movement of spare parts, establish firm’s own transportation and logistics infrastructure, share transportation network with other firms, provide training in transportation management skills, or build multiple warehouses (Ta et al., 2000). The challenge of today could nevertheless well be the business opportunity of tomorrow for manufacturers of capital goods. Constraints can become opportunities: innovative solutions for spare parts logistics can be created specifically for the Chinese market. The combination of a relatively immature market with the shortening of delivery and response times, along with reductions in inventory and warehousing costs, should allow sustainable competitive advantages to be gained. Using China as a logistic hub for solving challenges in spare parts logistics should also benefit the Asian market in general. The research process Assessment of the quality of the research The objective of this study was to explore the design of spare parts logistics concepts for the emerging Asian and Chinese markets, and involved action research. The action research, which was organized into a focus group and a single case study, followed the principles of the iterative grounded theory (Orton, 1997). Iterative grounded theory suggests that the researcher examines the literature relevant to spare parts logistics and employs the empirical data to fill in the gaps. Through this procedure, researchers reveal flaws in the empirical data and literature, elaborate their meaning and extending
  6. 6. their coverage. This eventually helps to create internal and external reference points Spare partsfor the emergent explanatory logic in the research process. logistics The action research was guided by Lincoln and Guba’s (1986) criteria for achievingtrustworthiness: credibility, dependability and transferability. Credibility in the extentto which the findings correspond with reality was ensured through the followingactivities: triangulation of different types of data (focus groups, participation inworkshops, interviews, reports, etc.) and being in situ (i.e. in the company) over a period 753of time. Dependability ensures the consistency of the findings. It was addressed byaccounting in detail for the choices made in the action research. Transferabilitycorresponds to the conventional terms of “internal validity”, “reliability” and “externalvalidity”. It reflects the extent to which the findings can be “transferred” to othersituations. Similar attributes (e.g. size of the company, experience in the Chinese marketand type of products) enhance the transferability in terms of external validity. In order toreduce the likelihood of false interpretations being made, as well as to obtain internalvalidity, a distinctive feature of the research is the above-mentioned triangulation ofsources of evidence (Yin, 1994). Moreover, participants reviewed all preliminaryresearch reports to enhance validity and reliability further. The reviews often ledparticipants to provide more detailed information. Finally, to assure reliability andvalidity of the data analysis, manual and computer-aided content analyses based on theNVivo 7.0q procedure were used for data analysis. NVivo was used when we workedwith various unstructured information obtained in the research process. NVivo allows us to codify, organize and classify data according to dependent,independent and context variables. Logistics performance measurements, such asdelivery time, costs, inventory and working capital costs, are the dependent variables.Independent variables include logistical design elements such as logistic processes,warehouse locations, warehousing structure (local, regional, global, decentralized orcentralized), customs arrangements (bonded and non-bonded) and inventory planningprocesses. Logistics processes can be grouped into inbound, outbound and returnprocesses. Local warehouses (distribution centres of spare parts) implicate a ratherdecentralized structure and may well be replenished through regional and globalwarehouses. The existence of global warehouses that do not have local distributioncentres for spare parts suggests a rather centralized warehouse structure. Contextvariables include the size of the company, type of service strategy and the number ofinstalled bases.Research study of the focus groupThe action research started with an exploratory focus group (Morgan, 1988). Thisfocus group met for about six hours and began with a discussion of the challenges ofdelivering spare parts from Europe to Asia as well as within each Asian country and,more specifically, within China. The participants outlined their challenges anddescribed the way in which they approached spare parts logistics. The moderator useda flip chart to summarize and highlight discussion points and assist participants indescribing potential logistics concepts. The findings were used to substantiate thetheoretical insights gained from the literature review and preliminary understandingof the research topic (Miles and Huberman, 1994). The results of this focus groupprovided guidance for the single case study.
  7. 7. BIJ Single case study of Machine Incorporation18,6 The single case study was chosen on conceptual grounds rather than for it being representative (Miles and Huberman, 1994). The aim was to provide fertile ground for understanding the design of Asian spare parts logistics: a company that has actively redesigned its logistics activities was therefore chosen. The single case study was conducted in a major European capital goods754 manufacturer that designs and manufactures machines and automation equipment for the tool and die-casting industry. The company is also actively developing a service business, which created about 27 percent of the total revenue in 2006-2008. The service revenue involves labor services (repair and maintenance) as well as parts. The spare parts business creates about 75 percent of the service business. Its margins leverage with the product business is about ten. The company, which is here known by the pseudonym Machine Inc., generated approximately e650 million in revenue and employed almost 3,300 people worldwide in 2008. Europe and North America were the main markets during that time, but the Asian market provides a very attractive potential for future growth. The revenues created in Asia accounted for about 30 percent of the total revenue. The key facts with respect to the spare parts business can be summarized as follows: . approx. 10,000 machines installed in Asia in mid-2007 with China representing around 50 percent of the installed base; . local warehouses in seven different location (Beijing, Shanghai, Shenzhen/Hong Kong, South Korea, Japan, Singapore, and Taiwan); . total gross book value of e6 million; . availability of spare parts in local warehouses ranged from 15 to 80 percent; and . average delivery time of 64 hours. These are shown in more detail in Table I, which also illustrates the initial logistic situation. The single case study involved inquiries over a period of 24 months (Eisenhardt, 1989). This allowed direct observation of the key parts of the corporation’s main redesign process of the Asian spare parts logistics concept. The redesign process was an integral part of the global parts distribution concept. It was one of the main pillars of the customer services concept aiming at improving customer satisfaction and the profitability of spare parts. The single case is compiled through multiple sources of evidence, including company documentation and, most importantly, participation in internal workshops and interviews with employees, ranging from logistics and service employees to the sales manager for Asia and the head of the spare parts and service business areas. The author participated in a total of 31 workshops and interviewed more than 17 employees. The involvement of the author started in October 2007 when the company recognized that its performance in the logistics of spare parts did not reach customer expectations and that its logistic structure was problematic. The company contacted the author and requested academic input in the analysis and resolution of its design problems, from an operational as opposed to a strategic or organizational angle. The study proceeded in five phases from October 2007 to January 2009; the content and sources of evidence are illustrated
  8. 8. Spare parts (2) Provision of spare parts from local (1) Direct export of spare parts from warehouses and warehouses replenished logistics Europe to customers in China (Asia) from Europe to customers in China (Asia)Description Companies run a central warehouse Beside a central warehouse, companies carrying spare parts in Europe and have run decentralized (local) warehouses in no local warehouses in China and other different regions of China and in various 755 Asian markets Asian markets Inventory planning and control are Local warehouses are responsible for conducted at the central warehouse basedinventory planning and control based on on state-of-the-art methods relatively unsophisticated inventory methods Parts are exported and delivered from the Parts are delivered from the local central European warehouse directly to warehouse to the customer if they are the Chinese customers available locally Parts are exported from the central warehouse if they are not available locallyAdvantages Low inventory and working capital costs Short delivery times for parts available locally Low operating costs for the central High customer satisfaction due to short warehouse in Europe delivery times High availability of spare parts at the Low logistics costs due to replenishment central warehouse shipments from Europe to Asia rather than single express deliveriesDisadvantages High logistics costs due to express High inventory and working capital costs transport mode Long delivery times caused by customs High costs for operating and maintaining Table I. clearance delays a network of local warehouses Results of the exploratory Low customer satisfaction due to long Limited availability of spare parts at the research activities (focus delivery times local warehouses group)in Table II. The activities also involved logistics providers such as DHL, Sinotrans,TNT, FedEx and Schenker. The author maintained frequent contact with Machine Inc.throughout the duration of the study.ResultsThe exploratory study (focus group)The exploratory study reveals two basic approaches to the logistics of providing spareparts to the Chinese and, in a broader sense, the Asian markets. They are the directexport of spare parts from Europe to Asia and using local warehouses in Asiansubsidiaries. Direct export of spare parts from Europe to Asia. The first logistics approachinvolves the direct export of spare parts from Europe to the Asian subsidiaries wheneverthe customer orders a spare part. The spare part is delivered directly from the subsidiaryto the customer. The local storage of spare parts, with inventory planning and control, isunnecessary. The main advantage associated with this approach is the relatively low capital costdue to the significant consolidation effect in the central European warehouse. Resourcesregarding inventory planning and control are also centralized, avoiding coordination
  9. 9. BIJ Phase 1:18,6 analysis of the Phase 2: Phase 3: detailed logistics preliminary logistics Phase 4: planning Phase 5: performance logistics concept concepts implementation implementation Primary Workshops on Carrier tenders Site visits toSite visits to Stock756 and preparing a obtained re: various logistics various Asian movement secondary template for potential providers in sales companies to from Europe to sources of measuring logistics and China (UPS, design the Shanghai data and logistics to service levels in DHL, Schenker interfaces of the related discover the Asia and Sinotrans)logistics hub activities actual logistics (e.g. financial, performance document and process flows) Survey carried Analysis of the Discussion of the Workshops with Migration of out of all the carrier tenders logistics solution local parts, local inventory Asian and proposed logistics and Chinese sales service managers companies on the migration involved of local inventories to the new warehouse Descriptive Description of Further Specification Workshops analysis of the various logistics development of sheets for all with logistic survey scenarios for one logistics inbound, managers on regional solution via outbound and process warehouses interactive return processes, improvements (e.g. Shanghai, workshops with especially post- Hong Kong and that logistics customs clearance Singapore) provider and temporary borrowing Site visits to Selection of Workshop with Contract on Workshop with verify the most attractive all managing performance managing logistics logistic directors from criteria for the directors to performance at providers Asia to review logistics provider review the Beijing, according to the the logistic logistics Shanghai, carrier tenders solutions performance Hong Kong and and logistics proposed Singapore scenarios Telephone Workshop with Workshop with Workshops with interviews with all managing the European the IOR/EOR to sales directors from organization to confirm companies in Asia to review incorporate the post-customs Taiwan, Japan the logistics logistics solution procedures and and scenarios proposed into export conditions South Korea existing for repairable processes parts returned to Europe Workshop with all managing directors fromTable II. Asia on theDetails on the single logisticscase study performance
  10. 10. costs for different local inventory storages as well as enterprise resource planning (ERP) Spare partssystems. Availability in the central warehouse is very high, often exceeding 95 percent. logisticsThe approaches used by the central warehouses include ABC analysis and strategiesusing value, frequency and criticality of parts. Whilst direct export is very suitable in mature Asian markets such as South Korea,Japan, Taiwan, Hong Kong and Singapore, various disadvantages arise in the Chinesemarket. Chinese customer satisfaction regarding the direct export approach is relatively 757low despite high availability. Customers complain specifically about the long deliverytimes involved: the delivery time is still about ten days even when orders are placeddirectly with Europe and express transport is used. For spare parts, this is ratherunacceptable. The delays are mainly caused by the time required for customs clearancein China, a procedure that places an essential constraint on the overall delivery time.It normally takes one day to process the order, another two days to ship the spare partfrom Europe to China, at least five days for customs clearance and, finally, two days fordomestic delivery from the subsidiary to the customer. The international and domestictransport modes are express deliveries, resulting in logistics costs being very high.Another obstacle was revealed in the case of domestic deliveries: until 2007, nointernational logistics provider was allowed to operate in the Chinese market. Instead ofemploying door-to-door shipment, as in mature markets, companies had to set upinterfaces between international and national logistics providers. International logisticsprovider delivered to the airport and, after successful customs clearance, a domesticservice provider delivered from the airport to the customer. This interface entailedsignificant gaps in communication, such as the translation of delivery notes fromEnglish to Chinese. Naturally, these gaps created problems and delayed the process.The participants also argued that the domestic logistics providers available do not fullycover the whole Chinese market. It was often necessary to collaborate with differentlogistics providers for each region (e.g. Bohai Rim Region, Pearl River Delta andYangtze River Delta), thereby multiplying coordination and integration efforts.Furthermore, the domestic providers lacked in additional services normally attributed tostandard deliveries. It was not possible to outsource services such as invoicing,providing proof-of-delivery and tracking data. Another disadvantage of this approach emerges around the repair process for spareparts. Chinese regulations forbid the re-exportation of spare parts from China to othercountries. Once a new spare part has been installed, regardless of whether or not thereplaced part is repairable, it cannot be exported to Europe. This restriction limits thecosts of spare parts. In mature markets, the pricing of spare parts takes the possibilityof repairing them several times during their lifetime into consideration. Price sensitivecustomers have the opportunity of buying repaired parts. Without the option ofrepairing parts, companies have to either increase their prices or make less profit. Local warehouses in Asian subsidiaries. The second approach involves setting uplocal warehouses in Asian subsidiaries. A local warehouse, which is replenished fromthe central warehouse, delivers spare parts directly to the customer. This logisticapproach is complemented by the direct export of spare parts if the part is not availablelocally. A local warehouse is responsible for inventory planning and control. Thisapproach is relatively easy to apply in Asian markets such as such as South Korea,Japan, Taiwan, Hong Kong and Singapore, as with the first concept, but variousbottlenecks and constraints arise in China.
  11. 11. BIJ The main advantage associated with this approach is a relatively short delivery time18,6 since delays caused by customs clearance procedures are avoided. In order to achieve these benefits, however, companies have to take operating costs for local warehouses and working capital costs into consideration. The resources necessary for inventory planning and control create higher operating costs: inventory planning and control require an ERP system and each local warehouse has its own overheads. The758 participants argued that the underlying skills are still insufficiently developed in Asia, and specifically so in China. The lack of skills leads to less sophisticated approaches to inventory planning and control. Local management tends therefore to make mistakes in forecasting the requirement of spare parts, leading to relatively high depreciation costs. In addition to this, Asian subsidiaries are difficult to integrate into European ERP systems. International licenses are very expensive and subsidiaries either do not have the skill to operate ERP system or they consider ERP operators to be too expensive: they are difficult to find and already command a salary similar to that paid in Europe. The participants also mentioned that only a few ERP systems include Asian characters. Whilst this option is both expensive and requires Asian language skills being available in Europe, providers of logistics service or local subsidiaries will always have to duplicate the information if they are unable to create delivery information in the local Asian language. There is, once again, the potential that failures and inconsistencies may arise. The necessity of storing the same parts in different local warehouses also causes higher working capital costs. Since the local warehouses have already completed customs clearance, the inventory belongs to the local subsidiaries and not the European organization; the inventory value of the spare parts is therefore based on sales prices and not manufacturing costs. The sale price includes value-added tax (VAT), duty and surcharge levied on the manufacturing costs. Sales prices and the multiplication of storage locations increase the working capital costs by 500-600 percent. In order to avoid a cost explosion, it is natural that availability in local storage facilities is lower than in the first approach: availability levels are typically around 60 percent. Reduced logistic costs are another advantage of this approach: the majority of the deliveries made from Europe to Asia are made by consolidated replenishments and not express transport. The local delivery costs are rather similar to the first approach. Table III summarizes both approaches, highlights their advantages and disadvantages and illustrates the logistics activities. Single case study Despite the advantages of both logistics concepts, Machine Inc. did not regard either of them as being an adequate way of fulfilling their logistics challenges, internal requirements or customer expectations. The concepts were instead seen as a starting point. It was assumed that an intensive elaboration of alternative solutions in close collaboration with logistics providers, along with academic input, could lead to a better solution (Tian et al., 2008). The logistics solution implemented embraced the following five interrelated key issues arising directly from the idiosyncrasies of the Chinese market: (1) setting up one regional warehouse for Asia, including China; (2) combining bonded and non-bonded warehouse options;
  12. 12. Subsidiary A B C D E F G TotalEstimated sales of parts (KEUR) 1,200 920 2,100 420 1,200 750 1,870 8,460Number of shipments 3,790 1,080 2,500 970 1,940 3,900 6,370 2,0550Gross inventory value (KEUR) 870 490 950 250 1,470 730 1,700 6,460Rate of depreciation (%) 46 37 21 59 53 49 24 37.5Availability of parts (%) 65 30 50 20 64 15 80 54Estimated costs of warehouses (KEUR) 60 12 90 30 50 35 120 397Delivery costs from local warehouse to customer 28 KEUR 43 KEUR 171 KEUR 2 KEUR 58 KCHF 24 KEUR 152 KEUR 478 KEURDelivery time (hours) 72 108 100 84 48 96 16 64Delivery costs (Europe to local warehouses) (KEUR) 205 38 142 30 157 108 159 839Note: Confidentiality reasons permit to use the names of the subsidiaries; thus, it is only referred to A, B, C, D, E, F and G, instead of Beijing, Shanghai,Shenzhen/Hong Kong, Taiwan, Japan, Singapore and South Korea logistics logistics performance measurements The initial situation Spare parts as described by the Table III. 759
  13. 13. BIJ (3) organizing post customs clearance for outbound processes;18,6 (4) incorporating temporary borrowing into the outbound and return process of the spare parts; and (5) defining the roles and activities in the logistics concept. Each of these key issues is described below.760 According to the regional warehouse, Machine Inc. did not consider a simple centralization or decentralization of direct export or local warehouses for any part of its spare parts logistics chain: various options of configuring the logistics network were considered instead. These options included using Beijing, Shanghai, Hong Kong or Singapore as regional hubs that, in turn, provide spare parts to various countries. Compared with the existing decentralized warehouse infrastructure, with its low degree of availability and high depreciation costs due to the lack of planning skills, setting up regional warehouses was expected to reduce fixed costs and offer the opportunity of achieving an availability of spare parts of up to 90 percent. This involves 90 percent of all spare parts being delivered from the regional warehouse direct to the customer, with only 10 percent of the parts being delivered from the global European warehouse directly to the final customer. The delivery time would then, of course, be higher than for deliveries from local warehouses in each country. The total delivery time could nevertheless be lower than in the initial situation, bearing in mind the relatively low level of availability in local warehouses of between 30 and 60 percent. An initial estimation in the setting up of regional warehouses in Shanghai, Beijing, Hong Kong and Singapore gives an expected delivery time of 24-48 hours. The estimated delivery times reveal that the most time-consuming element is the customs clearance procedures necessary to import parts. This fact is of the utmost importance: although China is the major market with the highest growth expectations, the Chinese customers were regarded as being the most demanding in terms of service levels and delivery times. Machine Inc. decided to set up a combined non-bonded/bonded warehouse to overcome this disadvantage. The non-bonded warehouse would serve the Chinese market without any time delays caused by customs clearance processes since all of the parts in stock would already be declared: the additional bonded warehouse facility would deliver parts to the other Asian market. Using a combined non-bonded/bonded warehouse infrastructure, however, requires that the necessary logistics planning and coordination actually function. The non-bonded warehouse would mean, in addition, that the parts in stock are already declared, and that import duty and VAT have been integrated into the parts value. The capital cost would thus be 27 percent higher. Discussions with logistics providers have led to the alternative option of setting up a combined non-bonded/bonded warehouse employing the post-customs clearance option in Shanghai. This option offers clear additional advantages, the first of which lies in the fact that all of the spare parts can be stored in the bonded warehouse. This bonded warehouse is able to serve all of the other Asian markets in less than two days, and most Chinese provinces within two days as well. Parts delivered to China would not have to be declared before being delivered to the domestic Chinese customer. The post-customs clearance option means that the part is delivered first and declared afterwards. In the current project, this option was restricted to only five third-party logistics providers and the bonded area in Shanghai, Shenzhen and Beijing. Consolidating the spare parts into one single-bonded stock would lead to significant reductions in working capital costs
  14. 14. compared to having a bonded and a non-bonded warehouse. It would also avoid Spare partsduplication in logistics planning and purchasing processes: one logistics competence logisticscentre, attached to the bonded regional warehouse, would suffice. The bonded stock remains the responsibility of the European service organizationsince it has not been declared. The stock value is calculated based on the cost of theparts manufactured and not on the transfer price. As spare parts generate the mostprofit for Machine Inc., the differences in the manufacturing costs of the spare parts 761and the transfer price were, on average, 50 percent. This stock value could be reducedsignificantly, leading to lower working capital costs. Furthermore, the bonded warehouse offers the opportunity of operating the logisticsoperation using the ERP system used in Western Europe and not that used by the Asiansubsidiaries. This enabled Machine Inc. to restrict the IT infrastructure necessary to asimple ERP terminal in the bonded warehouse, thereby avoiding investments forintegrating the Western European and Asian ERP systems. Using SAP in the bondedwarehouse has the advantage that the stock can be managed from Europe, thusminimizing investments in recruiting, training and retaining logistics skills. TheEuropean headquarter, nevertheless, remains responsible for planning and purchasingprocesses. The logistics provider operates the combined bonded regional warehouse andtakes over responsibility for quality inspection, warehousing and inbound andoutbound logistics. It charges Machine Inc. a fee for warehousing and the effectivelogistics costs for inbound and outbound processes. Elaboration of the outbound processes revealed an additional outbound process optioncalled “temporary borrowing”, a specific outbound process that is linked to the postcustomer clearance procedure. Temporary borrowing offers the opportunity of supplyingmore than one spare part to the customer if it is not possible to specify the part that needsreplacing: service technicians can, for example, order five spare parts to diagnose andrepair a machine. The variety of parts means that the service technicians have a betterchance of repairing the failure without any delays. The parts that are used for thediagnosis and repair but are not installed in the machine may, however, be returned to thebonded warehouse. Customs clearance will not be necessary, since the parts were onlyborrowed temporarily from the bonded stock. Only if the parts are not returned within twoweeks will customs clearance be required. Temporary borrowing also enables thecompany to send the used parts from a bonded warehouse to Europe for quality inspection(e.g. a package was opened and the parts used for diagnosis and testing). The only type ofparts that may not be returned through the temporary borrowing system to the bondedstock is the item that is the cause of the machine failure. Should these items be consideredas being repairable, they are stored in a small non-bonded stock attached to thebonded warehouse. On reaching a minimum value, the repairable parts can be declaredand re-exported to Europe. No export duty or taxes have to be paid if each specificrepairable part is returned to China through the repair and return system. Finally, Machine Inc. defined the roles of the logistics concept. The global spare partscentre in Europe remains responsible for the definition of strategic guidelines for theparts business in Asia. It plans inventory levels and monitors key performanceindicators for the spare parts business (e.g. availability, inventory levels and volume).The regional warehouse is responsible for the implementation of the strategic guidelinesand shares logistic know-how with the Asian sales companies. It also monitors customersatisfaction in terms of delivery times and service levels. Responsibilities also include
  15. 15. BIJ the selection of logistics partners for running the warehouses and local deliveries as well18,6 as the management of the return process of repairable parts. Local sales companies remain responsible for diagnosing machine breakdowns and ordering spare parts from the regional warehouse. The logistics concept can be summarized as identifying the most suitable location for a regional warehouse; setting up a bonded warehouse in co-operation with a logistics762 provider that is able to perform post-custom clearance procedures and can offer the temporary borrowing option. Bonded regional warehouses thereby deliver parts door-to-door to all Asian customers. Spare parts for the domestic Chinese market in particular require the use of post-customs clearance procedures, before being delivered door-to-door from the bonded warehouse to the final customer. The temporary borrowing option enables Machine Inc. to deliver parts for diagnosis and testing to the customer and to return them to the bonded warehouse without any customs clearance. More specific details and performance indicators are illustrated in Table IV. Discussion The study goes beyond the existing literature (Patton and Feldmann, 1997; Pfohl and Ester, 1999) on the management of spare parts. Conditions pertaining to spare parts logistics specific to the Chinese market, which would allow a cross-cultural logistics comparison, were explored (Luo et al., 2001). Rather than concentrating on performance benchmarks of the supply chain of spare parts or specific aspects of spare parts management, this article develops the setting up of a cutting-edge logistic solution for China and Asia. The cutting-edge solution is based on two main pillars: (1) Companies should try to develop logistics solutions for Asia that consider existing Asian and Chinese constraints instead of taking the logistics practices used in mature markets and trying to adapt them to the Chinese market. (2) The development of the logistic solution should be in intensive collaboration with the logistic providers. Both pillars are discussed in more detail in the following paragraphs. Interestingly, enough, both the exploratory focus group and the single case study revealed an absence of a strict application of performance benchmarks. Literature often suggests that logistics solutions could be evaluated based on performance benchmarks during the design phase (Pfohl and Ester, 1999). The lack of internal data, however, is often restrictive, forcing companies to rely on subjective estimation instead of simulations and calculations of logistic performance. Furthermore, the Chinese market seems to be rather complex with regard to measuring the performance of logistics. Companies complain that they are only able to receive rough estimates for logistics costs and delivery times from the logistic providers whereas, in most Western countries, it is possible to receive guaranteed delivery times and costs for various post codes. Delivery costs in China, for example, were often given in the form of average calculations for whole provinces. Another interesting observation emerged from the joint venture between the logistics service provider and Machine Inc. Literature often reports intensive cooperation during the operation of a logistics network, but tends to neglect the collaboration necessary for designing the logistics program (Tian et al., 2008). Logistics partners are not involved in designing the program: they are simply expected to respond to the specification sheet
  16. 16. Spare parts After implementation of the logistics Initial situation solution logisticsDescription Local (non-bonded) warehouses attached One regional warehouse serves all Asian to the seven Asian sales subsidiaries customers (Beijing, Shanghai, Hong Kong, Japan, A regional warehouse is a bonded Singapore, South Korea and Taiwan) warehouse with a minor non-bonded 763 Local sales subsidiaries are responsible for warehouse for repairable parts planning inventory, diagnosing machine failures and processing orders Local warehouses operate using different logistics providers Global warehouse in Europe are used to Shipment of spare parts to the customer is replenish local warehouses and send directmade either from the regional warehouse shipments to customers (90 percent) or global warehouse (10 percent) Shipment of spare parts to customers Parts are shipped directly to the customer either from local warehouses (60 percent) and declared afterwards (post-customs or the global warehouse (40 percent) clearance option) Parts are imported into China Parts are shipped under temporary borrowing conditions. Parts that are not installed are return to the regional warehouse without customs declaration being necessary Repairable spare parts are not officially Repairable parts are returned directly to allowed to be returned the customer from either the bonded or non-bonded warehouse Each local warehouse is responsible for One dedicated logistics provider is used for inventory planning and purchasing regional warehousing, as well as for shipments in Asia and China The global spare parts centre defines strategic guidelines, plans the inventory and monitors key performance indicators (e.g. availability, inventory levels and volume) The regional warehouse implements the guidelines and monitors customer satisfaction Local sales companies diagnose machine failures and order spare partsLogistics Gross inventory value: 8,460 KEUR Gross inventory value: 2,200 KEURperformance Working capital costs: 508 KEUR Working capital costs: 136 KEUR Availability of parts: 54 percent Availability of parts: 90 percent Warehousing and delivery costs (regional Warehousing and delivery costs (regional warehouse to customer): 593 KEUR warehouse to customer): 593 KEUR Table IV. Delivery costs (Europe to local warehouse): Delivery costs (Europe to regional The situation before and 839 KEUR warehouse): 273 KEUR after implementation of Average delivery time: 64 hours Average delivery time: 24 hours the logistics solutionfor logistics services and provide attractive prices. Collaboration in this single casestudy proved to be very beneficial. It was discovered that the development of a learning relationship between the logisticsprovider and Machine Inc. was an important success factor. It resulted in the personnel
  17. 17. BIJ of the logistics service provider becoming more skilled and working actively towards18,6 meeting the logistics needs of Machine Inc. The personnel of a logistics provider learn about the complex logistics system and gain an intimate understanding of their logistics requirements. Machine Inc. also learned about the capabilities of the logistics provider and that the logistics provider can, in fact, be trusted to solve current and future logistics challenges. The role of Machine Inc. in leading this joint support venture is also a success764 factor. Although there was a lot of interaction between the logistics provider and Machine Inc., the complexity of the logistics systems means that they are forced to team up if they are to resolve challenges. The specific interrelationships between a bonded warehouse, post-customs clearance and temporary borrowing would not be a part of the logistics concept without such intimate collaboration (Tian et al., 2008). The positive association between collaboration and logistics performance suggests the existence of different types of inter-company collaboration. Logistics services in mature logistics markets such as Western Europe or Northern America are highly standardized; ongoing collaboration between logistics providers and capital goods manufacturers is characterized by strong “transaction orientation”. This means that the logistics fees and prices are a markup for warehousing and transportation costs every time a logistics service is provided. This form of collaboration implies that warehousing and transportation services are based on periodical tenders, and that capital goods manufacturers choose the logistics partner with the most reasonable prices for the delivery in question. The choice of logistics partner in China should, on the contrary, consider the opportunities presented by such collaboration and not concentrate solely on the price. Inter-company collaboration should link the logistics people of the capital goods manufacturers with a diverse collection of individuals from the logistics partner. In China, such collaboration also requires the involvement of import of record (IOR) and export of record (EOR) firms, which aids the development of a shared understanding of both the logistics conditions and the complex requirements of spare parts logistics. Close collaboration with logistics partners helps clarify the degree to which newly formulated modifications in the logistics procedures fulfill the underlying logistics needs and desires. It is therefore suggested that collaboration be centred on developing a learning relationship. This, in turn, requires different roles and competences being available at the logistics provider and the capital goods manufacturers. Logistics providers have to be perceived as being trusted advisers; as such, they collaborate with, and provide unbiased recommendations to, capital goods manufacturers as to how they can achieve the improvements desired in the complex Chinese and Asian logistics systems. They should participate in both the formulation and implementation of logistics problems and not just in the implementation of a manufacturer’s solution. Such a learning relationship is educational for logistics partners, as they gain experience in problems surrounding the complexities of spare parts logistics. Manufacturers gain an intimate understanding of Chinese as well as Asian logistics systems. Succeeding in such a learning relationship requires behavioural and focused attitudes from both partners. The learning processes are rather complex and should, therefore, be firmly established with the leaders and managers, who can encourage and monitor learning and collaboration performances. Bearing this in mind, establishing leading-edge logistics solutions in China and Asia transcends traditional topics of logistics,
  18. 18. adressing instead the way in which logistics partners and capital goods manufacturers Spare partsshould work together. logistics Furthermore, context factors do not determine the logistics concept. The companiesare first and foremost after-sales service providers in China; their logistics requirementscentre on delivering parts as quickly as possible to the customer in the event of abreakdown. This argument agrees with the dominant customer expectations of Chinesemanufacturing companies. The major segments are highly sensitive either to price or the 765logistics performance of their basic service requirements. Focus on basic service needscorresponds with the value proposition of an after-sales service strategy. The density ofthe installed base is still rather low, considering the geographical dimensions of Chinaand Asia, and restricts the establishment of additional local warehouses in China. Thelogistics solution proposed by Machine Inc. is not, however, limited by the size of thecompany: it can be implemented by medium-sized companies as well as multi-nationalenterprises. The only restriction applies to small companies without their ownsubsidiaries in China. A subsidiary is necessary because of the legal handlingrequirements of non-bonded warehouses, which have to be attached to a local legal entity. The practical impacts of collaboration hinge on the ability of the company todevelop useful recommendations for their managers. The managerial implications canbe formulated around the question of how managers can organize procedures andprocesses for enhancing the company’s spare parts logistics in China and Asia.Managers can judge the suitability of their existing logistics concepts by comparingthe approaches outlined. The description of the direct export of spare parts and theprovision of spare parts from local warehouses to customers can help managers focusmore on specific logistics issues. Managers can use the results obtained in this study tochallenge their current logistics practices and develop a project procedure on how toinitiate logistics projects that lead to cutting-edge logistics performance. Despite substantial managerial and theoretical implications, the study also hassome limitations. General inferences cannot be made, as is the case with any qualitativeresearch. The focus groups and single case study were combined for reasons ofconvenience rather than being representative (Miles and Huberman, 1994) and, as such,the extent to which our results can be used to generalize examples remains unclear,even though this method of analysis (exploratory focus group and longitudinal actionresearch) seems promising. Future research should obtain additional qualitative datato replicate our findings. Researchers should then be able develop further hypotheseson the relationships between logistics performance, logistical design elements andcontext variables and test them empirically.ConclusionConducting action research with a variety of firms allows this article to provide a betterunderstanding of challenges in the field of spare parts logistics in China. A cutting-edgelogistic solution is introduced to cope with the challenges faced. This solution uses notonly performance benchmarks of the supply chain of spare parts but also specificaspects of the management of spare parts. In addition, this innovative solution is basedon two main pillars: (1) Companies should try to develop logistics solutions for Asia that consider existing Asian and Chinese constraints instead of taking the logistics practices used in mature markets and trying to adapt them to the Chinese market.
  19. 19. BIJ (2) The development of the logistic solution should be in intensive collaboration18,6 with the logistics providers. Implementing this cutting-edge solution overcomes the disadvantages associated with existing approaches to spare parts logistics, such as the direct export of spare parts from Europe to customers in China (Asia) or the provision of spare parts to customers766 in China (Asia) from local warehouses and warehouses replenished from Europe. The cutting-edge solution takes advantage of short delivery times for parts, high customer satisfaction and low logistics costs, as well as reasonable warehousing, inventory and working capital costs. References Auguste, B., Harmon, E. and Pandit, V. (2006), “The right service strategies for product companies”, McKinsey Quarterly, No. 1, pp. 40-52. Cohen, M., Zheng, Y. and Agrawal, V. (1997), “Service parts logistics: a benchmark analysis”, IIE Transactions, Vol. 29 No. 8. Eisenhardt, K.M. (1989), “Building theories from case study research”, Academy of Management Review, Vol. 14 No. 4, pp. 532-50. Gebauer, H. (2007), “Extending the service business in China? Experience of Swiss companies”, Singapore Management Review, Vol. 29 No. 1, pp. 59-72. Gebauer, H. (2008), “Identifying service strategies in product manufacturing companies by exploring environment strategy configurations”, Industrial Marketing Management, Vol. 37 No. 3, pp. 278-91. Gebauer, H., Fleisch, E. and Friedli, T. (2005), “Overcoming the service paradox in manufacturing companies”, European Management Journal, Vol. 23 No. 1, pp. 14-26. Goh, M. and Ling, C. (2003), “Logistics development in China”, International Journal of Physical Distribution & Logistics Management, Vol. 33 No. 10, pp. 886-917. Homburg, C., Fassnacht, M. and Guenther, C. (2003), “The role of soft factors in implementing a service oriented strategy in industrial marketing companies”, Journal of Business-to-Business Marketing, Vol. 10 No. 2, pp. 23-51. Hong, P., Noh, J. and Hwang, W. (2006), “Global supply chain strategy: a Chinese market perspective”, Journal of Enterprise Information Management, Vol. 19 No. 3, pp. 320-33. Huiskonen, J. (2001), “Maintenance spare parts logistics: special characteristics and strategic choices”, International Journal of Production Economics, Vol. 71 Nos 1-3, pp. 125-33. Jiang, B. (2002), “How international firms are coping with supply chain issues in China”, Supply Chain Management: An International Journal, Vol. 7 No. 4, pp. 184-8. Kennedy, W.J., Patterson, J.W. and Fredendall, L.D. (2002), “An overview of recent literature on spare parts inventories”, International Journal of Production Economics, Vol. 76, pp. 201-15. Lawrenson, J. (1986), “Elective spares management”, International Journal of Physical Distribution & Materials Management, Vol. 16 No. 5, pp. 1-11. Lincoln, Y.S. and Guba, G. (1986), Naturalistic Inquiry, Sage, London. Luo, W., van Hoek, R. and Roos, H. (2001), “Cross-cultural logistics research: a literature review and propositions”, International Journal of Logistics Research and Applications, Vol. 4 No. 1, pp. 57-78. Mathieu, V. (2001), “Service strategies within the manufacturing sector: benefits, costs and partnership”, International Journal of Service Industry Management, Vol. 12 No. 5, pp. 451-75.
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  21. 21. BIJ Gebauer, H. and Fischer, T. (2009), “Exploring service needs in the Chinese manufacturing industry”, Chinese Management Studies, Vol. 3 No. 2, pp. 143-54.18,6 ¨ Gebauer, H., Putz, F., Fischer, T. and Fleisch, E. (2009a), “Service orientation of organizational structures”, Journal of Relationship Marketing, Vol. 8 No. 2, pp. 103-26. ¨ Gebauer, H., Putz, F., Fischer, T., Wang, C. and Lin, J. (2009b), “Exploring maintenance strategies in Chinese product manufacturing companies”, Management Research News, Vol. 31768 No. 12, pp. 941-50. Hakansson, H. and Snehota, I. (1995), “Developing relationships in business networks (book)”, Journal of Marketing Management, Vol. 11 No. 4, pp. 377-8. Homburg, C., Workman, J.P. and Jensen, O. (2000), “Fundamental changes in marketing organization: the movement toward a customer-focused organizational structure”, Journal of the Academy of Marketing Science, Vol. 28 No. 4, pp. 459-78. Humphreys, P.K., Lai, M.K. and Sculli, D. (2001), “An inter-organizational information system for supply chain management”, International Journal of Production Economics, Vol. 70 No. 3, pp. 245-55. Corresponding author Heiko Gebauer can be contacted at: heiko.gebauer@eawag.ch To purchase reprints of this article please e-mail: reprints@emeraldinsight.com Or visit our web site for further details: www.emeraldinsight.com/reprints