The Royal Navy: JIT based ship spares provisioningAlan FowlerIntroductionJIT methods are commonly associated with mass production industries, for example carmanufacturing, in which investment in developing and implementing radical new processes can bejustified against savings in large volume turnover. However, Womack and Jones1 identified severalsuccessful applications of this practice in different industries around the world, and claimed that itcould be applied in low volume operations and office activities as well as in mass production on thescale typically found in the automotive industry. The question therefore arises as to whether thesemethods can yield cost-effective benefits in the small quantities that are turned over in industriessuch as defence. Spares provisioning for the Royal Navy typifies such a requirement where, inaddition to potential concerns about higher set-up costs for small batch production, developmentcosts are high relative to material costs. For a service that is becoming increasingly aware of theneed to reduce costs, whilst simultaneously maintaining a high level of operational availability,JIT based methods of spares provisioning appear potentially promising.Contending models for warship spares provisioningTraditionally, spares support for warships, as depicted schematically in Figure 32.1, can be dividedinto two categories: Forward Support, including carried-on-board (COB) spares, and Base Support(base spares). Ships carry a limited range of spare parts, mechanical and electrical, so that repairsand some maintenance can be performed whilst at sea. The range of COB spares is limited by theability to conduct the related maintenance at sea while the quantity is determined by stock-out risk(SOR) criteria. This is typically set at 95 per cent which means that the warship crew can be 95 percent confident that they will not run out of spares during a standard mission (for example 90 days).This calculation assumes constant random failure rates for all equipment (no account is taken ofwear-out rates within this simplified assumption). In practice this is a reasonable assumption, sinceit is generally true for the electronic products which comprise the largest population of COB spares.Conversely, the rate of demand for mechanical items is so low as to make the required sparesquantities insensitive to the inaccuracies of this assumption.Figure 32.1 Conventional warship spares provisioning system
The majority of maintenance and repair work, other than emergencies at sea, is performed at thedockside by a ‘prime contractor’ working for the MOD/Navy (the MOD Support Organisation).When a warship returns to base, any COB spares used on deployment must be replaced. Furtherspares may also be required for base maintenance. These are drawn from stores, either held at theshore base or at a central depot. Currently, the level of spares inventory for each ‘Line ReplaceableUnit’ (LRU), sometimes called a ‘spareable’ item, is again determined by a SOR criterion for someinitial period of the warship’s operational life. By definition, the stock-out risk criterion isdemanding: almost twice as many spares are held as are expected to be needed, just in case. Therationale for this is that the Royal Navy is charged with the defence of the nation, implying thatoperational availability is crucial and should not be jeopardised by lack of spares. The situation isexacerbated by MOD’s requirement for insurance spares. These are required since occasionallydamage is incurred to warships through fire, accident or combat. Under these circumstances sparesmay be required on a range and scale that would not normally be anticipated. These often includelarge quantities or high-value items that represent a significant cost. The prime contractor is supplied by original equipment manufacturers (OEM) who, in turn, aresupplied by component manufacturers comprising the ‘spares supply chain’. Collectively, thiscomprises the supplier support organisation, depicted in Figure 32.1. Finally, Figure 32.1, alsoalludes to the current state of relationships within the supply chain which may be characterised byan ‘over the wall’ mentality involving limited integration and transparency. Currently the MOD isbeginning to contract with prime contractors to provide the Support Organization for a ContractorLogistic Support (CLS) period (Tasker and Willcox2) which corresponds to the period for initialsupport. During this initial period the actual spares demand is monitored and further spares areordered as required. However, there are some fundamental problems with this existing system. Forexample, the initial support period is not long enough to determine future demand; too much stockis procured initially; shortages develop quickly; obsolescence problems arise and excessiveinventory costs are incurred.Process reconfiguration drawing on JIT principlesFigure 32.2 illustrates how a JIT approach to replenishment could enable base-spares inventory tobe reduced to give an equivalent SOR but with a shorter replacement lead-time. First, it should benoted that there is no real change at the COB end of the spectrum, except a stronger emphasis onproviding timely information when a failure occurs which necessitates a call on spares. Notably theMOD shore base stores are reduced and responsibility for provisioning is passed further backupstream, moving from a just-in-case to a JIT concept. The system therefore depends upon afundamental change in the relationship and associated contract with the supplier. This entailsarrangement for replacement of spares in a guaranteed lead-time with fixed prices. By adopting thisapproach based on JIT principles, featuring a shorter replacement lead-time, it may be possible toreduce base-spares inventory and tackle the problems outlined above, whilst continuing to providean equivalent SOR. This also allows insurance spares to be largely eliminated by making alternativearrange ments
for timely replacements in the event that they are needed. This would be achieved by changing thestructure of the contract with the supplier whereby instead of a one-off buy of equipment andspares, the supplier would be contracted to provide a service level commitment for a specifiedperiod of time. Reduced bureaucracy should also characterise this system. Currently, whendefective items are returned to industry for repair or refurbishment, there is a protracted contractualdebate about whether it is economical to repair the item, how much this should cost and how long itshould take. This debate can often take place between the MOD and several tiers within the supplychain.Consequently it is disproportionately expensive and time-consuming. With the JIT concept, alldefective items are simply returned directly to the supplier who then takes the decision on repairindependently. Since the supplier is already contracted to provide a replacement in a guaranteedlead-time at a fixed unit price, the customer can be indifferent to the decision outcome. However,the supplier must also provide information on the diagnosis of the failure and any repair activitycarried out to maintain ‘Corrective Actions’ and ‘Configuration Management’ records. Since it isenvisioned that a fixed price would be paid for this service, then the supplier should be motivated totake the most cost-effective decision to maintain margins. Indeed, by assessing the expectednumber of items that will be capable of repair, and the likely repair costs, the fixed unit price forreplacements can be negotiated to a weighted average of new build and repair costs with an agreedmargin. This means that the aggregate unit price for spares could be less than that paid for theoriginal equipment. Under such a system, the supplier would also be motivated to improve thereliability of its equipment, since this is the other way in which margins can be maintained orimproved.In contemplating the potential of such a system, there are a number of current developments whichillustrate the trend towards alternative approaches. For example, there is notable evidence that manyin the defence industry are attracted to the idea of moving spares stock from the customer’spremises to those of the suppliers. This view, which appears to be gaining popularity, is referred to
as ‘vendor managed inventory’ (Walmsley3 and Coles4). The benefits are seen as reducing the costof holding the inventory and enabling suppliers to manage inventory levels. However, suppliersnaturally expect to be paid for providing this service and taking on additional risk. Furthermore,Coles alludes to doubts over the sincerity of industry in its espoused willingness to participate insuch projects:‘Only those in industry can truly know whether they are prepared to work in this way, and there isstill some way to go before we can confidently predict what the exact result will be.’ Theseinitiatives have the potential to facilitate more rapid introduction of new technology into servicesince the switch to upgrades can render large spares inventories obsolete overnight. However, themost significant factor impacting on the more rapid introduction of new technology is the adoptionof commercial off-the-shelf (COTS) components. This is because commercial development movesat a rapid pace and is supported by a much larger market. Use of COTS, therefore, enables theMOD to take advantage of new technologies as they emerge without the time and cost penalties ofdeveloping bespoke military equipment.Conversely, there are penalties associated with having to accept commercial specifications, whichmay require concessions on military requirements such as shock resistance. Design must also bemodular to allow frequent upgrades in components to be accepted without affecting form, fit orfunction. However, on balance, the policies of increasing use of COTS and vendor managedinventory would appear to be entirely complementary with JIT spares provisioning. For example,JIT may be seen to facilitate the more rapid introduction of COTS upgrades by maintaining thesupply chain and reducing inventory while COTS components will be more suitable for JITprovisioning because of the larger manufacturing base and expanded production volumes. Thesesmart procurement policies are mostly enablers for defence projects to achieve greater efficienciesthrough modern information systems, streamlined bureaucracy and clear data standards. All arepotentially significant contributors towards the development of a JIT spares provisioning system,although amongst the various approaches proposed RAMP (rapid acquisition of manufacturedparts) appears to be the most relevant. This envisages the holding of electronic parts data and/orpartially manufactured components at the suppliers’ premises so that they can be completed andshipped quickly when required. In this way, the long leadtimes and risks associated with processplanning, sourcing exotic materials and elaborate forgings, and organising complex manufacturingprocesses can be managed upstream, leaving the relatively straightforward stages of manufacture tobe completed when the parts are required. The MOD pays for the extent of the work completed plusa fee for storage and only completes the balance when the part is actually delivered.Some issues of concernAlthough the JIT system potentially has several advantages, it is also necessary to sound acautionary note. The JIT model may work in situations where the accounting trade-off between therisk of losing a sale, due to the absence of immediate availability, can be balanced with the cost ofinventory. The question is, does this logic transfer directly to the case of the defence industry? TheMOD is charged with the defence of the realm. What higher priority can there be, and what pricecan be placed on success? Understandably, the MOD is preoccupied with operational availability aswell as cost. A simple trade-off between the costs of the traditional system and those of a JITsystem may not be sufficient to justify a change in policy. Additionally, JIT production is usuallyconsidered to depend on predictable demand and level scheduling, but both factors are significantlyabsent in the context of spares provisioning. Also, there is the broader issue of whether JIT reallyeliminates cost from the supply chain or just moves the costs to some point upstream. For example,some evidence indicates that only those suppliers who themselves also implement JITmanufacturing and purchasing techniques are able to supply JIT without increases in raw materialand/or finished goods inventory (Germain and Droge5). Furthermore, some would say that onlywhere manufacturing lead-time is less than the required response time can increases in finishedgoods inventory be avoided. This highlights the main threat to the application of JIT in the low-
volume operations of the Royal Navy. Short response times are required at irregular andunpredictable intervals for the supply of high-value, complex equipment with long manufacturinglead-times. The implication is that this can only be achieved through holding finished goodsinventory.In summary, it is essential to remember that still the most significant issue for the MOD, whichdifferentiates it from much of industry, is the importance of operational availability. Achieving atrade-off between inventory cost and availability is a difficult problem to solve.Cost modelling of the spares provisioning processFinancial viability is a primary consideration in contemplating a transition to JIT based sparesprovisioning. Towards this end, a limited modelling exercise may be readily conducted usingavailable suppliers’ data on component cost, reliability and production lead-time. Extending thiscontext, it is also important to ask the question: What happens after the initial in-service supportperiod? With the conventional approach, the stock level would be topped up to restore the desiredSOR for some follow-on period, taking account of the actual demand rate experienced during theinitial in-service support period. For analysis to proceed, it would have to be assumed that thepredicted failure rate is accurate so that the predicted demand rate, after the initial period, can beexpected to remain unchanged. JIT replacements would then continue to be provided, as before,with prices assumed to remain stable. Furthermore, the advantage of the JIT based approach couldactually be enhanced further when factors such as obsolescence and technology upgrading are takeninto account. This is because with JIT, accommodating changes to the inservice equipmentconfiguration is easier, quicker and cheaper because there is less inventory to become obsolete.Finally, it must always be emphasised that the operational availability of vessels is of paramountimportance to the MOD. Consequently, it is imperative when comparing the resulting sparesavailability under the two competing policies, to bear in mind that the availability of spares mustremain at least as good as it is at present and, ideally, should actually be improved following theimplementation of a JIT policy.A comparative illustration of a typical spares provisioning situationPresented below is a snapshot of some typical data pertaining to spares provisioning for warships.The Royal Navy is considering the alternative JIT based approach as a means of potentiallyreducing the cost of spares inventory and is using, as an example, the case of a particular high-techpart for a radar system. This is supplied by a single supplier who does not supply anything else tothe Navy. Under the existing arrangements, the Navy carries two years’ stock whilst alsosubscribing to the 95 per cent stock-out risk criterion (this means that there is a 95 per centconfidence of not running out of spares). Alternatively, this may be thought of as a 95 per cent‘stock-held’ confidence criterion. In addition, Naval operational requirements dictate that,irrespective of risk criteria based on probability, there should be a minimum inventory level of oneitem to provide for immediate availability. Under the alternative JIT based spares policy that isbeing considered, the customer (the Navy/MOD in this case) will hold reduced stock at its shorebase, while still achieving 95 per cent SOR against a guarantee of delivery on demand to the Navy,within five days, at a fixed unit price. The supplier will also maintain additional buffer stock, at anagreed level, to achieve 95 per cent SOR against its manufacturing lead-time, to maintainavailability (replacing any parts drawn down by the Navy during the support period). This servicewill be provided, in return for a fixed fee to be agreed between customer and supplier. It is assumedthat any failed parts will be discarded. For the purpose of calculation, the following customer data is available: ● There is one of these parts fitted on each of 10 ships. ● The anticipated utilisation is 1000 operating hours per year for each part.
● The mean time between failure (MTBF) of these parts is 10 000 operating hours. The following supplier data is also available: ● The supplier has a manufacturing lead-time of 90 days. ● The cost of each part to the supplier is £100 000. This is marked up by 10 per cent for sale to the Navy. ● The supplier proposes to charge a fee of £35 000 per annum to the Navy for providing the JIT type service, plus the initial cost of setting up the buffer stock. ● The contract will run for two years (to be directly comparable with the existing arrangements).In comparing the JIT based proposal with the existing arrangements, the followingquestions thereby arise: (a) What is the cost to the Navy in the existing, traditional arrangement, when there is a need to carry two years’ stock in accordance with the 95 per cent stock-out risk criterion? (b) Under the alternative JIT arrangement, what level of stock needs to be carried by the Navy and by the supplier respectively? What will this arrangement cost the Navy, in total? (c) Is the propose d JIT arrangement financially advantageous to both the Navy and the supplier (that is, what are the respective profits/benefits)? (d) Suppose that a sensitivity analysis is also to be performed in which the mean time between failure is assumed to be respectively: – 1000 operating hours. – 20000 operating hours. How does this affect the predictions of benefits/deficits accruing to the respective parties? (e) Are there any other sensitivities that should be considered and how influential are they with respect to the viability of the proposal? In performing the above analysis it should be assumed that cumulative Poisson probability data will be used to assess the value of the stock-out risk criterion for different scenarios. In performing your calculations you may choose, for convenience, to use the cumulative Poisson function provided in the standard Excel spreadsheet facility.Questions In addition to consideration of the financial and operational advantages that might accrue whenimplementing the changes suggested above, it is inevitable that political, cultural, social andeconomic issues will also impact on, and influence, the potential success of the JIT based proposal.A full analysis should therefore focus on a number of questions which may be summarised asfollows:1 How does the proposed JIT system compare with/differ from the existing conventional sparesprovisioning process?2 What are the qualitative benefits that might accrue, based on the data made available in the casestudy?3 The stakeholders involved in implementing this proposal may be broadly grouped into threecategories: the MOD/Navy, the prime contractors (organisations who provide first-line anddockyard services to the MOD) and subcontractors (the organisations in the industries that supplyand support the prime contractors). What do you believe the issues/problems would be in applyingJIT principles to spares provisioning from the perspective of each of these groups respectively?4 Based on the illustrative numerical data presented above, how attractive is the JIT propositionfrom a financial perspective, assuming this simplified quantitative example is typical of others(work through the calculations to produce your answer).5 Weighing all the evidence available, do you believe that it would be feasible and advantageous tomove towards a JIT based system for spares provisioning to Royal Navy warships? Explain yourreasoning.