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Striking the Perfect Balance between Service Parts Planning and SLA Performance White Paper (A Baxter Knowledge Leadership Library Publication)

Striking the Perfect Balance between Service Parts Planning and SLA Performance White Paper (A Baxter Knowledge Leadership Library Publication)

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  • 1. Austin, Texas 2008 Striking the Perfect Balance between Service Parts Planning and SLA Performance White Paper A Knowledge Leadership Library Publication By Baxter Planning Systems Inc.
  • 2. Striking the Perfect Balance between Service Parts Planning and SLA Performance Table of Contents SUPPLIER WEB PORTAL . . . STRATEGICALLY EXTENDING ……………………… 2 ESTABLISHING THE LINK BETWEEN PLANNING AND EXECUTION ……………. 3 REAL-WORLD UNDERSTANDING ……………………………………………………….. 5 A POINT OF CONTEXT …………………………………………………………………….. 5 THE END RESULT …………………………………………………………………………... 6 THE BAXTER WEB PORTAL ……………………………………………………………... 7 CALCULATING THE IMPACT ……………………………………………………………. 8 ABOUT BAXTER PLANNING SYSTEMS ………………………………………………… 9 Appendices APPENDIX A …………………………………………………………………………………. 10 1
  • 3. Striking the Perfect Balance between Service Parts Planning and SLA Performance Supplier Web Portal . . . Strategically Extending Enterprise Process Excellence “Supplier Web Portal (SWP) provides an electronic link between purchasing and any number or size of suppliers. This new module enables supplier and purchaser communication, captures detailed audit trails of pricing/delivery negotiations and delivers productivity and quality improvements in the supply chain operation. Confidence in supplier commitments and a reduction in supply lead-time variability is key to the planning organization that wishes to reduce inventory. Supplier Web Portal also incorporates supplier metric performance reporting, further driving continual process improvement.” New Year, New Modules, Same Leadership Position – Baxter Sets Pace, Exceeds Industry Expectations BNET Article January 29, 2007 2
  • 4. Striking the Perfect Balance between Service Parts Planning and SLA Performance Establishing the Link between Optimum Planning and Flawless Execution The demands associated with servicing a diverse installation base can be both complex and challenging. Striking an effective balance between optimal service parts planning and meeting clients Service Level Agreement (SLA) requirements demand the right tools and expertise. Far too often however, service organizations vacillate between a belt and suspenders approach whereby excessive inventory levels are maintained as a means of ensuring parts availability, or conversely rely on an ineffective strategic sourcing process which requires significant increases in personnel. With the former, the over-reliance on inventory usually creates several problems including SKU duplication leading to excess inventory build-up and mismanagement, costly write downs, and a phenomenon know as creeping margins. In the latter, an increased payroll rarely if ever overcomes the inherent inefficiencies of having to manually manage changes in delivery dates, quantities and pricing fluctuations in which supplier engagement is reduced to a reactionary versus proactive exercise in managing fulfillment. The negative impact on a service organization’s bottom line at either end of this pendulum’s swing is significant. This white paper will focus on the critical elements of effective inventory planning and management, including the tools that should be used to effectively manage the important collaborative relationship between key stakeholders such as buyers and suppliers in meeting the SLA performance requirements of an increasingly complex and demanding market. Is Ready Access Enough? A multinational IT services organization made the decision to rationalize their supply base down to 100 suppliers through whom they would receive volume discounts on the purchase of service parts, as well as streamline the repair and return to inventory process. The acquired service parts were to be maintained in a central warehouse, which in turn would act as a fulfillment clearing house for all service call transactions. 3
  • 5. Striking the Perfect Balance between Service Parts Planning and SLA Performance The logic behind this decision was multi-faceted in that the company viewed the strategy as a means of reducing the administrative costs associated with managing what they considered to be an unwieldy and expanding supply base, while simultaneously ensuring “best pricing” and “certain availability” re the right part, at the right time. Unfortunately, effective spare parts planning and management extends beyond the simple process of inventory counts and leveraging volume savings. It also includes managing key relationships with stakeholders such as suppliers. In essence creating a collaborative platform through which the real-time exchange of information facilitates performance in critical areas including but not limited to part availability and delivery certainty. By focusing on a single and somewhat myopic supplier rationalization strategy, communication between the company and its dramatically reduced supply base was limited to managing pre-established min-max levels. The challenge associated with relying predominantly on a traditional min- max approach is that it usually reflects an artificially established set of metrics that is more conducive to a static production versus dynamic service environment. In essence, the buyer and supplier relationship is set in accordance with a contract’s projected or “scheduled” product requirements in which real-world real-time interaction is limited to managing exceptions. True service parts planning and management is not confined to these hermetic variables, but is instead driven by requirements that are characteristically more random, in which SLA commitments usually call for a resolution within a matter of hours. In short it is not a production line environment and therefore requires a higher more advanced degree of managing the relationship between key partners. And while there are a number of forecasting models utilized in service parts planning, the most effective solutions recognize the ongoing need to proactively manage these critical relationships on an adaptive basis. This important element of a sound service parts planning and management program was notably absent from the company’s strategy which led to inflated, slow turning inventory levels, and an actual increase in the Cost of Goods (CoG) relative to then current market conditions. 4
  • 6. Striking the Perfect Balance between Service Parts Planning and SLA Performance Real-World Understanding . . . “The ability to comprehend the complexity of service parts procurement in which a balance between satisfying client service level requirements and bottom line financial considerations extends beyond the mere provision of a traditional warehouse management technology. What is required is a holistic approach that is only possible through a combination of unparalleled insight, proven expertise, and an ability to think and act outside of the framework of “accepted” practices to collaboratively leverage superior technological breakthroughs.” A Point of Context A major metropolitan transit authority contract established a target SLA for service call resolution of 98 per cent same day (on-site, 3-hours) to support their critical IT infrastructure. It is important to note that at 98 per cent, current SLA contractual requirements place an even greater demand on process efficiency and system reliability. Utilizing a consumption forecast model (Part Requirement Rate Formula or PRRF) an analyses was able to accurately forecast the frequency of usage or demand for specific parts for a particular device type based on the current install base. Once consumption rates were established by device type, a Product Compression Function (PCF) was employed to substantially compress inventory by reducing the quantities of individual SKU’s without negatively impacting contracting performance. (Note: as referenced earlier, inventory levels usually grow as a result of inefficient sourcing practices and ineffective collaboration between stakeholders versus an actual increase in service demand.) 5
  • 7. Striking the Perfect Balance between Service Parts Planning and SLA Performance The PRRF and PCF methods mentioned above were clearly focused on part normalization and inventory reduction. However, organizations determined to provide optimized best-in-class service should consider advanced planning capabilities that include additional factors such as part, product, location and customer criticality in a “lowest total cost” model that balances inventory cost versus stock out cost. The result is a service inventory- stocking plan that meets customer expectations at the lowest possible total cost. This ability to intelligently align inventory levels to ensure optimal service parts inventory while satisfying SLA performance requirements generated significant savings as the client was able to; a) lower their investment in slow or sporadic moving inventory, b) reduce warehousing and associated costs, c) establish a more proficient product life cycle management process. A global service parts planning suite was deployed to ensure prompt and easy access to the right inventory, at the lowest cost, from the right location at the right time. Future client demand, determined by historical part usage and up-to-date install base/service contract requirements was used to calculate optimal target stocking levels throughout a main hub (distribution center) and Strategic Stocking Locations (SSL) network. The centralized planning team was empowered to plan and procure central distribution center inventory sufficient to meet the ongoing demand on this critical location. The End Result By leveraging the advanced features of a supplier web portal, the buyer and supplier were proactive in their collective efforts to strategically communicate, manage and utilize inventory to fulfill even the most demanding SLA requirement through multiple warehousing sites. This meant that the transit authority was able to achieve a balance between efficient, cost savings processes and demanding service level requirements to deliver results in terms of customer satisfaction and an increase in bottom line profitability. The collaborative process between buyer and supplier(s) which was essential to the program’s success was facilitated by a centrally managed 6
  • 8. Striking the Perfect Balance between Service Parts Planning and SLA Performance intelligent solution suite of which the supplier web portal was the critical component. This capability is one of the primary benefits provided by Baxter’s Web Portal. The Baxter Web Portal: The Gateway to Shared Commitment? Collaboration in real-time is a cornerstone of the Baxter SWP. This is due to the fact that unlike the manufacturing process which is driven by managing suppliers in relation to long-range forecasts with periodic adjustments, service parts planning is far more dynamic in nature. Specifically, SWP is not a forecast management tool, but is instead a proactive solution that allows the planning group and suppliers to adapt to shifting client requirements on a real-time basis thereby reducing an organization’s reliance on building unnecessary safety stock inventory to meet future or anticipated SLA commitments. As a component of the total Prophet-by Baxter Planning Solution, SWP is an intelligence conduit between the buyer and the supply base confirming the capability of the suppliers’ ability to deliver sustainable results on an on- going basis. Baxter’s suite of “industry leading planning solutions,” which includes the SWP is a reflection of the company’s conscious and proactive effort to extend planning system knowledge to the actual service delivery process. This is a natural evolution of the intuitive solution development that is a reflection of Baxter’s unique and unparalleled understanding of the diverse and at times complex elements of effective supply chain execution. And Baxter’s strategic footprint is the most proficient in terms of simultaneously and seamlessly linking these elements through a single web- based platform that establishes multiple points of correlation between inventory planning and utilization as well as strategic sourcing. 7
  • 9. Striking the Perfect Balance between Service Parts Planning and SLA Performance Calculating the Impact Far too often savings claimed in one area of an enterprise are not necessarily recognized or at least given the same degree of importance or priority when it comes to an organization’s bottom line. Given the above, a strategic industry survey was conducted by Procurement Insights which asked the following question: “How does the CFO calculate the bottom line contribution associated with effective inventory control and superior customer service?” Specifically, how are savings in terms of effective inventory management (which could mean reductions in inventory levels, more frequent turns and avoidance of costly write downs) and superior customer service such as SLA Performance applied by the CFO to an organization’s balance sheet in the following five key areas; a) Return on Invested Capital (ROIC), b) Cost of Capital, c) Economic Value Add (EVA), d) Earnings Per Share (EPS), and e) P/E/ Ratio. While a fair percentage of responses reflected a continuing disconnect between the respondents’ areas of operations and those of the finance department’s, it was generally felt that the role of the finance department “is to facilitate the creation of tools needed to measure improvement.” It was further suggested that finance should also be “an impartial scorekeeper, as it is up to operations to actually make things work.” In terms of importance, the level of priority placed on effective inventory management and achieving and maintaining customer service levels was generally viewed as “originating at the top,” with the emphasis that “a good CFO will recognize the value of tools,” such as the ones offered by Baxter. What were particularly noteworthy were the responses received from finance executives themselves. One head of finance for a major U.S. healthcare organization made the following observation: “The level of inventory plays an important role on the bottom line. However, depending on the industry you are looking at, the level of importance and the recognition might be different: 8
  • 10. Striking the Perfect Balance between Service Parts Planning and SLA Performance Example 1: A manufacturer of Medical Equipment spare parts for equipment, e.g. the tube for an x-ray machine, has to be at the customer’s site within 24-hours. If not, penalties from a service contract apply. Example 2: Internet bookstore customers order books using the internet. The usual time a customer accepts as a standard delivery in this instance is is 6 to 10 days. In Example 1, the primary goal of the company must be an on-time delivery rate (on time meaning installed within 24-hours) of 95%. All other measures, like the total amount of money tied into inventory, have to be secondary and the higher levels of inventory have to be accepted. Ways of fine tuning in this case are systems that allow the company to minimize the time of ownership of the parts. In addition, when selecting a supplier, quality and on-time delivery must take precedence over price. If parts are made in-house, then production planning also becomes a key area of focus. In example 2, the acceptable delivery time is somewhat more flexible, so the company has an opportunity to balance delivery performance with inventory levels. Lower levels of inventory make it into all of the five measures (re ROIC, EVA etc.) listed in the survey question, however the ultimate impact might be marginal depending on the actual decrease in inventory or on how well it is managed on an overall basis. As a result, these metrics might not be the best ratios to show appreciation for any one particular area of an organization, but they do measure the common effort of everybody. And as a company is only as good as the sum of its parts, the inventory and/or service manager’s role should be recognized as an important part of the overall equation.” Taking into account the results of the survey as well as the changing economic conditions, the collaborative approach of the Baxter organization will address the unique interests of all stakeholders both within and external to the enterprise through an active engagement mechanism that encourages participation from key areas including finance, service and logistics. 9
  • 11. Striking the Perfect Balance between Service Parts Planning and SLA Performance Working closing with your team, the Baxter team will identify, clarify and achieve the bottom line results that will resonate throughout the organization, delivering unsurpassed value. 10
  • 12. Striking the Perfect Balance between Service Parts Planning and SLA Performance Baxter Planning Systems offers a unique mix of software applications and parts planning services that are designed to help turn your service parts organization into a profit center. Software Applications Prophet-by Baxter™, (http://www.bybaxter.com/solutions_prophet.html), a 100% web-architected software suite, is a service supply chain solution focused on the unique complexities of the after-market, service, repair, and spare parts industries. Distribution Center Planning (http://www.bybaxter.com/solutions_distribution.html) Field Planning (http://www.bybaxter.com/solutions_field.html) Supply Chain Execution (http://www.bybaxter.com/solutions_supplychain.html) Supply Order Management (http://www.bybaxter.com/solutions_supplychain_order.html) Supplier Web Portal: Regardless of the size of the company, reducing cost and improving control of the supply chain is critical to overall service delivery and financial performance. Planning and purchasing systems must work seamlessly to ensure that the service part supply chain is operating at an optimal level. Too often the purchase and repair order supply chain process involves a manually intensive, seemingly endless maze of phone calls, faxes and e-mails. Baxter’s Supplier Web Portal replaces the inefficiency of common supplier/purchaser communication processes. The real-time Supplier Web Portal captures a detailed audit trail of pricing, quantity and delivery negotiations and delivers productivity and quality improvements in the supply chain operation. Parts Planning Services Baxter’s On-Demand Planning, (http://www.bybaxter.com/solutions_services.html), ensures that you will have an experienced, knowledgeable partner who will work side-by-side with you to lower costs, improve service, and build your business. Our global On-Demand Planning capabilities include regional planning hubs and proven track record that has become a critical component of managing and controlling our client’s service supply chain infrastructure. 11
  • 13. Striking the Perfect Balance between Service Parts Planning and SLA Performance About Baxter Planning Systems Since 1993, Baxter has pioneered the development of Web-based solutions to meet the unique demands of after-market, service, repair, and spare parts industries. The Prophet-by Baxter™ suite of integrated forecasting and planning applications enables Baxter’s clients to achieve industry-leading customer service levels while significantly increasing profitability. Global 2000 and Fortune 500 enterprises deploying Baxter solutions include Agilent Technologies, Silicon Graphics, Enterasys Networks, Alcatel- Lucent Technologies, NetApp, Kodak and Philips Medical Systems. For more information, visit Baxter on the Internet at www.bybaxter.com, or call (866) 323-5959. © Baxter Planning Systems Inc. 2008 12
  • 14. Striking the Perfect Balance between Service Parts Planning and SLA Performance Striking the Perfect Balance between Service Parts Planning and SLA Performance White Paper Appendices 13
  • 15. Striking the Perfect Balance between Service Parts Planning and SLA Performance APPENDIX A Bibliography New Year, New Modules, Same Leadership Position – Baxter Sets Pace, Exceeds Industry Expectations. BNET Article (January 29, 2007). http://findarticles.com/p/articles/mi_m0EIN/is_2007_Jan_29/ai_n17155680) (Pg. 2) Select Customers, Baxter Web Site http://www.bybaxter.com/customers_customers.html Success Stories, Baxter Web Site http://www.bybaxter.com/customers_success.html Warehouse Intelligence versus Warehouse Management: The Baxter Advantage Procurement Insights Article (September 18, 2008) http://procureinsights.wordpress.com/2008/09/18/warehouse-intelligence- versus-warehouse-management-the-baxter-advantage-baxter-planning- systems-profile/ 14