Inventory management of repairable service parts for personal computers: a case study.

Introduction

The production process in many consumer manufacturing organizations has changed drastically in recent years. Attention has shifted from increasing efficiency by means of economics of scale and internal specialization to meeting market conditions in terms of flexibility, delivery performance and quality. Ideally, this trend towards just-in-time (JIT) production implies working with absolute minimum work-in-process and finished-goods inventories. However, not enough attention has been paid to the management of after-sales activities of which one of the important aspects is the management of (repairable) service-parts inventory. Competition has forced consumer products industries to provide very short-call service contracts in order to boost sales, and this has resulted in large inventories of service parts in the after-sales logistics chain.

Recent years have seen an increase of interest in the field of service-parts inventory, particularly in the computer industry. This increase can be attributed to the wide use of micro-computers. When a computer or a system fails, it is not always easy to trace the reason for its failure. It is frequently because of either a quality problem or the wrong way of using the computer or its component parts, or a combination of both. Whatever the reason for the failure, computer availability or, generally, system availability and the time needed for maintenance or repair, are important to most users. For example, in a financial institution such as a bank, any short interruption may cost thousands of dollars. Here, the goal is to reach 100 per cent system availability, or to come as close to it as possible. Without doubt, good service-parts inventories can contribute to this goal. The computer industry as a whole is a highly competitive industry; products have to be repaired as quickly as possible, since a slow repair can lead to loss of future business to competitors with better service reputations. A good reputation is therefore closely linked to the availability of spare parts on the market. For companies operating worldwide, the problem becomes even more complex and important.

Although in the design of computer systems attention is already paid to reliability through careful selection of components, design sophistication, the incorporation of various types of redundancy and provision of backups, good management of service-parts inventory is of prime importance to many consumer electronics companies, particularly the computer industry. Given this fact and using a real-life case study, the next section begins by elaborating on the management and control of service-parts inventory using the case as a vehicle. The third section gives a brief overview of the contemporary literature on the subject. The solution approach adopted and results of the study are presented in the fourth section. Overall conclusions are drawn in the final section.

Management and control of service-parts inventory: the Olivetti case

Olivetti is an Italian company which produces and distributes computers, monitors, printers, etc. The sales of complete units in The Netherlands are coordinated by the Olivetti office in Leiden. Customer service calls arrive at the Olivetti service office in Nieuwegein, where the service activities are coordinated for the whole country. This department plays an important role in the management of service-parts for the after-sales activity of Olivetti in The Netherlands.

The structure of inventories with repairable service-parts for this case study is comparable with the structure of a two-level distribution inventory problem. The major difference here is that repair facilities exist in the system. The repair facilities are located in different countries, in The Netherlands and France. Usually, a repair is performed locally in an electronic laboratory (e-lab), except for more complex repairs or large repair batches which are performed in Paris (see [ILLUSTRATION FOR FIGURE 1 OMITTED] for an overview of service-parts logistics flow at Olivetti in The Netherlands). The non-Olivetti parts are sent to external repair facilities. The Olivetti service parts are divided into repairable modules and non-repairable components. These parts are separately stocked in the inventory in Nieuwegein.

Over 10,000 different components are stored in Nieuwegein. On average, almost 50 per cent of the components have a positive inventory status at any time. The components on hand occupy about 20 per cent of inventory space and are worth about F1900,000. The inventory management system for components has been developed by Olivetti and is called SigerC. The system forecasts the demand for the components using "double exponential smoothing". Based on this forecast and using the classical economic order quantity (EOQ), orders are generated for different components. The current inventory control system of components has proved to be reliable enough. However, it does not control the flow of repairable modules. There are 2,300 different types of repairable module of which 1,600 types are frequently demanded. The stock of modules utilizes the other 80 per cent of inventory space and is worth about Fl12,000,000. Comparing the value of stock of components with those of modules, it can be seen that good management and control of modules are a necessity. The study therefore concentrated on developing a solution approach for management of the modules. To aid in understanding the methodology adopted and discussed in the fourth section, the logistics flow of repairable modules is elaborated on below.

Demand for repairable modules is of two types, those generated by the customers who have no service contract (carry-in) arriving directly at Olivetti and those with a service contract. The latter constitutes the major portion of the demand for repairable modules (90 per cent). As illustrated in Figure 1, telephone calls reporting a particular defect all arrive at a central office in Nieuwegein, where a rough diagnosis of the problem is made. Depending on the problem, a field engineer is assigned to look after the service. The service contracts usually fall into one of the following categories of two, four and eight hours service delivery after receipt of a phone call. The service is provided from 8.30 a.m. to 5 p.m. (weekends not included). Therefore, when a customer with a four-hour service contract reports a defect at 4.0 p.m. on Monday, he or she should be serviced before 11.30 a.m. on Tuesday. As mentioned earlier, respecting this response time is crucial. In order to meet the obligations and to reduce costs as much as possible, the stock of modules has been centralized in Nieuwegein. However, a small portion of the inventory lays for one day maximum with the service engineers to meet the short service contracts and then is returned to Nieuwegein.

The logistics process between Olivetti and service engineers and the repair facilities is as follows. When, for example, a number of modules are delivered on Monday evening to a service engineer for a prognosed defect, an engineer takes the modules on Tuesday to the customer. Then one or more good modules are exchanged for the defective one(s). The good modules that are unused will stay with the service engineer until Wednesday evening and, if not required for the day after, they are returned together with defective modules to Nieuwegein on Thursday. Altogether, it takes three days to rebook the correct modules in inventory in Nieuwegein. The defective modules are then either repaired locally or are shipped to Paris for repair. The repair facility in Paris usually delivers a repaired module in one day when enough inventory exists (inventory in circulation) or repairs the same module and …