Forecasting Challenges of the Spare Parts Industry
M.D. Morris · 2013
EXECUTIVE SUMMARY |Forecasting the demand for spare parts is very much different from finished goods. The author describes the unique problems that occur when forecasting spare parts, and how to best deal with them. He also discusses SKU proliferation as well as the legal obligations that accompany forecasting spare parts.recently transitioned from a finished goods management role to the unique world of spare part management. It has been a while since I've had the opportunity to be involved in spare part management. However, a few years ago, I had the privilege of developing a spare parts department including the implementation of their ERP software to manage the entire supply chain. So needless to say, I wasn't a total stranger to the undertaking. Of course, managing spare parts inventory presents a high level of complexity and certain obstacles that are not so inherent in the world of finished goods management.The management of spare parts inventory presents several immediate problems that are unique to this industry, including SKU proliferation, legal obligations, and forecasting difficulties.SKU PROLIFERATIONSKU proliferation is a very common issue in the spare parts industry because the quantity of overall SKUs can easily surpass the resources available to manage them. A company may have hundreds if not thousands of finished goods SKUs that it forecasts regularly. But when it comes to spare parts, the number of SKUs can easily increase exponentially because each finished good has a number of parts. In the musical instrument/electronics business, for example, one product can easily have several hundred parts. Substitutes, replacements, transitions, revisions, and refurbished parts can create a forecasting nightmare leading to the dreaded forecaster's migraine. As the number of products has proliferated in recent years, so have their spare parts.LEGAL OBLIGATIONSFrom a legal perspective, there are also numerous legal requirements governing spare parts that don't pertain to the typical finished goods. For example, several states have laws-repair paths-that require the supplier to supply a replacement part to repair a product, or supply the consumer with a similar or better part for up to seven years. If your current finished goods inventory requires 50,000 replacement parts, then by law their spare parts will have to be supplied for up to seven years. As you can imagine, this can balloon even the best inventory systems.Let's assume that every two years you introduce a new model, which has 500 part SKUs. These SKUs must be supplied as long as the product is being offered. In this scenario, the company would have to supply 2,500 SKUs by year 9 (seeTable 1).Not only that, but the same part is frequently used in multiple products. During its lifespan, that part can be revised or upgraded, which then creates a new SKU. All these variables feed the SKU proliferation and its resulting inventory. Most suppliers would prefer to cease manufacturing the replacement part after the model is discontinued. However, because of the seven-year legal requirement, it becomes part of the cost of doing business. Additionally, manufacturers would like to take advantage of the economies of scale and produce their total demand once rather than over several years. Unfortunately, it is extremely difficult to forecast their total needs-Last of Supply. Over producing results in dead stock; conversely, under producing may mean losing profit as you give away a brand new model because you simply couldn't supply a 2-cent knob.The Last of Supply forecast can be tough to navigate as well. If the finished good is fairly inexpensive, say $50 retail, the consumer may choose to purchase a new one instead of attempting to repair the old one. On the flip side, a more expensive item like a grand piano tends to stay in families for a long time, so cost becomes almost irrelevant.FORECASTING DIFFICULTIESTypical forecasting strategies used in finished goods do not always apply well in spare part forecasting. …