Boost your spare parts supply - A case study on cooperation terms in the spare parts supply chain focused on the supplier-buyer dyad

Abstract

Purchasing has become an increasingly important function in manufacturing companies, as it accounts for a large extent of total spending and influences a company's competitive position. It is relevant for Tetra Pak, a global manufacturer of packaging and processing solutions, active since the 1950s. Tetra Pak has over 100.000 active units at customers site over the world, to service them and offer spare parts is both a significant source of revenue for Tetra Pak and a service requested by the customers. The customers expect fast responses, as breakdowns in the food industry have severe consequences. It implicates that a wide array of parts are needed to be made available with short notice globally. To achieve it, Tetra Pak is working with an adapted consignment stock strategy, referred to as the logistics agreement. It means that some suppliers hold materials in finished stock. It enables the suppliers to deliver with short lead times, with the condition that if Tetra Pak does not purchase the material according to forecast, Tetra Pak financially compensates the suppliers for the remaining stock. The purpose of the thesis was to understand how the logistics agreement worked, but also to understand the implications of the solution and determine if the strategy was beneficial to Tetra Pak. Further, the aim was to compare Tetra Pak's processes with literature and comparative companies and give improvement suggestions.

The research was initiated with a literature review to compile knowledge from research within purchasing, after-sales services, and spare parts management. Based on that, an analysis model was created. The model helped to analyze the empirical data by dividing the area into three different parts: the overall goals with the strategy, which spare parts should be included in the strategy, and which suppliers should be included in the cooperation.

The empirical data was collected mainly through interviews and quantitative analysis based on historical information from Tetra Pak's ERP. In addition to that, interviews were also conducted with strategic Tetra Pak suppliers and three comparative companies. With help from the structure of the analysis model, Tetra Pak’s processes were analyzed.

The conclusion was that an adapted consignment stock strategy is favorable for spare parts. It increases availability, which is the main KPI for parts, to the customer. The cost of increasing availability is substantially lower than the alternative, which is to keep the material in stock. The main challenges to succeed are identifying the materials that get an added benefit from the solution and finding terms of the agreement ensuring a manageable scope of materials and compliance from the suppliers.

Popular Abstract

Implementing and applying buyer- supplier agreements to achieve increased performance in the after-sales service business of selling spare parts can be a valuable tool. Succeeding with it may be challenging.

Due to the nature of spare parts, planning and overseeing the supply chain is quite tricky. To know when a machine will break down and need a spare part is almost impossible. The solution is to have the spare parts in stock to offer them to customers in need quickly. As some parts may take months to manufacture and each hour of downtime for the customer is costly, this is important. Keeping all the necessary stock in your warehouse is expensive, though.

Parts Supply Chain at Tetra Pak uses a logistics agreement with their suppliers to tackle this, based on the consignment stock strategy. That means that they allow their suppliers to build up a level of pre-made stock for certain critical materials. The levels in Tetra Pak’s case are called Approved Stock Levels (ASL). Instead of having lead times of many months, they can decrease it to 14 days. Tetra Pak then takes on the financial risk for the ASL materials, agreeing to buy out pre-made stock that is not ordered during the set-out time period.

The logistics agreement has been shown to improve the performance of the after-sales business at Tetra Pak. The company sees lower lead times, higher delivery performance and better availability of the ASL materials. The suppliers also showed during the study that they appreciate this way of working, as it gives them financial security, increased information sharing, and opportunities to optimize their production planning better. It also helps with
improving the collaboration between supplier and buyer.

The logistics agreement is not perfect, though, and there are areas to improve. Materials are each month selected to the list of ASL if their economic order quantity period is between 10 and 50 days. It has led to high volatility and turnover levels, making it hard for the partners of the logistics agreement to optimize planning fully. The disruptions also add unnecessary costs, manual labor, and the screening process is not always correct in choosing spare parts that best fit the strategy. Further, there is no specified process for selecting which suppliers to implement the agreement with and how to implement it, leading to miscommunication and decreased oversight.

The literature on the consignment stock strategy suggests using more control parameters to tackle the imperfect screening process — e.g., price, specificity, and production time. Due to a lack of applicable data in Tetra Pak’s case, increasing the number of parameters was not possible. Instead, a solution of using moving averages and locking the list over a set time period was suggested, as simulations showed it drastically decreasing volatility in the list. An adapted Kraljic matrix was suggested for identifying potential suppliers, focusing on finding suppliers with many spare parts that would benefit from a logistics agreement.

The research culminated in a general model for how a manufacturing company can set up their own buyer-supplier agreements with the consignment stock strategy. The full model and the rest of the study is published in the report “Boost your spare parts supply” at the Faculty of Engineering – LTH – at Lund University.

• author: Krantz, Måns and Fasth Gillstedt, Anders
• supervisor: Louise Bildsten
• organization: Engineering Logistics
• course: MTTM05 20211
• year: 2021
• type: H2 - Master's Degree (Two Years)
• subject: Technology and Engineering
• keywords: Purchasing, After-Sales, Spare Parts, Supply Chain Management, Supplier Collaboration, Consignment Stock Strategy
• report number: 5950
• language: English
• id: 9054253
• date added to LUP: 2021-06-15 08:41:38
• date last changed: 2021-06-15 08:41:38