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Service Parts Management: A Real-life Success Story From the September 2004 issue of Supply Chain Management Review
JOSEPH J. CHAMBERLAIN and JOHN NUNES Supply Chain Management Review September 1, 2004

In many capital equipment sectors, management of the service parts supply chain has become a key requirement to business success. But it is easy to overspend on parts inventory in an effort to satisfy customers. This article tells how KLA-Tencor found the right balance. The semiconductor-equipment maker applied a fourstep process to service parts management that improved fill rates by as high as 21 percent while cutting supply chain costs by 6 percent. More and more businesses are experiencing a shift in revenue from productbased sales to service-based sales. Competitive pressures are driving down product prices, which increases the importance of revenue over the life of the product. Companies that differentiate themselves in after-sale service and support can create a significant source of revenue and profitability for existing products and a steady flow of investment dollars for new products. This pattern is well established in many business sectorsmost notably in high technology. While early market leaders can focus on innovation, technology leaders are forced to find ways to differentiate their products as their industry matures and competition increases. When technology offerings approach parity, after-sale service increases in importance as a criterion for supplier and product selection. And its here that a practice known as service supply chain management (SSCM) becomes critical. ADVERTISEMENT

Nowhere is service and support more crucial than in capital equipment. From network servers to large construction equipment to commercial aircraft, extended downtime can have a significant impact on the user's financial health. As capital equipment lifecycles grow longer and each sale becomes more competitive, equipment suppliers are finding that after-sale service can drive customer loyalty and become a significant source of revenue and profitability. Additionally, in a weak economy, the service part of an equipment business plays a more visible role in terms of revenue and profit contribution. It is not surprising that businesses such as IBM and HP have shifted their focus and investment strategies from improving product delivery to improving service delivery. However, this transition can be difficult, if not impossible, when the right capabilities are not in place. In the hightech sector, for example, benchmark data from AMR Research suggest that most companies have traditionally underinvested in service, particularly when it comes to the critical enabling information technology (see Exhibit 1). But while some may look at investment in IT and infrastructure as the magic bullet, it is dangerously easy to overspend in these areas. The challenge lies in investing in and developing the necessary infrastructure and capabilities while sustaining historical profitability levels. (The sidebar below suggests some questions to ask when making this transition.) As the aftermarket opportunity increases, we believe that the right degree of investment, backed by a coherent overall strategy for SSCM, is critical to maintaining or improving financial performance . Service can be a differentiator, but it must be an affordable differentiator. To make this case, we lay out the experiences of our company, KLA-Tencor, a leader in yield-management and process-control solutions for semiconductormanufacturing and related industries. While our discussion will focus on semiconductor equipment and the hightechnology sector, the general lessons discussed are applicable to any manufacturer of capital equipment.

Inside the Semiconductor Business

The semiconductor capital-equipment business provides a unique perspective from which to analyze SSCM's importance and complexity. To begin with, the semiconductor industry is on the leading edge of technology. The latest generations of materials, processes, and equipment technology permit production of integrated circuits with critical dimensions of less than 90 nanometersthat's significantly less than the diameter of a human hair.

A more important factor is the classic boom-and-bust cycle that is the semiconductor sector's trademark. In an upturn, manufacturers build capacity in an attempt to capture market share. In a downturn, many find themselves saddled with excess capacity; equipment orders drop as manufacturers wait for demand to catch up, and the cycle begins again. During a downturn, revenues may shift dramatically from being product-based to being service-based. The financial community, however, has the same expectations for gross margins and overall profitability. These expectations put significant pressure on the service organization to deliver strong financial performance. Furthermore, these boom-and-bust cycles may be even more dramatic in the future because many

leading companies are producing 300mm wafers (the silicon disks on which integrated circuits are fabricated). A 300mm wafer has more than twice the area of the previous-generation 200mm wafer, so the potential for excess capacity is much greater. Finally, semiconductor manufacturing is extremely capital-intensive. A state-of-the-art 300mm wafer fabrication facility can easily cost in excess of $3 billion, and downtime on a bottleneck machine can mean millions of dollars of lost revenue. Not surprisingly, then, semiconductor manufacturers expect high levels of after-sale service and support for their equipmentparticularly in terms of availability and rapid delivery of parts. It can be very expensive to provide the kind of availability that customers expect. Equipment makers face the challenge of positioning inventory close to customers while assuming the risks associated with technology that's always susceptible to obsolescence. In this environment, it's not uncommon for an equipment manufacturer to find itself stuck with millions of dollars of obsolete or excess spare-part inventory.

"Get Parts off the Agenda"

Like many capital-equipment manufacturers, KLA-Tencor operates in a very complex service environment. That complexity is driven by a number of factors including geographic diversity, product variety, and extremely low failure rates for service parts. Parts consumption worldwide is extremely low, averaging 0.5 parts per system per month across an installed base of more than 10,000 systems. While a typical wafer fab may have a large number of KLA-Tencor systems, the average number of systems per product or platform family is relatively small and limits economies of scale from a support perspective. Unlike actual chip-making process equipment, KLA-Tencor systems use few if any consumable parts and most partsrelated service events involve very high-value, highcomplexity field replaceable units (FRUs), such as large PC boards and modules. In practice, all of this creates a very tough economic dilemma: How do you service customers well without investing a fortune in a pipeline of costly parts?

Questions to Ask Up Front Companies that have begun transforming their service supply chains must first answer these questions:
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KLA-Tencor had struggled with this problem. Earlier investments in inventory and supply chain improvements had failed to achieve sustained results. Inventory growth had begun to outpace installed base growth, and overall inventory levels were quite a lot higher than best-in-class performance (judging by the results of a service supply chain benchmarking study of high-tech manufacturers). The cost of poor operational performance was creating a significant drain on service profitability. At the same time, customers who were working to get more out of the same equipment were beginning to voice many more complaints. It became clear that poor parts availability threatened to impact future system sales. Complicating matters further, when needed parts were not available, customer-service engineers couldn't be as productive as they needed to be. The issue quickly became a priority for the senior management team. Their message to us: Get parts off the customer's agenda.

What are the critical issues facing your customers in the current business cycle? What do they care about today, and how will that change as business changes? How can you translate what the customer cares about into key measures of success that must drive your overall strategy? Will those measures allow you to compare your performance to competitors and companies in other industries in equivalent terms? What is best-in-class performance and what is good-enough performance? How do you deliver best-in-class performance while maintaining and improving profitability?

We were able to pinpoint several root causes of poor overall performance in parts availability and service supply chain management. At the most basic level, KLA-Tencor had traditionally relied on a planning and execution system that was not designed to be effective in an extremely low-usage environment. Applying linear forecasting methods in situations where linear model assumptions are not met led to poor fill rates and excess inventory. The field-stocking model that the company used in early 2001 did not consider cost as a major decision variable, so it did not achieve the best balance between parts availability and inventory investment. To make matters worse, poor systems interfaces created data integrity issues that further affected the quality of decision making. And finally, past improvement efforts had always relied on short-term actions that prioritized material by location, customer, or product. Short-term improvements in one area simply could not be sustained when other priorities arose.

KLA-Tencor began to overhaul its service supply chain in mid-2001 with the strategic objective of improving fill rates by as much as 30 percent in some regions while containing the rapid growth in service inventory. That effort continues today with the refinement and implementation of a service supply chain strategy, ongoing performance measurement, and change management. A change-management process is one of the most critical success factors in any business transformation; without it, KLA-Tencor would not have been successful. So that's where we begin this story. In rethinking our approach to parts availability, we anticipated significant changes to the way the service supply chain operated as well as to the importance of the measures of success. For these changes to be understood and accepted, there had to be constant communication within KLA-Tencor at all levelsfor two reasons. First, we had to gain acceptance that the strategy was going to deliver results. And we had to use hard data to set expectations about when the results would appear. We delivered our message in every available forum executive reviews, service director meetings, customer meetings, operations reviews, and moreand we kept repeating the message. It was crucial to communicate clearly the timing of expected results so that we didn't have to divert resources to short-term actions to satisfy individual expectations or needs. We realized that if improvements weren't delivered as expected or if we set unrealistic time horizons, we would be forced to respond, ultimately delaying the implementation of sustainable solutions. Second, we had to get buy-in from the people most affected by the change process. Because organizations will always feel a strain during a transition, employees and suppliers most involved with the changes must have full visibility into the impact of these changes. It's important to convey that multiple changes in such a short time may result in short-term inefficiency and temporary drops in productivity. The best way to ensure buy-in is to explain the complete strategy and ensure that it is understood at the lowest levels of the organization. With a change management framework in place, we were able to move forward on the following four-phase transformation, which we believe can be useful to capital-equipment companies in a wide range of industries. Phase IContain the Problem The first priority was to disable the linear-forecasting methods used to plan field inventory requirements. In their place, we implemented an interim methodology that would begin to drive improvements in fill rate, basing our decisions on cost optimization. This was necessary to prevent further erosion in fill rate and to limit growth in excess inventory. With no off-the-shelf system available to optimize field inventory investment, KLA-Tencor developed a simple optimization algorithm based on contribution to service. Parts are categorized into "material-class" groups based on cost and demand frequency. To optimize the balance between contribution to service and total investment cost, specific groups are earmarked for local (2-4 hour response), regional (24-hour response), or global (less than 72-hour response) stocking. For example, an extremely high-value field replaceable unit that fails infrequently (once or twice a year globally) would be located in a facility offering worldwide service, given its limited impact on system availability and the obvious risk to excess inventory and obsolescence. By contrast, a frequently used component of lesser value would be positioned in a local depot. Actual stock levels for each component at each location would be determined based on local population and demand history. While fairly simplistic, our cost-optimized approach did dramatically slow the growth in excess inventory. And by simply demonstrating the trade-off between cost and service, it allowed us to map out future improvements,

Our Transformation Process

creating an environment that helped us explore longer term, more sophisticated solutions. At this early stage, we were content to broadly identify which parts should be held locally, which regionally, and so on. Later, we applied specialized software to derive much more detail on the trade-offs. That software allowed us to fine-tune our stocking model such that, for example, a part might be "local" in Europe but "regional" in Japan. The key lesson from this first phase is the importance of establishing executive-level credibility via short-term wins and by delivering on commitments. Had we failed to do so, our top management team, all too aware of the customer dissatisfaction levels, would have shown little interest in pursuing more sophisticated approaches to service supply chain management. Phase IIEstablish Meaningful Improvement Targets While fill rate is a widely used measure of parts availability, KLA-Tencor faced a unique challenge in establishing a benchmark for fill rate improvement. Service supply chain strategies, practices, and metrics are not standardized across or within industries, which limits the development of a common framework for comparing performance. Cross-industry benchmarks provide limited insight because there is such a wide range of customer requirements and performance metrics. In short, fill rate is simply too broad a measure to support meaningful cross-industry comparison. To establish a fill-rate improvement target that would be meaningful for our company, we turned to part wait time. Our overall objective was to devise a part wait time benchmark that could be translated into a fill-rate improvement goal. In the semiconductor industry, a typical target for equipment availability is less than 5percent unscheduled downtime. Part wait time is one of several factors that can contribute to total unscheduled downtime. (Exhibit 2 shows how and where part wait time fits in the unscheduled downtime picture.) While fill rate may be the primary measure of part availability, what the customer cares about is minimizing unscheduled downtime attributable to parts. A commonly used metric for part wait in the semiconductor industry is "mean down awaiting part" (MDAP) which measures average lost production time attributable to parts across all equipment in a fab as a percentage of total available machine time. (For more on this metric, see sidebar on right.) In an informal survey of the members of International SEMATECHa global consortium of leading semiconductor manufacturersthe benchmark for MDAP was defined as less than 1 percent of total available machine time. With a baseline goal for MDAP, we were able to translate part wait time into a meaningful number for "multiechelon" fill ratethe fill rate at local, regional, and global levels. We used the material-class groups to begin the conversation with customers about service expectations. It was important for us to agree that a 95-percent local fill rate was an unreasonable goal for KLA-Tencor as a supplier of process-control solutions. That level of performance is more appropriate for process equipment operating in a high parts-usage environment. MDAP allowed us to demonstrate that difference. Once we agreed on acceptable downtime levels given the cost trade-offs, we were able to translate those numbers into the right combination of local, regional, and global fill rates. The key to success here was working with the appropriate managers at each customerideally the fab manager. The fab manager's understanding of uptime could then be translated into requirements for the customer's procurement team, which is typically focused on cost and availability. Phase IIIDevelop and Implement a Service Supply Chain Strategy The third phase of the transformation was the development and implementation of a service supply chain strategy. With improvement goals tied to meaningful customer benchmarks, we set out to develop a strategy that would allow us to improve the targeted fill rate while reducing service inventory and service supply chainrelated costs. The strategy consists of five major components. 1. Service Planning and Optimization The core SSCM problem is the trade-off between cost and customer service. Exhibit 3 clearly illustrates this trade-off and shows that the relationship is exponential rather than linear. That means there are some areas on the curve where service can be improved dramatically with minimal inventory investment and other areas where a small improvement in service level can be extremely costly. The material-class planning approach discussed in the first section allowed KLA-Tencor to move onto the curve (action 1 in the exhibit) and begin moving in the direction of improved service (action 2 in the exhibit). But it was clear that a more sophisticated science-based approach was necessary to help us pinpoint the sweet spot where inventory costs would be well-balanced without either underserving or overserving customers and in-line with the MDAP goal of less than 1 percent. In the fall of 2001, after an extensive search and evaluation process, KLATencor procured a state-of-the-art decision-support tool for service-parts planning. (This enabled action 3.) This system is critical to our ability to execute the service supply chain strategy. 2. Multiechelon Fulfillment Process Given the very low parts usage environment in which KLA-Tencor operates, providing a MDAP of far less than 1 percent with local fill rates above 70 percent can be extremely costly. With a new service planning and optimization system, KLA-Tencor was able to target specific levels of availability at local (2-4 hour response), regional (24-hour response), and global (less than 72-hour response) levels, achieving an optimal balance between service and inventory investment while delivering a MDAP at 1 percent or less. Most orders are fulfilled by local depots. But when those demands cannot be fulfilled, the designated regional depot, along with other local depots in the region, is expected to provide the next tier of support. If the request still cannot be fulfilled, the global distribution center and all other depots in the network become potential sources of supply. 3. Global Demand and Inventory Visibility A successful service supply chain management strategy calls for the ability to see and share inventory across the entire distribution network and to source parts globally and continuously, seven days a week around the clock. In turn, that requires seamless enterprise resource planning (ERP) integration across regions and with third-party logistics providers. 4. Knowledge of Installed Base If we have detailed knowledge of the local installed base down to the component level, we can make stocking decisions based on expected failure rates and anticipated first-time failures. The result: higher overall system availability. Because we can't use traditional linear-forecasting methods, we use combinations of component populations and demand to establish a probability of failure for each part at each location. Then we can use sophisticated optimization methods to determine inventory-investment requirements.

5. Holistic View of the Supply Chain It's always challenging for a product business and a service business to share the same supply chain. Combining the demand signals from two very different businesses can make upstream supply planning difficult. Over the course of a business cycle, the requirements for each part of the business can shift dramatically and in opposing directions. That's why a key tenet of our SSCM strategy is independence from (but close collaboration with) the product division's materials and manufacturing, wherever possible. This separation pertains to all the processes and activities involved in planning, sourcing, forward and reverse logistics, engineering, and quality management. Historically, aftermarket demand had been largely an afterthought in the development of supplier contracts. Today, there's much more understanding that the service operation needs to be considered as a primary customer over the life of the product. Phase IVPerformance Feedback and Continuous Improvement To foster an environment of continuous improvement, KLA-Tencor continues to rely on three homegrown tools. These tools provide ongoing feedback on fill-rate performance along with a methodology for corrective action when performance falls short of target. Our fill-rate calculator was developed in early 2001 to permit real-time measurement of fill-rate performance for any customer in the world. The tool simplifies the process of creating customer metrics and reports and allows field personnel to measure fill rate for any combination of products, locations, and time periods. The MDAP calculator helps us identify where fill-rate improvements are possible but MDAP performance falls short of expectations. And our problem-solving roadmap is used for root-cause analysis and corrective action to drive continuous improvement across the supply chain network.

More Work Ahead

Our transformation work is far from over. But preliminary results show that we've made excellent progress. We've struck the right balance with significant improvements in local, regional, and global fill rates (see Exhibit 4). Compared to our December 2001 baseline, there has been a 21 percent improvement in local fill rate and an 8 percent lift in regional fills. Over the same period, we reduced supply chain expense by 6 percent. In every area, performance has been sustained or continues to improve. While many factors contributed to overall success, it's clear in retrospect that the most important factor was ensuring that the keytone of the strategythe inventory/service level exchange curve was understood at all levels, from KLA's chief executive to all the employees who executed to the plan. The curve is a simple but powerful diagram that sums up the strategy succinctly. Moving forward, we are planning two important initiatives. First, we want to enable our field service engineers (FSEs) to carry out their maintenance and repair work more effectively. In effect, the FSEs influence the supply chain as much as the supply chain influences them. Any inadequacies in FSE tools, processes, and execution result in FSEs pulling parts that do not contribute to servicing the customer's equipment. If we participate in prioritizing what's needed to improve the engineers' service capability, we can help them identify and order only the parts they need to correct a problem. If not, unneeded parts must be returned to stock or be tested and repackaged. The supply chain can help by contributing the return-on-investment evaluation of any solution to improve field-service effectiveness. So it is the service supply chain team's obligation to understand field service practices thoroughly and to collaborate to address the activities that fall short of best performance. Our second big program will be to get agreement on a common measure. We believe that an ideal common measure is lost productive time waiting for parts during the service event. Whether it's a semiconductor fabrication tool, a mainframe computer, or an oil-drilling platform, this measure holds the same meaning. Fill rate simply doesn't provide the common measure of total impact to the customer as it can mask overall performance. Implementing a common part-wait metric will require us to track the key data points of the event, from request to delivery. In most companies, this means being able to integrate their own data-collection systems with those of 3PLs and other outsourced providers. It will also require communication with customers to get their buy-in. We've already seen good progress on both fronts, and we expect to make greater strides in service supply chain effectiveness through 2005. Toward a New Standard of Measurement Fill rate is pretty much the universal measure for service supply chain management (SSCM), used across a range of industries. But metrics such as part wait time and mean down awaiting part (MDAP) have been around for a long time and are beginning to attract more interest, especially in the semiconductor industry. In practice, KLA-Tencor uses simple simulation techniques to establish local, regional, and global availability targets that support an MDAP goal of less than 1 percent. We use expected failures per tool per month to calculate average part requests across a known installed base. Ongoing analysis based on hard data is used to validate and refine the fill-rate targets at each location every month. We now hope to establish MDAP as a standard for SSCM measurement and benchmarking, ultimately replacing the fill-rate measure. There are two big challenges ahead of us. First we have to sort out an end-to-end measurement system, working with various third-party logistics (3PLs) and transportation providers to develop real-time measurement and reporting capability. There is no way to measure MDAP effectively without accurate order-fulfillment cycle times. The second and equally complex challenge is the task of determining the aggregate part wait time within a given service event even when cycle-time data is available only for individual parts. Essentially, this involves turning individual part cycle-time data into a total down awaiting part metric for each tool in the wafer fab. The correlation of MDAP and fill rate is based on the assumption that all part transactions are additive in terms of their impact on total part wait time. In reality, part requests often do not arrive sequentially, and the total part wait time for each complete service event is a function of the time the first part was ordered and the arrival time of the last part actually used in system repair. If all order and delivery event times are known, a simple algorithm can calculate the time lost waiting for parts during each service event. The total part wait time for each can be summed to derive a total part wait for a given system. That total number can then be averaged across the fab to arrive at the MDAP. Today, KLA-Tencor has the ability to measure mean down awaiting part, and we continue to work closely with 3PL partners to improve our real-time measurement and reporting capabilities. Joseph J. Chamberlain is senior director of Service Supply Chain Management and John Nunes is senior director of Service Product Marketing in the Global Support Services Business Group at KLA-Tencor Corp. 2004, Reed Business Information, a division of Reed Elsevier Inc. All Rights Reserved.