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When a critical machine breaks down and a missing part is not available, the ripple effect can be enormous — maintenance delays, service teams scramble, and customer trust is put at risk. In the world of service and spare parts, complete and on-time availability is everything.
Yet most service parts supply chains are not completely prepared for today’s volatile, high-expectation environment. Why? Because traditional inventory strategies ignore a network-wide view of inventory planning and connected processes to maximize inventory investments.
That’s where multi-echelon inventory optimization (MEIO) comes in.
Instead of managing spare parts inventory in silos, MEIO takes a network-wide view — coordinating inventory buffers across all levels of the supply chain (from central warehouses to regional depots). For service networks with multiple vendor sources, customer lanes, and high volumes of low-demand SKUs, a MEIO approach is essential.
The results speak for themselves. Companies that implement MEIO strategies report [1] :
- Up to 30% reduction in inventory levels across the network
- 5% improvement in item availability
In an era where downtime is unacceptable and working capital is under constant scrutiny, adopting MEIO helps you strike the right balance: high availability, low carrying inventory cost, and effective inventory buffering.
What Makes Spare Parts Networks So Complex?
Most spare/service parts supply chain networks follow a hub and spoke distribution model with multiple customer sourcing lanes and multiple sources of vendor supply. Overall, the number of echelons for such supply chain networks tends not to exceed more than three or four. The complexity of spare/service parts supply chain networks comes from the large number of materials flowing from the multiple sources of vendor supply and ensuring the material flow distribution meets customer service levels while balancing inventory working capital requirements and material obsolescence.
SAP: Chart Example of a Spare Parts Supply Chain Network.
Like other multi-echelon supply chain networks, spare/service parts supply chain networks are subject to internal and external uncertainties that impar ability to meet customer service levels and inventory management targets, leading to requiring a comprehensive and network-based inventory buffering strategy.
What do we mean by a comprehensive and network-based inventory buffering strategy?
Well, it starts with considering multiple variables impacting inventory buffers in a multi-echelon supply chain network, such as the ones listed below. Then, leverage a solution that consumes such variables as inputs, generating safety buffer recommendations for each node of the network that will meet customer service levels while optimizing inventory investments.
- Customer and internal service levels
- Customer demand and variability
- Cost of holding inventory
- Lead times and lead time variabilities for both internal and vendor distributions
- Lot sizes for both internal and vendor distributions
For this, SAP Extended Service Parts Planning, SAP eSPP for short, offers the option to plan inventory following a multi-echelon inventory optimization strategy, including:
- Reorder point (ROP) calculation as time series in addition to multi-echelon safety stock calculation
- Add economic order quantity (EOQ) calculation in dependency of multi-echelon safety stock
- Period of Demand (POD) or EOQ Period calculation
- Explanatory key figures of safety stock:
- Safety Stock Demand Variability share: Driven by forecast error coefficient of variation and demand forecast inputs
- Safety Stock Service Variability share: Driven by internal service level optimization
SAP eSPP: Enabling multi-echelon inventory optimization and view of results
Do you want to learn more on how multi-echelon inventory optimization works for spare/service parts planning?
We, at Westernacher Consulting, have delivered more than 18 transformation initiatives in spare/service parts planning over the span of more than 15 years.
With SAP eSPP, Westernacher Consulting can help you achieving transformation benefits to your supply chain:
- Reduce stockholding costs across the entire planning network while keeping a high customer-service level
- Optimize safety stocks across the network while maintaining the same customer-service level
- Enhance usability and validation of planning results
