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Volume 30, Issue 3

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Why Customer Service professionals are turning to third-party warehouse and delivery companies to help manage cost without compromising service standards.

It is sometimes astonishing how technical improvements in a high-tech product can change the underlying economics of a vendor’s business.

In mainframe computers, for example, engineered improvements in reliability and computing power have also multiplied the cost of certain key components.

Newer designs may replace as many as 15 circuit boards with a single, more integrated assembly worth as much as $50,000. With such price tags, replacement parts inventory has become a major asset management issue for field service managers. Integrated components combine a very high value with a very low failure rate, resulting in a low turnover. Keeping a sufficient number of spares in inventory to meet required service levels in multiple locations may be tantamount to allowing a substantial sum of money to idle on the shelves.

But the stakes in product support are often extremely high—so high in fact, that nothing less than near perfection is acceptable for many customers. With that goal firmly in mind, service professionals like today’s high-tech equipment vendors must manage spare parts inventories with one eye on the competition.


“Service is becoming the primary differentiating factor among vendors of information systems,” says Sharon Steward, manager of logistics support at Unisys Corporation’s Division of Customer Services and Support.

“Unisys began using a customized third-party warehouse and distribution system in May 1989 to help manage replacements for key components of its 2200 Series of mainframe computer systems,” she says. Presently, the company uses of 20 stocking locations around the country in its customer support program, including 18 third-party warehouses and two company-owned locations.

“We can more quickly deploy sets of spares, and we can get by with fewer of them,” Steward explains, adding that with a year’s experience using third-party facilities behind it, the company plans to expand the program to include four more stocking locations over the next several months.

Hewlett Packard is currently adding to its third-party warehouse tally, with a second location coming into the loop, according to David Swanson, U.S. and Intercom Logistics Manager. He said his company uses strategically located warehouses to supplement its own network of distribution centers.

So far the program has focused on spare main computer circuit boards, components which have “extremely high value and low failure rates,” he says, adding, “These assemblies tend to be in high-end critical field locations.”
Both Unisys and Hewlett Packard have turned to third party warehousing and delivery in response to the changing economics of providing appropriate customer support for their state-of-the-art mainframes. The old strategy of keeping a redundant supply of spare parts near every installation is no longer acceptable, given the cost of major components. Instead these companies are seeking outside expertise which can efficiently bank a smaller inventory of parts, yet provide an identical level of security for their customers.

With near-perfect the only acceptable service level, however, neither company is eager to emphasize to its customers that it is working at reducing inventory levels. Spare components are like a security blanket, and it is difficult to pull this inventory back without making some people nervous.

“To our customer, service should be invisible,” says Swanson. He notes that Hewlett Packard has been “cautious” about utilizing third party warehousing, “because our reputation is at stake with our key customers.”
Swanson says his company has not sacrificed its high level of service as a result of the move to outside warehousing. “We would not be expanding to the second location if it had.”

Another issue for vendors who place a large portion of their spare parts inventory into the hands of a third party is the potential loss of control. Unisys’ Steward says, “We had to prove ourselves to some of our field engineering people.”

She points out that the CSEs were concerned they would find themselves in embarrassing situations at field installations if the spare parts delivery did not live up to their standards for reliability. Happily, she says her company’s unblemished experience during the past year has buoyed the engineer’s confidence.

The control issue is also addressed through electronic data interface (EDI). Unisys has a 24-hour, 365-day computer link from its customer service facilities to its third-party service which allows the on-line tracking and location of every part in the system. Service calls placed at any time of any day are immediately put through to the appropriate stocking location and the part is dispatched to meet the CSE at the installation.

Swanson notes that with many of Hewlett Packard’s latest components, “The failure rate is so low that 50 percent of spares may never be used.”


Vendors may not like to admit it, but even their best-engineered equipment will experience a small but significant rate of failure. But for companies which support installations that operate 24 hours a day, 365 days a year, such as database servers, communications networks, medical and diagnostic equipment or transportation systems, every hour of delay may mean tens or hundreds of thousands of dollars in lost business for the client.

When this much is at stake, a fast-as-you-can delivery strategy is the only appropriate response. Taken to the ultimate extreme—zero waiting time—such a strategy would require a vendor to store a spare for every replaceable part at each installation site. While this would eliminate delays in spare part delivery, the disadvantages are obvious: it would require a vendor to tie up a fortune in idle inventory, pushing up the prices of its hardware, and slowing down new product introductions.

Obviously, the opposite extreme would be equally hazardous. If a vendor elected to keep only a best-case supply of spare parts at a single location (probably its main distribution facility), it would free up inventory dollars, but at the expense of lengthening delivery times. New installations might be more quickly deployed, but the vendor could also face a crisis if the same part failed in several locations before it could be replenished into inventory.

In between those two admittedly unlikely scenarios lies the elusive quantity known as “ideal response time.” It can vary for different vendors and installations. For a given vendor it may vary with every part. However subtle the judgements, ideal response times can be objectively determined by optimizing as a function of the desired economies, inventory levels, number of stocking locations and transportation alternatives.

Managing all those factors simultaneously is a job for specialists. Normally, each vendor company must either develop this expertise in-house or rely upon its service partners to help them develop it. Large computer companies, in particular, have learned to use premium delivery methods to speed the arrival of crucial replacement parts to the field.

By employing the expertise of a third-party warehousing/rapid delivery service—in essence, an inventory management strategist—response time and inventory levels can usually be simultaneously reduced.


As conventional wisdom would dictate, there is a direct correlation between delivery speed and cost. For example, chartering an aircraft to deliver a single plug-in circuit board can carry a price tag as high as $15,000. If that circuit board will bring a crashed telephone switching facility—whose hourly downtime cost can run well into six figures—back on line, however, the cost can easily be justified, even if just one hour is saved over less expensive transportation.

While the significant hourly cost of computer downtime can justify the price of emergency delivery, most of us would agree that the pricelessness of human life will justify any cost. Physicians regularly call on medical implant manufacturer W.L. Gore & Associates requiring as fast as possible delivery of their products. By using a 24-hour-a-day, 365-day-a-year service, the company is able to meet “99 percent of our deadlines” in extreme emergency situations, according to Gore Associate Sharon Wallace.

In situations such as these, which justify any cost in return for fastest possible delivery, a response “window” of less than four hours is possible between almost any two points in the country. A next-flight-out response raises this average to about 6 hours, at prices significantly lower than chartered air delivery, but still much more expensive than a standard overnight service.

By employing the expertise of a third-party warehousing/rapid delivery service—in essence, an inventory management strategist—response time and inventory levels can usually be simultaneously reduced. The result is dramatic savings, even at the fastest delivery rates. Needless to say, what many companies find most valuable is the resulting increase in customer goodwill.

While savings will vary greatly depending on the individual circumstances of a company, parts warehousing has proved itself the most flexible, cost-effective method of managing inventory that exists today. When decentralized warehousing is used to shorten the distance a replacement part will need to be shipped, the savings on inventory, personnel, and protection from the customer relations damage that a single field service delay can inflict will more than offset the cost of the service.

Baxter Healthcare Corporation’s Scientific Product Division provides on-site field service to the hospitals that purchase their scientific and healthcare products. To meet the around-the-clock needs of the hospitals and medical laboratories, Baxter turned to a third-party warehousing and field-support service. Not only did Baxter avoid the expense of 24 hour-staffing or putting its employees on call, but it was also able to simultaneously reduce its inventory level.

“It would be too costly to use our own system for 24-hour support,” said Rick Follweiler, area manager for technical service for Baxter. Parts warehousing “does a better job” of controlling inventory and making it available when it is needed, he added.

Many vendor companies say they are employing third party warehousing strategies for their latest product lines, rather than trying to reorganize their service systems for established customers.

It can be difficult to pull the excess inventory back without sowing anxiety among long-time customers.

With high reliability now standard for the industry, service professionals must also consider that maintaining excess spare parts inventory may also slow down the pace at which new products can be introduced to the marketplace. As the pace of competition continues to accelerate, the inhibiting effects of excess inventory on new product deployment becomes an important consideration.


When considering a third-party warehousing and transport firm, a detailed cost analysis of the services that will be provided is essential. To ensure that you get the most for your money, however, take the extra time to thoroughly research the company. Before you enter into any agreement, the following questions must be answered to your complete satisfaction:

  • Ask to see the firm’s leases—is there adequate space to accommodate your anticipated needs? Does the lease term at least cover your contract term? Remember, a successful third-party relationship is a long-term relationship; even with the best of firms, it will take some time for them to learn your business. You want a firm that is constantly expanding its network, but not one that will be forced to shift the location of its current warehouses.
  • Can the company provide computer inventory tracking, or, at the very least, detailed information on the movement of your inventory? Decentralized inventory should not mean decentralized control. EDI and logistics planning software are no longer “luxury” services, but should be a part of any third-party warehousing package.
  • Does the company maintain a sufficient number of parts bank locations to most efficiently distribute your inventory? Don’t let anyone talk you into a location that suits them instead of your customers.
  • Does the company have a working relationship with all major air transporters, or is it limited to only a few carriers? Is the service experienced in chartering private transportation, or does it do so “occasionally”? A service unfamiliar with arranging a private charter will waste the time advantage a private plane or helicopter confers.
  • Is a detail-specific disaster program included in the contract? Although most decision-makers tend to discount the possibilities of fire, flood and the like, when a disaster does occur, the resulting loss of business—let alone physical damage to inventory—can be devastating. For example, the 1989 San Francisco Earthquake brought Bay Area traffic to a standstill. Officials at Tandem computer feared the worst, since the company had warehoused a significant parts inventory in the area. Fortunately, its parts warehousing firm had a viable disaster plan and was able to move inventory in bulk to a nearby, but unaffected, facility. The moral of the story: Distributing replacement parts among several locations will limit losses when disaster strikes.
  • What is the labor structure of the company? Is there a contingency plan in case of a strike? Just as with natural disaster, repercussions from labor difficulties can be minimized by decentralizing replacement parts inventory.
  • Most important of all, is the service’s quality assurance superior to your own? This is not the place for managerial ego to enter the decision making process (“But no one’s quality assurance is better than mine!”). The old adage that a chain is only as strong as its weakest link holds true here. You want your parts bank to augment your service program. You don’t want to find yourself apologizing to your customers for its shortcomings.

Swap-Out: Cost-Cutting, Value-Added Service

The past year has seen a new value-added service enter the marketplace. Called non-technical swap-out (NTSO), this program utilizes specially trained couriers to perform simple parts replacement that really doesn’t justify the expense of a customer service engineer.

As we discussed earlier, this is yet another example of a technological advance changing the economics of a vendor’s business. In this case, it is the diagnostic circuits of many of today’s high-tech machines that has made NTSO a feasible method of cutting costs without compromising service.

When a built-in diagnostic program identifies a defective plug-in module, the trained courier can swap it for a new part, often at a cost of only $25 to $50, and return the damaged module for repair.

In contrast, a computer technician might charge $250 to perform the same “swap,” and the transportation of the spare might not even be included.

Obviously, it would be foolhardy to have an improperly trained employee make any repairs on a complex system. Thus, an intensive training program involving both the service provider and the contracting company is mandatory for the success of NTSO.

Couriers who perform this service are trained on a custom basis, and will require additional training to keep abreast of product improvement and new product development. NTSO is not designed to eliminate the role of the field service engineer, but rather to enhance it.

Flexibility within the Service Partnership

Contracting a third-party warehousing and delivery firm is not a decision to be taken lightly, since the greatest benefits will appear only after an initial adjustment period. During this time, the firm should do all it can to learn every aspect of your business.

After this period you should expect it to know your company as well as a business partner would.

The key to a successful third-party relationship is the ability of the service to conform with your company’s individual needs. The best firms place enough value on professionalism, and most of all on your business, to adapt their programs to fit your needs.

The very best go one step beyond; they frequently ask to have their performance evaluated and adjust their procedures accordingly. If need be, they will even custom-design a program to meet your business needs.
Clearly, the difference between a mediocre third-party firm and a team of service professionals can mean the difference between your business’ failure and its success.

Technology has made a tremendous contribution to the way business is conducted today, and a successful third-party relationship—in which the firm knows and can adapt to your business needs—is often the only way to ensure that your service network lives up to the promise of your product.

Hal Rabin is president of The Field Support Bank operated by SonicAir, the nation’s largest same day air courier, headquartered in Scottsdale, Arizona. The Field Support Bank encompasses 34 third-party warehouses in strategic locations throughout the United States, Canada and Europe. SonicAir has just introduced a Non-Technical Swap-Out service.

This article adapted from Vol. 5 #2.