2 Theoretical background

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Spare parts in manufacturing SMEs –

Strategic make-or-buy decisions in spare parts management

by

Jesse-Daan Spinder S3259978

j.a.spinder@student.rug.nl

Master Thesis Supply Chain Management

University of Groningen Faculty of Economics and Business

June 21, 2018

Thesis supervisors MSc Supply Chain Management:

Supervisor: Prof. Dr. R.H. Teunter Co-assessor: Dr. E. Ursavas

Acknowledgement

First of all, I would like to thank my supervisor Prof. Dr. R.H. Teunter in providing feedback and guidance during this process. I would also like to thank my second supervisor Dr. E.

Ursavas. Secondly, I am grateful to the case companies that spend their time and effort providing me with information.

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Abstract

This research explores a new field of strategic spare parts management. In current literature, much research has been conducted with the focus on operational aspects. However, research in relation to spare parts management is limited and revealed the need for more research on spare parts management. This research aims to gather insight on the influence of spare parts characteristics and the product life cycle (PLC) on the strategic make-or-buy decision of spare parts. By conducting a multiple case study, in-depth information was obtained at Dutch manufacturing small and medium sized enterprises (SME). The findings after analysing the data indicate that the PLC does not influence the make-or-buy decision. Differences in spare parts characteristics was found to be related to the make-or-buy decision. Also a clear distinction between small and medium sized SMEs was identified. These findings shaped the foundation in constructing a strategic framework with a set of conditions.

Key words: spare parts management, strategic framework, product life cycle, SMEs, make-or- buy, decision making

Word count: 11.724 excl. references and appendices

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1 Introduction

In today’s world, customer value is becoming the focus of manufacturing companies. This customer value relates to the functional status of products, in which customers expect an assured availability of spare parts during the entire product life cycle (PLC) (Holström, Partanen, Tuomi

& Walter, 2009; Khajavi, Partanen & Holström, 2013). However, due to spare parts complexity issues and characteristics, such as demand uncertainty, number and variety of items, and item value (Molenaers, Baets, Pintelon & Waeyenbergh, 2012; Kleber, Zanoni & Zavanella, 2011), the managerial attention of spare parts is considered to be important, yet a difficult aspect of inventory management. The trade-off between low costs and high availability has been analysed in many spare parts inventory and forecasting models on an operational level.

Managing spare parts has obtained increasing attention of researchers in the field of inventory management. Most researches relating to spare parts have focused on the operational aspects based on specific case studies. Prior research focused on one business case in order to improve and adapt existing spare parts models for one or multiple stock keeping units (SKU), customers, or a specific PLC stage (Wagner, Jönke & Eisingerich, 2012). Authors such as Pascual et al.

(2017); Zhijie, Qian, Shenyang and Chen (2016); and Constantino, Gravio, Patriarca & Petrella (2017), and many more try to improve existing spare parts inventory models and their related economic trade-offs in order increase service levels and decrease costs.

Related to spare parts and strategic decision making, only few researches can be found, such as Huiskonen (2001); Legnani, Cavalieri & Ierace (2009); Wagner et al., (2012); and Hu, Boylan, Chen & Labib (2018). The illustrative case context of Huiskonen (2001) relates to the user- supplier interface for spare parts logistics management in the supply chain setting. Based on four elements (strategy/policies/processes, network structure, supply chain relations, and coordination/control), Huiskonen (2001) discussed both views of the buyer and supplier of spare parts. In the end, the aligned views for each element and the spare parts characteristics were used to address the strategic need for different logistics policies and strategies. Wagner et al. (2012) analysed 10 manufacturing firms (Small and Medium sized Enterprises, and large enterprises) and divided them in top- and bottom-performers. Differences between the two groups have been analysed to find which components are needed to create a successful spare parts logistics strategy. The most recent research of Hu et al. (2018) focused on designing a spare parts management system, by reviewing 222 spare parts management studies. The

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presented strategic framework is based on three steps, namely defining the spare parts objectives, the main management tasks for each lifecycle process, and operational techniques (e.g. classification and forecasting) facilitating the management of spare parts.

As described above, research related to strategic spare parts management is limited (Wagner &

Lindemann, 2008). As Hu et al. (2018) mention, at this moment there is a need for a more comprehensive critical reviews on spare parts management, and spare parts logistics strategy development. To my knowledge, only the research of Wagner et al. (2012) relates to a strategic strategy framework based on a case study of multiple supplying spare parts companies.

Furthermore, since after sales of spare parts is one of the major cost factors in the PLC (Hedberg, Hartman, Rosche & Fischer, 2017; Wagner et al., 2012) spare parts have to be managed accordingly during the stages of the PLC (Inderfurth & Mukherjee, 2007).

The aim of this research is to provide, like Wagner et al. (2012), a general overview of the strategic considerations in manufacturing companies. However, this research differentiates itself from Wagner et al. (2012) by focusing on the PLC stages, and specifically on Small and Medium sized Enterprises (SME). By focusing on manufacturing SMEs, this research provides insight into how such firms deal with strategic spare parts decisions during the PLC stages. The reason for choosing manufacturing SMEs relates to the fact that these type of companies are often described as vulnerable (Vaaland & Heide, 2007), as the market environment of SMEs is described as harsh and constantly changing (Cant, Wiid & Kallier 2015). Additionally, the dynamic capabilities to adapt to changes, such as spare part demand, seems to be relatively difficult for SMEs. This is due to the limited set of human, financial, and capital resources most SMEs have to deal with (Gomes, Moshkovich & Torres, 2010). Therefore, it might be more difficult for SMEs to deal with all the uncertainties related to manufacturing and supplying spare parts. However, research of Wagner et al. (2012) exposed that four out of five SMEs were labelled as bottom-performers. These companies did either not have a spare parts logistics strategy at all, or was not aligned with the spare parts characteristics. Since customer value has to be satisfied during the entire PLC, SMEs have to define their spare parts strategy as well.

The importance of the after sales service (e.g. spare parts supply) during the entire PLC is explained by Legnani et al. (2009), as the profit margins of the after sales are mostly higher than generated from the original product. Thus, it can be stated that the strategic considerations related to the spare parts is relatively important for SMEs.

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In this research, considerations relating to the strategic decision-making in the PLC concerns whether either the spare parts are made and delivered by the SME or sourced and delivered by a third party manufacturer of spare parts, in a business-to-business environment. In order to provide this overview, a framework with strategic spare parts decisions for different stages in the PLC will be constructed in this research. This research contributes by providing a general overview of when and what strategic decisions have to be made in each stage of the PLC.

Furthermore, this research explores a new field of research by addressing a framework for SMEs on a broad review of spare parts management that has not been done in the past. By providing an overview of this topic of interest, SMEs will be able to ensure spare parts availability in the PLC stages. The main research question is:

Do the spare parts characteristics and product life cycle stages influence the strategic spare parts make-or-buy decisions within Dutch manufacturing SMEs?

This paper is organized as follows: chapter 2 presents the literature framework related to the topic of this paper. Followed by chapter 3, including the applied methodology of collecting and analysing the data. Thereafter, chapter 4 discusses the results, based on the data that has been analysed. Finally, chapter 5 provides an overview of the discussion and conclusion related to the research question.

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2 Theoretical background

This chapter reviews the existing literature. At first an overview of spare parts management is provided, including the general types of spare parts and their complexity characteristics.

Subsequently, strategic make-or-buy decisions regarding the outsourcing or in-house production of spare parts are reviewed, followed by the different PLC stages in relation to spare parts. Finally, a conceptual model is provided in order to provide a summarized overview of the relations between the variables.

2.1 Spare parts

From the perspective of an equipment owner, spare parts are used to: “reduce the consequences of equipment downtime, playing an important role in achieving the desired equipment availability at a minimum economic cost.” (Hu et al., 2018: 395). Hence, they expect a good spare parts service performance from the original equipment manufacturer (OEM). This highlights the importance of a well defined spare parts logistics strategy for a manufacturer (Wagner et al., 2012). This spare parts logistics strategy should be aligned with the strategy, policies, processes and structure of the organization, as well as the kind of coordination, control and relationships with the customers (Huiskonen, 2001). A spare parts logistics strategy is defined by Wagner et al. (2012) as: “the market-orientated planning, design, realization, and control of the spare parts supply and distribution, along with associated information flows within a firm and between the firm and its network partners.” (Wagner et al., 2012: 69).

2.1.1 Spare parts types and classification

Effective management of spare parts requires the right allocation of workforce, equipment and SKUs (Khajavi et al., 2013). With the appropriate classification technique, groups of SKUs can be managed based on their ranked value. A well-know model in classifying SKUs is done with the traditional single criterion ABC classification (Hu, 2018). This model is used to split SKUs in A, B, and C groups based on their annual demand multiplied by the costs per unit. The inventory strategy for each of these groups will be managed accordingly (Teunter, Babai and Syntetos, 2010). However, classifying spare parts based on their unit price and demand volume is not recommended, since spare parts entail many other objective and subjective criteria (e.g.

spare part value). Resolving this problem has been done by creating a multiple criterion ABC classification, providing a certain service level for e.g. spare parts (Teunter et al., 2010). The

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adapted cost criterion to rank SKUs increases with the shortage cost and demand rate, decreases with the inventory holding cost and order quantity.

Besides ranking SKUs objectively in different classes, Huiskonen (2001) and Wagner et al.

(2012) mentioned that spare parts can to be controlled according to four control characteristics.

These control characteristics include: criticality, specificity, demand pattern and value of parts.

Assessing spare parts with these characteristics is based on both objective and subjective criteria, which can be used to separate spare parts in different groups to make inventory, forecasting or production decisions about.

Criticality

Huiskonen (2001) clearly mentions that criticality is the most important control characteristic of spare parts, as it defines how important and valuable a spare part relates to the production process. Critical spare parts are directly related to the usage of the primary product. Therefore, failure of a critical part does create an immediate breakdown or malfunction. Unlike critical parts, failure of a non-critical part does not directly harm the functionality of the primary product (Wagner et al., 2012).

Specificity

The specificity of a spare parts can be either a standard or a user-specific part. Standard parts are considered to have a low lead time due to its high availability. For user-specific parts the opposite applies. Suppliers do not keep these parts on stock, require extensive and detailed communication before being produced, and have long lead times. Before considering producing these parts, it is reasonable to assess whether the part can be repaired or not.

Demand pattern

Even while spare parts demand is in general relatively uncertain, demand patterns can be distinguished and categorize spare parts in slow and fast moving goods. Managing each of these demand types is difficult. As low demand relates to the majority of the parts, it is hard to define which part should be on stock. Also Wagner et al. (2012) mention the distinction between wear or failure spare parts. As the wear spare parts are based on maintenance intervals and user environment conditions, the usage patterns should be known over time (Hu et al., 2018; Wagner et al., 2012). However, in case of failure spare parts, demand is based on unscheduled product failures and will be much more difficult to predict.

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Value of parts

High value parts have a greater impact on the inventory assets and will therefore be held to a minimum by all partners in the supply chain. High value parts include for example user-specific parts, which encounter in general longer lead-times. Most standard parts can be classified as low value parts. These parts can be easily held on stock without having a significant impact on the inventory assets over a longer period of time (Wagner et al., 2012).

2.1.2 Spare parts uncertainty characteristics

In order to manage spare parts, the important uncertainty factors must be addressed. As Kurata and Nam (2013) mention: “Uncertainty makes supply chain management difficult, and managing uncertainty is among the most critical supply chain challenges.” (Kurata & Nam, 2013: 268). Therefore, understanding the general characteristics that create these uncertainties is an important factor in managing spare parts. Different authors (Hu et al., 2018; Khajavi et al., 2013; Kurata & Nam, 2013; Huiskonen, 2001; Wagner et al., 2012; Kleber et al., 2011) write about the uncertainty characteristics of spare parts, which have been clustered into three groups.

Demand uncertainty

First of all, customer demand of spare parts is hard to predict in the supply chain (Huiskonen, 2001). Uncertain demand especially holds for new introduced products, due to the lack of failure and maintenance data (Khajavi et al., 2013). Additionally, even customers often do not know their exact needs of spare parts (Kurata & Nam, 2013). This leads to strongly fluctuating demand, often long intervals with zero demand and occasional periods with positive demand (Hu et al., 2018). Due to this uncertain and dynamic fluctuations in demand, forecasting inventory and production of spare parts is difficult (Kleber et al., 2011).

Variety of spare parts

Secondly, since products contain many different part types, a wide variety of spare parts have to be potentially delivered (Hu et al., 2018). Furthermore, as a company sells a wider variety of products and innovates products over time, more spare parts have to be made to support customer service (Kleber et al., 2011). As this increases the amount of SKUs to be held on inventory significantly (Khajavi et al., 2013), spare parts require strict control in order to maintain manageable.

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Obsolete inventory

The third uncertainty characteristic relates to the obsolescence inventory of spare parts. Spare parts that are rarely needed, should not be held on inventory or inventory should at least be minimized to control costs (Hu et al., 2018). The inventory holding costs for these parts outweigh the costs of delivery with a certain delay (Kleber et al., 2011). While on the other hand, under-stocking may lead to unsatisfied customers losing their trust and loyalty, and may even cause the loss of customers (Wagner & Lindemann, 2008). However, as spare parts are characterized by high demand uncertainty and a wide variety, it is difficult to determine an appropriate inventory level for each SKU.

2.2 Strategic make-or-buy decisions

Due to economical globalization, most companies face competition from around the world. This has made companies aware of controlling the product and service cost aspects to stay competitive (Jain & Hazra, 2015). As a part of the supply chain strategy, companies have to face the trade-off whether to keep all functions in-house or to outsource some of them (Wagner

& Lindemann, 2008). So recently, make-or-buy decisions have become of strategic importance for companies operating both locally as globally (Nordigården et al., 2014).

Lately many companies have decided to outsource functions in order to improve the core competences of a company. According to Chung and Hsieh (2015), outsourcing can help to:

“allow a company to subcontract non-core, auxiliary functions or operations to external specialized firms through the signing of business contracts to use these firms’ expertise and strengths to improve the overall firm efficiency and competence.” (Chung & Hsieh, 2015: 1).

This means that companies are buying products and services from third parties, which they used to make and deliver themselves first. These outsourced functions can for instance include production, IT and customer services such as call centres. By focusing on the core competences and deciding to outsource functions, companies expected to decrease costs, increase quality and improve the time to market (Zhu, 2016). On the other hand, outsourcing can also be driven by uncertainties. Companies facing supply and demand uncertainties, may have difficulties in fulfilling demand and therefore chose to opt for outsourcing (Jain & Hazra, 2015). Bakhtiatri and Breunig (2014) mention multiple researches that have found a positive relation between the intensity of outsourcing activities and variability in demand fluctuations.

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Since spare parts are characterized by high demand uncertainty, it seems desirable to outsource the production of spare parts. However, companies could also choose a hybrid approach, in which some of the spare parts are product in-house and other spare parts are sourced (Jain &

Hazra, 2015). Nevertheless, companies that consider outsourcing face an increasing rate of business failures or interruptions due to the increasing supply chain complexity. As the supply chain complexity increases, it will be more challenging to control all organizational aspects (Kotabe & Mudambi, 2009). Since outsourcing also increases the number of suppliers, it will be more complex to manage them, by for example assessing the supplier performance to keep quality standards on a certain level (Choi & Krause, 2006: Nordigården et al., 2014). Even though, outsourcing of spare parts manufacturing has not been researched. Therefore, previous research provides limited information about the make-or-buy decisions of spare parts (Wagner

& Lindemann, 2008).

2.3 Product life cycle in spare parts

A life-cycle concerns the management of a new product, company or entire industry by a framework that relates to the growth and development of its life (Hayes & Steelwright, 1997).

This framework of the PLC consists of four stages, namely introduction growth, maturity and decline (Figure 2.1). Each of these stages has its own specific product decisions and marketing tools (Cant et al., 2015). The life span of the PLC begins with the introduction of the product to the market, when customers are still unfamiliar with the product this is only bought by early adapters. As the familiarity of the product increases, the introduction is followed by a rapid growth of sales. Thereafter, sales run into a period of stability in the maturity stage. Finally, after a couple of years the product is old and might be replaced by either an update or a new version. This creates the final stage of decline, in which sales are going down and the product vanishes from the market.

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Figure 2.1: Different stages of the product life cycle

Up till now, the PLC has been researched in many different organizational contexts (Hayes &

Steelwright, 1997). However, as mentioned earlier by Wagner et al. (2012), research about the PLC stages in the relation to spare parts is limited. Nevertheless, as the PLC has a direct impact on the strategic decisions, such as whether to buy-or-make spare parts, it is considered important (Cheshmberah, Makui, Seyedhoseini & Yousefi, 2011). Also providing tangible and intangible after sales services, will help on creating a long-lasting and stable customer relationship throughout the whole PLC (Legnani et al., 2009). As Armistead and Clark (1991) mention in their paper, the strategy linked to the after sales and spare parts delivery is influenced by the stage of PLC. However, due to the characteristics of spare parts, such as demand uncertainty and amount of SKUs, it is difficult to define a specific strategy for each of the PLC stages for all spare parts. Even though, there has to be an overall spare parts logistics strategy throughout the PLC stages to ensure supply of spare parts (Wagner et al., 2012: Cant et al., 2015).

As a manufacturer of spare parts, it is necessary to understand the equipment life-cycle process used by buying companies of spare parts (Hu et al., 2018). The equipment life-cycle consist of three stages, namely the procurement, normal operation, and end-of-life stage. Within the procurement stage, spare parts are often purchased simultaneously with the primary product. In the normal operation stage, spare parts are procured as parts of preventive or corrective maintenance. Therefore, these spare parts are bought based on inventory and forecasting models that have been designed after the initial purchase of the product. Finally, the end-of-life stage

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is characterized by a final order of the spare parts to cover maintenance for a certain time frame (Hu et al., 2018).

Like Hu et al. (2018), Wagner et al. (2012) describe the PLC for spare parts slightly different.

They separate the PLC for wear and failure parts. However, as demand of failure parts is unpredictable, only for wear parts a certain life cycle pattern can be distinguished. Figure 2.2 shows that with the production of the primary product, sales as well as the demand data of spare parts start to increase. At the end of production and start of utilization, spare parts will reach their highest sales level. In the utilization sales decline and spare parts reach their end of service stage, meaning that the legal obligation of supply has been met. Thereafter, in most cases the remaining spare parts will be sold till the end of life.

Figure 2.2: Product life cycle of spare parts

2.4 Conceptual model

As mentioned before, research about spare parts on a strategic level is very limited. This makes it rather difficult to find theories about this topic in relation to specific variables, such as the PLC stages and make-or-buy decisions. Even though, there is a need to explore strategic decision making in relation to spare parts management. In order to explore this topic of interest, two additional multiple sub-questions have been created. Using these sub-questions, it is tried to provide guidance and structure in this research.

Since strategic decision making related to spare parts is still relatively unknown (Wagner &

Lindemann, 2008), the first step in this research is to define how manufacturing SMEs come to a logical and structured reason in deciding to make-or-buy spare parts. As the literature related

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to make-or-buy decisions suggests, strategic outsourcing of spare parts production might be of value due to the related uncertainties (Jain & Hazra, 2015). Therefore, it can be expected that the general spare parts complexity characteristics have a direct influence on this strategic make- or-buy decision. By expecting this relation between these two variables, the following sub- question has been developed to confirm this expectation:

Sub-question 1:

Do spare parts complexity characteristics affect the make-or-buy decision?

Amongst other variables, the PLC stages of a product determines the spare parts logistics strategy (Huiskonen, 2001; Wagner et al, 2012; Hu et al, 2018). As this strategy defines whether to make-or-buy spare parts, it seems logical that the PLC stages influence the make-or-buy decision. Additionally, the PLC stage can be seen as a specific characteristic for certain spare parts related to a primary product. For this reason, the PLC might function as a moderator, influencing the decision on producing spare parts in-house or to outsource to a third party.

Therefore, based on this reasoning the following sub-question has been defined:

Sub-question 2:

What moderating influence do the spare parts product life cycle stages have on the make-or- buy decision of spare parts?

Finally, by combining all the variables and their relations, the following conceptual model has been created (Figure 2.3). This model shows that the general spare parts characteristics have a direct influence on the make-or-buy decision of the SME. Furthermore, as the PLC stages influence the spare parts logistics strategy (Wagner et al., 2012) and function as a specific spare part characteristic as well, it is expected that it will also be a factor in the make-or-buy decision.

As the PLC is one of multiple influencing factors, it will not directly influence the make-or-buy decision, but function as a moderating factor.

Figure 2.3: Conceptual model

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3 Methodology

This chapter provides insight in the used methodology of this research. At first the research design is presented, followed by the research setting. Thereafter, the case selection and data collection are explained. Finally, the to answer the research questions, the data analysis is discussed.

3.1 Research design

In order to answer the sub-questions and finally the main question of this research, a case study based research design has been constructed. At this point, research about strategic decisions in spare parts is still very limited and in an early exploratory stage (Hu et al., 2018). Meaning that relations between variables are unknown and the phenomenon is still not fully understood. To provide a great-depth understanding of this phenomenon, an inductive in-depth case study with data collection via a small amount of selected companies will suit this research (Handfield &

Melnyk, 1998; Voss, Tsikriktsis & Frohlich, 2002). Furthermore, using multiple sources of evidence creates a holistic view of the phenomenon in its natural setting (Noor, 2008).

Subsequently, this will help in understanding the nature and complexity of the phenomenon (Karlsson, 2009). The clear structure of the execution of a case study described by Noor (2008) in combination with the complementary information of Karlsson (2009) will be used in this research.

3.2 Research setting

By using a case study based research, this study aims to find the reasons why a certain make- or-buy decisions is made in a Dutch manufacturing SME setting. As adapting to the changing environment is essential for SMEs to survive, SMEs need to constantly improve their knowledge-based resources. Using spare parts in Dutch manufacturing SME as the unit of analysis, the outcomes and new insights of this research will help SMEs to supplement to their knowledge-based resource to improve their competitive edge (Saad, Kumar & Bradford, 2017).

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3.3 Case selection

For this case study research, manufacturing SMEs have been select based on certain criteria.

These criteria are emerged from the variables of the main research question, and function as an initial assessment for being included in this research. The included criteria are based on the spare parts characteristics, the PLC stages, and the SME size. As recommended by Karlsson (2009) a minimum of three cases should be selected to provide sufficient evidence in answering a theory building construct. In order to meet this demand and enhance the external validity using the replication logic, this research includes four companies (Table 3.1). However, each company is interviewed about two spare parts relating to the primary product, namely a wear and failure spare part. It is chosen to discuss both spare parts types for each PLC stage to provide a holistic view of the production decisions made. The decisions made in each stage will help to build a generic spare parts strategy framework.

As this research follows a theoretical and a literal replication logic, it is assumed that cases produce subsequently contrary and similar results (Karlsson, 2009). Therefore, in this research is expected that the certain variables will lead to a different kind of make-or-buy decision, while other certain variables will generate the same make-or-buy decision.

Relating to the theoretical logic, it is expected to find contrary results on the make-or-buy decision of spare parts. By comparing company A with company C, and company B with company D, it is projected that different decisions will be made. These contrary decisions are caused by the spare part characteristics and the size of the SME, even while spare parts are in the same PLC stage.

Using the literal replication logic, it is expected to find similar results for companies with the same spare spare part characteristics and SME size, but are situated in a different PLC stage.

Literal replication is predicted to be found by selecting and comparing company A with company B, and company C with company D.

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Case selection variables

Cases Spare part

characteristic

Product life cycle

stage of spare parts SME size

Company A

Known demand/

wear spare part

Production stage Small sized 10-50 employees Unknown demand/

failure spare part

Company B

Known demand/

wear spare part

Utilization stage Small sized 10-50 employees Unknown demand/

failure spare part

Company C

Known demand/

wear spare part

Production stage Medium sized 50-300 employees Unknown demand/

failure spare part

Company D

Known demand/

wear spare part

Utilization stage Medium sized 50-300 employees Unknown demand/

failure spare part

Table 3.1: Case selection

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3.4 Data collection

Multiple Dutch SMEs have been contacted via e-mail or telephone that suited the characteristics as described in the the case selection. After contact was made and a willing interviewee was found, the duration, anonymity and goal of the interview was communicated. As this research focuses on strategic decisions in manufacturing SMEs, an appointment was made with either an operational-, spare parts (after-sales)-, sales-manager or CEO. Data has been collected using in-depth semi-structured with open and closed questions. A semi-structured interview has been chosen, since it leaves space for follow-up question based on the input of the interviewee. The interviews are conducted with one interviewer asking the questions and one interviewer taking notes and recording the interview. Each interview has an agreed duration of 30-60 minutes and has the permission for being recorded. Before conducting the interview, an interview protocol has been established (Appendix A). This interview protocol includes all the relevant questions relating to the variables of this research. In order to create reliable interview results, a pilot interview has been conducted at first. Input and feedback from this interview is used to improve the completeness and questions in the interview protocol. After conducting the other interviews as well, the interviews can be analysed. An overview of all four interviewed companies and their general information, based on rounded and estimated numbers, is provided in Table 3.2 below. Most of the information is based on rounded and estimated numbers (e.g. employees, total revenue) provided by the interviewee of the company.

Company Role interviewee Main business Number of employees

Total

revenue Duration A Manager purchase

and logistics CNC lathes 40 16 million 40 minutes B Sales manager Pallet handling

machines 20 4 million 25 minutes

C Team coordinator purchasing

Mass flow and

pressure meters 310 49 million 35 minutes

D Aftersales

manager

Ventilation, hoist and housing drive

systems

120 67 million 40 minutes

Table 3.2: General company information

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3.5 Operationalization of variables

As the variables of the conceptual model are the main body of this research, they have to be operationalized. By operationalizing the variables, the variables require a clear definition before being translated into questions for the interviews. Table 3.3 provides an overview of the three variables of this research, their definitions as used in this research, and an example question from the interview guide relating to this variable.

Variable Definition Interview question

Spare part characteristics

“control characteristics include; criticality, specificity, demand pattern

and value of parts.”

(Huiskonen, 2001 & Wagner et al., 2012)

Is it possible to create a certain kind of demand pattern of these spare parts?

And how?

Make-or-buy decision

“companies have to face the trade-off whether to keep all

functions in-house or to outsource some of them”

(Wagner & Lindemann, 2008)

Which factors play a part in deciding to produce this part

in-house/elsewhere?

Product life cycle

“A life-cycle concerns the management of a new product, company or entire industry by a framework that

relates to the growth and development of its life”

(Hayes & Steelwright, 1997)

How does the PLC stage of the primary product reflect demand of the spare parts?

Table 3.3: Operationalized variables

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3.6 Data analysis

After the interviews have been conducted, the interviews are transcribed within 24 hours, using the recorded conversation of the interviews. Both activities of recording and transcribing the interview will help to increase the reliability in analysing the data.

After transcribing the interviews, the data will be coded using the qualitative data analyse and research software Atlas.ti. This open coding technique is used to label and group certain quotes based on pre-defined codes. Coding the interviews will narrow the interviews in order to analyse only the most interesting and essential parts that are relevant to the variables of this research.

Based on these pre-defined codes, a code tree (Appendix B) has been developed. At first, the data from the interviews is labelled to the first order codes, which are derived from the theoretical framework of this research. Secondly, the first order codes can be linked to second order codes. These second order codes are used to discover certain patterns, characteristics and explanations within each case. Finally, the second order codes are linked to the third order codes. The third order codes are used in the cross-case analysis to seek for similarities and differences between the cases.

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4 Results

This chapter of the results is based on the outcomes of coding the case interviews. For each of the four cases the results are being discussed with interview quotes. The discussed topics follow the same content as the main issues discussed in the theoretical background. Namely, the spare parts characteristics and classification, the make-or-buy decision, and the influence of the PLC stages. The case analyses will be the foundation to find certain patterns relating to the strategic decisions between the cases. Finally, the discovered patterns are used to come up with a general overview.

4.1 Company A

Company A is a small manufacturing SME which designs and assembles CNC machines. About five years ago this company nearly faced bankruptcy, and from then on the company has been placed under an umbrella organization. In that period, the organization started to grow again and faced opportunities to expand to Poland, Belgium and the Czech Republic.

The purchasing and logistics manager was interviewed at company A. This manager has grown in the past 16 years from mechanic to manager within this company. Currently, he has four year experience his latest function. During the interview a lathe CNC machine was the primary product of the discussion. The wear and failure spare parts relating to this product are the V- belt and the shaft coupling.

4.1.1 Spare part characteristics

Demand of both spare parts are described as completely different. As checking the V-belt is part of regular maintenance, it is replaced in certain time intervals. While on the other hand the shaft coupling does seldom fails, and when it fails it is most likely caused by improper use of the operator. However as mentioned by the interviewee, overall demand of spare parts is low:

“as our machines don’t require a lot of maintenance and do not often fail, we don’t have to deliver that many spare parts. Except for the regular parts that have to be replaced during each service.”

The low demand of spare parts is also the reason why this company has no dedicated workforce on delivering spare parts. Even though, the relative value of the parts is rather high and require

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a fast supply of spare parts. In case of the V-belt, the relatively value is not that high when it is wearing over time. However, a failing shaft coupling can have some serious consequences for the machine and needs to be replaced immediately. As the interviewee mentioned:

“The V-belt can be old, but this does not imply that the machine wouldn’t be able to operate.

However, if the V-belt is broken it has to be replaced immediately, otherwise the machine would not function at all. In case something is wrong with the shaft coupling, it has to be replaced immediately.”

Furthermore, this company does not use any data of spare parts demand to develop a certain demand pattern. Even though, it was mentioned that demand is the main factor of uncertainty for them and for their customers. So demand information is not used in determining the inventory. Defining the amount of inventory of the wear parts is based on instinctive and experience. If a failure part is needed, it is a matter of luck whether this part is on inventory and not needed in the regular manufacturing process to be shipped to the customer. While if this part is not in inventory, it has to be ordered at the manufacturer.

“…we know on average how many parts we need a year. And keep those parts we have to deliver frequently on inventory. In case of the V-belts, we have a lot on stock since we know that these parts have to be replaced once in a while.”

The way this company deals with their spare parts demand information and inventory can also be related to their spare parts policy. They do not have an actual strategy, but a policy including a set of rules which is based on experience of the workforce. In order to adhere to this policy, the company has clear agreements with their suppliers to guarantee a fast supply of spare parts.

“…these days we have a pro-active spare parts policy. We keep track of the date of purchase of our machines, and each year we send customers an email relating to a service check.”

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4.1.2 Product life cycle

Relating to the PLC of the primary product, this company stands out a bit. The interviewee mentioned the following:

“for many of our machines, sales were in the maturity phase. But as sales started to grow, it looks like we are in the growth phase of the product life cycle again. This is a kind of strange, but it is all related with the history of our company over the last five years.”

So as the financial situation of the organization stabilized and were placed under a larger umbrella organization, sales started to rise for the second time in its product life cycle.

Regarding the sales of spare parts, this company sees a clear trend in increasing sales of spare parts as the primary product is in its growth stage.

“I can say that business has increased enormously for us. This can be seen in our sales of machines and spare parts. So I would say yes, as our sales increased our sales of spare parts has also increased over the last five years. And when I talk about the sales of parts, I mean the wear parts that we send on a regular base to our customers.”

4.1.3 Make-or-buy decision

The vast majority of all parts and components is outsourced by this company. Their reason for outsourcing their production is twofold. First of all, outsourcing production of spare parts is a financial matter, as company A is not big enough to produce parts at their own site. Secondly, they are not a manufacturer of parts but a manufacturer of CNC machines. Therefore, their current way of buying spare parts is something they have always done, and will continue to do so in the future. As mentioned by the interviewee:

“We are simply not big enough and don’t have the finance to support the production at our own site. We have come from a deep depression, so we are still busy recovering, even while its going pretty well now. …we are professionals in designing and assembling the machines. Not in producing all of those parts…”

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4.2 Company B

Company B is almost a micro manufacturing SME with less than 20 employees. This small SME is responsible for designing and assembling (semi-) automatic pallet handling machines.

For example, machines to cut parts of pallets, or machines to sort and stack them on each other.

At company B, the sales manager, with an experience of nine years, has been interviewed and was accompanied with the CEO who has founded the company. The discussed primary product, was the so-called palletsaw. This semi-automatic sawing machine is one of their oldest products (15> years) that is still in their assortment these days. The discussed spare parts for this product are the blade of the band-saw as the wear part, and for the failure part the main control unit (e.g.

programmable logic controller).

As for the wear parts it is possible to identify a certain demand pattern. Depending on the intensity of the usage of the machine, it is relatively predictable how many saw blades are needed for each customer on a yearly basis. Demand of the failure part is unpredictable, as it is unlikely to fail.

“For customers that use the machine intensively in their process, we know quite exactly how many blades they need a year. For the PLC (programmable logic controller), we don’t know it. It is not usual for this item to break down.”

With less than 20 employees it is rather obvious that they do not have a dedicated workforce for handling spare parts. Furthermore, as the parts are standardized, there is no need on reworking the spare past based on customer specifications. However, even while both the customer and company B have the saw blades on inventory, the relative value is high. Since sawing without a bade would not be possible. For the control unit, this part has to be send immediately to prevent long downtime of the machine. Therefore, the relative value for the customer is high. This is also the reason for company B to have one or two of these items on inventory, providing customers a fast delivery of these parts in the event of a failure.

“Since the saw has to be replaced regular, customers have multiple of them on stock. When needed, they order multiple of these items, which can be directly sent to them from our location.

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In case of the PLC (programmable logic controller), we have one or two of them in our stock, besides the ones we need in our production process.”

During the interview it was mentioned that they strive for a fast supply of spare parts from their supplier, but they could not tell how they guaranteed this fast supply. Also, company B defines their inventory levels based on experience. They do not apply a spare parts strategy or policy (i.e. set of rules) at all in handling their spare parts since:

“Our focus is on designing and manufacturing machines for our customers. Therefore, a spare parts strategy is not related to our company.”

The primary product of company B is almost at its final stage of the PLC. The product is relatively old, as its first model dates from 2000. During its life cycle, the machine has had multiple updates in the past to keep the machine up-to-date, even though it will be replaced in the upcoming years.

“…when we will introduce our new fully automatic sawing machine within the next couple of years, therefore we expect that sales of spare parts will actually decline for this machine.”

Furthermore, at company B there seems not to be a link between an increase in spare parts demand as the primary product ages over time, as the interviewee mentioned:

“Currently, it does not reflect the demand of spare parts. The blades having a relatively constant demand, based on the usage. And fortunate, failures of PLCs (programmable logic controller) are negligible. So we don’t se an increase in demand, as the product becomes older.”

Manufacturing of spare parts is outsourced by company B as their business is producing machines and not the spare parts. So by outsourcing production of the spare parts, company B can maintain their focus on their core business.

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“by focusing on design and assembly, means that we can stay as small and personal as we are.

If we could produce everything our self, the focus of our company would fade away.”

Furthermore, outsourcing production of spare parts makes handling spare parts more efficient according to the interviewee, as they do not have to deal with production uncertainties relating to spare parts. The following was mentioned:

“The only thing we have to do is order the part at a supplier or deliver the parts our self from the products we have on stock.”

4.3 Company C

Company C is a rather large SMEs, with two locations in Germany and the Netherlands, and a worldwide distribution network. With more than 35 years of experience, this company has succeeded to grow towards becoming a worldwide market leader. The main business of company C is the development and manufacturing of thermal and coriolis instruments to measure and regulate gas and fluid throughput based on customer specifications.

During the interview, the tactical purchaser with seven years of experience at company C was interviewed. The interview related to a standard thermal mass flowmeter as this product has the biggest share in their sales. Related to this product, the sensor in the high pressure environment of the product is discussed as the wear part, and the digital readout instrument was the discussed failure part.

Due to the large size of company C, they have the advantage of receiving a substantial quantity of sales data from all of their sales points around the world. By using this data, company C is able to establish a certain sales pattern of their standard spare parts and products.

“we keep track of our spare parts sales at all of our points of sale worldwide. Therefore, based on historical data we can indicate the demand pattern for all our spare parts and our products.”

About 200 employees work at the production department, producing both standard as customized spare parts and products. Combining all hours that are used to handle spare parts

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only, it would result in approximately 10 full-time employees. This includes employees that produce the spare parts, but also the employees that order spare parts, since not all spare parts are produced by company C. To manage the operation of ordering, producing, and sending spare parts in their daily operation, the company has recently adapted the lean principles as their spare parts strategy.

“we are analysing our spare parts data of the last coupe of years, and define for each part minimum required inventory. Still at this stage we make sure that we have enough slack in our inventory to keep it safe. Based on a periodical planning control we determine to order new parts for our inventory and whether to raise it if there were any shortages relating to a spare part.”

As both the wear and failure part are relative critical to the functionality of the primary product, company C strives to serve their customers as fast as possible. One of the actions they take to adhere this is based on a priority rule in production, namely spare parts have priority over regular production. Demand seems to be the main reason for this priority rule, as:

“We see demand as a big uncertainty. We have different spare parts with a low demand prognosis. But when a large order of the same low demand spare parts is placed, we might have a shortage.”

According to the interviewee, the PLC of a product should be at least 70 years. In order to realize their company slogan; Performance for life. According to the interviewee, this means that the first models this company produced are in their maturity stage. However, most of their new introduced standard products are in the growth phase as sales have increased over the past five till ten years.

“So as our company is now 37 years old, it means that our first models would still last for at least another 30 years. However, as we bring better more precise products on the market, many of our older models have been replaced, and will be replaced.”

A relation between the growth stage of the primary products and demand of spare parts seems clearly present at this company.

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“Overall we see a trend in a higher demand of spare parts for all our products. However, demand of spare parts has not grown similar to the growth rate of our products. But still as we started sell more products, we started to sell more spare parts.”

Currently, production of some of the spare parts is being outsourced to other manufacturers.

Based on a make-or-buy analysis it is decided whether to make parts in-house or to outsource production. Most of the parts that are being outsourced arrive at the production site of the company before being shipped to the customer. At the production site, the parts will be remanufactured in order to supply it according to the customer specifications. However, the interviewee stated the following about the production of parts in the future:

“…in the near future we have to reassess all parts, since we would like to produce more parts at our own factory. Our new policy is to produce more parts by our self, which shape the core business of company C. By producing at our own site we will increase our knowledge in the future and develop our own products based on this knowledge.”

4.4 Company D

Company D is larger SME with over 65 years of experience in the development and production of electromechanical drive systems in the agricultural sector. This company has become a market leader with worldwide sales locations in countries such as Canada, the USA, and China.

The interview was conducted with the after sales manager, who has four years of experience in his field of expertise. The primary product discussed during the interview is an older solution for greenhouse farmers which is not being produced anymore. In short, this solution provides greenhouses farmers to open and close their roof windows. The two related pars parts were the gear rack, as the wear part, and the geared motor, as the failure part.

Even while demand of both parts is fairly unpredictable, it is able to determine a certain demand pattern for the wear parts. Additionally, the wear parts are held on inventory as demand and quantities needed of these parts is relatively high compared to failure parts.

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“…we know the demand pattern of parts that are being supplied regularly, such as the gear racks. For these parts we also control our inventory based on supply data. In case of the geared motors, we have an estimation how many we need a year. But due to the low demand we actually don’t make any forecasts and inventory plans for these parts.”

It is remarkable that such a relatively large company does not have a dedicated workforce for handling spare parts only. Yet, this company has an after sales department with three full time employees. Spare parts are handled on a ad hoc base, meaning that a spare part order is provided to the production and warehouse department, who fulfils this order with priority. The priority of both parts is rather high, as a failure of one of the two parts will cause one window or a set of windows in the greenhouse to stop operating. Additionally, company D has a clear vision and strategy about how they should work with spare parts.

“We should be able to handle spare parts fast and efficient possible, and provide continuous information for the customer… by creating partnerships we will always come to a solution.

This fits for all of our products and especially for products that have ended their life cycle.

Keep them a partner implies that we should find a solution to their problem, no matter what problem.”

As mentioned, throughout the interview an older primary product that had past its life cycle had been discussed. However, even while this product is not being produced anymore, does not imply that the company does not support the supply of spare parts. Spare parts for older types are frequently being replaced by new parts, or even a complete module of the product is replaced, meaning that the customer has to invest in multiple (updated) parts.

“…we deliver all parts of the machine. However, as some parts are not made anymore, we have to replace a module to make it operational again...This means that we are constantly thinking of how new parts can be used in older machines, to minimize the amount of spare parts.”

The PLC in relation to demand of spare parts is likely to be interrelated. The interviewee mentioned that sales of spare parts have increased, however he does not know whether it is related to the ageing of the discussed primary product that had past its lifecycle or the overall

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increasing sales of other primary products. Even though, from the quotation below it seems to be the case that spare part demand is related to the PLC.

“…we have the sales data of spare parts, but I don’t know to which product it belongs. So if it’s a product that has past its life cycle or not. However, I do see an increasing trend in spare parts demand over the last couple of years for this specific machine.”

For company D, it is highly important to comply with their historical trademark of producing and supply a fully Dutch product. All parts are made in their own factory, except for some exceptional parts, which are bought from Dutch manufacturers. Outsourcing either a service relating to spare parts or production is totally irrelevant for this company. As the interviewee also mentioned, in-house production has main benefits over outsourcing production of parts.

“If we would outsource our production, we would never get the same quality even while production itself might be cheaper…You have short lines, which makes it easy to communicate…. as we don’t outsource to China or whatsoever, we don’t have any issues with time zones…. we have full insight in what is going on within the company. So having the complete and clear picture of what is going on within the production and delivery are the main pros of in house production as I see it.”

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4.5 Summary of findings

The results of all four companies clearly describe the three variables of this research in relation to their way of working with spare parts. To compare the different ways, a code scheme (Appendix C) has been developed. A summarized overview of the code scheme can be found in table 4.1 below, providing a quick overview of the four cases. By making use of the code scheme certain patterns have been discovered between the four cases.

Company A Company B Company C Company D

Spare parts characteristics

No use of demand data to define inventory

Use of demand data to define inventory

High relative value

Deliver standard parts

Deliver standard and customized parts

Product life cycle

Production stage Utilization stage Production stage Utilization stage Spare parts

demand linked with PLC of primary product

Spare parts demand not linked with PLC of primary product

Spare parts demand linked with PLC of primary product

Make-or-buy decision

Outsourced as done always

Partly in-house will increase in near future

All parts in- house

Financial matter and maintaining focus on design and assembly

Less

uncertainties and maintaining focus on design and assembly

Flexibility, knowledge expansion and development potential

Flexibility, product quality and efficiency

Table 4.1: Overview of the findings

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4.5.1 Spare parts characteristics

First of all, the way SMEs work with their spare parts within their organization is the most obvious pattern that stands out. Companies A and B do not have a strategy and neither do they actively use their spare parts data in their daily operation. This in contrast to companies C and D, as they have a clear spare parts strategy to make, store and deliver their parts. Furthermore, companies C and D use their demand data of spare part sales to improve their operation. For example, for companies C and D, inventory levels are defined based on this demand data. At companies A and B, inventory levels are not defined based on historical data, but based on work experience with the primary product and spare parts.

The spare parts discussed during in the interviews all had a high relative value. Since the primary products would not function at all or function according to its specifications, with one of these parts failing. Therefore, as mentioned in the interviews, a fast and reliable supply of spare parts is required by the customers of all companies. A remarkable difference between the spare parts characteristics of the companies is found in the type of spare parts. Companies A and B, deliver standard parts only. This in contrast to companies C and D, who both produce and deliver standard parts as well as customized parts.

Secondly, based on the PLC of the primary product it is not really possible to find a certain pattern between the cases. Companies A and C both mention that they see a relation in the production stage of their primary product and their sales of spare parts. However, as company A does not uses their demand data it is rather difficult to assume that this correlation is trustworthy. Company B mentions that they do not see a relation between the PLC of the primary product and spare parts sales at all. As mentioned in the interview of company B, sales of wear parts are relatively steady at all times, while sales for the failure parts are totally unpredictable. Finally, company D stands out by noticing that as the primary product ages in its utilization stage of the PLC, the sales of spare parts seems to increase. However, as demand data does not make it clear whether these sales relate to the discussed primary product, it is again rather difficult to assume that this correlation is trustworthy.

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Finally, a pattern can be found within the make-or-buy decision of spare parts. Company A and B are smaller SMEs which both outsource production of their spare parts. Their main reason for this decisions is based on their size and specialization. As they do not have the financial capacity to produce spare parts, it is not feasible to expand their organization and make it themselves. Furthermore, it was mentioned that these companies want to preserve the specialization of designing and producing the primary product and do not want to lose focus due to spare parts production.

In case of the medium sized SMEs, company C is currently producing their spare parts partly in-house. However, company C is aiming on expanding their in-house production in the near future. By expanding their in-house production, they try to become more flexible, gain knowledge and control development of spare parts that shape their core business. Company D has produced their primary product as well as their spare parts at their own factory for many years. Still, some specialized parts are being outsourced. Even though, all parts are made in Holland as their trademark is to make a fully Dutch product. Besides their trademark, reasons of producing in-house relate to flexibility and to keep control over their own process.

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4.5.4 Strategic framework

To conclude the results parts, a strategic framework has been constructed based on the findings of the four cases. Figure 4.1 shows the framework for both wear and failure parts, as well as for both small and medium sized SMEs. The PLC stages has not been taken into account within this framework, as the PLC stages do not have a grounded relation with the make-or-buy decision.

Figure 4.1: Strategic framework

Based on this framework, it can be seen that it is recommended for small SMEs to outsource production of spare parts when the following conditions apply:

• the company delivers standard spare parts to their customers.

• the key focus is on design and assembly of their primary product.

• there is limited financial capacity to produce spare parts in-house.

• there is high demand uncertainty of spare parts.

In case of medium sized SMEs, it is recommended to produce spare parts in-house under the following conditions:

• the company delivers both standard and customized spare parts to their customers.

• the key focus is on flexibility and efficiency in production and supply of spare parts.

• there is a need to ensure high and steady quality standards.

• there is interest in a wealth of knowledge expansion and potential product development.

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5 Discussion

Based on the previous section, the results will be discussed in contrast with the existing knowledge. This section is split into the three variables that will be discussed, namely the spare parts characteristics, PLC stages and make-or-buy decision of spare parts production.

5.1 Spare parts characteristics

In this study, the spare parts characteristics have been discussed in relation to how companies work with their spare parts. Even while there has been made a distinction between wear and failure spare parts, for all cases little difference could be distinguished in their way of working with either wear or failure parts. However, a difference could be identified in the professionalism in working with spare parts, such as the spare parts strategy. According to Wagner et al. (2012) and Huiskonen (2001), there should be a clear and suitable spare parts strategy in order to supply spare parts in an organized fashion. However, this strategy was only adopted at the two medium sized SMEs. Furthermore, their professionalism was also indicated by the use of demand data and planning in spare parts. The small sized SMEs do not use a strategy at all. However, the larger SME of the two does have a specific set of rules (i.e. policy) to keep their spare parts on stock. So in this research it seems to be the case, as Wagner et al.

(2012) identifies, that the larger the organization, the higher the professionalism on working with spare parts.

The literature relating to the spare parts characteristics indicate that criticality is the most important control characteristic (Huiskonen, 2001; Wagner et al., 2012). In this research, all case companies indeed included the criticality aspect in defining their spare parts inventory. As for the large SMEs, they constantly observed trends in their demand data to adapt inventory of critical spare parts. The same holds for the small SMEs, as they also tried to indicate trends in order to adapt their inventory levels on their experience and less based on data. Another characteristic of Huiskonen (2001) and Wagner et al. (2012) that could be identified in this research was specificity. Small sized SMEs only supplied standardized primary products and parts. In regard to medium sized SMEs, these cases supplied both standardized and customized primary products and spare parts.

2 Theoretical background

Abstract

Table of contents

1 Introduction

2 Theoretical background

3 Methodology

4 Results

5 Discussion