Last Time Buy bye bye: a solution to avoid overstocking is in sight for OEMs
by Tibor van Melsem Kocsis
Original Equipment Manufacturers, OEMs for short, are typically obliged to provide service parts for 10 years in the case of home appliances. This service lifetime can be even longer for other capital goods. OEMs often have an agreement with their suppliers to make these components available for this timeframe. But what happens when the term is nearing completion and the supplier decides to stop producing these items? Enter what’s known in the industry as a Last Time Buy. The Last Time Buy (LTB) is the supplier’s “last call” for a part or component. The final chance an enterprise will have to buy the part before the supplier stops producing it. This puts the supply chain team at the OEM in a tough position. They need to come up with a strategy to fulfill their company’s commitments, but with little to no certainty into future demand or results.
The risks of LTB for OEMs
Based on data we have analyzed, LTB orders tend to happen during the second half of the 10-year stretch. Forecasting anticipated demand for the remaining service lifetime, and making the right decision on the amount of parts to purchase, is difficult. The truth is, demand is almost always highly unpredictable.
The immediate effects of LTB events are tied up working capital and higher costs. As DEX explains in this report, “LTBs can take a significant bite out of a company’s cash flow.” Companies also incur “lifetime” or “carry costs,” aside from a large initial investment. Namely, storing, shipping and handling costs.
Eventually, LTBs tend to result in excess stock which has to be written off as an accounting loss and scrapped after some time. In other words, LTBs result in financial — and material waste in the long term.
This leaves procurement professionals facing a dilemma: how can I fulfill my service obligation while safeguarding my company’s economic interests and minimizing our environmental footprint? The balancing act is hard to solve, but Additive Manufacturing can offer solid solutions. Let’s explore some examples.
A company with 240,000 SKUs labeled as service/spare parts, has to make a decision on a handle which has an LTB volume of 3,050 pieces for the remaining service lifetime of 2.9 years. Historical data tells us that the part saw an annual demand volume of 5 pieces on average over the past 36 months.
The same company has to purchase a button with a LTB of 500 for a remaining service lifetime of 1.9 years and annual demand of 4 pieces over the past 36 months.
In the first situation, the company would likely end up with 3,035 redundant pieces in their inventory if demand stays the same, or 607 years of stock. In the second, they would end up with 492 or more, which would translate into 123 years of stock.
By contrast, if they digitized the part design and produced it with Additive Manufacturing, they can simply tap into this virtual stock to get the exact quantity they need — 15 handles instead of 3,050 and 8 buttons instead of 500.
Say goodbye to LTBs
How can you bypass the negative effects of an LTB order by embedding Additive Manufacturing (AM) in your supply chain? Start with these best practices:
- Look at your data first: make sure you thoroughly understand how your service parts procurement works and what the total cost of an LTB order is.
- Perform scenario comparisons using data to uncover if AM would be a viable solution for certain parts. Make sure you look at parts for which AM would be an option from a technical standpoint.
- Evaluate whether you need to re-engineer the part.
- Work towards digitizing your parts library to produce parts when and where they are needed.
- Assess whether you should purchase equipment in-house or work with a platform or supplier. If you want to start experimenting with the technology at low risk, a platform is your best bet.
If you’re struggling with LTB decisions or would like to discuss the possibilities offered by AM, feel free to contact me.
