Spare parts logistics for theChinese market

Heiko GebauerInnovation Research in Utility Sectors,

Eawag: Swiss Federal Institute of Aquatic Science and Technology,Dubendorf, Switzerland

Gunther KuczaSchool of Management and Law, Winterthur, Switzerland, and

Chunzhi WangCollege of Economics and Management, Dalian Nationalities University,

Dalian City, China

Abstract

Purpose – This paper aims to offer recommendations to increase spare parts logistics performance.Recommendations have been rare despite the proven benefits of high-performing spare parts logistics.The spare part business is the profit pool of the capital goods industry: creating about 17 percent of theindustry’s total revenue. The margins involved in spare parts revenue are, on average, 25 percentcompared to 2-3 percent of the capital goods.

Design/methodology/approach – The authors conducted an extensive benchmarking project witha variety of firms (focus group and single case study) to gain a better understanding of spare partslogistics in China. By reviewing the first benchmarking findings with a single company that struggledto achieve sufficient spare parts logistics performance, additional insight was gained.

Findings – The paper attempts to provide a better understanding of the necessary changes forimproving logistics performance in the Chinese market. It analyzes the necessary changes to achieve acutting-edge logistics solution, and shows how companies can implement the solution.

Research limitations/implications – The qualitative nature of the research.

Practical implications – Managers can develop a procedure to initiate logistics projects that lead tocutting-edge logistics performance.

Originality/value – The paper develops a cutting-edge logistics solution for China and Asia basedon two main pillars: companies should try to develop logistics solutions for Asia that consider existingAsian and Chinese constraints rather than adapting the logistics practices used in mature markets andthe development of the logistics solution should be in intensive collaboration with the logisticsproviders.

Keywords Services in manufacturing companies, Spare parts logistic, China, Logistics solution,After-sales services, Spare parts, Distribution management

Paper type Research paper

The current issue and full text archive of this journal is available at

www.emeraldinsight.com/1463-5771.htm

The authors would like to thank the Swiss National Science Foundation (SNF) for supportingHeiko Gebauer’s research. They would like to express their deep gratitude to Maureen Sondellfor her language editing services.

This article is part of the special issue: “Supply chain networks in emerging markets” guestedited by Harri Lorentz, Yongjiang Shi, Olli-Pekka Hilmola and Jagjit Singh Srai. Due to anadministrative error at Emerald, the Editorial to accompany this special issue is publishedseparately in BIJ Volume 19, Issue 1, 2012.

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Benchmarking: An InternationalJournalVol. 18 No. 6, 2011pp. 748-768q Emerald Group Publishing Limited1463-5771DOI 10.1108/14635771111180680

IntroductionThe recent strong growth of the Chinese manufacturing industry has increased thedemand for capital goods (e.g. manufacturing machines and equipment). China’smanufacturing industry continues moreover to mature. This, in turn, places morecomplex requirements on the spare parts supply chain for capital goods, including theavailability of spare parts in general and of spare parts for older installations (Zhu et al.,2007). The capital goods industry must modify not only manufacturing and supplychain strategy but also the logistics of procuring specific spare parts. Manufacturingand supply chain strategy has previously been discussed in the literature (Pyke et al.,2000) whereas spare parts logistics for the emerging Chinese market has been largelyneglected. Spare parts issues are either related to supply chain literature or areconsidered as being part of the service offered by manufacturers of capital goods. Supplychain literature related to spare parts discusses maintenance and reliability, productionand inventory control along with some strategic aspects such as warehouse locationsand service levels (Huiskonen, 2001). Literature on the service offered by manufacturersof capital goods assumes that spare parts are incorporated into repair or maintenanceservices (Gebauer et al., 2005; Oliva and Kallenberg, 2003). Neither of these researchfields provides any detailed concept of the design of spare parts logistics in China,offering instead some general recommendations. The literature thus rather neglects thearea of spare parts logistics pertaining to the emerging Chinese market. A cross-culturalcomparison between Western countries and China is, therefore, rather limited.

The absence of spare part logistic concepts for China is nonetheless surprising,since the spare part business is the profit pool of the capital goods industry: spare partscreate about 17 percent of the industry’s total revenue. The margins involved in thisspare parts revenue are, on average, 25 percent compared to 2-3 percent of the capitalgoods. In addition, local manufacturers are increasingly copying spare parts and legalactions to prevent them doing so seem to be limited. More attractive response anddelivery times, along with reasonable prices, seem to be the only way to competesuccessfully with local part manufacturers. Despite the high margins of the spare partsbusiness and their strong contribution to the overall financial success of manufacturersof capital goods, it remains unclear how companies should approach the logistics ofspare parts in China or, in a broader context, Asia (VDMA, 2008).

In collaboration with a European manufacturer of capital goods, a three-year effortto redesign the spare parts logistics of a European capital goods company was studied.It was difficult to frame the evidence found with existing theories in both servicebusiness development and supply chain management. The findings indicated variousbottlenecks, constraints and adjustments in supply chain networks that arisespecifically in China and, in a broader context, in Asia that differ in essence fromlogistic practices in mature markets.

This paper is organized as follows: first, the literature regarding the factorsdetermining the logistics of spare parts is examined from a supply chain perspective,along with a description of how existing recommendations of service businessdevelopment influence the concept of spare part logistics. The research setting of thestudy is then analyzed and the results obtained are presented. This is followed by adiscussion on the way in which the findings complement existing theory and, finally,avenues of future research are identified.

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Theoretical backgroundSpare parts logisticsThe logistics of spare parts constitutes a minor research field of its own in the area ofsupply chains and includes topics such as maintenance, reliability, supply chainmanagement, production and inventory control along with some aspects of strategicmanagement, such as warehouse location and service levels (Huiskonen, 2001). Withthe exception of a few management publications (Lawrenson, 1986; Patton andFeldmann, 1997) research into spare parts has focused mostly on inventory modelling(Silver et al., 1998; Cohen et al., 1997). It is, however, beyond the scope of this paper toreview all of these areas. The literature review concentrates on strategic choicespertaining to the logistics of spare parts relevant to their use in Asian markets.

Huiskonen (2001) categorizes control situations and describes respective strategiesand policies. The control situations can be described according to the criticality andspecificity of parts, e.g. in the case of standard and high-value parts of high criticality,suppliers are required to either optimize the safety stock of the customer and definetime-guaranteed supplies from established service company or else coordinate severalcustomers to set up co-operative stock pools.

Cohen et al. (1997) provide an overview of current industrial practice as well asemerging trends in the logistics of handling spare parts. Inventory investments andturnover have emerged as being critical internal metrics, the computation of whichshould consider the value of the parts and the speed at which they move through thelogistics system. The classification analysis of the spare parts should therefore reachbeyond traditional ABC methods. Industrial practices also reveal that companies oftenface a set of distribution network structures that have simply evolved over a period oftime. Making the distribution system leaner and more efficient should not, however,only include the reduction of fixed costs for facilities that are eliminated but also therisk of pooling in multiple locations.

Another research topic that is emerging in the field of spare parts logistics is theanalysis of repairable items (Cohen et al., 1997). Since items can be returned from repair,the spare parts operation contains two independent processes: one with repairable andone with non-repairable items. The two processes differ in the consequences for both thereplenishment process and the management of inventories (Kennedy et al., 2002).

By benchmarking current practices in spare parts logistics, Pfohl and Ester (1999)argue that key performance metrics within the planning and controlling logisticsprocesses of spare parts are not wide spread. Very few companies use metricsregularly. Even if companies use key performance metrics, companies rarelybenchmark the obtained key performance indicators with other companies (Pfohl andEster, 1999; Sueur Le and Dale, 1997).

Spare parts as an integral part of developing the service businessThe literature relating to development of the service business has focused on servicestrategies (Mathieu, 2001; Gebauer, 2008), the organizational structure of the servicebusiness (Oliva and Kallenberg, 2003) and the service orientation in corporate cultureand human resource management (Homburg et al., 2003), as well as measurement andreward systems (Matthyssens and Vandenbempt, 1998) and decision-making processes(Neu and Brown, 2005). These areas are all intricately linked to the logistics of handlingspare parts.

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The different requirements of the service strategies described as “after-sales serviceproviders” and “customer support service providers” influence the logistics of spareparts (Gebauer, 2008). In the event of breakdown or failure, for example, after-salesservice providers react as quickly as possible to solve the problem. Customer supportservice providers, in contrast, do not react immediately to failures: they concentrate onpreventing breakdowns from occurring in the first place. From the perspective of spareparts logistics, after-sales service providers are confronted with unpredictability andhigh customer expectations regarding delivery times. Thus, spare parts logistics tend tofocus on shortening delivery times and having relatively high stock values in order tomeet availability requirements. Preventive maintenance contracts, on the other hand,include pre-defined exchange parts, leading to a relatively predictable demand.The spare part concept is thus centralized, with a relatively smaller stock value.

Performance measurements also link the cost-effective spare parts logistics with theimprovements made in the after-sales service function. After-sales service providersreact as quickly as possible to machine failure, concentrating on minimizing the timespan from when the customer calls until the repair is complete and the machine is inoperation again. It is within this time span that after-sales service providers measure thepercentage of remote diagnoses and on-site diagnoses, i.e. “service response time”(Cohen et al., 1997). Customer support service providers emphasize instead theprevention of machine breakdown, focusing on monitoring the ratio between scheduledand unscheduled service activities. Scheduled service activities are measured by thenumber of on-site visits and remote diagnoses necessary to avoid machine failure,whereas unscheduled services involve performance measurements similar to those usedby after-sales service providers.

Another factor pertaining to the logistics of spare parts and determinants in thedevelopment of services is the discussion regarding the separation or integration ofproducts and services (Gebauer et al., 2005; Oliva and Kallenberg, 2003; Neu and Brown,2005). Should companies separate services from products, then the service businesswill form a distinct strategic business unit with its own financial responsibility(Auguste et al., 2006). The service business is responsible, as a strategic business unit,for spare parts and is forced to maximize its profit contributions. This, in turn, placespressure on stock values for spare parts to improve working capital costs. Smaller stockvalues would decrease the availability of spare parts and, most likely, increase deliverytimes. The service organizations would face increasing pressure to improvetheir financial performance, since they are evaluated as independent profit centres;their returns on assets and inventory turnover levels are hence compared with thecorresponding values for the manufacture and distribution of the finished productswithin the company (Cohen et al., 1997).

Issues pertaining to spare parts in the Chinese marketThe logistics of spare parts and the development of services in China are far from simpleissues (Gebauer, 2007). Despite observed improvements in highway, rail, water, and civilair transport, as well as warehousing and communication infrastructure, there remaingeneral logistic challenges (Goh and Ling, 2003). Although spare parts logistics facemany challenges (Pyke et al., 2000) there are two supply chain worlds in China: onefocuses on exports and the other on the domestic market. Export-focused supplychains currently enjoy a reasonable logistics infrastructure, low-cost production

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and streamlined logistic networks. Supported by world-class companies such as UPS,FedEx and DHL the coastal free-trade zones have efficient and simple supply chains,enjoy high-quality logistic services and have strong logistic skills.

Domestically focused spare parts logistics, on the other hand, is confronted with thedifficulties of reaching the Chinese end-customers, which include underdevelopedtransportation infrastructures, the insufficient skills of logistics providers,underdeveloped IT-interfaces and protectionist customs regulations. According tothe latter, companies face difficulties in clearing customs and are confronted with alabyrinth of rules and regulations. Even through the lasted efforts to enforcestandardization of customs regulations, various regions continue to make arbitrarydecisions on goods categories and customs clearance procedures. Customs clearancetimes are reported to range between two days and two months. Such erratic customsclearance times make it extremely difficult to provide satisfactory spare parts deliveryperformances (Goh and Ling, 2003). The domestic supply chain comprises domesticplayers supplying small to midsize companies and is rather fragmented. This has ledto complaints of high inventory costs and long delivery times for spare parts, and isaggravated by the bureaucratic restrictions surrounding the legal importation, sellingand servicing of spare parts ( Jiang, 2002; Hong et al., 2006).

Costs for domestic logistics are still on a low to moderate level, but companies facedifficulties in identifying the components of logistics cost (transportation, warehousingcosts and so on). Furthermore, research reports a lack of qualified logistics personnel,even in logistics service providers. Therefore, employee training and education is animperative for the effective implementation of best-practice logistic solutions (Song andWang, 2009). In order to respond to these challenges, companies cultivate relationshipswith appropriate parties (customs or logistics providers), hire logistics provider tomonitor the movement of spare parts, establish firm’s own transportation and logisticsinfrastructure, share transportation network with other firms, provide training intransportation management skills, or build multiple warehouses (Ta et al., 2000).

The challenge of today could nevertheless well be the business opportunity oftomorrow for manufacturers of capital goods. Constraints can become opportunities:innovative solutions for spare parts logistics can be created specifically for the Chinesemarket. The combination of a relatively immature market with the shortening ofdelivery and response times, along with reductions in inventory and warehousing costs,should allow sustainable competitive advantages to be gained. Using China as a logistichub for solving challenges in spare parts logistics should also benefit the Asian marketin general.

The research processAssessment of the quality of the researchThe objective of this study was to explore the design of spare parts logistics conceptsfor the emerging Asian and Chinese markets, and involved action research. The actionresearch, which was organized into a focus group and a single case study, followed theprinciples of the iterative grounded theory (Orton, 1997). Iterative grounded theorysuggests that the researcher examines the literature relevant to spare parts logisticsand employs the empirical data to fill in the gaps. Through this procedure, researchersreveal flaws in the empirical data and literature, elaborate their meaning and extending

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their coverage. This eventually helps to create internal and external reference pointsfor the emergent explanatory logic in the research process.

The action research was guided by Lincoln and Guba’s (1986) criteria for achievingtrustworthiness: credibility, dependability and transferability. Credibility in the extentto which the findings correspond with reality was ensured through the followingactivities: triangulation of different types of data (focus groups, participation inworkshops, interviews, reports, etc.) and being in situ (i.e. in the company) over a periodof time. Dependability ensures the consistency of the findings. It was addressed byaccounting in detail for the choices made in the action research. Transferabilitycorresponds to the conventional terms of “internal validity”, “reliability” and “externalvalidity”. It reflects the extent to which the findings can be “transferred” to othersituations. Similar attributes (e.g. size of the company, experience in the Chinese marketand type of products) enhance the transferability in terms of external validity. In order toreduce the likelihood of false interpretations being made, as well as to obtain internalvalidity, a distinctive feature of the research is the above-mentioned triangulation ofsources of evidence (Yin, 1994). Moreover, participants reviewed all preliminaryresearch reports to enhance validity and reliability further. The reviews often ledparticipants to provide more detailed information. Finally, to assure reliability andvalidity of the data analysis, manual and computer-aided content analyses based on theNVivo 7.0q procedure were used for data analysis. NVivo was used when we workedwith various unstructured information obtained in the research process.

NVivo allows us to codify, organize and classify data according to dependent,independent and context variables. Logistics performance measurements, such asdelivery time, costs, inventory and working capital costs, are the dependent variables.Independent variables include logistical design elements such as logistic processes,warehouse locations, warehousing structure (local, regional, global, decentralized orcentralized), customs arrangements (bonded and non-bonded) and inventory planningprocesses. Logistics processes can be grouped into inbound, outbound and returnprocesses. Local warehouses (distribution centres of spare parts) implicate a ratherdecentralized structure and may well be replenished through regional and globalwarehouses. The existence of global warehouses that do not have local distributioncentres for spare parts suggests a rather centralized warehouse structure. Contextvariables include the size of the company, type of service strategy and the number ofinstalled bases.

Research study of the focus groupThe action research started with an exploratory focus group (Morgan, 1988). Thisfocus group met for about six hours and began with a discussion of the challenges ofdelivering spare parts from Europe to Asia as well as within each Asian country and,more specifically, within China. The participants outlined their challenges anddescribed the way in which they approached spare parts logistics. The moderator useda flip chart to summarize and highlight discussion points and assist participants indescribing potential logistics concepts. The findings were used to substantiate thetheoretical insights gained from the literature review and preliminary understandingof the research topic (Miles and Huberman, 1994). The results of this focus groupprovided guidance for the single case study.

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Single case study of Machine IncorporationThe single case study was chosen on conceptual grounds rather than for it beingrepresentative (Miles and Huberman, 1994). The aim was to provide fertile ground forunderstanding the design of Asian spare parts logistics: a company that has activelyredesigned its logistics activities was therefore chosen.

The single case study was conducted in a major European capital goodsmanufacturer that designs and manufactures machines and automation equipment forthe tool and die-casting industry. The company is also actively developing aservice business, which created about 27 percent of the total revenue in 2006-2008.The service revenue involves labor services (repair and maintenance) as well as parts.The spare parts business creates about 75 percent of the service business. Its marginsleverage with the product business is about ten. The company, which is here known bythe pseudonym Machine Inc., generated approximately e650 million in revenue andemployed almost 3,300 people worldwide in 2008. Europe and North America were themain markets during that time, but the Asian market provides a very attractive potentialfor future growth. The revenues created in Asia accounted for about 30 percent of thetotal revenue.

The key facts with respect to the spare parts business can be summarized asfollows:

. approx. 10,000 machines installed in Asia in mid-2007 with China representingaround 50 percent of the installed base;

. local warehouses in seven different location (Beijing, Shanghai, Shenzhen/HongKong, South Korea, Japan, Singapore, and Taiwan);

. total gross book value of e6 million;

. availability of spare parts in local warehouses ranged from 15 to 80 percent; and

. average delivery time of 64 hours.

These are shown in more detail in Table I, which also illustrates the initial logisticsituation.

The single case study involved inquiries over a period of 24 months (Eisenhardt,1989). This allowed direct observation of the key parts of the corporation’s mainredesign process of the Asian spare parts logistics concept. The redesign process wasan integral part of the global parts distribution concept. It was one of the main pillarsof the customer services concept aiming at improving customer satisfaction and theprofitability of spare parts.

The single case is compiled through multiple sources of evidence, including companydocumentation and, most importantly, participation in internal workshops andinterviews with employees, ranging from logistics and service employees to the salesmanager for Asia and the head of the spare parts and service business areas. The authorparticipated in a total of 31 workshops and interviewed more than 17 employees. Theinvolvement of the author started in October 2007 when the company recognized that itsperformance in the logistics of spare parts did not reach customer expectations and thatits logistic structure was problematic. The company contacted the author and requestedacademic input in the analysis and resolution of its design problems, from an operationalas opposed to a strategic or organizational angle. The study proceeded in five phasesfrom October 2007 to January 2009; the content and sources of evidence are illustrated

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in Table II. The activities also involved logistics providers such as DHL, Sinotrans,TNT, FedEx and Schenker. The author maintained frequent contact with Machine Inc.throughout the duration of the study.

ResultsThe exploratory study (focus group)The exploratory study reveals two basic approaches to the logistics of providing spareparts to the Chinese and, in a broader sense, the Asian markets. They are the directexport of spare parts from Europe to Asia and using local warehouses in Asiansubsidiaries.

Direct export of spare parts from Europe to Asia. The first logistics approachinvolves the direct export of spare parts from Europe to the Asian subsidiaries wheneverthe customer orders a spare part. The spare part is delivered directly from the subsidiaryto the customer. The local storage of spare parts, with inventory planning and control, isunnecessary.

The main advantage associated with this approach is the relatively low capital costdue to the significant consolidation effect in the central European warehouse. Resourcesregarding inventory planning and control are also centralized, avoiding coordination

(1) Direct export of spare parts fromEurope to customers in China (Asia)

(2) Provision of spare parts from localwarehouses and warehouses replenishedfrom Europe to customers in China (Asia)

Description Companies run a central warehousecarrying spare parts in Europe and haveno local warehouses in China and otherAsian markets

Beside a central warehouse, companiesrun decentralized (local) warehouses indifferent regions of China and in variousAsian markets

Inventory planning and control areconducted at the central warehouse basedon state-of-the-art methods

Local warehouses are responsible forinventory planning and control based onrelatively unsophisticated inventorymethods

Parts are exported and delivered from thecentral European warehouse directly tothe Chinese customers

Parts are delivered from the localwarehouse to the customer if they areavailable locallyParts are exported from the centralwarehouse if they are not availablelocally

Advantages Low inventory and working capital costs Short delivery times for parts availablelocally

Low operating costs for the centralwarehouse in Europe

High customer satisfaction due to shortdelivery times

High availability of spare parts at thecentral warehouse

Low logistics costs due to replenishmentshipments from Europe to Asia ratherthan single express deliveries

Disadvantages High logistics costs due to expresstransport mode

High inventory and working capital costs

Long delivery times caused by customsclearance delays

High costs for operating and maintaininga network of local warehouses

Low customer satisfaction due to longdelivery times

Limited availability of spare parts at thelocal warehouses

Table I.Results of the exploratoryresearch activities (focus

group)

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Phase 1:analysis of thelogisticsperformance

Phase 2:preliminarylogistics concept

Phase 3: detailedlogisticsconcepts

Phase 4: planningimplementation

Phase 5:implementation

Primaryandsecondarysources ofdata andrelatedactivities

Workshops onpreparing atemplate formeasuringlogistics todiscover theactual logisticsperformance

Carrier tendersobtained re:potentiallogistics andservice levels inAsia

Site visits tovarious logisticsproviders inChina (UPS,DHL, Schenkerand Sinotrans)

Site visits tovarious Asiansales companies todesign theinterfaces of thelogistics hub(e.g. financial,document andprocess flows)

Stockmovementfrom Europe toShanghai

Survey carriedout of all theAsian andChinese salescompaniesinvolved

Analysis of thecarrier tenders

Discussion of thelogistics solutionproposed

Workshops withlocal parts,logistics andservice managerson the migrationof localinventories to thenew warehouse

Migration oflocal inventory

Descriptiveanalysis of thesurvey

Description ofvarious logisticsscenarios forregionalwarehouses(e.g. Shanghai,Hong Kong andSingapore)

Furtherdevelopment ofone logisticssolution viainteractiveworkshops withthat logisticsprovider

Specificationsheets for allinbound,outbound andreturn processes,especially post-customs clearanceand temporaryborrowing

Workshopswith logisticmanagers onprocessimprovements

Site visits toverify thelogisticsperformance atBeijing,Shanghai,Hong Kong andSingapore

Selection ofmost attractivelogisticprovidersaccording to thecarrier tendersand logisticsscenarios

Workshop withall managingdirectors fromAsia to reviewthe logisticsolutionsproposed

Contract onperformancecriteria for thelogistics provider

Workshop withmanagingdirectors toreview thelogisticsperformance

Telephoneinterviews withsalescompanies inTaiwan, JapanandSouth Korea

Workshop withall managingdirectors fromAsia to reviewthe logisticsscenarios

Workshop withthe Europeanorganization toincorporate thelogistics solutionproposed intoexistingprocesses

Workshops withthe IOR/EOR toconfirmpost-customsprocedures andexport conditionsfor repairableparts returned toEurope

Workshop withall managingdirectors fromAsia on thelogisticsperformance

Table II.Details on the singlecase study

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costs for different local inventory storages as well as enterprise resource planning (ERP)systems. Availability in the central warehouse is very high, often exceeding 95 percent.The approaches used by the central warehouses include ABC analysis and strategiesusing value, frequency and criticality of parts.

Whilst direct export is very suitable in mature Asian markets such as South Korea,Japan, Taiwan, Hong Kong and Singapore, various disadvantages arise in the Chinesemarket. Chinese customer satisfaction regarding the direct export approach is relativelylow despite high availability. Customers complain specifically about the long deliverytimes involved: the delivery time is still about ten days even when orders are placeddirectly with Europe and express transport is used. For spare parts, this is ratherunacceptable. The delays are mainly caused by the time required for customs clearancein China, a procedure that places an essential constraint on the overall delivery time.It normally takes one day to process the order, another two days to ship the spare partfrom Europe to China, at least five days for customs clearance and, finally, two days fordomestic delivery from the subsidiary to the customer. The international and domestictransport modes are express deliveries, resulting in logistics costs being very high.Another obstacle was revealed in the case of domestic deliveries: until 2007, nointernational logistics provider was allowed to operate in the Chinese market. Instead ofemploying door-to-door shipment, as in mature markets, companies had to set upinterfaces between international and national logistics providers. International logisticsprovider delivered to the airport and, after successful customs clearance, a domesticservice provider delivered from the airport to the customer. This interface entailedsignificant gaps in communication, such as the translation of delivery notes fromEnglish to Chinese. Naturally, these gaps created problems and delayed the process.The participants also argued that the domestic logistics providers available do not fullycover the whole Chinese market. It was often necessary to collaborate with differentlogistics providers for each region (e.g. Bohai Rim Region, Pearl River Delta andYangtze River Delta), thereby multiplying coordination and integration efforts.Furthermore, the domestic providers lacked in additional services normally attributed tostandard deliveries. It was not possible to outsource services such as invoicing,providing proof-of-delivery and tracking data.

Another disadvantage of this approach emerges around the repair process for spareparts. Chinese regulations forbid the re-exportation of spare parts from China to othercountries. Once a new spare part has been installed, regardless of whether or not thereplaced part is repairable, it cannot be exported to Europe. This restriction limits thecosts of spare parts. In mature markets, the pricing of spare parts takes the possibilityof repairing them several times during their lifetime into consideration. Price sensitivecustomers have the opportunity of buying repaired parts. Without the option ofrepairing parts, companies have to either increase their prices or make less profit.

Local warehouses in Asian subsidiaries. The second approach involves setting uplocal warehouses in Asian subsidiaries. A local warehouse, which is replenished fromthe central warehouse, delivers spare parts directly to the customer. This logisticapproach is complemented by the direct export of spare parts if the part is not availablelocally. A local warehouse is responsible for inventory planning and control. Thisapproach is relatively easy to apply in Asian markets such as such as South Korea,Japan, Taiwan, Hong Kong and Singapore, as with the first concept, but variousbottlenecks and constraints arise in China.

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The main advantage associated with this approach is a relatively short delivery timesince delays caused by customs clearance procedures are avoided. In order to achievethese benefits, however, companies have to take operating costs for local warehousesand working capital costs into consideration. The resources necessary for inventoryplanning and control create higher operating costs: inventory planning and controlrequire an ERP system and each local warehouse has its own overheads. Theparticipants argued that the underlying skills are still insufficiently developed in Asia,and specifically so in China. The lack of skills leads to less sophisticated approaches toinventory planning and control. Local management tends therefore to make mistakes inforecasting the requirement of spare parts, leading to relatively high depreciation costs.In addition to this, Asian subsidiaries are difficult to integrate into European ERPsystems. International licenses are very expensive and subsidiaries either do not havethe skill to operate ERP system or they consider ERP operators to be too expensive: theyare difficult to find and already command a salary similar to that paid in Europe.

The participants also mentioned that only a few ERP systems include Asiancharacters. Whilst this option is both expensive and requires Asian language skillsbeing available in Europe, providers of logistics service or local subsidiaries willalways have to duplicate the information if they are unable to create deliveryinformation in the local Asian language. There is, once again, the potential that failuresand inconsistencies may arise.

The necessity of storing the same parts in different local warehouses also causeshigher working capital costs. Since the local warehouses have already completedcustoms clearance, the inventory belongs to the local subsidiaries and not the Europeanorganization; the inventory value of the spare parts is therefore based on sales prices andnot manufacturing costs. The sale price includes value-added tax (VAT), duty andsurcharge levied on the manufacturing costs. Sales prices and the multiplication ofstorage locations increase the working capital costs by 500-600 percent. In order to avoida cost explosion, it is natural that availability in local storage facilities is lower than inthe first approach: availability levels are typically around 60 percent.

Reduced logistic costs are another advantage of this approach: the majority of thedeliveries made from Europe to Asia are made by consolidated replenishments and notexpress transport. The local delivery costs are rather similar to the first approach.Table III summarizes both approaches, highlights their advantages and disadvantagesand illustrates the logistics activities.

Single case studyDespite the advantages of both logistics concepts, Machine Inc. did not regard either ofthem as being an adequate way of fulfilling their logistics challenges, internalrequirements or customer expectations. The concepts were instead seen as a startingpoint. It was assumed that an intensive elaboration of alternative solutions in closecollaboration with logistics providers, along with academic input, could lead to a bettersolution (Tian et al., 2008). The logistics solution implemented embraced the followingfive interrelated key issues arising directly from the idiosyncrasies of the Chinesemarket:

(1) setting up one regional warehouse for Asia, including China;

(2) combining bonded and non-bonded warehouse options;

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(3) organizing post customs clearance for outbound processes;

(4) incorporating temporary borrowing into the outbound and return process of thespare parts; and

(5) defining the roles and activities in the logistics concept.

Each of these key issues is described below.According to the regional warehouse, Machine Inc. did not consider a simple

centralization or decentralization of direct export or local warehouses for any part of itsspare parts logistics chain: various options of configuring the logistics network wereconsidered instead. These options included using Beijing, Shanghai, Hong Kong orSingapore as regional hubs that, in turn, provide spare parts to various countries.Compared with the existing decentralized warehouse infrastructure, with its low degreeof availability and high depreciation costs due to the lack of planning skills, setting upregional warehouses was expected to reduce fixed costs and offer the opportunity ofachieving an availability of spare parts of up to 90 percent. This involves 90 percent of allspare parts being delivered from the regional warehouse direct to the customer, withonly 10 percent of the parts being delivered from the global European warehousedirectly to the final customer. The delivery time would then, of course, be higher than fordeliveries from local warehouses in each country. The total delivery time couldnevertheless be lower than in the initial situation, bearing in mind the relatively low levelof availability in local warehouses of between 30 and 60 percent. An initial estimation inthe setting up of regional warehouses in Shanghai, Beijing, Hong Kong and Singaporegives an expected delivery time of 24-48 hours.

The estimated delivery times reveal that the most time-consuming element is thecustoms clearance procedures necessary to import parts. This fact is of the utmostimportance: although China is the major market with the highest growth expectations,the Chinese customers were regarded as being the most demanding in terms of servicelevels and delivery times. Machine Inc. decided to set up a combined non-bonded/bondedwarehouse to overcome this disadvantage. The non-bonded warehouse would serve theChinese market without any time delays caused by customs clearance processes since allof the parts in stock would already be declared: the additional bonded warehouse facilitywould deliver parts to the other Asian market. Using a combined non-bonded/bondedwarehouse infrastructure, however, requires that the necessary logistics planning andcoordination actually function. The non-bonded warehouse would mean, in addition,that the parts in stock are already declared, and that import duty and VAT have beenintegrated into the parts value. The capital cost would thus be 27 percent higher.

Discussions with logistics providers have led to the alternative option of setting up acombined non-bonded/bonded warehouse employing the post-customs clearance optionin Shanghai. This option offers clear additional advantages, the first of which lies in thefact that all of the spare parts can be stored in the bonded warehouse. This bondedwarehouse is able to serve all of the other Asian markets in less than two days, and mostChinese provinces within two days as well. Parts delivered to China would not have to bedeclared before being delivered to the domestic Chinese customer. The post-customsclearance option means that the part is delivered first and declared afterwards. In thecurrent project, this option was restricted to only five third-party logistics providers andthe bonded area in Shanghai, Shenzhen and Beijing. Consolidating the spare parts intoone single-bonded stock would lead to significant reductions in working capital costs

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compared to having a bonded and a non-bonded warehouse. It would also avoidduplication in logistics planning and purchasing processes: one logistics competencecentre, attached to the bonded regional warehouse, would suffice.

The bonded stock remains the responsibility of the European service organizationsince it has not been declared. The stock value is calculated based on the cost of theparts manufactured and not on the transfer price. As spare parts generate the mostprofit for Machine Inc., the differences in the manufacturing costs of the spare partsand the transfer price were, on average, 50 percent. This stock value could be reducedsignificantly, leading to lower working capital costs.

Furthermore, the bonded warehouse offers the opportunity of operating the logisticsoperation using the ERP system used in Western Europe and not that used by the Asiansubsidiaries. This enabled Machine Inc. to restrict the IT infrastructure necessary to asimple ERP terminal in the bonded warehouse, thereby avoiding investments forintegrating the Western European and Asian ERP systems. Using SAP in the bondedwarehouse has the advantage that the stock can be managed from Europe, thusminimizing investments in recruiting, training and retaining logistics skills. TheEuropean headquarter, nevertheless, remains responsible for planning and purchasingprocesses. The logistics provider operates the combined bonded regional warehouse andtakes over responsibility for quality inspection, warehousing and inbound andoutbound logistics. It charges Machine Inc. a fee for warehousing and the effectivelogistics costs for inbound and outbound processes.

Elaboration of the outbound processes revealed an additional outbound process optioncalled “temporary borrowing”, a specific outbound process that is linked to the postcustomer clearance procedure. Temporary borrowing offers the opportunity of supplyingmore than one spare part to the customer if it is not possible to specify the part that needsreplacing: service technicians can, for example, order five spare parts to diagnose andrepair a machine. The variety of parts means that the service technicians have a betterchance of repairing the failure without any delays. The parts that are used for thediagnosis and repair but are not installed in the machine may, however, be returned to thebonded warehouse. Customs clearance will not be necessary, since the parts were onlyborrowed temporarily from the bonded stock. Only if the parts are not returned within twoweeks will customs clearance be required. Temporary borrowing also enables thecompany to send the used parts from a bonded warehouse to Europe for quality inspection(e.g. a package was opened and the parts used for diagnosis and testing). The only type ofparts that may not be returned through the temporary borrowing system to the bondedstock is the item that is the cause of the machine failure. Should these items be consideredas being repairable, they are stored in a small non-bonded stock attached to thebonded warehouse. On reaching a minimum value, the repairable parts can be declaredand re-exported to Europe. No export duty or taxes have to be paid if each specificrepairable part is returned to China through the repair and return system.

Finally, Machine Inc. defined the roles of the logistics concept. The global spare partscentre in Europe remains responsible for the definition of strategic guidelines for theparts business in Asia. It plans inventory levels and monitors key performanceindicators for the spare parts business (e.g. availability, inventory levels and volume).The regional warehouse is responsible for the implementation of the strategic guidelinesand shares logistic know-how with the Asian sales companies. It also monitors customersatisfaction in terms of delivery times and service levels. Responsibilities also include

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the selection of logistics partners for running the warehouses and local deliveries as wellas the management of the return process of repairable parts. Local sales companiesremain responsible for diagnosing machine breakdowns and ordering spare parts fromthe regional warehouse.

The logistics concept can be summarized as identifying the most suitable location fora regional warehouse; setting up a bonded warehouse in co-operation with a logisticsprovider that is able to perform post-custom clearance procedures and can offer thetemporary borrowing option. Bonded regional warehouses thereby deliver partsdoor-to-door to all Asian customers. Spare parts for the domestic Chinese market inparticular require the use of post-customs clearance procedures, before being delivereddoor-to-door from the bonded warehouse to the final customer. The temporaryborrowing option enables Machine Inc. to deliver parts for diagnosis and testing to thecustomer and to return them to the bonded warehouse without any customs clearance.More specific details and performance indicators are illustrated in Table IV.

DiscussionThe study goes beyond the existing literature (Patton and Feldmann, 1997; Pfohl andEster, 1999) on the management of spare parts. Conditions pertaining to spare partslogistics specific to the Chinese market, which would allow a cross-cultural logisticscomparison, were explored (Luo et al., 2001). Rather than concentrating on performancebenchmarks of the supply chain of spare parts or specific aspects of spare partsmanagement, this article develops the setting up of a cutting-edge logistic solution forChina and Asia. The cutting-edge solution is based on two main pillars:

(1) Companies should try to develop logistics solutions for Asia that considerexisting Asian and Chinese constraints instead of taking the logistics practicesused in mature markets and trying to adapt them to the Chinese market.

(2) The development of the logistic solution should be in intensive collaborationwith the logistic providers.

Both pillars are discussed in more detail in the following paragraphs.Interestingly, enough, both the exploratory focus group and the single case study

revealed an absence of a strict application of performance benchmarks. Literature oftensuggests that logistics solutions could be evaluated based on performance benchmarksduring the design phase (Pfohl and Ester, 1999). The lack of internal data, however,is often restrictive, forcing companies to rely on subjective estimation instead ofsimulations and calculations of logistic performance. Furthermore, the Chinese marketseems to be rather complex with regard to measuring the performance of logistics.Companies complain that they are only able to receive rough estimates for logistics costsand delivery times from the logistic providers whereas, in most Western countries, it ispossible to receive guaranteed delivery times and costs for various post codes. Deliverycosts in China, for example, were often given in the form of average calculations forwhole provinces.

Another interesting observation emerged from the joint venture between the logisticsservice provider and Machine Inc. Literature often reports intensive cooperation duringthe operation of a logistics network, but tends to neglect the collaboration necessary fordesigning the logistics program (Tian et al., 2008). Logistics partners are not involved indesigning the program: they are simply expected to respond to the specification sheet

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for logistics services and provide attractive prices. Collaboration in this single casestudy proved to be very beneficial.

It was discovered that the development of a learning relationship between the logisticsprovider and Machine Inc. was an important success factor. It resulted in the personnel

Initial situationAfter implementation of the logisticssolution

Description Local (non-bonded) warehouses attachedto the seven Asian sales subsidiaries(Beijing, Shanghai, Hong Kong, Japan,Singapore, South Korea and Taiwan)

One regional warehouse serves all AsiancustomersA regional warehouse is a bondedwarehouse with a minor non-bondedwarehouse for repairable partsLocal sales subsidiaries are responsible for

planning inventory, diagnosing machinefailures and processing ordersLocal warehouses operate using differentlogistics providersGlobal warehouse in Europe are used toreplenish local warehouses and send directshipments to customers

Shipment of spare parts to the customer ismade either from the regional warehouse(90 percent) or global warehouse(10 percent)

Shipment of spare parts to customerseither from local warehouses (60 percent)or the global warehouse (40 percent)

Parts are shipped directly to the customerand declared afterwards (post-customsclearance option)

Parts are imported into China Parts are shipped under temporaryborrowing conditions. Parts that are notinstalled are return to the regionalwarehouse without customs declarationbeing necessary

Repairable spare parts are not officiallyallowed to be returned

Repairable parts are returned directly tothe customer from either the bonded ornon-bonded warehouse

Each local warehouse is responsible forinventory planning and purchasing

One dedicated logistics provider is used forregional warehousing, as well as forshipments in Asia and ChinaThe global spare parts centre definesstrategic guidelines, plans the inventoryand monitors key performance indicators(e.g. availability, inventory levels andvolume)The regional warehouse implements theguidelines and monitors customersatisfactionLocal sales companies diagnose machinefailures and order spare parts

Logisticsperformance

Gross inventory value: 8,460 KEUR Gross inventory value: 2,200 KEURWorking capital costs: 508 KEUR Working capital costs: 136 KEURAvailability of parts: 54 percent Availability of parts: 90 percentWarehousing and delivery costs (regionalwarehouse to customer): 593 KEUR

Warehousing and delivery costs (regionalwarehouse to customer): 593 KEUR

Delivery costs (Europe to local warehouse):839 KEUR

Delivery costs (Europe to regionalwarehouse): 273 KEUR

Average delivery time: 64 hours Average delivery time: 24 hours

Table IV.The situation before and

after implementation ofthe logistics solution

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of the logistics service provider becoming more skilled and working actively towardsmeeting the logistics needs of Machine Inc. The personnel of a logistics provider learnabout the complex logistics system and gain an intimate understanding of their logisticsrequirements. Machine Inc. also learned about the capabilities of the logistics providerand that the logistics provider can, in fact, be trusted to solve current and future logisticschallenges. The role of Machine Inc. in leading this joint support venture is also a successfactor. Although there was a lot of interaction between the logistics provider and MachineInc., the complexity of the logistics systems means that they are forced to team up if theyare to resolve challenges. The specific interrelationships between a bonded warehouse,post-customs clearance and temporary borrowing would not be a part of the logisticsconcept without such intimate collaboration (Tian et al., 2008).

The positive association between collaboration and logistics performance suggeststhe existence of different types of inter-company collaboration. Logistics services inmature logistics markets such as Western Europe or Northern America are highlystandardized; ongoing collaboration between logistics providers and capital goodsmanufacturers is characterized by strong “transaction orientation”. This means thatthe logistics fees and prices are a markup for warehousing and transportation costsevery time a logistics service is provided. This form of collaboration implies thatwarehousing and transportation services are based on periodical tenders, and thatcapital goods manufacturers choose the logistics partner with the most reasonableprices for the delivery in question. The choice of logistics partner in China should,on the contrary, consider the opportunities presented by such collaboration and notconcentrate solely on the price.

Inter-company collaboration should link the logistics people of the capital goodsmanufacturers with a diverse collection of individuals from the logistics partner. InChina, such collaboration also requires the involvement of import of record (IOR) andexport of record (EOR) firms, which aids the development of a shared understanding ofboth the logistics conditions and the complex requirements of spare parts logistics.Close collaboration with logistics partners helps clarify the degree to which newlyformulated modifications in the logistics procedures fulfill the underlying logisticsneeds and desires. It is therefore suggested that collaboration be centred on developinga learning relationship. This, in turn, requires different roles and competences beingavailable at the logistics provider and the capital goods manufacturers. Logisticsproviders have to be perceived as being trusted advisers; as such, they collaboratewith, and provide unbiased recommendations to, capital goods manufacturers as tohow they can achieve the improvements desired in the complex Chinese and Asianlogistics systems. They should participate in both the formulation and implementationof logistics problems and not just in the implementation of a manufacturer’s solution.

Such a learning relationship is educational for logistics partners, as they gainexperience in problems surrounding the complexities of spare parts logistics.Manufacturers gain an intimate understanding of Chinese as well as Asian logisticssystems. Succeeding in such a learning relationship requires behavioural and focusedattitudes from both partners. The learning processes are rather complex and should,therefore, be firmly established with the leaders and managers, who can encourage andmonitor learning and collaboration performances. Bearing this in mind, establishingleading-edge logistics solutions in China and Asia transcends traditional topics of logistics,

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adressing instead the way in which logistics partners and capital goods manufacturersshould work together.

Furthermore, context factors do not determine the logistics concept. The companiesare first and foremost after-sales service providers in China; their logistics requirementscentre on delivering parts as quickly as possible to the customer in the event of abreakdown. This argument agrees with the dominant customer expectations of Chinesemanufacturing companies. The major segments are highly sensitive either to price or thelogistics performance of their basic service requirements. Focus on basic service needscorresponds with the value proposition of an after-sales service strategy. The density ofthe installed base is still rather low, considering the geographical dimensions of Chinaand Asia, and restricts the establishment of additional local warehouses in China. Thelogistics solution proposed by Machine Inc. is not, however, limited by the size of thecompany: it can be implemented by medium-sized companies as well as multi-nationalenterprises. The only restriction applies to small companies without their ownsubsidiaries in China. A subsidiary is necessary because of the legal handlingrequirements of non-bonded warehouses, which have to be attached to a local legal entity.

The practical impacts of collaboration hinge on the ability of the company todevelop useful recommendations for their managers. The managerial implications canbe formulated around the question of how managers can organize procedures andprocesses for enhancing the company’s spare parts logistics in China and Asia.Managers can judge the suitability of their existing logistics concepts by comparingthe approaches outlined. The description of the direct export of spare parts and theprovision of spare parts from local warehouses to customers can help managers focusmore on specific logistics issues. Managers can use the results obtained in this study tochallenge their current logistics practices and develop a project procedure on how toinitiate logistics projects that lead to cutting-edge logistics performance.

Despite substantial managerial and theoretical implications, the study also hassome limitations. General inferences cannot be made, as is the case with any qualitativeresearch. The focus groups and single case study were combined for reasons ofconvenience rather than being representative (Miles and Huberman, 1994) and, as such,the extent to which our results can be used to generalize examples remains unclear,even though this method of analysis (exploratory focus group and longitudinal actionresearch) seems promising. Future research should obtain additional qualitative datato replicate our findings. Researchers should then be able develop further hypotheseson the relationships between logistics performance, logistical design elements andcontext variables and test them empirically.

ConclusionConducting action research with a variety of firms allows this article to provide a betterunderstanding of challenges in the field of spare parts logistics in China. A cutting-edgelogistic solution is introduced to cope with the challenges faced. This solution uses notonly performance benchmarks of the supply chain of spare parts but also specificaspects of the management of spare parts. In addition, this innovative solution is basedon two main pillars:

(1) Companies should try to develop logistics solutions for Asia that considerexisting Asian and Chinese constraints instead of taking the logistics practicesused in mature markets and trying to adapt them to the Chinese market.

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(2) The development of the logistic solution should be in intensive collaborationwith the logistics providers.

Implementing this cutting-edge solution overcomes the disadvantages associated withexisting approaches to spare parts logistics, such as the direct export of spare partsfrom Europe to customers in China (Asia) or the provision of spare parts to customersin China (Asia) from local warehouses and warehouses replenished from Europe. Thecutting-edge solution takes advantage of short delivery times for parts, high customersatisfaction and low logistics costs, as well as reasonable warehousing, inventory andworking capital costs.

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Corresponding authorHeiko Gebauer can be contacted at: heiko.gebauer@eawag.ch

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