Managing Critical Spare Parts within a Buyer–Supplier Dyad: Buyer Preferences for Ownership and Placement

• Author: Cynthia Wallin Blair,Manus Rungtusanatham,Richard Bruce Money,Yuhchang Hwang,Elliot Rabinovich
• DOI: http://doi.org/10.1111/jbl.12243
• Published date: 01 June 2020
• Date: 01 June 2020

Managing Critical Spare Parts within a Buyer–Supplier Dyad:

Buyer Preferences for Ownership and Placement

Cynthia Wallin Blair

1

, Manus Rungtusanatham

2

, Elliot Rabinovich

3

, Yuhchang Hwang

4

, and

Richard Bruce Money

1

1

Brigham Young University

2

York University

3

Arizona State University

4

China Europe International Business School

Despite the criticality and expense of spare parts, many firms lack a coherent strategy for ensuring needed supply of spare parts. Moreover,

scientific research regarding a comprehensive spare parts strategy is sparse in comparison with direct material. Our research identifies and

tests three literature-based, theoretically anchored attributes that influence a buyer's preference for inventory ownership and inventory placement

when managing the stock of a critical spare part. Our findings indicate that item specificity and item supply uncertainty are useful in predicting

a buyer's preference for managing the inventory of a critical spare part. Furthermore, we find that buyers have (1) a strong preference for con-

signment-based inventory management approaches, (2) a bias against inventory speculation despite its use in practice and analytical models,

and (3) a strong preference for inventory postponement when the level of supply uncertainty is low.

Keywords: spare parts; specificity; customization; uncertainty; consignment; scenario-based role-playing experiment; experimental design

INTRODUCTION

Spare parts are independent demand items used to repair and

maintain operational systems. No doubt they constitute a large

capital expenditure for firms (Bailey and Helms 2007). Take, for

example, the airline industry, which spends more than $10 bil-

lion per year on spare parts and has more than $50 billion worth

of spare parts sitting in warehouses, 80% of which is owned by

airline operators (Yen et al. 2009). In manufacturing, spending

tied to spare parts for maintenance, repair, and operations

(MRO) typically accounts for 20%–50% of all purchases by

value and 70%–90% of purchase orders, shipment expenses, and

invoices processed (Barry 1999; Carter et al. 2003; Cox et al.

2005).

In addition to the sheer dollar value of spare parts spending,

spare parts require a different approach to ensuring availability

and minimizing costs compared to direct material, due to their

unique nature and use (Strijbosch et al. 2000; Kennedy et al.

2002; Bailey and Helms 2007; Wagner and Lindemann 2008).

Spare parts are replaced based on maintenance policies rather

than customer usage, which means a part might be repaired

rather than replaced depending on the reason for its failure,

something that is difficult to predict in advance. Reliability infor-

mation is generally not available to the degree needed to accu-

rately predict failures, particularly for new equipment. Part

failures are often dependent on other parts or systems, further

complicating the planning process. Demand for a spare part is

sometimes met through cannibalization of other parts or units,

making it difficult to predict future needs. Also, spare parts

become obsolete when equipment is retired. While most spare

parts are rarely used, they are critical to maintaining production,

and if a spare part is not available when needed the likely out-

come is unexpected downtime and lost revenue (e.g., Strijbosch

et al. 2000; Huiskonen 2001; Kennedy et al. 2002; Bailey and

Helms 2007; Wagner and Lindemann 2008).

Despite the criticality and expense of spare parts, many

firms lack a coherent strategy for ensuring an adequate spare

parts supply (Barry et al. 1996; Cox et al. 2005; Bailey and

Helms 2007; Wagner and Lindemann 2008; Kowalkowski

et al. 2012; Slater 2014). This may be because scientific

research regarding spare parts is sparse in comparison with

nonspare parts, or because of a na€

ıve belief that spare parts

can be managed in the same manner as direct materials (Barry

et al. 1996; Huiskonen 2001; Strijbosch et al. 2000; Cox et al.

2005; Bailey and Helms 2007; Wagner et al. 2012). Of partic-

ular note is the lack of research that addresses the ownership

and placement of spare parts (Huiskonen 2001; Wagner and

Lindemann 2008).

To remedy these shortcomings, our paper investigates the

effects of three literature-based and theoretically anchored factors

(i.e., item specificity, item supply uncertainty, and item usage

rate) on buyer preferences for the ownership and placement of

critical spare parts. Data were collected from 256 sourcing pro-

fessionals participating in a scenario-based role-playing experi-

ment in which they assumed the role of the buyer for a critical

spare part in a manufacturing setting. In answering the call for

further research into how firms establish their spare parts strategy

(e.g., Huiskonen 2001; Cox et al. 2005; Bailey and Helms 2007;

Wagner et al. 2012), we provide a model to assist buying firms

in developing a sound plan for managing their critical spare

parts. The model can also assist suppliers to better predict a buy-

ing firm’s preference for their spare parts inventory strategy and

thus improve the probability of suppliers’success in developing

solutions for customers and negotiating favorable outcomes with

buyers.

Corresponding author:

Cynthia Wallin Blair, Department of Marketing and Global Supply

Chain, Marriott School of Business, Brigham Young University,

Provo, UT 84602, USA; E-mail: cynthia.wallin@byu.edu

Journal of Business Logistics, 2020, 41(2): 111–128 doi: 10.1111/jbl.12243

© 2020 Council of Supply Chain Management Professionals

LITERATURE REVIEW

Overall, research into managing spare parts has focused on the

tradeoff between ensuring access to spare parts and the cost of

maintaining adequate inventory. Scholars have used two main

approaches in their research: first, analytical modeling aimed at

optimizing spare parts policy, and second, empirical observation

aimed at understanding larger strategic questions related to spare

parts management (see Table 1).

Our review of the literature revealed three factors that impact

a buyer’s inventory management strategy for a spare part: the

demand pattern, the supplier’s behavior, and the degree of cus-

tomization (see Table 1). To date, however, these three factors

have not been examined in an integrated, holistic manner. More-

over, supplier behavior in particular has not been fully explored.

A handful of analytical models include supplier lead time and

mention supplier performance as a significant factor in buyer

decision making (Wiggins 1967; Wong et al. 2005; Hua and

Zhang 2006; Romeijnders et al. 2012). However, it is not clear

from these oblique references how supplier behavior specifically

impacts buyer decision making for spare parts inventory.

The analytical modeling research offers multiple approaches to

the challenging task of forecasting demand for spare parts and

determining cost-efficient ordering policies (see Table 1). From a

buyer’s point of view, this research addresses how much of a spare

part to stock in order to prevent a shutdown in a manufacturing

facility (e.g., Dekker et al. 1998; Sarker and Haque 2000; Strij-

bosch et al. 2000; Chang et al. 2005; Louit et al. 2011; Wang

2012). On the other hand, from a supplier’s point of view, the

research highlights how much of a spare part to stock to maintain

an acceptable level of customer satisfaction (e.g., Cohen et al.

1989; Teunter and Haneveld 2002; Caglar et al. 2004; Jalil et al.

2011; Pincße and Dekker 2011). In every case, some aspect of the

demand pattern is used in these models, that is, either the pre-

dictability of demand or the time between usage (see Table 1).

Most models acknowledge the unique behavior of spare parts com-

pared to direct materials (Cobbaert and Van Oudheusden 1996;

Dekker et al. 1998; Strijbosch et al. 2000; Teunter and Haneveld

2002; Chang et al. 2005; Vaughan 2005; Hua and Zhang 2006;

Hua et al. 2007; Louit et al. 2011; Jalil et al. 2011; Pincße and Dek-

ker 2011; Romeijnders et al. 2012; Wang 2012). Likewise, most

models include some aspect of the importance of the spare part,

either the high cost or degree of criticality (e.g., the manufacturing

line will not operate without it) (e.g., Cobbaert and Van Oudheus-

den 1996; Dekker et al. 1998; Sarker and Haque 2000; Teunter

and Haneveld 2002; Caglar et al. 2004; Chang et al. 2005; Regat-

tieri et al. 2005; Vaughan 2005; Louit et al. 2011; Pincße and Dek-

ker 2011; Wang 2012). In each model, the assumption is made that

the ownership of the spare part follows its placement.

The relatively smaller body of empirical research regarding

spare parts has focused more broadly on the strategy used to

manage this unique type of inventory (e.g., Cohen and Lee

1990; Cox et al. 2005; Bailey and Helms 2007; Cavalieri et al.

2008; Wagner and Lindemann 2008; Bacchetti and Saccani

2012; Wagner et al. 2012). A consistent theme in this research is

that many firms do not have a plan in place to manage spare

parts inventory, despite acknowledging that this inventory

requires a different approach than production inventory (Barry

et al. 1996; Cox et al. 2005; Bailey and Helms 2007; Cavalieri

et al. 2008; Wagner and Lindemann 2008; Kowalkowski et al.

2012; Wagner et al. 2012; Slater 2014). It is also interesting to

note that, generally speaking, firms do not use the inventory of

critical spare parts-planning models from academic research

because they find them too complex to implement (Wagner and

Lindemann 2008; Bacchetti and Saccani 2012). Similarly, in this

research, the assumption is made that ownership is usually not

decoupled from the placement of spare parts inventory.

Gaps in the research

Our review of the literature exposed several important gaps

between what we currently know about critical spare parts inven-

tory management and what scholars and practitioners need to

know. Specifically, we see gaps in the research related to the

limited number of factors considered in that research, the

assumptions made regarding inventory ownership and placement,

and the methods used.

There is a clear focus in prior research on the demand pattern

(predictability or frequency of use) for spare parts. Mention is

made in the literature of the importance of the supplier’s perfor-

mance in some form (see Table 1), but we lack definitive find-

ings as to how the supplier’s behavior impacts inventory

management preferences of the buying firm. Hence, the behavior

of the supplier appears to be an important aspect of spare parts

management that merits further examination.

Another under-researched theme in prior research is how the

type of spare part, whether standard or customized, affects the

management of spare parts inventory. Suomala et al. (2002)

develop a framework for suppliers to use when deciding whether

or not to offer a customized spare part; several articles also men-

tion the need to consider the degree of customization in the spare

parts management strategy (see Table 1). However, we lack a

clear understanding of how customization influences a buyer’s

preference for managing the inventory of a spare part.

In addition to the narrow focus on the demand pattern, the

vast majority of the research to date also assumes that the owner-

ship of a spare part follows its placement, therefore limiting the

options for inventory management to speculation or postpone-

ment (Bucklin 1965; Zinn and Bowersox 1988; Pagh and Cooper

1998). A handful of articles note the importance of considering

inventory ownership and placement as activities that can be

decoupled (Huiskonen 2001; Cox et al. 2005; Bailey and Helms

2007; Wagner et al. 2012), opening the door to alternative con-

figurations of inventory ownership and placement. Table 2 illus-

trates how considering inventory ownership and placement as

separate activities that either the buyer or supplier could perform

results in four inventory management approaches (inventory

speculation, inventory postponement, forward consignment, or

reverse consignment) and describes the advantages and disadvan-

tages of each from a buyer’s perspective (Wallin et al. 2006).

Finally, the majority of research conducted to date relies on

case study data. While case study research is particularly helpful

in collecting rich information about how a firm is managing its

spare parts, or how a particular analytical model might help bet-

ter balance meeting demand with minimizing costs, it is difficult

to generalize the results of such research to a larger population.

112 C. Wallin Blair et al.