Work-execution-management planning and condition-based maintenance are getting a lot of attention these days — as well they should. The internet of things combined with big data analytics and artificial intelligence are enabling supply chain professionals to focus on what will or might happen, rather than firefighting machine failures. It has never been easier to establish failure modes before they manifest as downtime.

A good maintenance strategy lays out when mandatory and preventive maintenance will be scheduled and suggests how resources should be deployed to identify failure modes and when interventions must be taken to maintain uptime. Ensuring that your maintenance strategy is attainable means having the skills, tools and asset availability to execute planned work in a timely manner. It also requires availability of the right parts and supplies. This is where maintenance meets supply chain — and integrated asset management is born.

But getting the right parts and supplies where and when they’re needed is more complicated than it sounds. It demands

• parts and supplies that are clearly identified and described
• easily accessible components stored in such a way that they won’t disappear, deteriorate or get damaged
• inventories that can be deployed close enough to point-of-use to be available when required, yet managed centrally to minimize administrative costs and leverage stocking synergies
• predictable, inexpensive deliveries that get supply where and when it is required
• reasonable prices to drive longer asset life with an overall low cost of ownership.

Not long ago, many companies designed their own solutions to these challenges. They built maintenance shops with warehouses, then filled them with highly trained and equipped technicians, tools, testing equipment and inventories. Companies would keep their relationships with equipment suppliers at an arms length, which drove them to buy the recommended critical spares and subsequent original equipment manufacturer (OEM) parts to maintain their warranties.

These businesses worked with specialized distributors for consumables and other parts. They managed their own inventories, determined how and when deliveries would occur, and incurred extra costs when expedited deliveries were required. They leveraged their buying power with each of these players, who built in extra profit to the prices so they could “give back” in power-based negotiations. The ensuing ecosystems were nicely profitable despite high inventories and material handling costs.

A new approach

Today, operating models are driving a greater service component into OEM and distributor capabilities. Inventory is consigned or held further up the supply chain, where several customers can be protected with the same slow-moving critical parts and modules. Parts and supplies are being kitted to each major maintenance task, then sent back to be topped up. On-site storerooms are staffed by distributor personnel. Repair shops are staffed by OEM technicians. Commercial models are emerging through which customers only pay for equipment when it is available.

These new models dramatically change the nature of the commercial relationship via a more complex sharing of tasks, responsibilities and risks. As we advance maintenance practices and leverage advances in technology and thinking, we must change the way we think about the supporting supply chain. The role played by suppliers and the terms of engagement we employ will play an increasingly important role in determining the success of our integrated asset management strategy. This is dramatically changing the nature of supplier relationships and placing new challenges on how maintenance and supply chain managers work with suppliers. Getting things done through independent third parties will be a crucial challenge. Both maintenance and supply chain managers must adapt to these new realities.

Sourcing models framework

The University of Tennessee recently published research into how these new relationships can be managed. It focuses on how organizations buy rather than what they buy. This distinction is important, as it aligns with the category strategies that support the maintenance strategies. In an environment where the customer has complete control over equipment design, installation, modification and maintenance, the suppliers provide easily defined products and simple services to well-established service and quality levels. A highly defined, arms-length, key performance indicator (KPI)-driven approach typically works in these cases.

At the other end of the spectrum, where the outcome is strategically imperative to the customer, but the solutions are not well defined, a far more collaborative model is required. This can go as far as a joint venture with another organization that has complementary capabilities.

Table 1: Strategic Sourcing in the New Economy (used with permission)

Table 1 summarizes the key characteristics of the various models. Transactional relationships on the left are used for easily defined and specified goods and services with predictable outcomes. Approved vendors typically are vetted for basic risk through compliance to generic risk parameters (business continuity, performance, service, warranty) and may have conceded preferential terms (price, service) for repeat business. Preferred suppliers typically offer greater benefits, such as unique accommodations or innovations. In exchange for sustained business and priority access to new opportunities, preferred suppliers are expected to offer greater value through industry best practices that can be adapted to customer specific situations. These might include dedicated or consignment inventory, onsite staff, customized dashboards, or any number of innovative industry practices.

Performance-based agreements seek to achieve defined results through service-level agreements with qualified providers who have distinct competitive advantages, such as low-cost labor, specialized or dedicated systems or facilities, unique competencies, and less onerous regulations. These arrangements work well for situations that are well-defined and evolve gradually, where greater capability or effort can drive better performance that can be rewarded with monetary incentives and other motivations.

When the stakes are high — volatile, uncertain and strategically critical — and calling for unique and rare competencies, a highly collaborative relationship model may be appropriate. These relationships mobilize the best capabilities from the most qualified and capable service providers. Ongoing relationship management is principally concerned with how to handle the inevitable unexpected issues and opportunities. This is the most strategically integrated commercial model before financial control is exercised via joint ventures or shared service centers. It is also the riskiest, due to the uncertainty, high stakes and third-party management.

There is a significant challenge at many organizations to keep these models consistent internally. Some organizations are tempted to call their relationships collaborative and strategic; they manage the day-to-day operations following tactical KPIs that enact severe penalties for a failure to perform. There is little incentive for the supplier to outperform, bring their best ideas to the table or take any risk with the status quo. Other organizations may seek a collaborative relationship where there is limited benefit. No matter how much the parties share ideas, their activity just doesn’t warrant the effort.

As new business models emerge in integrated asset management, both suppliers and buyers are stretching the traditional transactional model. Becoming more collaborative to drive real competitive-differentiating innovation is imperative. The sourcing models in Table 1 provide a framework to chart how new commercial models can support your strategic intent in an internally consistent manner, which will align common sustainable interests; achieve meaningful goals; and ensure effective working relationships, management tools, and risk management.

In a tactical relationship, the quid pro quo is simple: The buyer pays a sum to secure a simple, defined product or service. The brand defines the quality, the price is posted, and consumer protection laws provide indemnity if something goes wrong. As a regular customer, you may be able to earn loyalty rewards or more lax returns privileges. You also have the power to rate the experience on product availability, choice, price and the pleasantness of the overall experience.

As the products and services become more complex and durable, the relationship must manage many more specifics and risks. What you buy is more closely related to the benefit you derive. Instead of supplying a spare part, your equipment is returned to a serviceable condition at an agreed price and timeframe. How this is achieved is less important. By working together, you can better predict activity levels and breakdowns. The supplier uses their depth of experience, capability and competency to perform the work better, faster and more cheaply. You share the benefits, and a failure to perform to a minimum standard can incur penalties. If the supplier performs over time, you may give them more business, lower the compliance burden or provide other benefits available only to trusted or long-term partners.

Now if you are pursuing goals that require you to engage the capabilities of a service provider with unique capabilities, you probably will want to use a relational model or a collaborative contracting approach. This involves the following:

• Highly aligned objectives drive defined benefits for all parties; strategic and economic alignment is obvious. Incentives ensure everyone benefits from success and suffer from setbacks.
• A collaborative governance model brings the right attention to issues as they arise. Focus is on joint success, not fixing blame, so there are only disadvantages in concealing or distorting problems.
• The service provider was selected for their superior capabilities and competencies. They are free to work out how to achieve the objectives, and the buyer is committed to doing their share for the relationship to prosper and succeed. Success often means transformation of the status quo.
• The relationship will probably have a limited duration, so an orderly exit plan is developed at the outset, allowing operational continuity and investments to be amortized.
• Risk management goes beyond compliance to corporate enterprise risk management edicts of financial, business continuity, legal and trades requirements, as well as ethical and sustainability standards that are important for more tactical arrangements.

The greatest risks are executional: a failure to achieve those goals. Thus, the governance model must drive and maintain positive and open working relationships at every level, ensuring that everyone puts their best foot forward to help the relationship meet its ambitions. For this reason, collaborative contracting relationships often represent a microcosm within the greater organizations involved. Hence, most supply chains can only handle a handful of relationships and must focus on their most strategic initiatives requiring third-party involvement.

As integrated asset management drives new and more collaborative commercial models, organizations must learn to engage differently with their trading partners. The sourcing models framework can be used to structure these new relationships. Maintaining internal model consistency is paramount to ensuring the new commercial models perform.