Coming to America: A Service Success Story
By Marco Ciccolini -- Supply Chain Management Review, 11/1/2008
Piaggio is Europe's largest manufacturer of two-wheeled vehicles, most notably the Vespa scooter. About 10 years ago the company eyed a growing U.S. market and began a project to expand its presence here. The number of dealerships selling the Piaggio brand names, including the Vespa, grew.
The company set out to improve its service levels by opening a U.S. distribution center in Atlanta. Not long afterward, I made the move from my home in Tuscany to New York to oversee the management of Piaggio's spare parts distribution in the U.S.
Upon my arrival, I found myself in a very different world. The first difference was the language barrier. I spoke English fairly well for someone living in Italy. However, I discovered that when it comes to doing business in the U.S., complete fluency in English is all but a necessity. Some dealership managers taught me English words I may otherwise never have learned. Unfortunately, they weren't always ones I wanted to hear.
Most of the “unkind words” were prompted by another cultural difference I had not been prepared for: the fast pace of American society and high expectations of customers. In Italy, it is not uncommon for a spare part not to be in stock and take perhaps three or four days to become available. In the U.S., if a part was not immediately available and the repair of someone's Vespa was delayed, the customer was more likely to become agitated.
I also discovered upon my arrival in the U.S. that the efficiency of Piaggio's U.S. operation was something less than I had experienced in Piaggio's Italian distribution centers.
So before I could even fully adapt to the language and cultural differences, I found myself working extra long hours and even weekends to field numerous complaints and even “Lemon Law” threats from dealerships in the wake of abundant backorders. I also found that we were dealing with an alarmingly high level of dead stock resulting from an inability to sense regular demand versus specialized demand.
Assessing The Problem
As I looked into these issues to see how we could resolve them, I identified three areas to address:
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Each of the brands appeals to a very different type of customer. This meant that each had very different demands, particularly for the replacement parts I was overseeing; this made it difficult to model and predict their needs.
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Our supply chain model originated with parts manufactured in Europe that were then shipped to the distribution center in Atlanta before being forwarded on to the dealerships on an as-needed basis. This extended chain translated into an average five-week lead time.
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Despite the extended lead time, new dealerships were not recognizing the need to stock spare parts, even the more frequently requested ones.
These issues were just part of the problem, though. In addition, forecasting and modeling was still being done by hand on basic spreadsheets. This limited how accurately we could depict the demand and stock levels for spare parts.
The impediments to optimal supply chain management, combined with the inefficient system for forecasting and modeling, forced us into a situation where we were placing far too much reliance on expediting shipments via air freight. The result was higher costs in the midst of service levels that dipped into the 50-percent range.
In March 2006, we took steps to address these service level issues by implementing an IT solution for our supply chain. We started with the SAP R/3 system. This provided us with basic inventory, forecasting and accounting applications. The solution paid dividends as the company's five-day service levels, which had fallen to percentages as low as the 40's, rebounded into the 70's and 80's almost immediately.
Bold Promise
It was at this point when our corporate president made a bold move that threatened to cause more problems. At our September 2006 dealers meeting, a pledge was made to replace any Piaggio product that could not be repaired within 15 days with a new one. I could already imagine hearing my phone ringing again on weekends with calls from dealers upset over having to provide new scooters or motorcycles to customers because we hadn't fulfilled a parts order in a timely fashion.
Although the implementation of the SAP R/3 system improved our service levels, they were still inconsistently dipping and peaking over the six months they'd been in place.
With this new 15-day replacement guarantee in place, we knew we would have to develop a more consistent system, one that would exceed 90-percent on a consistent basis. If we didn't meet that challenge, we would be facing the potential loss of a great deal of money to replacing products, not to mention the effect on customer perception.
In October 2006, we took steps to ensure this consistency by implementing ToolsGroup's inventory optimization package, Service Optimizer 99+ (SO 99+). We followed the model that had been deployed by our European divisions, where SO 99+ was used to manage approximately 180,000 SKU-Ls and optimize the inventory for more than 50,000 products with a variety of characteristics in terms of volume, price, and cost.
Within two months, our process for fulfilling spare parts orders had been revamped. This system not only generates requests for the stock needed to fulfill orders, but also provides us with a forecast model for in-transit and safety stock that minimizes inventory while still improving the service level for parts requests.
By February 2007, the impact of our more analytical approach was already being felt. Five-day service levels for all of Piaggio USA's brands leapt into the 90-percent range, sometimes exceeding 95-percent, and remained consistent throughout the rest of the calendar year. We have dramatically reduced reliance upon expediting orders via airfreight and reversed the ratio of transatlantic ship versus air transit. This major upswing in service level was accomplished without adding excess inventory.
While our U.S. spare parts operations has witnessed significant success in improving service level optimization, our goal is to continually improve. In 2007 we employed the joint SAP-ToolsGroup system and created the right inventory mix to meet our needs and dramatically improve our service levels.
Meanwhile, with the increased price of gasoline, Vespa and Piaggio sales continue to boom in the U.S., bringing even more challenges ahead.
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