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Creating an Optimal Parts Management System, Part 1

A company can differentiate itself in the consumer electronics sector with excellent after-sales service. Medion AG, a manufacturer of consumer electronics and IT products, has established its reputation on such service. But in a market characterized by short product lifecycles, expensive spare parts, and uncertain demand for replacement parts, how can a company guarantee its after-sales support?

In conjunction with Abels & Kemmner, a Herzogenrath, Germany-based consulting firm, Medion has recently developed an intelligent solution for the stocking of replacement parts. First, some background. Medion's product groups focus on three areas:

  • PC/multimedia (e.g., personal computers, notebooks, TFT monitors, scanners, printers, and software)
  • Consumer and household electronics (e.g., televisions, flat screens and plasma screens, DVD players/recorders, and hard disk recorders)
  • Communication technology (e.g., including satellite-based systems, decoders, telephones, fax machines, and telephone answering machines)

One of Medion's challenges in the supply chain is its “build-to-order” model: Products are only manufactured in the required quantity once orders have been received from trading partners. The advantage of this production strategy is that there are no storage costs, a cost-savings the company passes on to its customers, yielding a particularly good price-performance ratio.

This strategy also ensures that the company's products are always up-to-date. Geographically, Medion has a strong market presence, not only in Germany, but throughout the euro-zone area as well as in Scandinavia and the United Kingdom. Also, in association with its trade and cooperation partners, the company has a number of very well positioned professional distribution and customer care units it can rely on.

On the surface, it may look as if such a business is quite simple; all you have to do is draw up some product ideas and sell, produce, and deliver the products. But that’s not the case. A particularly important part of Medion's value proposition for its partners is its own after-sales service for consumers. Medion partners therefore don't need to worry about this aspect of the business at all. A 365-day hotline at the company’s call center provides expert support on matters relating to use, warranty processing, and repeat orders.

Medion also carries out any repairs that might be necessary, and for specific products it sells in Germany it instructs a local service company that then calls on the consumer to provide advice or carry out repairs if need be. Medion also ensures that replacement parts are available to satisfy its customers’ needs by quickly resolving their technical problems, therefore reinforcing the quality of the brand when it comes to customer care as well.

Obviously, Medion can't completely do without stock, as particular importance is attached to stocking the right quantity of replacement components. The particular challenge here is that it's not possible to source replacement parts throughout the whole warranty period: Parts are frequently discontinued by manufacturers well before the warranty period of the end product expires.

Motherboards for PCs are often only available for delivery with identical component parts for a few months. Plastic housings for notebooks are often only available for delivery during production. The right hinge, therefore, has to be ordered in good time in case it is broken during the warranty period. At this point, though, hardly any information is available on the demand for replacement parts, as customers have not been using the products for long.

There are two risks involved here:

  1. Low stock:
  2. If the stock is too low, the replacement parts will run out and the customers' equipment will no longer be able to be repaired.

  3. Too much stock:
  4. If the stock is too high, Medion may be left with inventory at the end of the warranty period, increasing its costs considerably.

How can this conflict of goals be solved? In the second part of this series, we will take a step-by-step look at how Medion implemented its unique replacement parts management system.

6 comments on “Creating an Optimal Parts Management System, Part 1

  1. Barbara Jorgensen
    August 16, 2011

    The EOL issues Medion faces are really interesting:

    “Plastic housings for notebooks are often only available for delivery during production. The right hinge, therefore, has to be ordered in good time in case it is broken during the warranty period. At this point, though, hardly any information is available on the demand for replacement parts, as customers have not been using the products for long. “

    Most companies are concerned with the EOL of the highest-priced components–Medion clearly needs a soup-to-nuts solution. I am wondering if Medion's model is unique in Germany or even in Europe?

  2. jbond
    August 17, 2011

    This is an excellent article and I'm looking forward to the second part. It seems like Medion might have a solution to the problem that plagues all companies, how to control inventory without losing. Have other companies followed suit with Medion's inventory control? Or is this a universal management system used in Europe? It would seem like many companies would be able to benefit from this style of management. 

  3. _hm
    August 19, 2011

    It will be certainly interesting to study model of Medion optimal parts management. What is additional cost to customer?

  4. AKemmner
    August 19, 2011

    @Barbara

    Medion's business model is meanwhile almost unique in Europe, since practically all competitiors have failed to manage the spare parts / EoL problem sufficiently well. This is the Archilles heel at least in this business model.

    So Medion has been doing quite well already with its old spare parts / EoL planning process, but wanted to do better. For what we know the statistical approach that has now been taken is quite unique, as you will see in part 2.

  5. AKemmner
    August 19, 2011

    @jbond:

    Medion's approach towards  EoL forecasting is specific and by no mean a common approach. After the Medion project, the methodology applied has been implemented as a standard feature of a specific high-end forecasting tool, which is available on the market meanwhile.

  6. AKemmner
    August 19, 2011

    @_hm:

    Part of Medion's business model is to take care of the whole after-sales service for end-consumers on a “flat rate” basis. Medion's direct customers, e.g. resellers, do not pay additional fees for the after-sales service. Therefore: no additional costs for Medion's direct customers and full benefits for Medion resulting from the improved EoL-forecasting and inventory management results. Managing this risk for its customers is one of Medion's USPs.

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