Managing “Equivalent Parts” Effectively
If there is a single topic in supply chain management that seems to defy easy solution, it’s “equivalent parts.” Even explaining why the subject leads to such complexity is difficult, because the situation varies so much from company to company. The explanation is often rooted in engineering and operations practices that were set up years ago, which can be difficult to undo. Additionally, when companies indulge in mergers and acquisitions, the situation generally gets even more complex.
Thus, let’s look first at what “equivalent parts” are, and the issues that arise from them. Then we can begin looking at some of the specific solutions available to manage them more effectively.
Nearly all of us have had some experience with items (often, from different suppliers) that are equivalent to each other in terms of their form, fit and function. Even if we haven’t encountered them at work, we see this in the grocery store when we buy commodities like butter, milk and flour; and we see it in the automobile parts aisle when we buy items like windshield wipers, replacement light bulbs, and batteries.
With a little thought, we also recognize that there are degrees of equivalence. Even though they fit our car and provide the same basic function, cheap “Brand X” windshield wipers may not last as long, or clean the windshield as well, as name-brand replacement wipers. A recipe that calls for Irish butter may not taste the same if it’s made with the store brand. We also intuitively know that the degree of equivalence may depend on a person’s environment and personal circumstances. The quality of a windshield wiper will make a much bigger difference to someone who lives in a rainy climate; the performance of a head lamp bulb will matter more to someone who drives in the countryside at night; even the exact taste of butter made from grass-fed cows vs. feed-lot cows will matter more to someone with a sophisticated palette.
The degree to which this is an issue in industry depends on the degree to which that industry uses standardized parts. “Discrete” industries – companies that sell products that are primarily assembled (rather than fabricated or processed) tend to be most affected. The high-tech/ electronics industry is heavily reliant on standard components. Automotive manufacturing also uses a significant number of standard parts, and even industrial machinery relies on the easy availability of some standardized parts.
Standardized parts make it easier to design a product, but make source management more difficult. Custom-manufactured parts are by their nature almost certain to come from the chosen manufacturer; but standard parts could come from a variety of suppliers – thus, more control is needed. Most companies gain that control by issuing their own internal part numbers, and approving specific manufacturers to provide those part numbers… and that is precisely what creates the potential for multiple equivalent parts in the same company.
The “degrees of equivalence” concept explains why the topic of equivalent parts in manufacturing defies easy description (not to mention solution). A high level of equivalence is important if the end product is, for instance, used in an airplane or automobile, where failure can mean personal injury or even death; versus in a flat-screen TV set or personal printer, where failure is less critical even if it leave a consumer unhappy.
A further complication is how a particular organization wants to use the concept of equivalent items. A contract manufacturer may recognize, for instance, that it is buying the exact same part, from the same two or three suppliers, for fifty of its customers. They may simply want a mechanism that permits them to consolidate their purchases under one purchase order and one part number, but correctly account for usage for each individual customer. That’s a substantially different requirement than another organization that has permitted “part number proliferation” (multiple internal part numbers that represent essentially the same item in terms of form, fit and function) and is facing a shortage of part number XYZ. Can they find another part that has the same form, fit, and function that has sufficient inventory to relieve that shortage?
The good news is that there are tools that address many of the specific requirements to better manage companies’ issues and opportunities around equivalent parts. Some of those tools are available in nearly every ERP system; a few have been developed by companies like SAP to provide solutions to common supply chain issues. The specific solution(s) that a company needs will depend on its engineering practices, the master data, the products made and the markets they serve, as well as the supply chain environment. However, most equivalent parts situations fall into one of three main categories:
- A need for greater efficiency or lower costs in managing the inbound supply chain. These solutions are strategic and preventive in nature – if done properly, many problems will be avoided.
- An urgent need to solve a particular supply chain issue – usually a shortage but sometimes also a parts surplus. These solutions are reactive.
- A proactive opportunity to learn from a previous supply chain issue and solution. For example: if we had a shortage of X and were able to substitute Y, document that in a systematic way, so if it happens again we can apply the same solution with less effort.
The good news is that many of the strategic, preventive solutions can be implemented with conventional tools – and those solutions will improve an organization’s ability to execute the reactive & proactive processes as well. The bad news is that many organizations struggle to use some of the conventional tools because they would involve significant changes to legacy systems (both in terms of the company’s management systems, as well as its IT systems). However, implementing some of these ideas can enable considerable cost savings. It’s also possible to combine them with major system upgrades (like a move from SAP ECC to S/4HANA). The short list includes:
- Structured, Standardized Description fields. A typical approach is to standardize description of components from major categories down to individual attributes – for instance, “Capacitor, Ceramic Chip, X7R, 0.1µF, 10%, 8050, 50V” for a ceramic chipcap or “Transistor, Bipolar NPN, MMBT3904, SOT23” for a transistor. Describing each component in a standard way will make it easy to search for similar items – and will often expose duplicates that are essentially identical to each other.
- A Part Number Consolidation program can identify duplicate part numbers and determine if there is a valid reason to retain both of them. (Sometimes there is a valid reason – usually due to a specific customer, or because one part is being applied to a product that requires tighter controls. But it is not unusual to find that a dozen part numbers can be consolidated down to two or three.
- Approved Supplier List. This simply allows a company to identify that Supplier XYZ’s part number SP12345 has been approved for use under that company’s internal part number IN13579. (Some companies will also limit their approval to parts from a specific manufacturing facility.) The real power comes when the company additionally approves Supplier ABC’s part number AB12345 for use under that same part number IN13579. This essentially combines two (or more) external part numbers into one internal item code.
- Consolidated Inventory Database. You get this for free if you have all of your company’s operations on a single ERP system – but if your company still has multiple ERP systems, you may need to build a data warehouse. The combination of a consolidated view of inventory with standardized descriptions will make it a lot easier to analyze shortage situations. (For instance, if you are short 10,000 pieces of part number IN13579 in one factory but find that you have a 20,000 piece surplus of part number IN98765 in another factory – and the two have almost identical descriptions – you may be able to fill the shortage, after suitable review by engineering.)
What if you can’t execute these now, or in the foreseeable future? Some of these tools can be put in place over time – once you have set a standard for part number descriptions, for instance, you could require that all new products use the updated structure. Additionally, at least one of the major ERP players has enabled special functionality that permits some work-arounds. For instance, SAP’s Form-Fit-Function Class “Material Type” permits an organization to identify two different part numbers as “fully interchangeable.” This is an incredibly powerful tool, although it needs to be used carefully. (Once it is set up, two or more part numbers linked together in this way are deemed to be perfect substitutes for each other, with no additional approvals needs and no constraints placed on exchanging one for the other.)
Another SAP tool is called “alternative parts.” This is much more limited in scope but as a result can be used more often. The tool essentially identifies a part that can be substituted for another, but only on a specific product (BOM). This is a proactive tool – once a part has been determined to be ‘sufficiently equivalent’ to another in a particular application, that relationship can be documented on the product’s BOM; and therefore an organization can take advantage of it the next time there is a discontinuity in supply.
There are additional tools available as well – but organizations that identify opportunities to use equivalent parts in some way will also need to think about process. More on that later.