A few years ago we developed a supply chain strategy for the spares group in a large semi-conductor company. The catalyst for the project was a request from their sales group to provide each customer with their own spares warehouse located inside each customer’s facility. That’s great customer service, but very expensive. It was an easy thing for sales to request since they were not paying for inventory or supply chain expenses.

We were engaged to help the company determine conditions under which customers “earned” their own warehouse. We developed a deployment simulation system to help them answer the question on an on-going basis (Figure 1).

We began by working with finance to develop a return on asset threshold for customer warehouses. Based on estimated revenue, inventory consumption, and location logistics, we estimated return on assets (ROA) for on-site stocking for each customer. Customers were assigned on-site inventory based on their predicted ROA. Customers who did not qualify for the on-site spares program were given the option to increase volume to qualify.

Sales and marketing accepted the responsibility of the additional supply chain costs of supporting on-site inventories. The key was having finance, sales, and supply chain collaborating to work through the decision with reliable data and a real-time decision support tool.