How to share the benefits of cooperatively pooling spare parts?

Christmastime is around the corner, and with it comes the enchanting magic that draws us into a world of togetherness, peace, and trust. Surprisingly, these elements, central to the festive spirit, are also key ingredients for successful spare parts pooling. And unfortunately, these often are the pain points when pooling spare parts between different companies. Therefore, this so-called cooperative pooling remains far from common practice. Below you will read about the benefits of pooling and how these benefits are shared fairly with the other pooling partners.

What is spare parts pooling?

Spare parts pooling is simply about sharing a common inventory of spare parts with different parties. This concept aims to optimize the availability of critical/slow moving components while minimizing costs associated with inventory management (such as the costs you incur when an item becomes obsolete or the associated opportunity costs), storage and procurement. It can be broadly categorized into two types: internal pooling and external pooling.

Internal pooling – refers to the practice of sharing spare parts inventory within a single organization with multiple sites. The inventory can be stored centrally, via a hub-and-spoke network or distributed across all sites. As long as the total inventory is digitally managed as one (virtual warehouse).

External pooling – involves collaboration between different organizations. So this is where those three main ingredients I mentioned earlier are important! This form of pooling would, for example, be perfect for the four Dutch tram operators within the Randstad. Even though they use different tram models, many parts are the same. This similarity makes it easy for them to share and manage their parts efficiently. Plus, they’re all less than an hour’s drive away from each other. This example lends itself well to a cooperative pool.        

The advantages of spare parts pooling

  • Demand aggregation

    Demand for spare pasts is often unpredictable and erratic or lumpy (slow movers). And therefore, you usually have too much inventory for regular needs but lack enough for unexpected situations. For example, your tram needs a new derailment sensor on average every year, but then suddenly 4 of them break within two months. There is a good chance that you will miss out on your inventory at that moment.

    By pooling parts you also pool the demand. The advantage of this is that the aggregate demand is less volatile. As your peak demand is lost in the larger aggregate demand. Therefore, on average, less safety inventory is needed and you are not left without inventory during peak demand.

  • Supply aggregation

    When negotiating with suppliers, having a larger aggregated supply gives organizations more negotiating power. This can be especially advantageous when dealing with multiple suppliers or negotiating long-term contracts. Stronger negotiation positions can lead to better pricing, terms, and service levels.

    Supply aggregation could also simplify the procurement process by centralizing purchasing activities. This streamlining can lead to increased efficiency, reduced administrative overhead, and faster response times to maintenance and repair needs.

How to share the benefits?

The benefits of pooling are convincing, but many companies are still reluctant to join a pool. The main obstacle is figuring out a fair way to share the costs. Many companies are hesitant because they’re not sure if it will save them money. Some worry that some companies will end up paying more to help others, some doubt if everyone will share their information truthfully, and others fear that new members might get more benefits from the pool than they contribute.

So, how should the value generated by pooling parts be distributed among the users? This can be achieved by allocating the total realized costs proportional to users’ demand rates. This is an attractive solution because it fulfills three success factors. Firstly, every user in the pool benefits. As the costs are proportional to your demand, there’s no benefit to being a small or big player. Secondly, it encourages pool growth. The costs for users are directly proportional to the total costs. Therefore, if the pool grows, and the economies of scale increase, the costs per item decrease. Thirdly, it encourages users to be open about their forecasted demand. As users pay for the actual long-term average costs, there is no benefit in lying about your expected demand. Lying could only impact the pool negatively, thereby also negatively impacting the lying user.

In conclusion, the Christmastime feelings of togetherness, peace and trust, do not have to be confined to the holiday season. A simple solution—fairly sharing the benefits and costs of pooling—can make spare parts pooling a success year-round.

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Daniël Bassie
Junior Consultant