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  • Author's Accepted Manuscript

    A decision-making framework to integratemaintenance contract conditions with criticalspares management

    David R. Godoy, Rodrigo Pascual, Peter Knights

    PII: S0951-8320(14)00152-5DOI: RESS5082

    To appear in: Reliability Engineering and System Safety

    Received date: 1 October 2013Revised date: 30 May 2014Accepted date: 27 June 2014

    Cite this article as: David R. Godoy, Rodrigo Pascual, Peter Knights, A decision-making framework to integrate maintenance contract conditions with criticalspares management, Reliability Engineering and System Safety,

    This is a PDF file of an unedited manuscript that has been accepted forpublication. As a service to our customers we are providing this early version ofthe manuscript. The manuscript will undergo copyediting, typesetting, andreview of the resulting galley proof before it is published in its final citable form.Please note that during the production process errors may be discovered whichcould affect the content, and all legal disclaimers that apply to the journalpertain.

  • A decision-making framework to integrate maintenance

    contract conditions with critical spares management

    David R. Godoy,a, Rodrigo Pascuala, Peter Knightsb

    aPhysical Asset Management Lab, Department of Mining Engineering, PontificiaUniversidad Catolica de Chile, Av. Vicuna Mackenna 4860, Santiago, Chile

    bSchool of Mechanical and Mining Engineering, The University of Queensland, QLD4072, St. Lucia, Brisbane, Australia


    Maintenance outsourcing is a strategic driver for asset intensive industriespursuing to enhance supply chain performance. Spare parts managementplays a relevant role in this premise since its significant impact on equipmentavailability, and hence on business success. Designing critical spares poli-cies might therefore seriously affect maintenance contracts profitability, yetservice receivers and external providers traditionally attempt to benefit sep-arately. To coordinate both chain parties, we investigated whether the sparecomponents pool should be managed in-house or contracted out. This pa-per provides a decision-making framework to efficiently integrate contractualconditions with critical spares stockholding. Using an imperfect maintenancestrategy over a finite horizon, such scheme maximizes chain returns whileevaluates the impact of an additional part to stock. As result, an originaljoint value -preventive interval and stock level- sets the optimal agreementto profitably allocate the components pool within the service contract. Sub-sidization bonuses on preventive interventions and pooling costs are also es-timated to induce the service provider to adjust its policy when needed. Theproposed contractual conditions motivate stakeholders to continuously im-prove maintenance performance and supply practices, thus obtaining higherjoint benefits.

    Key words: Maintenance outsourcing contract, Spare parts stockholding,

    Corresponding authorEmail addresses: (David R. Godoy),

    (Rodrigo Pascual), (Peter Knights)

    Preprint submitted to Reliability Engineering and System Safety July 2, 2014

  • Inventory pooling allocation, Imperfect maintenance, Supply chaincoordination.

    1. Introduction

    Maintenance outsourcing is a strategic means to improve business perfor-mance. Outsourcing creates value through the use of external resources byand for companies to acquire and sustain competitiveness [1]. The mainte-nance function is a main driver of outsourcing since it has excellent potentialto achieve cost benefits and enhance performance among partners [2]. Thisbusiness purpose is meaningful for asset intensive industries -such as min-ing, aeronautic, or defence- which face substantial investment in maintainingcomplex equipment and high demand on system availability. For these firms,main reasons to contract out maintenance tasks rather than perform themin-house are focusing on core business, accessing highly specialized services atcompetitive costs, and sharing risks [2, 3, 4, 5]. When dealing with outsourc-ing, effective supply chain coordination allows achieving a rewarding situationfor all stakeholders [3]. Accordingly, a model capable of coordinately opti-mizing performance can lead to successful maintenance contracting strategiesin capital intensive environments.

    Spare parts management has a critical role toward operational efficiencyof asset intensive industries. Equipment criticality is defined by the mostrelevant assets that efficiently and safely sustain production [6]. The opera-tion of such equipment is consequently supported by critical spare parts [7].Major spare components are related to considerable investment, high reliabil-ity requirements, extended lead times, and plant shutdowns with importanteffects on operational continuity [8]. A method to prevent production lossevents is having inventories at hand, especially when either target service lev-els or backorder penalties are large [9]. This is the case of capital intensivefirms, wherein critical spares storage is directly linked to business successdue to the impact of stock-outs on assets utilization [7]. As an example, theaviation supply chain holds remarkable US$ 50 billion in spares inventories toprovide availability service [10]. Efficient critical spares stockholding is there-fore essential for companies in which success strongly depends on equipmentperformance.

    Maintenance contracts profitability might be significantly affected by crit-ical spares policies. Particularly, the stock of critical repairable spares can


  • be interpreted as a pool of components from where replacements are satis-fied [7]. Consistently with the serious impact on operational and financialperformance, managing the pool of critical spare components becomes keyto improve profits within the service contract. However, as it depends on thedecision-makers position, both supply chain parties -service receiver (client)and external provider (agent)- traditionally intend to maximize benefits sep-arately. If the client controls the spare parts pool, there are scarce incentivesfor the provider to avoid an indiscriminate use of components aside from reg-ular restraints. Conversely, if the agent administers the pool, rational use ofcomponents turns reasonable. Critical spares stockholding is a supply chainlever to keep maintenance outsourcing viable for the parties involved.

    In pursuit of coordinating the contracting parties, we investigated whetheror not the client should outsource the management of the pool of spare com-ponents to the agent. This paper provides a decision-making framework toprofitably integrate the contractual maintenance strategy with critical sparesstockholding. Such scheme is based on a joint value -preventive interval andstock level- that maximizes the supply chain returns while evaluates the im-pact of an additional part to stock. Using an imperfect maintenance strategyover a finite horizon, the model leads to an optimal decision to allocate thecritical spare components pool within the outsourcing contract. An inter-esting link is thus created between maintenance performance indicators andsupply chain practices.

    Having introduced the importance of allocating critical spare parts man-agement within maintenance service contracts for asset intensive industries,the rest of the paper is organized as follows. Section 2 states the differencesbetween the enriched concept of the present paper and relevant existent re-searches. Section 3 describes the model formulation to integrate maintenanceand spares supply indicators. Section 4 presents a case study in the miningindustry, which holds substantial spares inventories to ensure system per-formance. Finally, Section 5 provides the main implications of applying thejoint model to coordinate the outsourcing strategy under an asset manage-ment perspective.

    2. Literature review

    The following literature review is structured as the importance of themanagement of the pool of critical spares within maintenance outsourcingcontracts.


  • As an interesting strategy to achieve cost-benefits, consolidating inven-tory locations by cooperative pooling has been addressed by [10, 11, 12, 13],among others. In the context of repairable spares pooling, the cost alloca-tion problem is analyzed using game theoretic models by [14]. As recentimplementations, virtual pooled inventory by managing information systemsis included in [15], and a calculation model of spare parts demand, storageand purchase planning in the coal mining industry is reported by [16]. Whendealing with cooperation in contractual alliances, the study of [17] statesthe relevance of interfirm trust to deter opportunistic behaviour in a sharedownership structure. Such trust is an important issue related to poolingstrategies. A widely applied scheme for repairable items stockholding fo-cused on system availability and spares investment is provided by [18]. Sincethe accuracy to determine the optimal inventory levels for both single-siteand multi-echelon techniques, such model is used to adapt the concept ofspare service level in the present paper.

    Maintenance outsourcing under supply chain coordination is discussedby [3], study that deals with incentive contracts terms to coordinate agentsand clients by a maintenance poli


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