Author: Shashank Verma | Head Supply Chain & Order Management | Maier+Vidorno
First published in July 2016

There is an old European proverb: “for want of a nail, the kingdom was lost”, and this still holds true – especially for manufacturing in India. Only with proper management of spare parts can foreign companies successfully “Make in India”. Companies often face downtime in production waiting for spare part(s) for a particular unit or machine, and this becomes a real issue when production is in full swing and further processing in the entire production line is hampered due to this single missing part, thereby resulting in inefficiency, lower production and not meeting the targets that will ensure success. All this is just because of the mismanagement of “Spare Part Inventory”.

Does this really mean that you need to ‘preempt’ the situation and keep the inventory for all spares available for the machine?  That’s a lot of pieces lying about gathering dust, and who knows what you will really need; you may not have the ‘historic’ data about the machine’s performance and the machine may have been a customized solution. And anyway, periodic maintenance of all machines provides a health check to the machine so that it lasts long and continues to perform. These schools of thought are correct, but when the ‘hard reality’ strikes (i.e. the downtime), everyone has to not only talk about what went wrong where, but also run behind the purchase team to immediately source the spare in order to start the machine.

Spare parts management is a challenge for any and every industry, especially when rent and land prices are going up and creating storage space is a real issue. Firms have tried maintaining inventory of critical spare parts with third party logistic (3PL) partners with warehousing close to the manufacturing facility. The space rented in these 3PL warehouses depends upon the requirement for spare parts – and data on these requirements is gathered by the firm over a period of months or years while operating on the particular machine. Firms that don’t have experience of the machine’s performance – or for whom the inventory wasn’t maintained, find themselves in a similar situation once a failure occurs: In order to avoid future discomfort and ‘insecurity’ of performance, firms sign up to long term warranties that include periodic maintenance from the suppliers of machine. Due to such a requirement, Multinational or Transnational Enterprises have resorted to having their maintenance and service offices close to the manufacturing units they support.  Of course, the story of these ‘service and maintenance’ enterprises is no different from the firms seeking support in maintenance and ensuring ‘zero downtime’ during the production. Again, maintenance of the spare parts remains a cause of concern.

Free Trade Warehousing Zones, introduced under the Foreign Trade Policy 2004-09, were to create trade related infrastructure to facilitate the import and export of goods and services with freedom to carry out trade transactions in free currency (Source: Foreign Trade Policy 2004-09). Land was allocated in the suburbs of major cities – Mumbai (Panvel), Delhi (Khurja), Chennai, etc. – with a vision of bringing the logistics infrastructure up to International standards and to address the storage requirements of the Special Economic Zones (SEZs), dealing in international trade.

Free Trade Warehousing Zones (FTWZ) came up with the state of the art infrastructure which not only caters to the storage requirements of SEZs, but also helps industry deal with the issue of maintaining spare parts, for which import duties need to be paid, resulting in ‘blocking of capital’. Since it’s not known which spare may be required, importing such a spare part and then paying import duty immediately on arrival at the Indian port is undesirable. Instead, with the FTWZ, international firms, or their 3PL service providers, can store the parts but not have to pay the duties for a period of 2 years.

FTWZ provides critical respite to industry, which faces the threat of the downtime, due to the non-functioning spare:

  • 2 years import duty free storage within India
  • Inventory imported in FTWZ remains guarded against Indian taxation system
  • Inventory can still remain on the books of the International Firm
  • Goods imported in FTWZ are free for International movement – they can be exported to any country or back to the origin, without paying any duty in India
  • Value Addition activity (like labeling / relabeling, kitting, etc.) is allowed in the FTWZ, before exports, without applicability of local Indian taxes
  • 24/7 customs clearance is allowed at the port (Panvel port), resulting in faster clearance
  • “State of the Art” infrastructure, which meets international standards
  • Expenses (including Storage Charges) incurred in the FTWZ are to be paid in the Foreign Exchange
  • In case goods are to be shipped to any Indian customer (within India), import duty will be applicable

How to handle the uncertainty of spare parts, utilizing the concept of FTWZ?

Spare parts can be shipped to a FTWZ and the goods can be cleared as required (after paying import duty), in case of supply to Indian customer. Due to faster clearances, downtime can be reduced to as low as ‘one day’, if the processes are followed correctly. With the help of the concept of FTWZ, purchase initiation and long waits can be avoided as the maximum spare parts can be stored and you can keep replenishing the FTWZ stock with the consumed spares without paying import duties.

Once the historic data is available, Indian firms with the help of the international firms may plan to maintain inventory of the ‘fast moving/required spare parts’, next to their respective production unit.

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