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Financial Watch
"Parts is parts. " Or are they?
Manufacturers, distributors and service providers are finding value in the innovative idea of leasing-rather than buying-parts. The idea of "parts leasing" is gaining popularity with a large variety of companies, from maintainers of aircraft engines to computer repair businesses.
The concept offers several advantages. Companies no longer have to consume cash to acquire parts inventories. Instead, a third party owns an actual-or virtual-parts "cabinet," and provides its customers the right to use those parts when needed.
CFOs like the idea of parts leasing because, since a thirdparty owns the parts, they can take advantage of off-balance sheet accounting treatment for the parts leased, boosting the company's financial performance.
History of Parts Leasing
Parts leasing was first developed for the aviation industry by aviation companies such as AAR in Wood Dale, Illinois, and The Triumph Group in Wayne, Pennsylvania, Understandably, the airlines didn't have the working capital to invest in engine parts and accessories to keep around in case those particular parts were needed. By contracting with third-party lessors to provide those parts-and to assume the residual risk-the airlines were free to use their working capital for other investments. Airlines could thus pay for the use, rather than the ownership, of the parts.
More recently, parts vendors such as Computer Products and Services (CP&S), in Boca Raton, Florida, have begun leasing the computer parts they sell to customers. IBM Global Financing, Armonk, New York, has further refined the concept with its Parts Lease Plan, by leasing any parts their customers need, whether IBM makes them or not. IBM Global Financing offers its customers a virtual "parts cabinet," and makes parts available if customers require them.
As it has evolved, the "parts cabinet" concept is elegant in its simplicity. A client (the lessee) and the owner of the parts (the lessor) agree on a list of parts necessary in the client's business. The parts, taken together, define the "asset" that's leased.
Features of Parts Cabinet Leases
Several features of the parts cabinet contract distinguish it as a lease:
1. The asset is defined: The lessor and lessee agree on the parts to be leased. The parts are defined, specifically, for identity, price, and storage location.
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