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There is a similar opportunity rising up today in the manufacturing world: the profits to be gained through delivering differentiated services after the product sale. Some durable goods manufacturers today are aware that post-sales service offerings can spring revenue streams that dwarf the amount of revenue captured from the original product sale. Many also know that a well-run service operation is an important factor in winning customer loyalty and repeat business. Yet what they still have to wrap their arms around is the breadth, depth and immediacy of that opportunity.
Many manufacturers are still only focused on a slice of the full service lifecycle, and a small slice at that. They tend to view service management as a series of disconnected or fractured tactical events rather than an interconnected, holistic system of related processes and technology platforms.
Instead, manufacturers often have individual, disjointed IT systems to manage service parts planning, parts pricing, warehouse management, field service management, or returns and repairs. In addition, the solutions they do have in place are often based on manual siloed processes, hindering those enterprises from realizing the full profit potential of the functional segments they are addressing. Rarely do they have a comprehensive solution to wrest the profitability out of the full spectrum of service lifecycle management, or SLM.
What is SLM? Simply put, SLM is the profit-driven optimization of the system of processes employed by durable goods manufacturers and their service network partners to ensure value is delivered to the customer long after the product sale.
This dilemma (and opportunity) is not limited to one or two industry sectors. It stretches across a broad spectrum of verticals, including aerospace and defense, consumer electronics and appliances, industrial equipment, high-tech, medical and scientific devices, motor vehicles and utilities. Its impact can be felt from headquarters to parts depots to field service units to dealers. In reality, any product where extending its life through service is more economically advisable than simply replacing it with a new unit when the old one breaks, can benefit from an SLM approach.
Some manufacturers attempt to solve this dilemma by bringing service-related tasks into their ERP systems. But that type of enterprise software doesn't have the flexibility or agility to manage a service program effectively. It is better at the repeatable, more predictable patterns involved in manufacturing than the highly volatile world of service.
"Leaders in service management ... are likely to depend less on ERP to handle parts and service, since ERP systems often struggle in areas such as forecasting, managing distributed inventories and aligning resources with specific service or maintenance events," states Accenture in its report, The Service Value Chain.
While there are a multitude of factors that can influence whether manufacturers realize the hidden profits in servicing what they sell, there are four operational building blocks that typically underpin an SLM strategy. What must be kept in mind, however, is that failure in any one component often means degradation or failure of the entire service supply chain, adding needless costs, causing missed revenue opportunities and ultimately resulting in lost customers.
Let's look at these four building blocks:
Parts need to be available
While it may seem self-evident that you need replacement parts in order to service products in the field, there are many factors behind the simple statement in the heading above that need to be managed. Replacement parts have to be manufactured, which means the market for replacement parts has to be predicted. How often will each replaceable component break? Could too high of a price cut on spare parts cause a run on those parts, leading to a stock-out?
With enterprises running lean, companies are focused on avoiding over-stock of spare parts. Yet without full and clear visibility into their daily inventory and usage patterns, they are at risk of both over- and under-stock situations. Inventory has to be managed at every echelon of the supply chain, from central, to field, to dealer, to truck stocking locations, to ensure that service parts are available where and when they are needed - and in the proper quantity.
Both over- and under-stocks have a direct effect on the bottom line. Over-stock sits on the balance sheet as "lazy capital" and prevents cash from being deployed in other areas where it would be put to better use. But an under-stock situation can bring a portion of the business to a grinding halt, resulting in lost revenue and customer dissatisfaction.
The service parts management component of SLM helps manufacturers and their service network partners to minimize the amount of spare parts held at every location, while maintaining or even improving customer service levels. It can also set limits for pricing managers to avoid imbalances in spare parts inventory, which helps manufacturers achieve their gross profit targets.
A systemic approach to optimizing service parts operations also enables companies to maximize their use of parts already in their networks - both new and repaired - before resorting to the profit-killing option of purchasing a new part. Often when field technicians install a new part, they add the old one to the growing stockpile of defective field replaceable units (FRUs) in trunk stock instead of delivering it back to a repair depot. As a result, new spare parts are purchased needlessly.
People need to be available
In field-based service environments - where technicians are deployed to the customer location to deliver service - having the right service technicians available, at the right time, with the right parts to respond to customer requirements is critical to a healthy service operation. After all, having parts available but no one to install them is the same, in effect, as not having the parts available at all. Yet many manufacturers and their service partners are still managing the people component using manual or even paper-based systems.
Through sophisticated automation that balances service demand and capacity in real time, field-based SLM solutions can optimize and manage technician scheduling, dispatch, routing and workflow - delivering a 20- to 25-percent uptick in calls per day per technician and a 50- to 100-percent improvement in technician to dispatcher ratio.
Not only can technicians be matched to jobs by areas of knowledge and expertise as well as proximity to the customer, these solutions often integrate a part location functionality to ensure the technician has what's needed to solve the customer issue. Combined, this level of visibility and control yields higher first-time fix rates - and more satisfied customers.
Parts need to be priced effectively - and competitively
In the current business climate, manufacturers that rely on OEM-original spare part sales in the aftermarket need to be able to adjust prices quickly to react to a wide variety of market dynamics. They want to avoid locking in longer-term pricing that leaves them vulnerable to competitor moves. Should spare part usage fall below forecast levels or manufacturing adjustments change the velocity of demand, pricing managers also need the freedom to authorize aggressive spare parts price cuts. These cuts can help them rebalance active inventory as well as liquidate excess inventory of end-of-life parts, keeping working capital requirements low.
Yet pricing doesn't exist in a vacuum. To maximize profitability, manufacturers need visibility into events and changes occurring in every market segment where their parts are sold. Examples include demand and competition by region, general availability, stage of the lifecycle and general inventory levels. Price a part too low and the manufacturer risks losing gross profit dollars. Price a part too high and the manufacturer risks losing market share to aggressively-priced imitation parts.
The service parts pricing component of SLM provides that visibility, which eliminates guesswork and allows pricing decisions to be made according to data rather than unilateral estimates or "gut feel."
Knowledge must be readily available
In order to be able to operate efficiently, field-, depot-, and support center-based service technicians require fast, easy access to the vast amount of institutional knowledge about products, service procedures, diagnostic requirements, service issues, policies and so forth. They also need to know the history of a particular customer's equipment, service records, availability and location of specialty parts and information that helps them overcome the unplanned.
Information is at the heart of effectively managing the service supply chain. Data about service level agreements (SLAs) and history with a particular customer, combined with comparative data across all customers, parts location and pricing, helps drive out costs, improve performance and enhance profitability.
The three-dimensional art books of the 1990s demonstrate how difficult it can be to see the bigger picture when you're too focused on the individual pieces. Yet there the only cost was in not seeing the picture.
In the world of post-sales service, the cost is more severe - lost profits, lost revenue opportunities and possibly even lost customers. SLM makes it easier to see profits that might otherwise be hidden, and enables the durable goods manufacturer to claim and sustain a defensible advantage in an increasingly competitive marketplace.
Keywords: Service Parts Management, Inventory Planning & Optimization, Transportation & Distribution, Value-Added Services, Logistics, Sourcing & Procurement Solutions, Technology, Service Parts Planning, Critical Parts Replacement
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