According to the Aberdeen Group, aftermarket spare parts and services account for 8 percent of the annual gross domestic product of the United States, with U.S. consumers and businesses spending more than $700bn annually on spare parts and services for previously purchased assets such as automobiles, aircraft and industrial machinery.

The service supply chain has an immense opportunity to become a strong, new source of revenue growth-delivering high margins, profit and stability in cash flows that can be instrumental in mitigating the potential impact of a volatile economy.

Corporate executives and, in particular, supply chain executives, are increasingly recognizing just how important the service supply chain is to corporate profitability.  Enterprises such as Cisco Systems, KLA-Tencor and Boeing are among the leaders in their industries, implementing advanced service supply chain systems to:

• Reduce inventory by 15 percent to 50 percent
• Improve service levels by 5 percent to 20 percent
• Reduce total supply chain costs by 5 percent or more
• Dramatically increase service revenues

Supply chain executives interested in achieving these kinds of benefits have to first understand that the challenges in the service supply chain are very different from the traditional production supply chain. These differences include the management of extended global service supply networks and reverse logistics, demand patterns that are much different than in production systems, and creation of planning requirements at all stages of the product lifecycle for large volumes of parts.

Service businesses continue to evolve.  Today, economic uncertainty, rising transportation and supply costs, and increasing attention to environmental concerns and regulatory issues are making strategic service even more important.  As the economy wavers, new product sales tend to slow, and manufacturing companies are becoming more dependent on the service business as a strong source of profits.  In addition, customers are looking to manufacturers to provide a broader range of service offerings that help maximize the value of the product.

In order to deliver these services effectively and profitably while taking into account the impact of changing cost structures and environmental requirements, there are some critical trends that service and supply chain executives should pay close attention to:

1) Effective Design of the Service Business
2) Customer-Focused Service Metrics
3) Best-of-Breed Components to Extend the Value of ERP
4) Strategic Outsourcing of Technology and Processes
5) Integration of Service with Other functions

1) Effective Design of the Service Business

Business strategy and analytics should be applied to the design of your service business to determine the profitability and customer impact of various service strategies and service supply chain configurations.

Companies need a systematic approach for better managing service networks that incorporates an analysis of a company's service product portfolio and creation of a service offering which may vary by product, customer and stage of the product lifecycle.  The analysis must reflect the trade-off of transportation and other supply related costs, inventory and customer service levels, while respecting constraints of budget and environmental requirements.

"Winning in the Aftermarket," published in Harvard Business Review in May 2006, highlights important actions companies should take before they can most effectively design and manage their service networks. These include the need to:

• Determine which products you want to support
• Create a portfolio of service products that map correlate customer demands for uptime and availability
• Establish appropriate business models to support each service product
• Re-organize after-sales operations to create incentives for delivering out-standing service

Once these critical elements have been addressed, companies can leverage innovative technologies to effectively design service networks and analyze profitability of service offerings, plan inventory and other resources, and achieve service objectives. 

2) Customer-Focused Service Metrics

Leading service organizations are turning their attention to end users, implementing service capabilities that are aligned with customer needs, including:

• Service agreements that focus on the key metrics critical to the end customer, including equipment availability and up-time
• Incorporating knowledge of service contracts and entitlements in determining optimal stocking levels
• "Performance-based logistics" contracts in which vendors are contractually rewarded for achieving customer-specific metrics
• Differentiated service contracts that provide higher levels of service response to those customers who deem it most important

To effectively meet the needs of various customers, companies need to be able to recommend a variety of service offerings to meet varied customer requirements.  For example, aerospace and defense manufacturers are charged with keeping mission-critical aircraft up and running. Leading companies are using service parts planning and optimization technology to effectively offer various performance-based contracts that create clear incentive for ensuring the availability of mission-critical aircraft, with financial rewards and consequences.

Manufacturers serving customers in similar environments where equipment uptime is important may require service offerings which are also performance-based and aligned with customer metrics.

Implementing these service strategies requires an advanced planning system developed with customer centricity in mind that delivers value for everyone involved: customers get the product availability they need and manufacturers see increased service revenue.

3) Best-of-Breed Components to Extend the Value of ERP

Because of the complex requirements in service, companies typically have a range of systems to manage their service business. The leading ERP companies have not only expanded their capabilities, but have enabled integration with best-of-breed vendors to provide specific functionality, leveraging the innovation and flexibility that best-of-breed vendors offer.

Service-oriented architectures allow component-based solutions to be plugged into the ERP backbone to meet specific service requirements. The portfolio of service systems should be analyzed to prioritize IT investment based on the requirements of the service offering and the associated ROI of the solution.

By leveraging this component-based architecture, companies can:

• Get more mileage out of their investment in ERP business process platforms
• Benefit from the advanced capabilities and innovation that comes from best-of-breed solutions
• Integrate specific functionality that meets the unique requirements of the service business

4) Strategic Outsourcing of Technology and Processes

When demands on IT are on the rise, justifying system projects is incredibly difficult. On-demand or hosted applications are becoming increasingly available for many service applications and allow faster implementations and far fewer IT resources. As a result, strategic service objectives can be achieved much more quickly and at much lower risk.

In addition to outsourcing the management of IT systems for service, companies are looking at business processes to determine which ones are core competencies and which ones can be outsourced to third-parties. Logistics is a standard area for outsourcing in order to leverage the infrastructure of third-party logistics providers. In addition, some companies are looking to outsource processes such as planning and sourcing. They are also looking to vendors to supply resources to help manage planning policy as well as day-to-day planning.

5) Integration of Service with Other Functions

Forward-looking executives understand the importance of the links between service and other functions in the company such as product development, marketing and customer service.  Service managers must coordinate with other groups in the company to implement cross-functional processes for product design, sales and operational planning, and global sourcing.

Sales and operations planning is an integrated cross-functional process that has traditionally been applied to finished goods planning.  Leading service organizations are recognizing that this integrated process is extremely valuable in service planning as well-providing visibility into the impact of decisions across service, marketing, design and manufacturing organizations.

The service supply chain has immense opportunity to deliver strong financial returns.  It also plays a critical role in customer satisfaction and the design and resulting quality of products produced.  For example, KLA-Tencor, the world leader in yield management and process control solutions for the semiconductor manufacturing industry, has a continuous product improvement approach in place. Data collected directly from the field through its service organization is continuously fed back to KLA-Tencor's product development team.

As manufacturers increasingly take on responsibility for servicing products on the market, there is clear value in integrating functions within an organization to show a 360-degree view of product performance and customer service to build even better products.

Service has increasingly become an important and strategic part of successful companies, as it is an immense opportunity to drive profitability and customer acquisition and retention.

These five trends, which executives should pay close attention to in order to capitalize on the service opportunity, will continue to shape service expectations and initiatives.

Morris A. Cohen, Panasonic professor of manufacturing and logistics at the Wharton School, University of Pennsylvania, is founder and chairman of MCA Solutions. Visit www.mcasolutions.com