Companies increasingly are using after-sales service as both a competitive weapon and a source of high-margin revenue. As a result, service supply chains are becoming mission-critical operations.
"To succeed in today's competitive marketplace, multinational companies are organizing their aftermarket service to differentiate themselves from their competitors and to provide highly profitable revenue for their company," says Ebrahim Butt, automotive sales-Americas, for DHL Global Customer Solutions, Plantation, Fla. In the automotive industry, he notes, about half of all OEM profits are derived from aftermarket operations.
The automotive sector is not alone. An Aberdeen Group benchmark survey, "Best Practices in Strategic Service Management," found that after-sales service accounts for 10 percent to 40 percent of revenue for many industrial and service companies and represents up to 50 percent of inventory investment.
A number of market pressures are behind the elevation of post-sales service, says Boston-based Aberdeen:
• Customers are demanding faster problem resolution and little or no down-time on critical equipment-demands reflected in broader manufacturer warranties and more stringent service level agreements (SLAs).
• Price pressures are eroding product-based profit margins in many industries, driving firms to rely more on post-sales service for revenue growth.
• Customer service has become a strategic competitive play, a consequence of customer retention costs averaging 15 percent less than customer acquisition.
• End users no longer are willing to maintain the equipment they purchase, but expect the supplier to shoulder this responsibility.
• Companies, in general, are striving to do more with less.
One manufacturer experiencing this trend is Lucent Technologies. The current climate among Lucent's telecommunications customers is very different from the boom years when the focus was on acquiring new assets and infrastructure. "In recent years telecom operators have been more cautious about investing in new equipment so they need more service on what they have," says Brendan Kenny, a Lucent field manager based in Dublin, Ireland. "To extract maximum value from the existing infrastructure assets, they are focusing on the maintenance and operation of that equipment."
Lucent provides world-scale network infrastructure to major telecom operators in the U.S., Europe and Asia, including many areas "that can be a little hard to get to from a logistics perspective," says Kenny.
These networks typically have tens and often many hundreds of sites, often with large installations of complex telecom equipment in each. "Those networks are what generate our customers' revenue streams, so keeping them up and running is absolutely critical," Kenny says.
Lucent uses a service parts planning solution from Baxter Planning Systems, Austin, Texas, to help it optimize the quantity and location of parts inventory in order to meet service-level agreements in the most cost-efficient way. "We put into the system all of our service-level agreements, our physical stocking locations and customer equipment by site, as well some data on historical failure rates for parts, and the planning tool generates a series of stocking levels," Kenny says. "So, for example, in order to support 300 service contracts across the EU, it would tell us, 'here are the recommended locations to hold stock and here are the parts and quantities that we recommend you hold at each of these locations.' It is definitely an effective materials planning tool."
"Different parts, different stocking strategies and different locations all need to be modeled," says Mark Anderson, product vice president at Baxter. "Probably the biggest challenge is having a strategy that not only is cost effective in terms of inventory but that also provides service levels that are acceptable to the companies that are paying for the service level agreement.
"If the field service network was left on its own, it would want multiple copies of everything," Anderson says, "but the logistics folks have a different agenda. They want minimal amounts of inventory and the fewest possible movements. So service parts planning is all about balancing the carrying costs of inventory with the costs of not having the part where it is supposed to be and optimizing that point."
This involves calculating the cost and likelihood of a stockout for each item at each location and the cost of holding the part in inventory in order to come up with an optimized field plan. "This is not just a statistics game," says Anderson. "All kinds of variables have to be considered." Having such detailed information, however, allows the plan to remain dynamic. "In the old world, inventory allocation was based on first-come, first-served," he says. "Now, since we have gone to great lengths to calculate all of these stockout costs by site and we know our exposure in every situation, we can replenish or re-position inventory to the site that most needs it, which may not be the one that ordered first."
Baxter is one of several companies answering the demand for optimized service parts planning-a market that also includes MCA Solutions, Philadelphia; Servigistics, Atlanta; and ClickCommerce, Chicago, among others. Companies using these solutions realize, on average, a 22 percent reduction in parts inventory and 90 percent higher fill rates, according to Aberdeen.
Such results are important because the cost of not having a part available when a machine goes down can be very high, both to the end user and the service provider, which typically pays penalties if promised response times are not met. Because of the high stakes involved, leading parts users are looking for new ways to structure SLAs.
Led by the defense and aerospace industries, there is an increasing move away from service agreements based on response times in favor of performance-based contracts. The idea, explains Bob Salvucci, CEO of MCA Solutions, "is that companies don't want to talk about parts availability and fill rates, they just want to know their uptime, so they are starting to construct contracts around that criteria."
One MCA customer, KLA-Tencor, is a supplier to Intel. "In the fabrication plant, Intel measures the time a machine is down awaiting a part," he says. "They don't measure how often KLA had the part and how quickly it was delivered."
|"There is a significant reverse logistics challenge in getting the good parts back onto inventory."|
- Phil Corwin of UPS Supply Chain Solutions
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