Hidden potential

Sept. 1, 2004
by Joe Parente and Robert D. Ticknor at a glance This article discusses how service parts management can help reduce inventory costs, while strengthening

by Joe Parente and Robert D. Ticknor

at a glance
This article discusses how service parts management can help reduce inventory costs, while strengthening customer relations.

Significant opportunities and measurable benefits await those who can realize the full potential of an effective service parts management system. Traditionally the focus has been to reduce inventory based on the premise that less is always better. However, more recent trends indicate that overall performance improves more dramatically with optimized — rather than minimized — inventory levels.

Shippers need to refocus their service organizations to become more truly service-centric. This requires that they become more customer-centric in their practices, measurements and organization:

  • Shippers should consider customers' expectations rather than asset utilization to drive the business process.
  • The most important key performance indicators (KPIs) should focus on customer satisfaction and revenue rather than expense control.
  • The service organization should report to the CEO or board of directors and be treated as a profit center rather than a cost center.

Profitability no longer stops at the point of sale. In today's business environment, additional profit is generated in the after-market by effective field services and logistics. Research has found that effective service organizations deliver up to twice the profit margin of their product sales counterparts.

By reengineering service parts management, manufacturers eliminate inefficiency and drastically improve inventory turns and delivery times. This streamlined service benefits both the manufacturer and the end user, by optimizing inventory investments and — through raising the actual level of service delivery to customers — enhancing loyalty.

A cutting edge service parts management system clearly empowers companies in their quest for fully realizing customer lifetime value. The reengineering of field service and logistics is crucial to this objective, and yet it largely remains a source of untapped potential.

Many challenges continue to hinder the majority of manufacturers from reaching their full potential, measured against both customer satisfaction and profitability. Manufacturers are struggling to implement real changes that will turn their customer-centric vision into a reality of everyday practice. Based on the April 2004 BearingPoint/APICS Service Parts Management Survey, which surveyed more than 1,000 executives, demand/forecast planning (44% of respondents), inventory management (39%), and collaboration with suppliers and vendors (30%) were cited as the three most crucial points respondents highlighted as opportunities for improvement.

According to the survey, the most frequently cited challenges were maintaining service performance levels (41%), eliminating excess inventory (30%) and managing complex configurations of the final product (18%). Manufacturers showed less concern for the speed and reach of service operations — simplicity and expanded offerings instead were the focus of opportunities and challenges.

This demonstrates a grasp of initial reform guidelines working to achieve better customer lifetime value through general service offerings, but, as illustrated by the top three high impact challenges, these offerings are presently unwieldy and a drain on business. The same (or more) coverage can be offered to customers for a much lower cost of operations, yet this achievement still eludes the vast majority of manufacturers.

Manufacturers are evenly split in their use of various types of service parts planning systems. The most commonly used system (22%) is an off-the-shelf spare parts planning system, but the least common response (excluding “other” and “none”), a customized spare parts planning system, garnered 15% of survey responses. Customized (19%) and off-the-shelf (17%) manufacturing planning systems fell in between.

In regards to these planning systems, no panacea exists that will perfectly position a company to capture the service organization's full potential. Instead, each of these systems is best matched with different demographics. Larger companies tend to favor spare parts and customized planning systems over manufacturing-based and off-the-shelf solutions. Automotive suppliers, on the other hand, rely on manufacturing systems by approximately a 3 to 2 margin. High-tech companies, siding with larger firms, reverse that statistic and are more likely to use a service parts planning system by the same 3 to 2 margin.

Historical usage is by far the most important factor influencing service parts planning. With 42% of the survey respondents selecting it as a high impact factor, historical usage is almost twice as common as the next most important factor, service level agreements (SLAs) with customers (25%). Less than 15% of respondents consider either the product lifecycle stage or the service installed base as a high priority.

While historical usage is a legacy measurement tool, its current prominence is not necessarily alarming. With one quarter of surveyed manufacturers considering SLAs an important factor, an awareness of customer-centric, profit-oriented service models is apparent. The high-tech industry stands at the vanguard, with 36% of respondents naming SLAs the most important factor. This commitment to service level agreements is one of the hallmarks of a strong service organization.

Shippers were also surveyed about service parts planning functions. Results from this question mark a definite return to a strong awareness of new service paradigms. Combined usage, forecasting and inventory management rank first, with 44% of respondents marking it as a high priority. Ability to use installed base is second at 22%. Sophisticated replacement capability of spare parts systems is a very close third, also at 22%.

These functions are all key parts of an effective, streamlined, customer-centric profit-oriented service operation, indicating that a large group of respondents have their eyes focused in the right direction. Still, the number is short of a majority, and the inclusion of these functions is necessary for effective planning across the board.

The way a company categorizes its service organization determines whether it faces the future or is rooted in the past. The optimized service organization is a for-profit venture, but 42% of respondents still categorize it as a cost center, with only 38% of respondents reporting their service organization as a profit center (20% either don't know or didn't respond to the question).

To tap the true potential of the service organization, a firm should first recognize the existence of this potential by treating the service organization as a profit center. With that mindset, investments in the service organization are easier to evaluate, and efficient, enriched service offerings can soon become the norm.

In many elements of organizational structure, management appears to have begun to grasp the basic tenets of the modern service organization; however, the treatment of the service organization as a profit center marks a true, committed step towards the complete and effective reengineering of the service organization.

Although cost center thinking still dominates overall, its lead is rapidly slipping, as the survey indicates only a 5% difference between the two mindsets, and, in a few forward-thinking industries, such as capital equipment (54%) and automotive (51%), low majorities already recognize the service organization as a profit center.

BearingPoint and APICS sought to decipher company service measurements, visions and goals by asking questions targeted at highlighting performance indicators and the existence of a quantitative measuring system to gauge customer service levels. In the first question, highlighting a variety of key performance indicators (KPIs), responses show strong support for indicators backed by modern manufacturing philosophies centered on the customer-centric, profit-oriented service enterprise:

  • Measurements of inventory service levels in the warehouse (43%) is the most frequently cited KPI.
  • Inventory service levels at the field location is second (31%).
  • Inventory turns is the third most popular choice (30%).
  • Responses vary in the automotive/ aerospace sector, where inventory service levels in the warehouse is fourth most popular response (28%), and inventory service levels at the field location rank as the most popular response among 47% of the industry executives surveyed.

The presence of these service-centric KPIs at the top of the list demonstrates that most companies pay serious attention to assuring they maintain the expected service levels. However, the relative lack of significant strength (none of the percentages were at or above 50%) indicates more widespread adoption of these KPIs is in order.

As a follow-up to these inquiries on performance indicators, the survey also asked respondents whether their company measures customer satisfaction with their service parts fulfillment. Encouragingly, 54% say yes they do measure customer satisfaction, while only 31% do not. This data suggests a definitive shift in focus from cost control to customer satisfaction. The automotive (70%) and capital equipment (68%) sectors lead the field in gauging customer satisfaction.

The BearingPoint/APICS survey reveals a manufacturing sector struggling to recreate itself. That metamorphosis will come at the hands of manufacturing service organizations worldwide. No longer is service parts management a drain on a company's revenue; it is instead an integral part of the customer package, a means for encouraging loyalty. Slowly, firms are realizing that not only is a strong service organization crucial to a customer-centric enterprise but that a fast, lean, efficient operator further enhances customer service while also yielding lower costs and greater revenues

Service parts management lies at the heart of field service and logistics. It is the key to the service organization. A truly efficient system, engineered to handle the demands of business in this young century, will reduce inventory costs, enhance value and allow for stronger customer relations. Looking to tap into the full potential of the service organization, organizations are placing a higher priority on maintaining service level performance, recognizing it as the most significant challenge facing manufacturing today. LT

Joe Parente is a managing director in the Manufacturing and Technology practice and Robert D. Ticknor is a practice director in Field Service & Logistics at BearingPoint Inc. Parente can be reached at [email protected] and Ticknor can be reached at [email protected]. The full BearingPoint/APICS study can be downloaded at www.bearingpoint.com.

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