Unleashing the Power of the Service Supply Chain

    December 21, 2005

Manufacturers are starting to embrace the aftermarket for increased revenue, stronger customer relationships and more dynamic lifecycles.

Recognizing multi-million dollar savings and increased customer satisfaction, industry giants and small companies are transforming their businesses into service-centric organizations – a major (and long overdue) industry shift.

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

While a critical component of the economy, the service sector remains underinvested. A recent study by AMR found that while after-sales service on average represents 24 percent of revenue and an astonishing 45 percent of profit for manufacturing companies, only 20 percent of IT spend is allocated to service.

While corporate executives are recognizing the aftermarket as a competitive edge for immediate profit, customer satisfaction, and new product revenue, they first need to understand three important trends before they can capitalize on this service opportunity:

1. Growing demand for performance-based service metrics

2. Linking product innovation and service

3. Continued value in outsourcing

All of these are based on a fundamental service concept: the objective of the product manufacturer is not in selling the product but rather in maximizing the value that the customer receives from the product throughout its lifetime. Smart executives need to leverage these three trends:

1. Performance-Based Service Metrics

Companies, noticeably in the defense industry, have begun to shift to a Performance-Based Logistics (PBL) approach, where payment is tied directly to product availability or usage. For example, GE Aircraft Engines now has “power by the hour” contracts.

In the military world, with Boeing Integrated Defense Systems’ “FIRST” PBL contract with the U.S. Navy for support of the F-18 Super Hornet fighter plane, Boeing is paid based on overall aircraft system availability, not a per-repair basis. In the war in Iraq, the Super Hornet achieved a 97.5 percent sortie completion rate and 92 percent operational availability versus the average 80 percent operational availability for conventionally supported aircraft.

With the right systems and processes in place, commercial companies can also shift to PBL-type contracts, increasing customer satisfaction for the end user, and profit for the manufacturer. An additional benefit for everyone involved is the incentive to increase product reliability, by creating a feedback loop between product development and service.

2) Connecting the Dots Between Product Development and Service

There are three primary processes involved in delivering product to the customer: product development, manufacturing, and aftermarket service. Arguably, customer value is created in developing the differentiated product and providing excellent support after the sale.

In addition to focusing on improved product development and service, forward-looking executives are increasingly tightening the link between these areas. Some examples include:

    Design for serviceability – Involve service engineers in the development of the product to ensure that products are built for reliability and efficient diagnosis and repair.

    Link engineering changes to service planning – Ensure that as engineering changes occur, the impact on inventory levels and reserves are factored into decisions about updating and upgrading products.

    Feedback between the field and product development – Collect failure data to understand the customer experience and changes needed to improve product reliability.

Cisco Systems, the leading manufacturer of telecom equipment has been a leader in this area, reviewing failure data from the service business to continually improve existing products and innovate new products that improve the customer experience.

3) Increased Value in Outsourcing

Outsourcing can be a productivity enhancer when intelligent decisions are made about which service processes are a core competency and which are better managed by a third party with the expertise to manage the process more effectively and at a lower cost.

Tellabs, a leading provider of bandwidth management solutions to telecom service providers such as MCI, SBC and Verizon, enhanced their service offering by offering same-day service contracts to its customers requiring a network of strategic parts centers, and the infrastructure to provide parts to customers in very short timeframes.

Recognizing their core competence was in product design and customer interaction and not in service logistics, Tellabs outsourced this as the company focused on expanding their offering. In two months, Tellabs put the new service offering in place, surpassing results from their original system that used only internal resources.

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With the right investments in service, executives will increase profit, streamline efficiency, and improve customer satisfaction. Understanding and embracing these three trends will help executives benefit from the untapped potential of the service supply chain and take a major step toward market leadership.

Dr. Morris Cohen is the co-founder and chairman of MCA Solutions and Matsushita professor of manufacturing and logistics at the Wharton School of the University of Pennsylvania. With 25 years of experience in the supply chain space, he has planned and designed many advanced value chain systems. Dr. Cohen has published extensively on the theory and practice of optimized service value chain design, planning and management, including his book, Manufacturing Automation. He can be reached at Morris.Cohen@mcasolutions.com.