Five Things You Need to Know to Maximize the Service Supply Chain

by Dr Morris Cohen, Co-founder and Chairman, MCA Solutions

Reverse Logistics Magazine, Summer/Fall 2006

Companies are increasingly looking to their service businesses for greater profits, improved customer satisfaction, and competitive advantage—and for good reason.

According to Aberdeen Group, 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.

Maximizing the value of the service supply chain requires management of forward product flows as well as reverse logistics flows of product from the field. Advanced service supply chain systems that effectively manage parts and products moving in both directions in the aftermarket can deliver immense ROI:

• Inventory reductions of 15 to 50 percent
• Service level improvements of 5 to 20 percent
• Total supply chain costs reductions that exceed 5 percent
• Dramatically increased service revenues and corporate profit

The aftermarket is quickly becoming a goldmine for companies across many industries, including high-tech, aerospace and defense and telecom. Here are five important things executives need to know to drive bottom-line performance.

1. Service and Production Supply Chains Are Very Different

Service supply chains are much more complex than traditional production supply chains in four major ways:

Varied service offerings: Aftermarket service must support warranty commitments, contract extensions (which may include same-day or next-day service), direct parts sales and distributor-driven sales intended to maximize the value of the end customer. Customers, moreover, demand highly differentiated levels of responsiveness in service support.

Reverse logistics: Service organizations must manage both forward movement of inventory and reverse logistics flows for the return of damaged items. To reduce new purchases and decrease inventory costs, companies need to quickly move returns back into usable stock.

Geographic / channel complexity: To meet same-day service requirements for products with low demand rates within stringent time standards, inventory must be positioned in a large number of near-to-customer geographic locations. Cisco Systems, for example, maintains inventory in more than 800 locations, including field locations, distribution centers and repair centers.

Product complexity: As product lifecycles are decreasing, the service function must support a widening variety of new products as well as a large number of out-of-production products with low demand and long manufacturing lead times.

These service-related challenges result in inventory turns that can be as low as one to two turns a year, requiring a very different supply chain planning approach.

2. Service Needs to Link Back to Product Development and Innovation

Forward-looking executives understand the importance of linking product development and service. Cisco Systems, a leader in this area, reviews failure data from the service business to continually enhance existing products and create new products that improve the customer experience.

Here are some examples:

Design for serviceability. Involve service engineers in product development, ensuring that products are built for reliability and efficient diagnosis and repair if problems occur.

Account for reverse logistics. Carefully manage the flow of parts and products through the repair process, to ensure optimal asset usage at the lowest possible cost.

Synch service planning with engineering changes. When engineering changes are made, the impact on inventory levels and reserves must be factored into decisions about updating and upgrading products.

Link field service to product development. Some of the most valuable data to drive product design comes from the field.

3. Your ERP System Cannot Manage Reverse Logistics

ERP systems have provided a strong transactional backbone to enable better management of reverse logistics and overall service, but getting the most value requires a system designed specifically to manage the challenges of the service supply chain.

While there have been large investments in ERP, and increasing pressure to extend its use across all business processes, a "best-of-breed" service solution reduces risk and meets the demanding nature of the service business.

4. Hosted Service Solutions Bring Rapid ROI at Lower IT Cost

A recent IDC survey of 512 North American-based I.T. professionals shows that nearly 79 percent have purchased or are reviewing software-as-service offerings.

Software as a Service (SaaS), a vendor-managed hosted solution, allows the end user to access the application via the Internet. This provides flexibility in product deployment and support, minimizing administration and hardware costs.

Hosted implementations can be deployed in weeks, not months, with minimal disruption to the IT department, and leveraging previous IT investments.

Industry influencers are also urging the shift:
"Users are saying I would be nutty not to at least give [software-as-a-service] strong consideration going forward," says Bill Gannon, vice president of consulting for AMR. "Whether they do it is another item, but upwards of 60 percent of customers are saying to get on my short list, software-as-a-service is one of the key criteria I am looking for. What they are saying is they recognize all the promised benefits of decreased cycle time, faster time to value, lower cost per user, lower [total cost of ownership], not to mention the change in the economic model from a capitalized expenditure to a manageable [monthly] expense."
(http://www.networkworld.com/news/2005/121205-saas.html?ts)

5. Service Leaders are Driving Customer Centricity

Leading service organizations are focusing on the needs of their customers to generate value through the use of mission-critical products by implementing these capabilities:

• Service agreements that focus on 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
• Incorporating "performance-based logistics" (PBL) contracts in which suppliers are contractually rewarded for improving customer-specific metrics thereby aligning incentives of both customers and service providers
• Implementing differentiated service contracts that provide higher levels of service response to those customers to whom it is most important

Reverse Logistics Takes Center Stage

As customers continue to demand higher levels of reverse logistics at a lower cost, companies have to figure out how to create an effective service supply chain to drive stronger customer relationships, increased revenue generation and more dynamic product lifecycles.

Dr. Morris Cohen is the co-founder and chairman of MCA Solutions and the Panasonic 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.

Reverse Logistics Magazine, Summer/Fall 2006