Source: Maquilaportal more information

Source: Maquilaportal more information

Source: Maquilaportal more information

Source: Maquilaportal more information

Source: Maquilaportal more information

Source: Maquilaportal more information

ARTICLE OF THE WEEK

Service level agreements (SLAs) with customers are gaining ground across industries, including the aerospace and defense industry where the ability to sell through performance-based service and logistics contracts rapidly are becoming table stakes. However, many companies are running into significant challenges fulfilling them. Because they often have very limited access to critical customer data, they are unable to appropriately assess, quantify and manage contractual risks and typically lack an understanding of the critical capabilities they need to put in place to satisfy customers' real needs at an affordable cost. Essentially, they are struggling to develop and manage a business model that they do not fully understand. Not surprisingly, the median on-time customer response for SLAs is just 90 percent and, for many companies, far less. Given the high cost of equipment downtime in many industries, such as semiconductor manufacturing or mining, low service levels are a costly problem and unlikely to generate much in the way of customer loyalty.

Putting the processes and technologies in place for delivering service excellence-one "perfect" customer interaction at a time-is a significant challenge. Exacerbating the gap, customers keep raising the bar for service excellence by requesting shorter lead times, higher service levels, lower cost, and better customer service support. Not surprisingly, perhaps, few companies report exceptional performance on their goals for customer satisfaction (6 percent) and customer loyalty and retention (9 percent). But there are some companies that take service execution to new heights. Twenty five percent of companies report that more than 95 percent of their service orders are resolved and closed on the first call. Likewise, a quarter of the service businesses benchmarked are able to deliver on time to customers more than 96 percent of the time. Doing this cost effectively is difficult at best, but some companies, like Hyundai Mobis, are building their businesses on a foundation of excellence in this area.

Hyundai Motor Company and Kia Motors Corporation are selling their passenger vehicles with warranties of up to 10 years/100,000 miles in key markets around the world. To do this cost effectively, not only must the cars be of high quality, but the service and parts operation must operate at the highest level of efficiency. Hyundai Mobis' Service Parts Sales Business is responsible for supplying service parts to Hyundai and Kia Motors vehicles worldwide. This involves stocking more than 890,000 parts for 137 vehicle types. It has built a US$55 million, 2.2 million square-foot spare parts center in Asan, south of Seoul, to help do this more effectively and support its global distribution network.*30 The center is piloting the use of item-level radio-frequency identification (RFID) tagging coupled with a central computer system using artificial intelligence for managing and optimizing the spare parts business. Customers can, in real time, remotely track the status of the shipment at any time between order and delivery. According to Park Jeong-in, former CEO of Hyundai Mobis, the new facility will play a key role in the company's global supply network: "With the Asan center, we will be able to provide improved service for our customers in the United States, China and other markets in the world, as well as those in South Korea."*31 Capturing a larger share of the servicing of Hyundai and Kia's more than 24 million vehicles in operation worldwide is a crucial part of the growth strategy of Hyundai Mobis Service Parts Sales Business.*32


Leapfrogging Through Process Collaboration and Technology Maturity

In reviewing the shortcomings of companies' efforts to drive the service business to new levels, two factors-process collaboration and technology-deserve special attention. Despite the possibility of adopting well-established processes and greatly enhanced and maturing technologies and tools to support the service business appropriately -- from strategy and organizational design, to operations management and transactional execution-most companies have a long way to go.

In the area of process collaboration, a majority of companies benchmarked have significant work remaining on building the road for delivering service excellence. For example, only one in seven service businesses benchmarked (14 percent) provided customers with extensive visibility into their order status-a capability that can improve the customer experience and lower customer service costs (Figure 11). Similarly, just 7 percent have implemented extensive collaborative planning, forecasting and replenishment (CPFR) with customers and with suppliers. And while vendor-managed inventory (VMI) processes with customers often can take customer service levels to new heights by providing better visibility, reducing inventory levels and stock-out risks, as well as increasing customer order fulfillment rates, satisfaction, and loyalty, only 1 percent of the companies included in this study have undertaken extensive implementations. Nearly 70 percent of executives say they have no implementation of VMI or do not know the implementation status.

Despite their rudimentary level of implementation in many areas, the value of improved processes and collaboration with customers and suppliers is evident.*33 our research suggests a strong correlation between the level of adoption of processes for collaboration and the benefits achieved (Figure 12). As the experiences of some of the world's largest manufacturing companies show, the value of implementing tried and true processes and tools for service and parts management is hard to overstate. The Parts and Accessories division of Volkswagen AG, the US$89 billion automobile manufacturer, experienced this first-hand in its North American operations.*34 With supplies coming from Europe and South America, more than 160,000 different parts, serving 1000 dealers with parts and accessories, and more than 12 million order line items per year, it is perhaps no surprise the company was struggling with excessive and often incorrectly located parts inventories across the distribution network, and low customer order fill rates. Volkswagen resolved to assess the entire service parts network.

By deploying a new business design, processes and planning techniques (including lean warehouse management), VW has reduced its structural cost, improved inventory management and productivity, and dramatically increased customer service levels-all within just six months. Customer order fill rates directly from inventory have been increased from 76 percent to 94 percent and fill rates using the entire network have increased to 98 percent. Beyond the hefty improvement in customer service levels, VW is reporting reductions in inventory and warehousing costs reaching more than US$25 million per year, conservatively estimated.

In the technology area, many companies are neglecting to upgrade their infrastructure to enable differentiating performance in the service business. In fact, executives asked to list the top barriers to operational excellence in their service business frequently cited inadequate and inflexible information systems. (See Figure 8 on page 9.) This is not surprising. Across a range of capabilities, most companies still have considerable ground to cover to fully exploit the power of new technologies and systems.*35

While enterprise resource planning (ERP) software, warehouse management systems (WMS), and demand planning and forecasting software tools have achieved extensive adoption in up to 30 percent of the companies studied, many other tools and technologies have yet to gain acceptance (Figure 13). Few service operations have extensive implementations of systems for customer relationship management (11 percent), product data management (10 percent), and advanced planning and scheduling (6 percent). Yet, technologies and systems for designing, managing, and optimizing service and parts operations-such as advanced planning and scheduling, field service management tools, and customer relationship management systems-have improved dramatically over the last decade. They are no longer the obstacle to transforming the service and parts operations they may have been 5, 10, or 20 years ago. Indeed, as experiences across a range of industries show, the benefits that can be realized from adoption of new technologies and systems for managing and optimizing the service business are substantial.

Our analysis shows a strong correlation between information system adoption and the benefits achieved. (See Figure 12 above.) The adoption of radio-frequency identification (RFID) and related technologies for real-time sensing and communication is still only nascent in most of the companies benchmarked. Barriers to adoption of RFID mentioned by executives include issues relating to the costs and benefits of adoption, technology maturity, and systems integration and industry communication standards (Figure 14). Interestingly, few companies saw significant problems around information sharing with suppliers and customers around their service business, indicating a potential for taking a collaborative approach to adoption of these technologies.

While most companies are taking a "wait-and-see" approach, a select few have started significant deployment of leading-edge technologies, such as RFID and other sensing and communications technologies, to help support integrated product and service strategies. For some companies, these technologies provide much needed capabilities for enhancing customer service levels while maintaining or even reducing the cost of delivery. General Electric, the US$152 billion diversified technology, media and financial services company, is applying RFID to manage and optimize equipment installation and use. It is using RFID technologies to tag large-scale power-generation equipment parts and modules for easier identification and assembly at customer sites.*36 In 1995, General Motors created OnStar to provide customers in-vehicle safety, security, and information services called "telematics," serving nearly 4 million customers by the end of 2005. The OnStar Vehicle Diagnostics system provides customers with both instant and periodic diagnostic checks of key areas-such as engine and transmission, brake system, and air bags-and will send status reports to customer via e-mail so they can schedule any needed service visits.*37

Rolls-Royce uses state-of-the-art sensing and communication technology to provide exemplary customer service.*38 In one example a Rolls-Royce jet engine on a passenger airplane in flight over the Pacific was hit by lightning. While the engine shut down and restarted appropriately, this kind of incident normally would require an unscheduled maintenance inspection on landing in Los Angeles, which would cost both time and money due to a significant delay. Because Rolls- Royce sensor and communications systems could access the data feed from the engine monitors in flight, Rolls-Royce was able to temporarily build in a variance to the maintenance program and schedule the maintenance at a more suitable time. With its strong capabilities for real-time service, Rolls- Royce handled the incident with flying colors and estimates the savings for the airline customer from this event alone were US$1 million or more. As the A&D industry moves towards performance based services, a US$1 million event like this could become an un-billable cost under a service level agreement (SLA) contract. The ability to increase customer service levels at lower cost by reducing the number of unscheduled engine removals is rapidly becoming a core capability for survival and success in the industry.


Why Now? Chasing the Changing Basis of Competition in Manufacturing

There are a number of critical reasons why top executives need to prioritize the service business among their strategic initiatives and investments First, the business model of many global manufacturers is under attack due to changing customer and consumer demands, maturing home markets, and competition from low-cost manufacturers. This is taking its toll on growth and margins in primary product sales and threatening even the service and parts business. In developed markets, main-line products are being commoditized through increased pricing pressures, particularly from low-cost country sourcing. Service businesses are typically more resistant to attack by low-cost competitors, because they involve considerable local presence and customer intimacy, which is difficult and expensive for newcomers to copy. In emerging markets, such as China and India, service and parts operations are under attack by price competition, and counterfeit and will-fit (and sometimes "ill-fit") parts, in turn jeopardizing profits, growth, and brand reputation. Protecting the business through service excellence is one way of keeping out the competition while improving customer satisfaction and loyalty. Second, the increased frequency of new product introductions and shorter lifecycles for main products make service excellence even more important. The combination of short sales cycles due to product proliferation and long service life cycles is a recipe for escalating costs, parts obsolescence, lost customer focus, and deteriorating customer service quality, if not properly managed. Among the benchmarked service operations, the median inventory obsolescence rate stood at 5 percent and in many cases exceeded 10 percent or more-a costly symptom of service business problems.*39

Third, quality issues and problems with service and parts can exact a staggering toll in terms of both warranty costs and brand damage. No wonder, then, that analysts estimate industrial equipment makers will invest a total of US$1 billion over the next five years to overhaul warranty management and spare parts logistics. Fourth, service businesses can be very resilient. In times of economic downturn, service and parts sales are often far more robust than the main business. For example, during the economic and financial crisis in Korea from 1997 to 1999, sales of new vehicles by Hyundai and Kia Motors dropped nearly 36 percent, but Hyundai Mobis Spare Parts Sales Business posted a 5.6 percent sales increase.*40

And, finally, the increasing complexity of the business-e.g., through business expansion into new markets, mergers and acquisitions, continued outsourcing of parts production, logistics, and service delivery, more and more new products, shorter initial product sales cycles but long service-cycles combined with more complex demands from customers for comprehensive service-based contracts-will make the business challenges and risks even more daunting.*41 Customers are likely to demand better tailored and better managed service solutions, often combined with risk-sharing agreements, from their suppliers. Ensuring the right customer experience-the right product, the right service, the right branding, the right price, all delivered to the right place at the right time-will become even more difficult in the years ahead. But for those able to manage the complexity, the cost and the risks, the results can be remarkable.


Conclusion

With significantly higher profitability and a growth potential that is still under-exploited in a majority of the companies benchmarked, the service and parts business is the overlooked jewel of many corporate portfolios, rarely receiving the attention it deserves. Joining the service revolution in manufacturing industries may be one of the most fundamental steps companies can take to ensure their future survival and success.

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