Increasing Customer Loyalty through Service Parts Management

Why is Service Parts Management Important?
Companies are increasingly discovering the importance of effective service parts management. Properly executed service parts strategies may lead to value creation for the company. There are three primary linkages between effective service parts management and value creation: direct profitability contribution, enhanced customer loyalty that leads to repeat purchases and the influence on original purchase.

Most companies would describe themselves as manufacturers, distributors, retailers, or marketers. It is hard to imagine the top management of many top aircraft, computer, telecom, or industrial products companies identifying their showcase products as their way of building a revenue stream of service parts and service for years to come. In actuality, however, service parts and service are the profit drivers of most companies in these industries. Recent studies have indicated that while accounting for only 10 to 25% of sales, service parts and service often account for 40 to 75% of profits. Depending on a company's position in the channel, the profit numbers can be even higher. Increasing the effectiveness of service parts management (i.e., balancing the inventory investment and operating costs with customer service requirements) can allow further exploitation of these profits.

The second linkage between service parts and value creation is the role parts and service play in building loyalty. Leading companies have come to realize that customer satisfaction may start with the new product sales, but that the relationship is nurtured or destroyed by the ongoing parts/service business. Loyalty creates value in two ways. First, loyal customers are more likely to continue buying parts and service from existing providers instead of seeking alternatives. Second, loyal customers are more likely to re-purchase the same brand. Not only does this repurchase directly contribute value, it is achieved with reduced levels of sales and marketing costs. Positive experiences enhance the loyalty and, hence, the life-time value of the customer. In addition, recent studies indicate that if a customer's problem is satisfactorily resolved through a positive service experience, that customer is more loyal than before the problem existed.

An example of these concepts is the personal computer industry. For a personal computer, a new product is typically replaced every four years. Over that four years, it is not unusual for the user to need software, hardware, and upgrade support six or more times. If those customer contact experiences are not positive, the customers will go elsewhere for their replacement products.

The automobile industry experience is similar. How many customers do you suppose are drawn to purchase a new product, but their dealer and service experiences are so bad that the same manufacturer never even makes the short list when replacement is considered? This inability to retain customers, measured through brand loyalty, is one of the key issues for automotive companies today. Every (answered or neglected) call, letter, or e-mail is a chance to build equity with customers. In addition, it is an opportunity to sell additional services and products that the customers need and that can, and usually do, purchase elsewhere. With the customer contact opportunities, potential for upselling, and the impact to customer loyalty, can any company continue to be successful if they fail to effectively manage parts and service?

Finally, service parts are a key factor in the original product purchase. For many customers, the ongoing operational effectiveness of the product is a key factor in determining the satisfaction. For example, the availability (uptime) of construction and mining equipment is a significant determinate of the profitability of construction and mining firms. These construction and mining firms carefully evaluate the service parts strategies of equipment suppliers prior to making purchases. For this reason, Caterpillar has chosen to deploy an effective services parts management program as a competitive weapon when marketing new equipment.

Why is Service Parts Management Becoming More Complex?
While service parts management is beginning to receive the proper level of awareness, successful execution is becoming increasingly difficult. Change drivers that impact all facets of a business hit service parts especially hard.

Globalization
Global access to parts information for planning, sourcing and delivery processes is stretching the capabilities of current organizations. Customers are expecting similar (or at least comparable) levels of service on a global basis. This requires parts operations to have integrated processes, access to information, and common policies.

Companies are beginning to realize that their brands are global. The experience the customer receives in the US should differ little from the experience they get in Europe, Africa, or Asia. Would you really expect poor service from Mercedes in Hong Kong? Or in Brazil?

Major customers are also going global. Global contracting or mining companies have the same expectations from Caterpillar (or Deere, Volvo, Case or Komatsu) wherever their operations happen to be located. To remain competitive, these heavy equipment manufacturers must set and fulfill a service standard globally.

New Marketplace Channels
A complex web of delivery capabilities is replacing single channels of distribution. Historically, a given manufacturer (or industry) would leverage a single distribution channel for parts. The construction equipment industry used dealers. The computer industry used field service technicians (either in house or outsourced). Appliance manufacturers leveraged independent repairmen. Today, this is changing, as roles within channels are becoming more complex. Progressive companies are segmenting their customers and developing parts and service distribution channels to meet the needs of each segment. Many manufacturers are looking for ways to supplement the access to customers by bypassing their dealers. Parts for computers are now available at "big box" retailers. And, of course, eCommerce is changing the marketplace.

Depending on a company's current role in the supply chain, the complexity of channels will have a different impact. OEMs are now faced with the challenge of different requirements for different channels. Think of the organizational, legal, marketing and logistics challenges required if an OEM were to start selling parts directly to consumers. These new channels also provide opportunities for new competition from non-OEM manufacturers, called "will fitters" in some industries. These will fitters can attack specific market niches or channels with a unique combination of prices, quality and service that creates a value proposition difficult for the OEM to match. Similarly, dealers and field service organizations are faced with new competitive threats. Their supplier (the OEM) may be selling directly to their customers. Furthermore, a retailer selling parts can merchandise better than the typical dealer.

Increasing customer demands
All facets of business are facing increasing demands from customers. In service parts, these requirements are historically a desire for more rapid delivery and increased parts availability. There is an increasing trend, however, towards more complex demands; primarily the bundling of products and services into one package. A common example is the bundling of three years normal maintenance with the purchase of a new car. A more progressive example is buying "uptime" on equipment (i.e., manufacturing/service hours) instead of buying the equipment directly. As companies are faced with these demands from customers (or when they want to take a leadership position within an industry) a complete understanding of marginal costs and reliability is critical for effective pricing.

At the same time this bundling is taking place, companies involved in service parts are being compared to a broader spectrum of competitors. No longer is the user of Deere & Company's service parts comparing Deere's performance only to Caterpillar; the user is also comparing Deere to the experience the user had interacting with Dell Computer Corporation. Just beating the same competition is no longer enough.

Product Proliferation and Shrinking Life Cycles
Customers continue to demand the latest and greatest products that leading manufacturers have to offer. The competitive nature of many industries drives leading companies to continue to develop and bring to market new, improved and more complex products. Often, a new generation of product will have more serviceable parts than the generation before. This means more parts for the service parts organizations to manage. Yet while this proliferation and shrinking of life cycles occurs, many customers continue to demand service on their older products. This puts additional strain on the service parts organizations, as they must support both the newer and the older products. Given the number of parts in complex products and the number of years companies must provide support in order to remain competitive, the number of parts a leading service parts organization will have to manage can seem nearly astronomical.

Technology
As companies have introduced new technologies into new products, the management of service parts has become more complex. The digital age has ushered in the age of an increasing use of electronics, silicon based hardware, and sophisticated software. These new technologies are increasingly difficult to diagnose and lead to a more repairs where the part is replaced, yet tested with 'no apparent problem'.

Reverse Logistics
As a result of legislative, technological, and environmental forces, reverse logistics play an increasingly important role in service parts management. Across the globe, governments have begun to mandate the reuse of parts and components. As a result, companies have begun to implement programs and processes to return defective service parts to the point of manufacture, point of remanufacture or to a proper salvage point. These governmental forces have been joined by technological forces which have increased the economic value of defective service parts and made reconditioning economically viable.  

What are the Leading Techniques for Managing Service Parts?
The increasing challenges presented above require improved management of service parts. While there is extensive information available on service parts management (world-wide-web search engines return over 15,000 web matches), most of the information is very tactical in nature. There are, however, several key management principles that when successfully implemented allow a company to differentiate their service parts management performance.  

Focus on integrated management not point solutions
Supply chains that support service parts are complex. They typically include multiple sources of supply, some internal manufacturing and some external suppliers; a complex network of distribution facilities; a mix of transportation providers across several modes; and an increasing number of channel partners. Typical improvement programs are very silo focused: select an area of the supply chain and "optimize" it. While this approach can lead to benefits, the results only reinforce a segmented, often disjointed, supply chain. It is nearly impossible to optimize each segment of the supply chain individually and the "weakest link in the chain" metaphor applies. Integrating the supply chain across the suppliers, internal company functions, and service providers directs the entire focus towards meeting customer requirements and driving excessive cost out of the system.

In addition to integrating across the supply chain, leading organizations are leveraging service parts and information into the design, manufacturing, and sales operations. Integration supports "design for serviceability;" the new mantra of leading companies. Standardization across stock keeping units and across model years can dramatically reduce the number of items in inventory, lower service part inventories, and increase service to customers. The product portfolio should plan for the entire lifecycle of the product by defining the useful life, the years of service parts support, and service part sources. Proactively planning the service part lifecycle will lead to lower end of life inventories, stabilized service part supply chains, and increased levels of customer service. Additionally, key service information (e.g., warranty claims, service failures) provide feedback to the design and manufacturing processes.

Overall, the need for integration increases as companies look to control part number proliferation, increase the speed that products are delivered, and to support the increased level of technology found in today's products  

Focus on the right set of performance metrics
Everyone agrees that it is hard to improve what you are not measuring, but if the measurements are not focused on root causes of problems, the metrics can not drive actions. Two examples will help reinforce this point. Every customer support organization measures, at some level, order fill rate. Typically, this measure is one of, if not the key, indicator of overall performance because of its impact on customer satisfaction. It is unclear, however, what actions can be taken when a directive is given to improve performance. This is because the metric used to monitor performance (fill-rate) provides very little insight as to what level of orders go unfilled, and why. A better measurement would be an "unfilled order rate." Specifically, this measure could break down the number of customer orders that were not filled due to specific causes. Then, the management system could be used to understand why orders are going un-filled. Examples might include: supplier was late in delivering the parts, the parts were put away in the wrong location and could not be found, or the order was misplaced. Once these causes are measured and understood, actions can be taken.

Another example is inventory turns. Every business measures inventory turns, but again it is very hard to improve turns based on that single measure. An improved set of performance metrics would include the "why" inventory exists measurements. Inventory can exist for many reasons: covering supplier lead-times, maintaining safety stock for customer service, and supporting one-time buys. With the information regarding why inventory exists, action oriented programs can be put in place.

Focus on systematically reducing variation in all areas of the parts business
One of the most important areas to focus on in reducing variation is in the area of demand forecasting. Having a 100% accurate demand forecast is next to impossible. There are too many reasons why parts would be under-forecasted in certain periods and over-forecasted in others. What is very possible, though, is understanding and managing the variation in a forecast. In addition to have a forecasting system, companies need a process that enables them to understand, and therefore manage, forecast variation. It has to be the responsibility of someone to understand why a forecast was missed and what corrective actions can be put in place to ensure it does not happen again. Forecasting systems cannot be put on "autopilot" for most parts and be expected to deliver results. Reducing forecast variation drives many benefits. More accurate forecasts allow reduced safety stock levels that are put in place to handle variation, therefore reducing overall inventory levels and cost. In addition, more stable forecasts help parts availability, which in turn directly drives higher levels of customer satisfaction.

The next major area to focus on in reducing variability is in lead time. Specifically, supplier lead time for procured service parts. Ask yourself this question: What would you rather have, a) an average supplier lead time of 6 weeks with 1 week of normal deviation, or b) an average supplier lead time of 5.5 weeks with 2 weeks of normal deviation. Most inventory managers will respond "b". In actuality, however, you can plan your inventories more precisely, with less safety stock required, the smaller the deviation in supplier lead time (assuming service levels remain constant) This is a problem that has to be addressed head-on. Does your company track supplier lead time? How about lead time variation? If a supplier's lead time is highly variable, what are the root causes? Is it the supplier's problem, a carrier's, your receiving department? Getting to the root cause of the situation and applying corrective action are important steps to reducing variation. Equally important is putting a system in place which systematically measures leadtime variation and provides you the information needed to address reducing it.

What are the IT Implications of Service Parts Management?
Most organizations are finding their current information systems do not adequately support parts operations in the new, more challenging environment. Most of the parts information systems are old, lack the necessary functionality, have data accuracy issues, are not integrated across the supply chain let alone integrated globally and are expensive to maintain. Certainly, few existing systems support the leading techniques outlined above.

Unfortunately, ideal solutions to this situation do not yet exist readily. Some companies are undertaking expensive modifications to their existing systems. These legacy systems are being opened up and functionality is being upgraded, but at an alarming cost. Trade-offs are being made in the level of integration, migration to new, more robust IT platforms, and the functionality that is being employed. Often times, these organizations lack the knowledge and expertise regarding the full breadth of requirements. Companies pursuing this modification route typically find they spend more money than planned with less functionality than desired.

Other organizations have initiated new, custom information system development efforts to build the required service parts management capabilities. Here, too, the efforts have been expensive undertakings. Some organizations have spent over 10% of annual parts sales to design and implement less than 50% of the desired functionality. The remaining functionality was deemed even more expensive.

Economists would point to this market and say the demand for improved systems would drive software suppliers into the service parts marketplace. To date, there is not a single software vendor with a complete offering covering service parts management. Numerous products exist that address a specific portion of the solution. For example, packages that focus on setting inventory targets for service parts exist and warranty management tools are coming into the marketplace. Yet even these typically lack required functionality. It is very difficult to find software that sets inventory targets and replenishment guidelines across a multi-echelon distribution network with differentiated service targets by customer segments. The lack of a comprehensive package solution has driven companies to patch together software systems. In addition to being a complex systems integration effort, this type of solution typically leads to functional optimization, not supply chain integration.

Companies wishing to remain competitive understand the requirement to have an information technology strategy that is aligned with their overall business strategy. When service parts management is an integral part of a company's business processes, that company must make sure that its IT strategy and infrastructure specifically addresses the requirements for service parts management. When considered as one part of a comprehensive IT solution, the enhancements necessary to provide effective service parts management should not appear to be so complex and will improve the chances of providing for an integrated solution rather than a functionally-optimal one.

CONCLUSION
If companies are to succeed in capturing the hearts of their customers, they must look not only at the products they sell, but also at the level of support provided after the sale. Service parts management, a key element in providing support after the sale ensures satisfied customers over the life of the product. By paying proper attention to the importance of service parts, acknowledging the increasing complexity of service parts management, and developing effective solutions, companies can win the long term loyalty of customers. Information technology, while beginning to focus on point solutions, needs to expand and provide integrated, complete offerings to support service parts management of leading organizations.

About the Author
Thomas Jenkins is an Associate Partner within the Accenture Supply Chain Practice specializing in developing and implementing supply chain strategies for leading companies. His specific area of focus is in developing Parts and Service Management approaches for automotive, industrial equipment, and high tech organizations. Throughout his career with Accenture, Mr. Jenkins developed a leading-edge service parts inventory management concept for a global, dealer-based manufacturer; designed a service organization for an industry leading company; and integrated the manufacturing and service organizations of a major equipment manufacturer.