Service Management: A New Revenue Source
General Motors' greatest return on capital does not come from selling cars —
it comes from after-sale parts and services. Although after-sale revenues comprise
only a small amount of GM's total sales, they are by far the largest creator of
shareholder value on a percentage-rate basis. A GM study revealed that $9 billion
in after-sale revenue produced $2 billion in profits.1 Relatively speaking, profits
from the company's $150 billion in car sales were much lower.
GM's experience demonstrates why more companies are building service management programs to boost profits and provide competitive differentiation. In the automotive industry, after-sale services and parts account for nearly 80 percent of all revenue opportunities, and more than 50 percent of the average automobile dealer's profits.2 Across manufacturing companies, after-sale services and parts have been shown to contribute about 25 percent of all revenue, and 40 to 50 percent of all profits.3 With nearly double the profit potential of first-time product sales, service management is the new frontier of competitive differentiation and profit-enhancement. And once again, supply chain managers are at the forefront of a major business-improvement opportunity.
Capitalizing on the opportunity is not simple, since comprehensive service management significantly complicates the typical company's supply chain. However, new strategies, infrastructures, and tools — combined with informed oversight — make it possible to create and deliver after-sale support more profitably than ever before. This article examines the opportunities and go-forward approaches that define world-class, profit-maximized service management.
Scoping the New Frontier
Service management can be defined as the sum of all customer interactions that follow a product's sale, delivery, and installation. These interactions include customer support, training, warranties, maintenance, repair, upgrades, product disposal, and sale of complementary goods.
Just as the components of service management are diverse, so are the potential benefits of a superior service management capability. To illustrate, a Harvard Business Review article noted that less than 25 percent of revenue opportunities in personal computers and locomotives are derived from first-time product sales, and most revenue opportunities actually are the results of after-sale services.4 The study also showed that, in those two industries, service-related revenues have the potential to exceed first-time product sales by 500 percent to 2,000 percent (see Figure 1).
Figure 1: In many industries, service is a larger revenue opportunity than the product itself.5
In addition, the operating-margin contributions of after-sale services generally outweigh the benefits of increased revenue. A study by the Wharton School revealed that gross margins for after- sale services in the computer industry generally exceed 50 percent for enterprise systems (non-PCs and desktop machines) and are around 20 percent for non-enterprise systems.6 Similar evidence can be found in the automotive industry, where service margins are three to four times higher than new- product sales margins.
Quality service management also can enhance customer retention. In fact, an automotive industry analysis by J.D. Power and Associates reveals a tight correlation between customer satisfaction with after-sale services, and customer intent to repurchase the same brand. Brands like Saturn and Lexus have built a very loyal customer base — complete with high levels of customer repurchase — by leveraging service excellence.
New Strategies, Infrastructures, and Tools
Companies must develop expertise in four areas to create an exceptional service experience and an efficient service management supply chain:
Anticipate Customer Service Requirements
To excel at service management, companies must understand — and anticipate — the value customers place on after-sale capabilities. For example, when a repair requirement is identified at Otis Elevator Company, Otis technologists log the information into a database. The compiled information then helps the company forecast how often and where the problem is likely to reoccur and whether it can be attributed to a certain part, supplier, or job lot. As a result, Otis can identify many problems before they occur and thus make repairs or adjustments before a service call is required — generally in the course of regularly scheduled maintenance. In the end, the company maintains peak customer satisfaction while minimizing expensive, unscheduled service visits.
Design and Build Products for Serviceability
Four interrelated strategies are implied by the need to design and build products for serviceability:
- Modularize: Create products from subcomponents that are easily manufactured
and assembled. This approach makes it simpler to identify, access, test, repair,
and replace critical subassemblies, which reduces the cost and duration of
after-sale service and enables customers to address certain problems directly.
- Instill the highest possible degree of remote- or self-diagnostics: General
Motors' OnStar system, for example, monitors engine performance and system
variables in the company's high-end cars. If a problem occurs, the driver
and GM's remote monitoring center are alerted, and the driver is told how
to proceed.
- Standardize service operations and share repair centers, staff, and other
resources: A leader in this category is Sears, which services a wide variety
of electronic appliances. This diversity reduces costs to manufacturers, which
makes it easier for them to underwrite a portion of Sears' service-personnel
costs. A similar model exists in the auto industry. Given the fairly standard
design of cars, automotive dealers can service multiple brands and models
of cars at the same repair center. Service management approaches also become
more viable when a manufacturer can reuse core parts across multiple product
generations. Car manufacturers, for example, introduce new models almost annually,
but they change their vehicles' core platforms and major components less frequently.
- Design products with an eye toward disposability and recycle-ability: Mercedes-Benz cars are currently designed to simplify disassembly, disposal, and recycling. Since the introduction of the Mercedes recycling system in 1993, the company has nearly doubled the number of reusable, recyclable materials.7 For other companies, recycling components, such as used printer cartridges, have proven to be a significant source of savings. Also, a growing number of third parties have built recycling businesses by extracting parts from discarded items.
Leverage New Technologies for Service Management and Delivery
As shown in Figure 2, successful service management requires the coordination of service materials, service information, and service labor. Today, new software and information technologies are available to optimize the management of these resources. Here are five examples:
- Because of wildly intermittent requirements, forecasting demand for spare
parts and services always has been difficult. Recently, however, more effective
planning tools have emerged that consider variables other than just historical
trends, such as parts' mean time between failures; the installed base and
product use at the customer level; and the potential for upgrades and substitutions.
With these expanded capabilities, companies can improve their forecasting
processes to reduce spare-parts inventories and increase inventory turns.
- Spare-parts planning and deployment can be a difficult task, since parts
may need to be located at repair facilities, central or regional warehouses,
and even at the point of use via a consignment arrangement with the end user.
To minimize complexity, spare-parts optimization software can provide more
accurate information about installed parts requirements and parts locations.
These same tools also can help managers plan the deployment of inventory at
different locations based on specific fill-rate objectives, and later test
different deployment configurations.
- Service order management refers to managing warranties and service plans,
scheduling services, diagnosing problems, and doing repairs. Several new tools
support the sum of these activities. For example, as service plans become
a greater source of earnings, service order management systems help companies
issue plans and warranties; track serial numbers of covered products to verify
eligibility and compliance to service agreements; and formulate new plans
for products that are resold by the original buyer.
- A challenge for many companies is reverse logistics — moving repair
items from the end user to a service center, and tracking items handled by
different service providers during the returns process. New technologies have
been introduced to enhance the returns process. For example, Swift Rivers
and the United States Postal Service recently developed a way for manufacturers
and their customers to print customized, prepaid postal labels from the Internet.
These labels contain bar-coded information that helps route return packages
according to the manufacturer's specifications. Other tools provide Internet-based
tracking capabilities throughout the returns-management process.
- Within a few years, the centerpiece of service management technology may be telematics: wireless, two-way communication between a vehicle or piece of equipment and its external environment. Although telematics has yet to become a familiar term, its concept already is well-known and broadly implemented. General Motors' OnStar system, for example, is a telematics application that provides driving directions, emergency assistance, Internet access, and basic diagnostics on an around-the-clock basis to more than 2 million U.S. subscribers.
Figure 2: Service-to-profit supply chains require a complex mix of materials, information, and labor.
A comprehensive telematics solution (including the embedded devices and the links to back-end systems) can recognize a potential problem before it occurs, so that service alerts can be transmitted, parts ordered, maintenance scheduled, and repair assignments rerouted. Telematics solutions also can feed data to service and customer databases that track and analyze usage and product performance. The overall result is new opportunities to fine-tune preventive- maintenance programs and detect product problems more quickly — thereby increasing equipment utilization and efficiency; reducing warranty, recall, and product liability costs; and potentially upgrading field repair operations. The technology also can help companies:
- Enhance customer service by shifting from reactive to proactive service processes.
- Improve product designs by continuously gathering information about usage and performance.
- Support additional, recurring revenue streams such as periodic monitoring fees and usage-based services.
- Deliver service at lower costs because remote monitoring enables fewer skilled engineers and technicians to manage more products.
- Ease the difficult transition from a seller of products to a relationship-based provider of services.
Link Partners Seamlessly Into the Service-to-Profit Supply Chain
Companies need no longer go it alone when implementing service management initiatives. Instead, it is increasingly possible — and preferable — to work closely with business partners, and even to outsource certain service management functions altogether. For example, more companies are working directly with suppliers on collaborative service-parts forecasts — tying customer demands for service directly to the affected supplier. This linkage helps reduce spare-parts inventories while enabling suppliers to identify the most economical approach to making and delivering parts. Technology also is helping companies connect downstream with distributors and retailers of spare parts. And more service management activities are being outsourced to third-party providers, including service-parts planning, inventory management, forward and reverse logistics, parts sourcing and procurement, and customer service. Even call-center and field-service operations are being outsourced, resulting in greater economies of scale, more varied capabilities, and greater responsiveness. Nowadays, most technicians providing in-home service are employed by third-party service-management companies.
Set the Transformation Agenda
Successfully building a service-to-profit supply chain requires flawless execution and a sage strategy. To ensure that both transpire, supply chain managers should lead their companies through staged implementations: from piloting to capability development to the scaling of operations. First, launching low-investment pilots can provide proof of concept while minimizing risks. If the pilots are successful, then companies can invest in new competencies and supporting technologies and scale these operations to ensure maximum benefit. By using a staged transformation agenda, thousands of companies have the potential to create service-to-profit supply chains that meet their customers' increasingly stringent needs while blocking competitive inroads and generating higher returns.
