For way too many years now, after-sales service has been little more than an afterthought for the typical manufacturer. Most saw little appeal (and little profit) in spending hours arranging an urgent delivery of a photocopier drum cleaning blade or an automotive clutch and accelerator assembly through clogged streets during peak business hours. The result was that few devoted high-level logistics resources or expertise to service parts logistics, the business of maintaining and repairing cars, telecom equipment or photocopiers after a customer has taken ownership. The consequences were predictable—mountains of obsolete inventory piling up in far-flung locations, inflated costs and, often, disgruntled customers.
But that's about to change. Manufacturers are finding that they can make more money from after-sales interactions with customers than they do from original sales. "Everyone's been waking up to the fact that this is where the profit is," says Morris Cohen, founder and chairman of MCA Solutions, a service supply chain consulting group in Philadelphia. "It's easier to sell service products today than it is to sell a new factory or whatever."
Easier, maybe, but it's still not all that easy. Service parts logistics operations are typically tied to ongoing service contracts between a manufacturer or vendor and its customers or dealers. If you buy or lease a photocopying machine, for example, you probably pay a monthly fee that covers visits by a technician when the machine breaks down. Often, in the case of a law firm, for example, keeping a copier working is critical to the business (how else to produce mounds of billable paperwork?), so service contracts will typically specify a time limit for repairs—sometimes as low as one hour.
A one-hour limit may represent the extreme, but four-hour and next-day service terms are typical across the board of commercial and industrial service contracts. That means two things. First of all, there has to be a responsive customer service point of contact—someone available by phone or e-mail who can set things in motion quickly. Secondly, there have to be parts (and engineers or technicians) within quick reach of the customer's location, in order to hit those critical time windows.
The question then becomes whether to outsource these tasks or try to do it yourself. "Nobody argues any more that a company like IBM should be buying trucks and delivering stuff on the street," says Cohen. "Of course there are issues about how you outsource that effectively, but the next question is how do you use that to support a competitive logistics strategy and how do you manage the relationship with customers? There, I think, is a debate."
Split decisions
For many companies, the answer has been to split these functions in two. They have outsourced the physical distribution and delivery of parts, but have kept in-house the more sensitive parts of customer service.
Hewlett-Packard, for example, has outsourced the deployment and delivery of its spare parts to UPS Supply Chain Solutions (UPS SCS), but has kept in-house its service demand planning software, which it considers critical to the core business. This means that HP decides how many spare parts UPS is going to need to fulfill customer requirements, but UPS decides where to keep them.
"We only outsourced pieces of it, the pieces that we felt we didn't want to focus internal HP assets on and become the best in the world at," says Dennis Cain, vice president of HP's Americas global supply operation, based in Roseville, Calif. "Instead, we wanted to partner with a world-class [logistics service] provider.We thought that, with their core competencies, they would be best at providing transportation and warehousing." HP has held onto the planning part of service operations—deciding how much stock is out there and the level of service it wants to maintain. Cain explains the company has also kept the parts procurement piece in-house—such functions as establishing relationships with suppliers, introducing new products and deciding which service parts are required for them. "Other customers have asked UPS and others to do their service parts planning for them; we haven't. That's what we believe drives our financials and our customer experience," Cain says.
Lucent Technologies has adopted a similar strategy, outsourcing the warehousing and delivery of parts as one piece of a three-pronged approach to managing its service contract operations. Calls from customers in need of service are handled by a central Lucent facility in Columbia, Md., where reps work with UPS SCS to coordinate the delivery of a needed part with the arrival of a Lucent engineer. Meanwhile, the service parts function is being influenced by a profits planning software tool from Baxter Planning Systems of Austin, Texas, leased by Lucent on a Web services basis. This gives the company feedback on product failure rates and predicted new product build times.
Pat Nelson, Lucent's director of global post-sales support operations, says physical distribution of service parts is the piece best suited to outsourcing because it's the easiest. "We can take the parts delivery for granted," she says. "We can't afford to worry about it, and generally speaking we don't have to," she adds. That frees up Lucent personnel to address issues that require human intervention, Nelson continues. "That's something that no third party is going to be able to get close enough to do."
Even outsourcing just the physical distribution of service parts to a third party can bring enormous financial benefits, as can be attested by Visteon, a tier one supplier of automotive parts, including climate control systems, instrument panels, suspension systems and automotive glass. Sales to former parent Ford Motor Co. account for 82 percent of sales, and it used to be that after-sales parts were funneled through central Ford locations, then through about a dozen Ford distribution centers that would feed 9,000 dealerships. As a result, Visteon found itself with an average of 1.2 years' worth of inventory floating around—a nightmare in a world where some parts have a lifespan of only six months.
Now, Visteon uses third-party logistics firm Exel to run a centralized parts facility in Groveport, Ohio, which effectively bypasses the Ford network and delivers direct to dealerships. Visteon now keeps roughly one month's worth of inventory. "We still sell product to Ford, but physically we handle the entire distribution process [with Exel]," says Mark Nadel, director of aftermarket and service operations, based in Livonia, Mich. Nadel says a customer order can come in as late as 5 p.m. and still be shipped that day. "Previously, parts were sitting in 20 different depots, but typically they were the wrong parts, so delivery ranged from two days to upwards of a month."
Partners in time
Rethinking the way parts are kept and distributed is one of the many changes happening in the service parts industry. And no one is more eager than the third-party service parts logistics suppliers to keep up with the changes. Different industry verticals are adapting at different rates, says John White, Exel's senior director of business development. "A lot of what I'm seeing in the automotive industry is mimicking what happened in grocery a long time ago," says White. He explains that service parts used to be housed in product-specific warehouses, and different functions such as repair or calibration were done in different locations too. Now, White says, automotive after-sales service parts providers are "trying to change to broad-line warehousing that carries all the manufacturer's parts, and the extra services that you do to those parts are done in the same building."
UPS Supply Chain Solutions' David Adams says service providers are also feeling pressure from their clients. Companies that outsource their service logistics are looking for more and more, says Adams, director of marketing for the group. This is driving an increasingly chummy relationship between 3PLs and their customers when it comes to service parts logistics. "Trust is critical, because we're providing against their customer service commitments. As those tighten, the requirement for a relationship as partners is increasing," says Adams. UPS service parts customers also want UPS to make its own supply chain management technology compatible with theirs. "There's a convergence of the technology that logistics providers use in managing service parts for our customers and the planning systems that customers are using." Companies also want a more holistic approach, bringing service parts logistics into the fold of other logistics operations in order to increase overall efficiency. "More and more [clients] are looking for integrated solutions across all functions of the supply chain," Adams says.
Typically, that means a customer will now require UPS to keep parts in 200 locations in North America, as well as manage distribution and return of those parts. "People are asking for integration of service logistics functions, all the way from one-hour fulfillment to the return loop and the repair loop. Five years ago, people were prepared to deal with many different vendors to manage those processes or do it themselves," Adams says. "Now they're looking for partners who can handle that entire loop of activity." This has made it more critical than ever that UPS or any other 3PL work closely with manufacturers and vendors. "One important thing for your readers to understand is that it's not just about planning the allocation of parts across a highly distributed network and keeping track of that outbound flow," Adams continues. "A significant part of the savings that can be achieved comes from managing returns more efficiently, ultimately increasing turns on inventory."
Adams points to another challenge: globalization. "There's a lot of talk about the globalization of the supply chain generally, but the service supply chain is not typically the focus of that discussion," Adams says. "But service supply chains are growing that way as well. A lot of our customers have many different vendors across the world and want a more globally consistent service supply chain."
Gartner, Inc.
