Service supply chain as a source of competitive advantage How businesses are creating value from the service supply chain

Transcription

1 Service supply chain as a source of competitive advantage How businesses are creating value from the service supply chain May 2014 At a glance Product companies have focused on reducing fulfillment supply chain cost in recent years. Now they are turning to the post sale, or reverse supply chain, for a next generation of benefit. Beyond cost, broadening operation options for customers is one factor that s driving the difference in performance. Leading manufacturing companies create competitive advantage through the service supply chain.

2 Introduction After recent years of focus on reducing product and supply chain costs, high performing product manufacturing companies are now taking a structured look at service supply chain operations. Traditionally, the service supply chain for these original equipment manufacturers (OEMs) has been perceived by company officers as hard to manage: a cost of doing business and a second tier driver of business value. Often, these operations have been an afterthought for creating competitive advantage since spending often exceeds reserves, inventory write-offs are common and customer experience ratings of post-sale services are traditionally weak. But it doesn t have to be that way. Through PwC s 17th Annual CEO survey, we found that 71% of US CEOs are planning to remake their fulfillment and service supply chains. Further, through PwC s recently completed Service Supply Chain Benchmark study, it was confirmed that there is a significant cost gap between average and top performing OEMs. For example, in the high technology market, where every point of margin is important, the difference in service supply chain cost as a percent of product revenue is 2.9 points. Some of this difference is based on the mix of service terms and operating models and some is based on the level of management attention put into these operations. What drives the difference in performance and is creating a competitive advantage now? We found three sources of leverage through our study and recent engagements: 1) broadening service operation options for customers, 2) engaging service supply chain partners in innovating operational practices, 3) focus on end-to-end performance quality and management. 2 Service supply chain as a source of competitive advantage

3 Broadening service operation options for customers Consider, for instance, how customers establish a service request. We found that OEM companies that are doing well have opened up multiple channels for initiating a service order. They have expanded beyond the traditional contact center support and are using web-based self-serve provisioning of service applications for mobile devices. This allows them to process issues at point-of-purchase across consumer and enterprise class products. Our study shows that 31% of customer entitlement requests now go through self-serve web sites as opposed to a call center. Use of crowd sourced or social media-based service support is also gaining momentum among consumers and professional field service technicians as well. As a result, the average cost to validate entitlement and create a service order is lower, lead time to a solution is shorter and, customer satisfaction is significantly higher. Another example of how the service supply chain is creating a competitive advantage for OEMs by being responsive to customer preferences is through innovations that deliver faster turnaround time for repair and product upgrades. Design for service has become a more common practice in many OEMs. Modularity of repairable parts has enabled a higher percentage of same visit walk in center repairs and customer completed repairs. Both reduce logistics and field service costs and the lead time to getting product back in use. In electronics, the advent of on line data and applications back-up enables use of unit swaps instead of same unit repair which shortens the time customers are without their device (by an average of 10 days for mail-in and 2 days for field service) and also shrinks the costs of handling same unit repairs. In certain industries this is becoming more popular: in the past 18 months, smart phone unit swaps have become a generally accepted consumer trade-off for reducing time without a phone. 3

4 Engaging service supply chain partners in innovating operational practices Beyond customer driven changes, the strategic value of service operations for OEMs is being shaped by the rise of third party capabilities and innovations. One growing area is from businesses that specialize in defective and out of commission asset recovery and repurposing. Increasingly these businesses are working with the OEM to recover older equipment and harvesting it for spare parts, remanufacturing it for use as a warranty exchange unit or, remarketing it. Even with profit taking, these companies are creating value propositions that reduce the cost of warranty for the OEM. In another example, we observe that component suppliers are working more now with their OEM customers to evaluate the trade-off of buying the components with warranties or to have the OEM self-insure instead. For particular classes of components and sub-assemblies, self-insuring can lead to lower overall component costs, and reduced reverse logistics and handling for defective part claims. In the past 24 months, several large OEMs have converted a significant portion of their spare parts and repair program to selfinsure lowering manufactured cost and the cost of the service supply chain. We also observe that tighter OEM partnerships help reduce spare parts waste and improve first time fix rates through simple processes such as providing feedback to call center and field service staff on metrics like dispatched parts not used, and dispatch of wrong parts where customer induced damage was found and where no defects for authorized returns were found. When structured in a learning forum, this OEM provided feedback has helped reduce service supply chain part logistics and field service costs. Our study showed that 25% of parts declared defective had no defect found when returned for repair: the opportunity is potentially significant. As with the fulfillment supply chain, we have also found OEMs that have a competitive part fill-rate and inventoryturn profile, and invest as significantly in spare parts planning as they do in new product part planning. In fact, the two are often integrated for lifecycle decisions, such as last time buy and E&O write-off. Partners can typically help with statistical forecasting, part substitution contingency planning and related areas. Over 73% of our study participants have active fill-rate programs and, those that do, also have a 4.5% advantage in their wrong part and missing part metrics. Many OEMs wind up providing free repairs for products that are not qualified for a warranty entitlement because the processes are not well defined or reinforced across call center and repair center or field service partner staff. However, we have observed that through effective co-process planning and management, these situations can be flagged and managed in a way that permits more consistent service with high marks for the customer experience. Coupled with reasonable pricing, we have found that charging for out of coverage repairs is generally accepted by customers and has no negative impact on future buying decisions. 4 Service supply chain as a source of competitive advantage

5 Focus on end-to-end performance quality and management Train, provide feedback, reward or remove, repeat. Even in heavily outsourced service supply chains, (over 66% of study participant service supply chains are outsourced on average), the quality management function is not abdicated. OEMs with highest first time fix rates were those with highest customer satisfaction and lower than average warranty cost. The correlation comes from ongoing OEM engagement in repair partner operator training, performance audit and feedback. OEMs with highly effective outsourced service supply chains typically have retained rights to reward or remove partner operators from their contract based on their performance. We have found a large gap in practice between average and leading performers when it comes to including the service supply chain in new product or new market launch planning. As obvious as it sounds, few companies have or use a robust post sale service readiness plan as they manage their supply chain set-up and sales and marketing readiness plans. Fewer still think to align the service supply chain set-up with local customs and tax regulations or with the local basis of competition in cases of a new country expansion. The level of thought and preparation put into the network design choices for service operations directly correlates to how well positioned these operations are for a high quality and cost effective experience that can quickly impact the brand value proposition. 5

6 The competitive advantage of service supply chain generated revenue Forward-looking companies are going beyond improved customer and partner engagement and improved quality controls in the service supply chain. They are looking to generate revenue and run the service supply chain like a business. Our benchmark study found that 44% of respondents drive revenue from the service supply chain and the trend is rising. Leading companies are all at once managing warranty costs, improving their brand through improved service supply chain operations, and generating revenues from things like premium service, off warranty service and remarketing repaired units. Interestingly, our work shows that when a revenue contribution goal is added to the service operations leadership team charter, cost efficiencies, quality, and customer promotion scores also rise. While still largely managed as a cost center and rarely managed to a reported P&L, service supply chain operations working within the overall service strategy achieve better performance levels. To do so, these supply chain leaders are partnering with sales and marketing piloting and deploying new, innovative practices such as a simplified menu of charges for fast turn-around instore or in-depot repairs, simplified warranty extension contracting (using self-serve web sites) and simple tradein programs in point-of-purchase locations or during a field service call. The approach leading companies take to generating revenue through the service supply chain will vary by industry, but regardless of the sector, provisions for revenue always are included in defining practices, roles and incentives. 6 Service supply chain as a source of competitive advantage

7 Taking steps toward improved performance Enhancing the competitive advantage that can come from a service supply chain is not a one-size-fits-all proposition. If there is one lesson to be learned from a close inspection of service supply chains, it s this: many companies are significantly spending more on the service supply chain even though they treat these operations as a cost center. The service supply chain, when managed strategically, need not just be about controlling costs but rather about creating competitive advantage. 7

8 To have a deeper conversation about how this subject may affect your business, please contact: Kevin Keegan Principal (617) kevin.keegan@us.pwc.com Ian Cohen Director (970) ian.cohen@us.pwc.com To learn more about PwC s supply chain and benchmarking services, visit PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved. PwC refers to the US member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. DC Rr.