2005 Articles
October 01, 2005
Managing Automation Magazine - Getting Smart About Service
Managing Automation Magazine
When Kia Motors Corp. (Seoul, South Korea) launched sales of its automobiles in the U.S. 11 years ago, its post-sales service organization didn't have to worry a whole lot about competition from after-market parts manufacturers. That's because there simply weren't enough Kia's on the road to attract major third-party parts competitors or service providers.
Today, however, Kia is no longer cruising under the radar. Eighteen months ago the company sold its one millionth vehicle in North America, stimulating intense interest from after-market parts manufacturers.
"One million was a trigger point," says Steve Green, director of parts and logistics at Kia Motors America (Irvine, CA). "It's now profitable for [aftermarket parts manufacturers] to go after our installed base. We've seen some aggressive tactics from them."
In order to fend off newly aroused after-market competitors, Kia is aggressively revamping several post-sales service processes, including the way it predicts demand for service parts in North America and the way it orders parts from the parent company in Korea. Kia America has replaced a homegrown forecasting system with the Demand Manager and Service Parts Planner tools from i2 Technologies Inc. (Dallas). The systems allow Kia to forecast and plan service parts demand down to the individual part number and location and to consider factors such as the impact of seasonality on demand. As a result, Kia has improved parts fill rates while reducing inventory and shipping costs.
The service parts planning revamp is part of a broader Kia initiative that includes rolling out standard operating procedures at parts distribution centers and beefing up marketing of support services offered by Kia's dealer network. "In the past, we didn't focus that much on things such as service parts," says Green. "But now we need to do whatever we can to defend our post-sales market."
SURPRISING VULNERABILITY
Kia's not the only manufacturer to have left its potentially lucrative post-sales service business open to poaching from competitors. Historically, many manufacturers tended to view the post-sales service side of their businesses as either a necessary evil or an entitlement. While most have invested heavily in recent years to automate production, streamline new product development and revamp supply chain planning and operations, many have neglected post-sales processes such as service parts planning and logistics, service call management and warranty claims management. As recently as 2002, according to AMR Research (Boston), enterprises on average devoted just 20% of their IT spending to improving post-sales service processes, while processes related to finished goods design, development and production soaked up 80%.
That's beginning to change, however. Manufacturers such as Subaru, Whirlpool, Kia and Cisco are beginning to devote more and more of their attention and IT spending toward improving post-sales service processes. In a recent survey of manufacturing companies by Aberdeen Group (Boston), 56% called improving field service a high priority. More than half said the priority level attached to field service has increased in the past one to two years.
NEWFOUND OPPORTUNITIES
Why? A couple of reasons. First, as manufacturers face increasing competition and pricing pressure on their finished products, many are realizing that improving post-sales service processes represents an opportunity to both significantly cut operating costs and drive new sources of revenue. "As product margins are getting pushed down, service is seen as a safe haven for profitability," says Ken Ruggles, a research director at AMR.
Also, the potential top- and bottom-line benefits are great. Depending on the industry, customers spend between five and 20 times the initial sale price of a manufactured item on subsequent services and consumables, AMR estimates. And, in many industries -- aerospace and high tech for example, where uptime is paramount -- customers are increasingly willing to pay more for higher levels of guaranteed service. Some companies, such as Boeing, have even taken to charging for their products based on overall availability, a practice that places a premium on field service and support.
Some progressive manufacturers are tapping into customers' appetites for premium post-sales support by turning their service offerings into increasingly important sources of sales and profits. By automating key processes such as service parts planning and logistics and service technician scheduling using wireless devices, for example, IBM has tripled post-sales service profit margins over the last eight years while increasing services market share by between 3% and 4% per year, says Scott Dougall, general manager for technology support for IBM Americas. IBM now provides post sales service for 66 clients.
Similarly, Cisco Systems Inc. (San Jose, CA) saw its revenue from post-sales services grow 12% in its most recent fiscal quarter to a total of $998 million. Post-sales service now represents 16% of Cisco's total revenues.
"It's an enormous opportunity for us," says Jim Reily, Cisco's vice president for global service operations. "Post-sales support is critical to customer satisfaction. We find if customers don't buy the full suite of offerings -- including parts and support -- they often end up dissatisfied."
At the same time, manufacturers increasingly see an opportunity to significantly cut costs by streamlining and automating key post-sales service processes. As product lifecycles shorten and manufacturers go global, providing post-sales service has become an increasingly expensive proposition. At many manufacturing companies, post-sales parts represent 50% of all inventory, Aberdeen estimates. Just understanding how many parts you need and in which stocking locations around the world in order to meet specific customer service level agreements can be a complex task -- and an expensive one if you get it wrong.
BUDDING PARTNERSHIPS
CAT Logistics, the logistics services arm of Caterpillar Inc. (Peoria, IL), for example, has seen the number of service parts it must manage globally for its parent company increase in the last few years from 250,000 to 550,000, says Krish Srinivasan, manager for strategy and business development at CAT Logistics. In order to increase inventory turns on those service parts and improve visibility, CAT Logistics in 2000 signed a deal with SAP AG and Ford to jointly build a new generation of post-sales service software applications focused on order fulfillment for service parts, service parts planning and warehouse management.
The applications are due to roll out in December, and CAT Logistics will deploy them internally beginning next year, replacing a series of homegrown applications. SAP will market the software as part of its enterprise applications suite.
The CAT Logistics/SAP/Ford joint development is part of a renewed focus on post-sales service processes by the big vendors of enterprise applications. Besides teaming with CAT Logistics and Ford, SAP last year created a new Service and Asset Management business unit that is focusing on post-sales services solutions. According to Bob Hogg, its director, the unit is building post-sales service-oriented solutions out of existing SAP software modules such as MySAP CRM and enterprise asset management.
Meanwhile, SAP arch rival Oracle Corp. has been beefing up field service capabilities in its Oracle 11i10 Advanced Manufacturing release, adding a service parts planning feature and support for wireless access for field technicians. The solution also integrates closely with Oracle's CRM module, allowing manufacturers to easily track a customer's contractual service level and to schedule field service calls accordingly, says Anand Subbaraman, senior product manager for field service at Oracle.
So what key post-sales service processes are savvy manufacturers targeting for improvement? Service parts planning and logistics is quickly becoming an area of major focus. Caught between escalating customer demands for quick repairs and rapidly expanding product portfolios and distribution networks, many manufacturers are seeing spare parts inventory levels and costs rise rapidly. By understanding and planning better for spare parts demand, they can not only cut inventory and logistics costs, but also provide customers with guaranteed service levels.
"We find that parts inventory and logistics expense is usually the number one thing manufacturers need to address because the cost of capital these days is huge," says IBM's Dougall. "They're trying to balance the size of inventories against their disbursed operations against client service levels. It's an art." IBM has developed its own proprietary software specifically for forecasting and planning spare parts demand and flow.
GOING AFTER SPARE PARTS
Other manufacturers, such as Subaru and Cisco, are tapping into off-the-shelf applications that target service parts planning and logistics, a space that is growing at a 20% annual clip, according to AMR. Such applications -- from a growing list of vendors including Baxter Planning Systems (Austin, TX), Click Commerce (Chicago), MCA Solutions (Philadelphia), i2 Technologies (Dallas) and Servigistics (Atlanta) -- are analogous to supply chain and demand planning applications, but take into account issues that are specific to spare parts planning.
Unlike traditional supply chain applications, for example, service parts planning systems need to deal with a bidirectional flow of inventory since parts are often returned for repair. They must also be able to take individual customer service levels into account and to scale to track large numbers of parts, since many manufacturers must continue to support -- and provide parts for -- manufactured products for years after they are out of production. And some parts planning systems help manufacturers shape demand by planning spare parts pricing in, for example, situations where a product is entering its end-of-life phase. Baxter Planning Systems currently offers this functionality, and Servigistics in March added a pricing optimization module.
Carmaker Subaru of America (Cherry Hill, NJ) is using Click Commerce's Service Parts Optimization solution to keep service parts inventories under control while meeting the parts needs of customers. Before deploying the latest version of the parts planning system, says Carlo Sacco, national parts inventory manager at Subaru, the company could only manage monthly forecasts. The Click Commerce system allows Subaru to pull inventory and order information from the company's Oracle ERP system, combine that with 36 months worth of demand history by item, location and dealer and come up with daily forecasts that are used by planners to order parts. Analytics associated with the system allow Subaru to see fill rates over time, total inventory by planner, aging of customer orders and other key metrics. "Now we can tailor our processes and purchases on a daily basis rather than monthly, so we don't have to bring in inventory before it's needed," says Sacco. "So we can save money and still keep customers happy."
Leading manufacturers are also focusing on taking cost out of dispatching field service agents to customer locations and handling warranty claims by making the process more efficient. In many cases, that means automating the process so that service providers show up when and where they are expected, have the parts and information needed to fix the problem on the first visit, and -- if the equipment to be repaired is under warranty -- are able to get reimbursed quickly, without the need for loads of expensive paperwork.
Not long ago, the way Whirlpool Corp. (Benton Harbor, MI) handled service and warranty transactions was anything but efficient. With 180 million units in consumer homes, Whirlpool -- through a network of independent service providers -- handles five million service calls and over one million warranty claims per year. Yet, until four years ago, 60% of the warranty claims came to Whirlpool via fax and snail mail and were handled manually by a 35-person group. That meant it often took weeks for service providers to get reimbursed, months if data entry errors crept in. Sometimes claims didn't get paid at all, which made service providers and customers alike unhappy.
Finally, Whirlpool decided its best bet was to outsource the management of service calls and warranty claims to ServiceBench Inc. (Fairfax, VA), provider of a hosted, Web-based system that automates the process of scheduling and executing service calls and handling warranty claims. ServiceBench handles payment processing, dispatching and even conducts online surveys to determine the level of customer satisfaction with the post-sale service transaction.
OUTSOURCING SERVICE
"Ultimately we decided that managing service transactions was not a competitive advantage for us," says Tom Welke, general manager and vice president for customer care at Whirlpool. "Having technicians who know how to fix our products better than our competitors is a competitive advantage. We want to pay quickly for every warranty claim associated with service a company performs on our behalf. That's the best way to breed loyalty and customer satisfaction."
Because the ServiceBench online interface is easy to use and automatically corrects mistakes, fewer valid warranty claims are rejected. Before using ServiceBench, Whirlpool rejected 20% of claims. Today that figure is less than 3%. Whirlpool has cut the average time to pay warranty claims from 45 days to less than a week. And the company has reduced the number of in-house staff handling claims from 35 to five.
Others are going further, attempting to integrate service management more tightly with other parts of the business so that, for example, service technicians can update customer records based on what they see in the field or service parts can be requisitioned and put in place as soon as a customer signs a contract.
Cisco, for example, has built tight links between the Service Planning and Optimization (SPO) application it uses from MCA Solutions to plan and allocate service parts and the Oracle ERP program with which, among many other things, it records new customer orders. So as soon as a new customer comes on board, Cisco can analyze where in its 700-location stocking network spare parts for that customer need to be, and do it in the 15- to 30-day window called for by many of its customers' service level agreements.
That kind of quick response has enabled Cisco to offer super premium post-sales services for which it is able to charge premium prices. Last year, for example, Cisco signed a major services contract with Nippon Telegraph and Telephone East Corp. that calls for Cisco to offer service and parts within 30 days of new equipment going into place as well as guaranteed two-hour service parts delivery.
INTEGRATING SERVICE
Software vendors also are trying to create new, high-value processes by integrating service management with applications such as CRM. Users of Siebel Systems Inc.'s Field Service and CRM applications, for example, can employ the company's Business Analytics tools to gain a deeper understanding of what types of customers are buying services and which are most profitable. With that kind of information, says Bill Hou, general manager of service and call center products for Siebel, manufacturers can begin to more aggressively and effectively market and sell services in much the same way they've historically sold and marketed their products.
Of course, integrating service management systems with enterprise applications is only part of what manufacturers must do in order to cash in on the post-sales service opportunity. They must also integrate on an organizational level, experts say. Historically at most manufacturing companies, the field service organization has been isolated from other groups such as sales and new product development. So it has been difficult for them to design processes that, for example, systematically link sales and service groups in order to mount more effective service-selling strategies. In a recent survey by Aberdeen Group, in fact, manufacturers cited "disjointed processes across CRM and service inventory management" as the biggest field service challenge they face.
Some manufacturers, however, are beginning to tackle that problem. Cisco, for example, has combined services delivery, service sales and customer satisfaction functions into what Reily calls a "customer advocacy organization." Headed by Senior Vice President Wim Elfrink, the group regularly conducts customer satisfaction surveys. Bonuses for all Cisco employees are based on the results.
BANDING TOGETHER
Other manufacturers are creating teams involving their service organizations and other groups in order to attack specific cross-functional problems. Nacco Materials Handing Group (Portland, OR), a maker of material handling equipment including Yale forklifts, for example, has created teams consisting of service engineers, design engineers and plant engineers to stay on top of the performance of equipment in the field and, ultimately, improve the quality of Nacco's products. The teams have developed standard forms that help representatives from the different groups share information, and they rate themselves on how quickly they are able to identify field service problems and correct the root cause.
To do that, the teams track failures by product type and pour over loads of service and warranty claim reports, looking for information that can help them understand the source of recurring problems.
Until recently, however, the number of documents the teams could review were limited since much of the information they want is in the form of text entered by field service technicians. "We were really struggling with understanding what's causing a particular problem," says Nacco's Quality Improvement Manager Ryan McLawhorn. "We were limited by our ability to handle and read all of the text."
Recently, however, the company took a big step toward eliminating that limitation when it deployed the text parsing and analysis tool Discover from Attensity (Palo Alto, CA). Essentially a search tool, it lets Nacco drill down into textual warranty claim information to more quickly discover the cause of a recurring problem.
Discover has helped Nacco isolate the root causes of problems 20% faster than before, says McLawhorn, and it has contributed to a 30% reduction in overall warranty costs. Those kinds of improvements can have a big impact on the bottom line. AMR, in fact, estimates that North American manufacturers are hit with warranty claims totaling $39 billion per year.
In the end, leveraging data generated by warranty and other post-sales service processes to quickly spot product defects, accelerate engineering changes and improve new product development may be one of the more significant benefits of automating post-sales service processes. Whirlpool's Welke sees it as a critical benefit that will flow from his company's initiative to automate the service dispatch and warranty process. Whirlpool, he says, has begun to use ServiceBench's analytical tools to understand where and why Whirlpool products sometimes break down in the field, sharing that information with the product development organization. "We need to understand what failed so we can design problems out or understand the right fix," says Welke. "It's all about getting accurate, timely information back from the field so we can share it with the engineering group. In essence we're creating an early warning system."
Software vendors such as Siebel and PLM provider Agile Software Corp. (San Jose, CA) have begun to build this kind of capability into their products. Agile, for example, is seeing increased demand for its Product Service and Improvement module, an offering that aggregates post-sales service history information from CRM and other systems and feeds it into a bill of materials database that design engineers can use to spot problems and correct designs. (See "Taking PLM to the Next Level," September 2005, p. 52, for an example of how the product is being used.)
EARLY DEFECT DETECTION
Consumer electronics manufacturer Mitsubishi Digital Electronics (Irvine, CA) is also using data generated from post-sales service to generate early warnings on product defects. Another ServiceBench user, the company has been able to cut the time it takes to spot defects and notify its engineering group about them from 120 days to 30 days. The result: Far fewer defective products find their way into the hands of consumers, which means lower post-sales service costs and more satisfied customers.
Before deploying the system, surveys showed 60% of Mitsubishi's customers described themselves as satisfied. Today, says National Warranty Manager David Velasquez, the number is up to 92%. "In our industry we have to run as lean as possible to keep our costs down," he says. "If we can do that and, at the same time, produce more satisfied customers, we think it's the best of both worlds."