1

10

Top Ten Things Your CEO Should Know About Service

T O P T E N T H I N G S Y O U R CEO S H O U L D K N OW A B O U T S E RV I C E
1 2 3 4 5 6 7 8 9 10

Top Ten Things Your CEO Should Know About Service

According to the Aberdeen Group, aftermarket spare parts and services account for 8 percent of the annual gross domestic product of the United States, with U.S. consumers and businesses spending more than $700 billion annually on spare parts and services for previously purchased assets such as automobiles, aircraft, and industrial machinery. It is here, in the service supply chain, that investments can truly pay off, by driving improved customer satisfaction and dramatically increasing service revenues while reducing operational costs. Yet, as compared to the massive ERP investments in the primary supply chain, service parts planning continues to be undervalued and underfunded, and often doesn't receive the attention it deserves at the executive level of manufacturing companies.

Listed below are the ten things that CEOs and other top executives might not know about service and the benefits it could bring to their enterprises:
1. The Service Supply Chain is Different than the Production Supply Chain 2. Your ERP System Cannot Manage the Service Supply Chain 3. The Service Supply Chain is Increasingly Viewed as a Driver of Corporate Profitability 4. Leading Manufacturing Companies Have Experienced Dramatic ROI from Investments in Service Supply Chain Planning 5. Service Has Strong Links to Product Development and Innovation 6. Service Solutions Can be Implemented as a (Hosted) Service with Minimal IT Disruption 7. Service Leaders are Driving Towards Customer-Centric Service 8. Service Control and Management is Required for Sarbanes-Oxley Compliance 9. Service Implementations Should Start with a Business Case Assessment 10. Good Service Management Starts with Effective Service Business Design

With each consecutive point, this white paper will help you learn how to drive greater executive awareness of the impact the service supply chain has on your organization.

T O P T E N T H I N G S Y O U R CEO S H O U L D K N OW A B O U T S E RV I C E
1 2 3 4 5 6 7 8 9 10

T H E S E RV I C E S U P P LY C H A I N

P RO D U C T I O N S U P P LY C H A I N
Service supply chains are fundamentally different than the traditional production supply chain according to the following criteria: VARIED S ERVICE O FFERINGS : Aftermarket service must support warranty commitments, contract extensions (which may include same-day or next-day service), direct parts sales and distributor-driven sales. Service objectives for these entitlements could include fill rates, response times, or maintaining system uptime. G EOGRAPHIC / C HANNEL C OMPLEXITY: To meet same-day service requirements for products with very low demand rates, inventory must be positioned in a large number of geographic locations. Cisco Systems, for example, maintains inventory in over 700 locations, including field locations, distribution centers, and repair centers. These locations may be owned by the manufacturer, distributors, third party logistics providers or repair providers, and must manage not only the forward movement of inventory but also reverse logistics flows for the return of damaged items. P RODUCT C OMPLEXITY: While product lifecycles are decreasing, the service function must support not only newly introduced products but also out-of-production products with low demand and very long manufacturing lead times. This requires not only support for a very large number of parts and products, but also the ability to stock them at different levels of the bill of material, i.e. a complete product, a repair assembly, and component parts. These challenges result in inventory turns that can be significantly lower as low as one to two turns a year than the production supply chain and require a fundamentally different planning approach.

IS

DIFFERENT

THAN THE

T O P T E N T H I N G S Y O U R CEO S H O U L D K N OW A B O U T S E RV I C E
1 2 3 4 5 6 7 8 9 10

Y O U R ERP S Y S T E M C A N N O T M A N A G E S E RV I C E S U P P LY C H A I N

According to industry experts like AMR and Gartner, ERP and traditional supply chain systems do not provide the requisite functionality for service parts planning. These systems were developed for finished goods planning and not for the low-volume, erratic-demand, and contract driven nature of the service supply chain, which can extend across a much larger number of locations. As stated by Gartner Group: ERP systems are strong fits for running the core transactional processes for discrete and process manufacturers, yet they are lacking in analytical capabilities, such as risk analysis for stocking specific parts in individual locations Best-of-breed systems from companies such as MCA Solutions for service parts management will remain key to closing the many gaps in product offerings in the area of end-to-end aftermarket service management. Gartner Group, Aftermarket Solutions Need Three Years to Mature, September 21, 2004 While there have been large investments in ERP, and increasing pressure to extend its use across all business processes, analysts note that a best-of-breed service solution reduces risk and is required for the demanding nature of the service business: Extending an ERP implementation from the Original Equipment Manufacturer (OEM) or production side of the operation to the services side rarely succeeds. The loss of productivity and the risk of project failure outweigh the benefit of integration and total cost of ownership. Users must embrace the differences in the businesses and create an independent implementation and configuration strategy... We believe that all service businesses, because of the unique, cross-functional disciplines required to effectively manage a product services business, must plan for and invest in best-of-breed applications. Marc McCluskey, AMR Research, Service Lifecycle Management, Part I

THE

T O P T E N T H I N G S Y O U R CEO S H O U L D K N OW A B O U T S E RV I C E
1 2 3 4 5 6 7 8 9 10

T H E S E RV I C E S U P P LY C H A I N DRIVER
OF

C O R P O R AT E P RO F I TA B I L I T Y

According to a recent AMR Research study, after-sales service represents on average 24 percent of revenue, but generates a whopping 45 percent of profit. Driven by the increasing commoditization of and competition in finished goods, organizations are viewing their service organizations through a strategic lens, utilizing them as profit-generating engines as well as a critical part of fostering customer loyalty and future revenue streams. Service management provides a low-risk, long-term revenue stream, especially for products with extended lifecycles. Aside from the higher margins in service parts sales, improvements in service quality lead to enhanced customer satisfaction, which, subsequently, increases new product sales. With outsourcing on the rise and an increasingly competitive manufacturing landscape, effective after-sales support can increase profit, streamline operations, and help drive opportunities to enhance customer value.

3
IS

I N C R E A S I N G LY V I E W E D

AS A

L E A D I N G M A N U FA C T U R I N G C O M PA N I E S H AV E E X P E R I E N C E D D R A M AT I C ROI
F RO M

INVESTMENTS

IN

Enterprises like Cisco Systems, KLA-Tencor, and Tellabs are increasingly looking to their service businesses for greater profits, improved customer relations, and true competitive advantage. Implementations of advanced service supply chain systems have seen ROI in as little as two months and benefits that include: Inventory reductions of 15% to 50% Total supply chain costs reductions of over 5% Service level improvements of 5% to 20% Dramatically increased service revenues

S E RV I C E S U P P LY C H A I N P L A N N I N G

Boeing and other military contractors also see great potential in service parts planning. To keep personnel and equipment battle-ready, defense-sector organizations are relying more heavily on outside contractors to manage supply chains by which weapon and fleet parts are distributed and repaired. Boeing's solution allows planners to forecast and position service parts in the U.S. Navy's delivery network, and to determine optimal order quantities for internal replenishment, repair orders, and new-buy orders. Investments in performance-based logistics, a new strategy combining authority, responsibility and incentives, promise further gains for the service supply chain, as companies look for better ways to optimize parts inventory performance.

T O P T E N T H I N G S Y O U R CEO S H O U L D K N OW A B O U T S E RV I C E
1 2 3 4 5 6 7 8 9 10

S E RV I C E H A S S T RO N G L I N K S DEVELOPMENT
AND

Forward-looking executives understand the importance of the links between product development and service and are continually improving these connections. There are several examples of how to accomplish this: D ESIGN
FOR SERVICEABILITY

TO

P RO D U C T

I N N O VAT I O N

- Leading companies are involving service engineers in product development,

ensuring that products are built for reliability as well as for efficient diagnosis and repair if problems occur. L INK
ENGINEERING CHANGES TO SERVICE PLANNING

- To ensure high levels of service, service organizations

have large investments in service parts, often strategically located across the globe. Leading service supply chain organizations ensure that, as engineering changes are made, the impact on inventory levels and reserves is factored into decisions about updating and upgrading products. F EEDBACK
BETWEEN THE FIELD AND PRODUCT DEVELOPMENT

- Some of the most valuable data to drive

product design comes from feedback from the field service force. Progressive engineering groups collect failure data to understand the customer experience and what must be changed to improve product reliability. Cisco Systems, a top-level networking company, has been a leader in this area, reviewing failure data from the service business to continually improve existing products and create innovative, new products that improve the customer experience.

T O P T E N T H I N G S Y O U R CEO S H O U L D K N OW A B O U T S E RV I C E
1 2 3 4 5 6 7 8 9 10

S E RV I C E S O L U T I O N S C A N S E RV I C E
WITH

M I N I M A L IT D I S R U P T I O N

Commonly, resistance to new system implementation comes from the IT department, which is concerned about the IT resources required to manage the system. Increasing interest is being paid to an alternative implementation plan: a hosted solution that is managed by the vendor, allowing the end user to access the application via the Internet. This provides true flexibility in product deployment and support, minimizing administration and hardware costs. With standard adapters to ERP systems such as SAP and Oracle, hosted implementations can be deployed in a manner of weeks, rather than months, with minimal disruption to the IT department. The hosted service represents an ideal best of both worlds solution for many enterprises seeking to optimize the supply chain but wary about cost and complexity complications. Hosting combines ownership benefits such as customization flexibility, performance and security with outsourcing benefits like lower administrative and support costs. A hosted solution can not only condense implementation timeframes, but also reduce total cost of ownership and maximize returns on previous technology investments.

6
BE

IMPLEMENTED

AS A

(H O S T E D )

S E RV I C E L E A D E R S

C U S T O M E R -C E N T R I C S E RV I C E
The recent AMR Service Parts Planning Vendor Landscape survey defined customer-centric service business as those that are bound by specific SLAs to particular customers that are often concerned most with asset availability and uptime These businesses distribute component or subcomponent parts to stocking locations that service installed bases of customers directly. Leading service organizations are becoming more customer-centric, focusing on the needs of their end customers by implementing the following capabilities: Service agreements that focus on the key metrics critical to the end customer, including equipment availability and up-time Incorporating knowledge of service contracts and entitlements in determining optimal stocking levels Incorporating performance-based logistics (PBL) contracts in which customers are contractually rewarded for improving customer-specific metrics Implementing differentiated service contracts that provide higher levels of service response to those customers to whom it is most important

7
ARE

D R I V I N G T OWA R D S

T O P T E N T H I N G S Y O U R CEO S H O U L D K N OW A B O U T S E RV I C E
1 2 3 4 5 6 7 8 9 10

Implementing these service strategies requires an advanced planning system developed with customer-centricity in mind. MCA Solutions has been recognized by AMR for having the most differentiated functionality for customer-centric business: MCA Solutions, designed specifically with customer-centricity in mind, offers the most differentiated functionality at present.

S E RV I C E C O N T RO L

AND

MANAGEMENT

S A R B A N E S -O X L E Y C O M P L I A N C E
Sarbanes-Oxley (SOX) regulations are ushering in a new era of IT automation and process control for public companies aiming to better manage financial risk. Of particular concern to logistics and inventory managers is Section 404, which states three overarching requirements: Managers are legally responsible for material internal control Management must attest that the company is controlled, and business and IT processes are documented Independent auditors must verify that the company is under control and business and IT processes are documented One of the primary goals of Sarbanes-Oxley is to prevent costly inventory write-offs and supply chain events that may affect the balance sheet. A critical objective, then, is to target reserves and expensing of uncontrolled inventories. With uncertain and difficult-to-forecast demand as well as requirements to support a large number of parts that are no longer in production and spread across remote locations globally, the service supply chain poses significantly more difficult challenges in control and risk management. While most service organizations have physical control of their inventories, management of the financial risk associated with service requires sophisticated planning systems that incorporate the inherent risk-based nature of service supply chains. Proactive service organizations are implementing advanced planning systems that allow them to better control and manage their investment in service parts.

IS

REQUIRED

FOR

T O P T E N T H I N G S Y O U R CEO S H O U L D K N OW A B O U T S E RV I C E
1 2 3 4 5 6 7 8 9 10

S E RV I C E I M P L E M E N TAT I O N S S H O U L D S TA RT BUSINESS CASE ASSESSMENT

In an age of increasing focus on costs, any system investment is evaluated with intense scrutiny. Justification requires a robust business case with a commitment to rapid ROI and alignment with future business direction. As noted, the value proposition for advanced service planning is very high, and it is possible to assess the potential value before implementation by modeling the service business and understanding the inventory / service-level tradeoff and the timeframe for achieving that value. Customers who have completed a modeldriven business case assessment as a first step have achieved the following results: A quantified business case using real operational data An understanding of the data and IT resources required for implementation A model of the service supply chain for business scenario planning A roadmap for implementation of a high value solution A well-defined assessment process can help service organizations develop the right business case to address their unique challenges and achieve their individual goals.

WITH

G O O D S E RV I C E M A N A G E M E N T S TA RT S

S E RV I C E B U S I N E S S D E S I G N
As service networks continue to take on new partners, vendors and third-party logistics suppliers, service operations are becoming increasingly complex. Service business managers face a number of critical decisions in looking for the most profitable way to develop a world-class service offering for their customers. These include determining the optimal service product to meet customer demand, identifying the most profitable supplier relationships, and finding the most efficient structure for the service supply chain. Service organizations cannot afford to make such decisions blindly, with only limited ability to simulate and understand the various costs and budget impacts. By investing in service business design, managers can analyze a broad range of business scenarios to ensure that they maintain full visibility into the factors that drive service profitability. The result is increased control for decision makers trying to develop a more effective service offering at the highest possible levels of customer value.

10

WITH

EFFECTIVE

T O P T E N T H I N G S Y O U R CEO S H O U L D K N OW A B O U T S E RV I C E
1 2 3 4 5 6 7 8 9 10

MCA S O L U T I O N S I S T H E L E A D E R I N S E RV I C E S U P P LY C H A I N O P T I M I Z AT I O N
MCA Solutions is keenly aware of the specialized requirements inherent to service parts planning. Its innovative Service Planning & Optimization (SPO) suite of software does not replicate ERP functionality but rather integrates with SAP and other planning systems, to provide end-to-end coverage of production and service supply chains. With advanced inventory planning, forecasting and tactical execution solutions, SPO can handle the myriad complexities of the service supply chain from varied service offerings and diverse product support to geographic and channel intricacies thus enhancing the management and monitoring of inventory levels for mission-critical materials. MCAs offerings encompass the complete range of a companys service needs, from strategic consulting that helps organizations evaluate their current service offerings and create a roadmap for the future, to the three key areas involved in service optimization: service business design, strategic planning and optimization, and tactical planning. The first commercial software to optimize assets in a multi-echelon supply network, SPO addresses the demanding requirements of the service parts planning process, while providing global, real-time visibility of the extended supply chain. Proof of the potential of service can be seen in the results of MCA customers. Inventory reductions of up to 50%, service level improvements of up to 20%, significant supply chain cost reductions, and dramatic increases in service parts revenue are standard for SPO adopters like Cisco Systems, Boeing, and Tellabs. With a record of 100% on time delivery, and lighting-fast deployments, MCA has provided rapid and positive returns in every engagement. For additional information please contact MCA at info@mcasolutions.com.

10

World Headquarters Two Penn Center Plaza Suite 700 1500 JFK Boulevard Philadelphia, PA 19102 Tel: 215.717.2180 Fax: 215.717.2189

EMEA Headquarters Mechelsesteenweg 277 B-1800 Vilvoorde Belgium Tel: +32 2 254.85.42 www.mcasolutions.com

2005 MCA Solutions. All rights reserved.