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  • SLM Hub Topics

  • New SLM Resource from Industry Week

    No longer a tired after-sales routine, service is now the strategy that builds and establishes reputations, sells the product, and creates new business potential for vendors and customers. However, many manufacturers still haven't tapped into the profit potential of post-sales service. Learn how many companies are organizing their service processes under the umbrella of Service Lifecycle Management, in much the same way as they’ve done in areas like Supply Chain Management and Product Lifecycle Management.

  • On Demand Webinar

    Learn why an integrated approach to parts pricing and planning helps boost service profits.

Get Your Service Parts Pricing in Line

By Jon Utterback

This week I am at the Professional Pricing Society’s Spring Conference in Chicago. It’s always enjoyable to network with other pricing professionals and to learn more about the challenges pricing managers are facing to remain competitive in today’s challenging economy. It also reinforces that those responsible for pricing service parts are faced with even more hurdles. How do you tackle these hurdles and pressures to gain pricing power in service parts?

As discussed in a previous SLMHub post on Service Parts Pricing, there are multiple approaches to managing prices when you are faced with very high volumes of parts, sometimes inconsistent information about competitive prices, and uncertain demand based on many competitors and part/model life cycles.

One general approach to Service Parts Pricing is to focus on Price Alignment.  Pure statistical methods sometimes used in setting service parts price levels often miss the need to provide consistent prices with defensible logic to use in customer communication.  The Price Alignment approach addresses this issue.

Price Alignment is based on pricing groups of parts by building relationships between parts.  These relationships can be based on one or more factors including:

  • Simple Part Groups – any collection of parts from which derivative prices can be based on another price
  • Part Chains – this is a collection of parts (typically inventoried over time) in which parts have superseded an earlier part
  • Part Kits – this represents a collection of parts in which the price of the group of parts (the kit) has a relationship with the sum of the individual parts.
  • Tier Relationships – in this approach, pricing relationships are based on one or more inherent part attributes such as form, fit, finish, function, etc.

Simple Part Groups

Simple part groups have pricing relationships established in which multiple part prices are based off of another price.  Individual strategies may vary.

Leader/Follower is one typical example.  Often there are examples, such as vehicle mirrors, in which prices can be aligned based on part replacement experience.   For a typical automobile model, based on multiple color options, there can be dozens of related parts for right-hand and left-hand mirrors.  In right-hand driving countries such as the United States, replacements are required much more often on the right side of the vehicle.  As a result, part manufacturing volumes are higher for right-hand mirrors leading to lower per-unit costs.  A pricing strategy could be established to ensure that right-hand mirror prices are set to equal left-hand mirrors, despite the lower per-unit cost, which will drive higher margins for right-hand mirrors.

Step Level Groups are based on offset relationships between two or more sub-groups.  For example, new and remanufactured parts may be grouped to maintain a price relationship reflecting the origin of the part.  Then, as various part prices may get adjusted (due to a part supersession or changing sourcing costs), the relationship between the new and remanufactured parts is maintained through the Step Level Group approach.

Branding strategies can also utilize step level pricing.  For example, many companies provide a “Good/Better/Best” approach to help drive profitability.  Step level pricing can enforce the relationship between branded quality tiers.

 

These simple group pricing techniques are typically used in conjunction with other pricing strategies than may factor in competitive pricing information, margin targets, and other considerations.  Used together, harmonized prices can be propagated across larger parts volumes resulting in better financial performance.

In the next installment on the topic of Service Parts Pricing in the SLMHub, we will discuss using Part Chains price alignment.

Question or comments? I look forward to the discussion.

Jon Utterback, VP, Pricing Product Line, Servigistics, has over 25 years of management consulting,    software implementation and product management experience.  Throughout most of the past decade,  Jon has focused exclusively on pricing and profitability management.  Jon is a graduate of Vanderbilt University, where he earned Bachelor of Science degrees in both Computer Science and Mathematics, and Georgia State University, where he earned a Masters in Business Administration in Finance.  He is a frequent speaker at Professional Pricing Society conferences and webinars.

The Four Building Blocks of SLM

By Mark Vigoroso

While many know that a well-run service operation is an important factor in winning customer loyalty and repeat business, what they still have to wrap their arms around is the breadth, depth and immediacy of that opportunity.

While there are a multitude of factors that can influence whether manufacturers realize the hidden profits in servicing what they sell, there are four operational building blocks that typically underpin an SLM strategy. What must be kept in mind, however, is that failure in any one component often means degradation or failure of the entire service supply chain, adding needless costs, causing missed revenue opportunities and ultimately resulting in lost customers.

Let’s look at these four building blocks:

Parts need to be available

While it may seem self-evident that you need replacement parts in order to service products in the field, there are many factors behind the simple statement in the heading above that need to be managed. Replacement parts have to be manufactured, which means the market for replacement parts has to be predicted. How often will each replaceable component break? Could too high of a price cut on spare parts cause a run on those parts, leading to a stock-out?

With enterprises running lean, companies are focused on avoiding over-stock of spare parts. Yet without full and clear visibility into their daily inventory and usage patterns, they are at risk of both over- and under-stock situations. Inventory has to be managed at every echelon of the supply chain, from central, to field, to dealer, to truck stocking locations, to ensure that service parts are available where and when they are needed – and in the proper quantity.

Both over- and under-stocks have a direct effect on the bottom line. Over-stock sits on the balance sheet as “lazy capital” and prevents cash from being deployed in other areas where it would be put to better use. But an under-stock situation can bring a portion of the business to a grinding halt, resulting in lost revenue and customer dissatisfaction.

The service parts management component of SLM helps manufacturers and their service network partners to minimize the amount of spare parts  held at every location, while maintaining or even improving customer service levels.  It can also set limits for pricing managers to avoid imbalances in spare parts inventory, which helps manufacturers achieve their gross profit targets.

A systemic approach to optimizing service parts operations also enables companies to maximize their use of parts already in their networks – both new and repaired – before resorting to the profit-killing option of purchasing a new part. Often when field technicians install a new part, they add the old one to the growing stockpile of defective field replaceable units (FRUs) in trunk stock instead of delivering it back to a repair depot. As a result, new spare parts are purchased needlessly.

People need to be available

In field-based service environments – where technicians are deployed to the customer location to deliver service – having the right service technicians available, at the right time, with the right parts to respond to customer requirements is critical to a healthy service operation. After all, having parts available but no one to install them is the same, in effect, as not having the parts available at all. Yet many manufacturers and their service partners are still managing the people component using manual or even paper-based systems.

Through sophisticated automation that balances service demand and capacity in real time, field-based SLM solutions can optimize and manage technician scheduling, dispatch, routing and workflow – delivering a 20- to 25-percent uptick in calls per day per technician and a 50- to 100-percent improvement in technician to dispatcher ratio.

Not only can technicians be matched to jobs by areas of knowledge and expertise as well as proximity to the customer, these solutions often integrate a part location functionality to ensure the technician has what’s needed to solve the customer issue. Combined, this level of visibility and control yields higher first-time fix rates – and more satisfied customers.

Parts need to be priced effectively – and competitively

In the current business climate, manufacturers that rely on OEM-original spare part sales in the aftermarket need to be able to adjust prices quickly to react to a wide variety of market dynamics. They want to avoid locking in longer-term pricing that leaves them vulnerable to competitor moves. Should spare part usage fall below forecast levels or manufacturing adjustments change the velocity of demand, pricing managers also need the freedom to authorize aggressive spare parts price cuts. These cuts can help them rebalance active inventory as well as liquidate excess inventory of end-of-life parts, keeping working capital requirements low.

Yet pricing doesn’t exist in a vacuum. To maximize profitability, manufacturers need visibility into events and changes occurring in every market segment where their parts are sold. Examples include demand and competition by region, general availability, stage of the lifecycle and general inventory levels. Price a part too low and the manufacturer risks losing gross profit dollars. Price a part too high and the manufacturer risks losing market share to aggressively-priced imitation parts.

The service parts pricing component of SLM provides that visibility, which eliminates guesswork and allows pricing decisions to be made according to data rather than unilateral estimates or “gut feel.”

Knowledge must be readily available

In order to be able to operate efficiently, field-, depot-, and support center-based service technicians require fast, easy access to the vast amount of institutional knowledge about products, service procedures, diagnostic requirements, service issues, policies and so forth. They also need to know the history of a particular customer’s equipment, service records, availability and location of specialty parts and information that helps them overcome the unplanned.

Information is at the heart of effectively managing the service supply chain. Data about service level agreements (SLAs) and history with a particular customer, combined with comparative data across all customers, parts location and pricing, helps drive out costs, improve performance and enhance profitability.

Are you looking at the bigger picture? I welcome your feedback and questions.

This post is an excerpt from a recent article. Read the entire article on SupplyChainBrain.

Mark Vigoroso is SVP of Global Marketing and Alliances at Servigistics.

Servigistics and MCA? Really?

By Mark Vigoroso

Anything I say on this topic will sound like an advertisement for Servigistics, right? Although I did spend 5 years as an impartial analyst covering this space. Perhaps you will permit me to speak from the latter perspective? Not buying it? Well, here goes anyway… This merger IS indeed good for the market.

At global 5000 durable goods manufacturers, post-sales service operations are incredibly complex value chains with innumerable points of failure upon which billions of dollars of revenue and profit rely. Service parts planning and optimization is all about minimizing capital tied up in inventory while maintaining or improving service performance – measured by fill rate, asset availability, or some other metric of SLA compliance.

For this – and all the other potential points of failure in the service lifecycle – service organizations need to balance two important factors when choosing technology partners: 1) Level of functional specialization, and 2) Staying power. Weight the first factor too heavily, and you risk ending up with a mish-mash of point solutions costing you more than they’re benefitting you. Weight the second factor too heavily, and you risk ending up with a monolithic IT provider that’s a jack of all trades, master of none. The mission of Servigistics is to deliver the perfect balance of these two factors, and this merger furthers this mission.

Regarding the Service Lifecycle Management space as a whole, this is a marathon, not a sprint. Scratch that, this is the Iron-Man. Not only for solution providers like Servigistics, but also for our current and prospective clients. The merger with MCA is a step along the way. Servigistics will be making build/buy/partner decisions for the foreseeable future to both DEEPEN and BROADEN our SLM portfolio to meet the needs of our clients and the market as a whole. MCA fits mostly into the “deepen” category. There will be others that fill white spaces in our existing footprint.

So, buckle up. Better yet, get your cycling shoes ready, because I’d say we’re just about approaching the end of the 2.4 mile swim!

 Mark Vigoroso is SVP Global Marketing and Alliances for Servigistics.