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    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.

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

Warranty and Contract Management: Grab the Gain and Ditch the Pain. How? By Breaking Down the Silos.

By Christa Prokos

Warrant Post 2 imageThis post is second in a series of four addressing best practices in warranty and contract management. The best practices highlighted in the series, we believe, are core to better warranty and contract management, happier customers, and fatter profit margins.

In this installment, we’ll look at how to break down silos that divide warranty and contract processes.

Manufacturers generally recognize the immense opportunity that better warranty and contract management represents. They see the “chain of gain” it promises to deliver:

1. Better warranties and contracts generate better product knowledge.

2. Better product knowledge leads to better warranty, service and product performance.

3. Better warranty, service and product performance leads to happier customers.

4. Happier customers are likelier to remain customers. And when customers see the increased value they’re getting from their products, they tend to buy more–and they refer more new prospective customers to the manufacturer.

5. Retaining and growing of current customers, combined with finding and nurturing new customers, increases the manufacturer’s revenue, profits, and market share.

6. A better bottom line means a better company– and increased shareholder value.

Of course, there’s the threat of the opposite effect–the “chain of pain” that can occur when a manufacturer fails to obtain better product knowledge through smarter warranties and contracts. They may miss the chance to add value and delight customers with their intelligence-driven service and product improvements. Revenue, profits, and market share may strain to keep up. The manufacturer may fall behind competitively.

The bullets below chart challenges and opportunities in warranty and contract management. None of the pains described here are insignificant. Yet, of all the difficulties they face, functional silos are typically their biggest barriers to success.

Silos not only divide warranty and contract processes, they separate service teams from each other and from the design, engineering, and manufacturing organizations that can benefit from their product insights. With disconnected departments and processes, the manufacturer’s opportunities for cross-enterprise efficiencies and synergies are lost. Breaking down the silos–it’s crucial for ditching the pain and grabbing the gain. A product-centric approach to warranty and contract management can be just the silo-buster needed.

What are the challenges from traditional methods of warranty and contract management?   Learn more…

Stay tuned for next week’s installment of the Warranty and Contract Management Best Practice Series to learn how to increase warranty and contract performance knowledge. 

Warranty and Contract Management Best Practice Series Step 1: Think bigger. Manage strategically. Outperform competitively.

By Christa Prokos

This post is first in a series of six steps to take to achieve better warranties and contracts for increased customer value.

In the past, it may have seemed enough for a manufacturer to ask of their service organization, “How can we streamline our warranty operations? How can we cut our warranty costs?” The company might then explore how to make improvements at an operational level, or even strictly at the departmental level of warranty management.

Not so today.

Manufacturers now increasingly view warranties and contracts as more than simply a cost burden, more than simply a service process to be made more efficient. With margins from product sales declining, manufacturers are looking to the service areas of their business for new revenue and profit opportunities. And they recognize the competitive advantages available to them through improved warranty and contract management.

Let’s look at warranties and contracts in terms of costs and gains:

  • 7% – The world’s manufacturers spend anywhere from 0.5% to 7% of product revenue on warranty claims each year, according to an IDC Manufacturing Insights report.
  • $50,000,000,000 – The same IDC report states that in the United States alone, manufacturers’ annual costs for warranty claims add up to approximately $23 billion in lost opportunity. According to BearingPoint Management and Technology Consultants, this cost totals to $50 billion or more worldwide.
  • 30%+ – Yes, the costs of warranty claims are high. But service contracts and warranties also drive revenue gains. Industry research shows that they contribute about 31% of total service revenue for the world’s manufacturers today.  With best-in-class service performance, the rate of revenue from service contracts and warranties can rise significantly more – and the costs of claims can drop substantially.

Recent industry research bears out management’s evolving perspectives. What was once largely thought of as a check-the-box requirement–a cost of doing business–today stands out as a prime strategy opportunity. Manufacturing executives now aim to use innovative better warranties and contracts to help differentiate their company’s offerings and stay ahead of the pack.

There’s greater pressure to be better.

Here, per the results of an Aberdeen Group survey, are the key factors driving service executives in manufacturing companies to invest in improving their warranty and contract management performance:

Top Pressures

  • 52% – Mandate to increase service profitability
  • 40% – Reduced margins on standard service operations
  • 37% – Reduction in new customer growth
  • 33% – Rising warranty repair costs
  • 33% – Competitive pressure from other service organizations

Top Goals

  • 38% – Improve customer satisfaction
  • 21% – Increase revenue
  • 18% – Cut costs
  • 11% – Improve product quality

As leading manufacturers are seeing, smarter handling of their warranty and contract management processes can provide the critical service and product insights needed to improve service and product outcomes and increase value to the customer.

How is your organization feeling the pressure to be better and what are you doing to address it?

Stay tuned for next week’s installment of the Warranty and Contract Management Best Practice Series to learn how to break down the silos that divide warranty and contract processes.

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Armed for the service parts pricing battle? Price Elasticity can help you win the fight for the optimal price

By Jon Utterback

Pricing service parts is a battlefield. With the proliferation of grey market parts increasing competition in the marketplace, the ultimate goal is to find the optimal price point for every part manufactured. Most pricing organizations are tasked with pricing thousands of service parts SKUs. Unless you are armed with the right approach and tools, this will probably be a long and tedious battle that you too often lose to your competitors.

As I’ve mentioned in previous posts, the best way to find that optimal price is with a 3-step blended approach of Price Alignment, Market-Adaptive Pricing, and Price Elasticity.

  • Price Alignment: an approach based on pricing groups of parts by building relationships between parts
  • Market-Adaptive Pricing: positioning prices against competing market prices from both OEMs and aftermarket competitors
  • Price Elasticity: Determines customer sensitivity to price changes throughout lifecycle changes and identifies parts that can be priced with elasticity

In this post, I am going to dive deeper into the third step of the blended approach, Price Elasticity. At its most basic definition, Price Elasticity deals with your customer’s sensitivity to changes in pricing which can lead to changes in your sales volume and affect your revenues and profits.

Price Elasticity further defines market specific prices and determines your customer’s sensitivity to price changes throughout lifecycle changes. For example, in the image below you see that as the price has increased, volume has decreased, but profit has increased.

Price Elasticity calculates the relationship between price and volume. This translates to gross profit curve with a peak point where price drives maximum gross profit.

With service parts, Price Elasticity is not necessarily a reliable pricing mechanism.  One needs to map price and volume changes over time, including common situations such as when parts have been superseded by newer parts.  Additionally, factors such as economic and seasonal variations must be removed.  Once those steps have been completed, then the price/volume and price/profit curves can be reviewed to determine if price elasticity is a good fit for a particular part.  If so, a business rule can be added to your blended set of price strategies to determine the optimal price.

Price Elasticity gives you the ability to price parts at the optimal price that the market will bear. Using this approach along with Price Alignment and Market-Adaptive pricing will give your pricing organization the best line of attack in the battle to find the right price point. Armed with the right pricing approach and tools, you can choose your price battles more wisely and improve your gross profitability by 15 percent or more.

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 market for service parts is exploding…is your parts pricing competitive?

By Jon Utterback

A recent report from Gartner says “the market for automobiles grew sharply in double digits to about 58 million passenger cars, 12 million light commercial vehicles and 7 million other commercial vehicles globally in 2011.”

With a growing motor vehicle market and an economic environment that is influencing the length of time a consumer holds onto their automobile, the market for service parts is exploding. As a result, there is more competition for parts manufacturers.

While Gartner’s statistic focuses on the automotive industry, growing parts competition is a reality for all markets generating service parts not just motor vehicle. Whether it’s automobiles, medical devices, consumer electronics, etc., setting the optimal price for every part is critical to maintaining profitability and staying competitive.

As mentioned in an earlier post, to find that optimal price a 3-step blended approach of Price Alignment, Market-Adaptive Pricing, and Price Elasticity is best. In June, I discussed Price Alignment, an approach based on pricing groups of parts by building relationships between parts. In this post, I’m going to dive deeper into Market-Adaptive Pricing and why it is a strategic technique for improving your competitive market position.

One of the clients I work with from a major automobile manufacturer has said, “We’re not just leveraging price increases any longer it’s much more of a strategic direction where we are moving parts both up and down according to the competition and the environment.”

This approach of positioning prices against competing market prices from both OEMs and aftermarket competitors is the basis of Market-Adaptive Pricing.   Figure 1 explains this by showing pricing relative to market statistics.

In this example, a variety of competitive price points are collected for Part XYZ.  The Q1 and Q3 values represent the 25th and 75th percentile of the market set of competitive prices and anything between the two can be considered “within the competitive cone”.

Fig. 1

This market may follow various strategies such as Static Pricing or Fluctuating Pricing.  Figures 2a and 2b below show that static pricing may result in some suboptimized prices that are not in touch with the market whereas fluctuating pricing strategies adapt prices to the competitive cone.

What are the key steps to building a Market-Adaptive Pricing approach?

  • Capturing, storing and leveraging competitive market data
  • Using your own competitive data
  • Monitoring complaint tracking data
  • Utilizing a Market Research Program – engineering matches, price checks, web-crawling process

There are various sources for collecting competitive pricing information – competitive “street” price points, dealer net prices, comparable part equivalencies, and surveyor: web crawler pricing. You should match the mix to meet your specific requirements.

Market-Adaptive Pricing helps you make better operational pricing decisions by giving you better insight and visibility over markets. Strengthening your approach in this area will help you respond faster to market and competitor price changes; help you identify undervalued parts to improve cash flow; and gain better control over losses to the gray market. The end result? A competitive edge that leads to increased revenue and profitability.

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.

Three Reasons Why ERP is a Misfit for Service Logistics

By Jim Schoessling

One of the common questions I get asked when talking to customers and prospects is “Why shouldn’t I just use my ERP system to handle my services business?”  For many companies, this is a natural first instinct given the amount of time and money you’ve sunk into your ERP application and the vendor’s promise that the ERP can handle the complexity of services.  In reality, many companies are using SLM applications to complement a typical ERP deployment.  We see this frequently in the area of Service Logistics (SL), where many of the complex operational aspects of service management are handled and customers find themselves without the proper tools within their ERP solution.  The reasons are many, but the three key issues driving the need to employ complementary service logistics solutions  rather than an ERP can be boiled down to data complexity, the ability to handle work orders, and extracting data in a meaningful way.

1. Data Complexity

As with almost all major business processes, the world of services uses its own “language” to describe key features or attributes that help drive processes.  These attributes are unique in that they may be important for the services side of the business, but less important for other areas of a company simply due to the nature of services.  Because an ERP is geared towards running the “main” part of the business for a company (i.e. Financials, HR, Manufacturing, etc.) it has systemic “blind spots” in terms of critical data needed for aftermarket services.  For example, in an ERP system, all products are new, in-warranty, and have clear ownership rules.  But in services, products can be in any number of conditions at various times within a Service Lifecycle (new, used, refurbished, repair, defective, etc.).  As a product moves across a services network, ownership may change based on business rules.  Any of these changes can and will impact how that part is managed within a services network as well as the value of the product, which impacts the total value of your inventory.  In services, products must be defined in a much more granular way with specific attributes that tell the true “story” of each product, down to the serial number.  An ERP is simply not built to handle this type of data complexity and it typically falters when a company attempts to use it in that manner. Having an SL platform that is capable of understanding this complex data requirement and is built from the ground-up to handle the unique data needs of the services network is critical.

2. Ability to Handle Work Orders

The complex data that is leveraged and created within a service network is a by-product of the operations that occur within post-sales support, specifically around work orders that are created to manage inventory within a services network.  As mentioned earlier, ERPs are very qualified to handle the non-services part of the business, such as manufacturing and procurement.  In this sense, ERPs can handle some type of orders, such as purchase and sales orders.  But in the aftermarket, a single services “event” can produce many sub-orders, or work orders, that drive the services process.  Order types can include Advanced Exchange, Return for Repair, Same Unit Repair – the list goes on.  Within each one of these Order types, there are events that occur that produce more work orders – Repair Orders, Replenishment Orders, Return to Vendor, etc.  All of these service-centric orders must be managed and typically need to be orchestrated across many partners and their numerous systems.  Given ERP’s lineage in Forward Logistics and in focusing within a single enterprise— creating, tracking, and orchestrating these orders across a complex services ecosystem is a completely foreign concept.   A strong service logistics solution with this complexity built right in will enable you to manage and optimize the multifaceted task of work order orchestration across the entire services network.

3. Extracting Data

Finally, one common complaint I hear about ERP systems is the difficult time people have extracting critical services information from the tool.  As mentioned, an ERP will not have the granular information around work orders or inventory attributes to effectively run a services business.  Even if it did, mining or extracting that data in a simple, meaningful way for services has proven to be difficult.  Service logistics solutions need to have a powerful and flexible data query and analysis engine that provide the right dimensions to search on that are critical to being able to mine services data properly.

Large ERP systems play a critical role in managing the overall business for an enterprise.  An ERP can effectively manage many of the core areas of a business, such as Finance and HR.  However, in a business area like after-market services, a typical ERP will have many gaps.  A service logistics solution will fill these gaps and can be used as an integrated, complementary tool to an ERP.

Jim Schoessling is Vice President of the Service Logistics Business Unit at Servigistics. Prior to joining Servigistics, Mr. Schoessling spent 7 years at Lucent Technologies (now Alcatel-Lucent) within the Supply Chain Networks (SCN) division in various key management positions including IT Systems and Processes, Demand Planning, Order Management, Order Fulfillment, and Strategy & Optimization. Jim has a Bachelor’s degree in Mechanical Engineering from Marquette University and a MBA from the Kellogg Graduate School of Management at Northwestern University.

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.

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