The quiet revolution

The quiet revolution

For the past five years or more, a quiet revolution has taken hold in the manufacturing sector, at least among leading companies. During this period, manufacturers have come to realize that they've been sitting atop a gold mine that until lately they had been too blind to see - after-sales product support and service.

In a new study of service-support practices at 80 global companies, presented at the Interlog winter conference, Deloitte Research offered impressive statistics on what it calls the service revolution in global manufacturing. "In manufacturing companies around the world, service businesses now account for a significant 46 percent of profits," the study says. "Even more significant, the average profitability of service operations is 75 percent higher than the overall manufacturing operations."

Despite these profit figures, many companies still don't tap the potential of after-sales product sales, support and service.

Customers aren't satisfied for long, especially in an increasingly competitive marketplace. Their service expectations continue to escalate. In perishable product markets such as consumer electronics, ever-shortening product lifecycles and rapid obsolescence mean that companies must maximize product usefulness.

The tremendous cost of asset downtime for high-value assets such as jet aircraft or million-dollar medical diagnostic machines makes rapid product support imperative. Service contracts typically include penalties for failure to perform within specified service parameters.

Service failure can be tremendously costly. Aircraft manufacturer Bombardier found that declines in customer service and replacement parts support threatened customer loyalty, particularly in its Business Aircraft division, and that the company couldn't solve the problem alone. It contracted with Caterpillar Logistics Services to reconfigure and manage its service parts warehousing. Together, the two companies have achieved best-in-class fill rates, shortened aircraft-on-ground cycle times to industry best, expanded aftermarket technical information and support, and maximized service parts volumes and margins - all while minimizing assets.

In the cutthroat laptop-computer sector, original equipment manufacturers understand that how well they support their product in the field determines whether the customer buys again or defects to another brand. At the same time, the OEMs realized that laptop repair is not their core competence. So they are outsourcing that activity to third parties such as Solectron Corp. In as little as 36 hours, Solectron can arrange to pick up a user's malfunctioning laptop, fix it and return it to its owner. To do this, Solectron has located specialized fast repair centers in key logistics hubs around the world, and has partnered with leading freight carriers to ensure priority shipment. Solectron now services more than 500,000 laptops worldwide each year.

UPS is performing similar functions for Toshiba at its Louisville hub. This pattern is being repeated again and again in the third-party logistics provider sector.

Excellent service parts support is a short- and long-term business growth strategy. Short-term, it generates high profit margins, solid revenue and greater market share. As a longer-term business growth strategy, excellence in service parts logistics builds brand identity and image. It cements customer relationships and fosters customer loyalty, which manifests itself in repeat and expanded buys.

Service parts logistics is a complex and very global business. It is also a business that many OEMs find difficult to manage successfully. For that reason, more manufacturers are outsourcing their service parts logistics operations to 3PLs. Companies such as Cat Logistics, ATC Logistics and Electronics, NAL Worldwide, DHL, Exel, UPS, FedEx and others specialize in meeting the particular challenges inherent in managing inventory for predicted and random demand.

The momentum for this changing profile of 3PLs has been fueled by advances in information technology that create visibility, crumble barriers between business units and permit more accurate forecasting. Wall Street's pressure on companies to perform, coupled with a greater understanding of the logistics-transport portion of the profit equation, has forced businesses to overhaul traditional business models and look to third parties to establish and maintain the service link between manufacturers and their customers.