Published by Economic Times July 25, 2014
A couple of decades ago, frequently visiting garages to get one’s car repaired was the norm. Car owners were familiar with the garage owners. In the last few years, the frequency of these visits has come down dramatically, thanks to cars becoming more reliable. The quantum jump in product reliability is seen not only in automobiles but also in consumer goods and industrial equipment categories. This, however, has not diminished the dependence on after-sales service infrastructure and the need for service excellence. A positive experience of a great product can be negated if even a few customers have a bad experience while interacting with the service center. A negative word of mouth from these customers can hit the sales of new products. In today’s highly networked world and the omnipresent social media, this negative feedback can amplify beyond any geographical limitations.
This implies that service centers should provide exemplary service regardless of how reliable a product is. The turn around time (TAT) for the repair or the planned service work should not only be low but also consistently low so that the experience of all customers is equally good.
Service centers are also a source of highly profitable revenues – the captive customer base allows companies to price spares and services at much higher gross contribution percentage than even the main product. Hence, to get additional focus, many companies create a separate division with topline and even profit targets for spares and services.
The twin objectives of providing great service and earning high profits, however, are conflicting. Actions taken to meet one can come in the way of the other.
Understanding the Conflict
One of the major sources of cost pressure in service centers is parts inventory. To meet the crucial customer requirement of lowest possible downtime, service centers prefer to stock parts. However, when there are many endproduct models, and each model has numerous parts, and the consumption is erratic, the forecasting errors for spare parts can be high. This is primarily because there are few parts within a product which are periodic consumables; bulks of them are “repair-driven-consumption” parts where demand can be erratic. The multiplier effect on forecasting error happens when the product design department creates new components for new products thus reducing the aggregation benefits of components across a variety of end products. The need to maintain standardization to drive aggregation benefits at the component level is well understood. Yet, the pressure to create new product platforms and come up with new competitive product features forces design departments to introduce new components, which in turn makes inventory management of spare parts challenging more so in cases where there are minimum order quantity limitations on the parts manufacturers.
The resultant impact can be seen in inventory profile of parts in service centers or spares stocking points. It is not uncommon to find here inventory as old as a few years. These same stocking locations may not have certain other parts when they are required. The level of inventory is high and so is the level of stock outs.
Stock out of parts at a service center delays the completion of a service case particularly when such a case needs multiple parts. Even if a single part out of the kit is unavailable, the service resolution lead time goes up. This locks up key resources like bays or experienced mechanics. Keeping the incomplete job aside adds to WIP. When the parts arrive, there are urgencies, priority changes. Service centers have to deal with expediting requests by customers.
Delay in one job can lead to cascading delays in several others; overall productivity of mechanics and the service centers drops. Service centers throttle intake to bring the situation back to normal, which soon turns chaotic again. The system oscillates between extremes of chaos and stability. In such environments, delivery dates are unreliable.
Periodic maintenance service of new vehicles may seem reliable as, initially, it involves changing only consumable parts; no running repair parts are required during this time. But as the vehicle gets older and the extent of running repair goes up, the reliability of service drops.
The Bigger Damage
When parts availability is poor in authorized service centers, a parallel market of “non-official” brands begins to flourish. At the same time, freelancer mechanics or multi-brand service centers come in to fill up the gap. Customers who are supposed to be “locked” for servicing with the main brand start to move away from authorized service centers. Few good experiences with the parallel market of freelancer mechanics and “non-official” parts encourage customers to permanently move out of the fold of the main brand’s service network. This phenomenon is prevalent in many industrial equipment categories. Some brand companies try to control the market by restricting the parts supply to authorized mechanics. This move often backfires. The parts supplier company (the one supplying to the main brand) starts operating in the market with a rightful claim of equivalent quality. These suppliers are also able to offer a price lower than that offered by the main brand. Joining forces with third party service points, they create a parallel market for parts and services.
This phenomenon impacts the potential sales of approved service centers. Poor sales coupled with high unwanted inventory hits the profitability of a service center. With the drop in ROI, the ability to open service centers is also jeopardized. This in turn curtails the service reach of the main brand.
Surprisingly, brand companies do not see the enormity of the problem as experienced by their front-end centers. This is primarily because of the wrong measure used to indicate performance – fill rate. Fill rate is a measure of the ability to complete an order within a stipulated time frame. It assumes that the person placing an order is doing it correctly. In reality, when forecast errors are high and ordering is influenced by the “scarcity mentality” and supply point tries to fulfill all orders to improve on fill rate, the problem of stock mismatch aggravates in distribution. In some service points with “conservative ordering” inventory becomes surplus while it is stocked out in other locations.
The chronic stock availability problems might present a great business opportunity for multi-brand service centers which can stock up on parts of as many brands as they desire. They are free to source parts from anywhere unlike the authorized service centers which are allowed to take parts only from the main brand. However, a multi-brand service center can encounter a bigger problem when brands are many and each has numerous products. The challenge of managing stocks is bigger if they decide to have both the infrastructure for servicing and parts inventory. If they choose not to hold parts, they are faced with the problem of long unreliable service time because the time required to source parts after logging a case becomes part of the total service lead time.
The Way Out
The key leverage point to resolve the conflict between earning higher profits and providing exemplary service lies in parts inventory management. If the parts are always available when a service job is opened, the full kit of spares for the job will not only help in dramatically reducing the service lead time but also help improve ontime delivery performance. However, when there are numerous parts to be stocked, and the demand pattern is erratic, trying to keep stocks based on a forecast would be injudicious. The way out is not to try and predict the variability with a “better” forecasting tool but to use mechanisms of variability dampeners in managing inventory.
Variable dampener no. 1 – Shift to consumption based ordering: Auto ordering based on daily consumption rather than on a fixed reorder level point or a min-max system or monthly forecast. Allowing daily auto ordering based on consumption ensures flexible and assortment ordering which in turn prevents mismatch of stocks across locations. It also helps stocks stay aggregated at a central hub. It allows parts suppliers to have flexible MOQs (minimum order quantity) rather than one rigid MOQ for every unique part in all situations. Daily ordering along with a priority signal based on the level of urgency (can be calculated based on stock available versus norms) helps in better allocation of stocks and production capacity.
Variable dampener no. 2 – Aggregation centers: The service lead time is the shortest when parts are readily available at the service location. However, as the parts move away from the supply stocking point to geographically spread out service centers, the errors of mismatched stocks multiply in the entire distribution chain. The solution is to stock very high fast movers, mostly consumables, at the service centers, a big set with additional slow movers at the regional or city hubs and to keep a set inclusive of the very slow movers at super-hubs connecting the regional hubs, creating a layered structure. Slow movers are best kept at an aggregated point for maximum benefit; the aggregation point has to be easily and quickly accessible to the service center.
This distribution structure may look more expensive as it involves additional transportation costs. However, these costs are more than compensated for through dramatic reduction in inventory in all locations (lead time comes down when there is a decoupled stocking point close by) and additional sales from improved availability. The aggregated central point is only exposed to any rigid MOQ limitation, which cannot be removed, while others can get assorted supplies.
The cost of logistics actually comes down significantly as the percentage of sales from parts and services. This also requires the supplying location to move away from fill rate measure and focus on daily availability. When stocks at stocking points are low, this focus will allow for uniform rationing of requirements. This kind of pull-based distribution also calls for discontinuing of all volume based schemes.
Variability dampeners helps minimize the impact of demand variability on stocks management, which in turn allows one to hold a wider assortment with much improved availability. However, the range of parts is so wide and ever increasing that it is important to define what can be serviced and what cannot be. This is necessary in cases where product life cycles are short. The supply chain’s inherent capability has to be incorporated in the service promises to the end customer. For example, when new product introductions are frequent, and demand for older parts dip to a point where making batches of the product becomes nearly unviable or it becomes difficult to maintain the good life of tools and dies for the component for long periods, companies need to recognize the limitations and announce it upfront while the product is being purchased by the customer.
Portfolio restriction is also required for multi-brand service centers. This is crucial, more so, for multi-brand service centers which want to expand rapidly. If they try to service every case as good as the brand service centers, the multi-brand service centers will end up with huge parts inventory that will lock up working capital leading to poor return on capital employed in the business.
Service Operations Management
Once parts availability is taken care of, it is important to ensure there are processes to improve productivity of critical resources at the service centers. The key to high productivity is to ensure that work starts with complete kit. Work involved in assessing the parts requirement has to be decoupled from the main work. The job should be assigned to mechanics only when all parts on the list are available in full. With this approach, the output of service centers goes up significantly as the TAT (turn around time) comes down dramatically. The decoupled improved parts assessment and improved parts availability also allows one to proactively increase ticket size of service to include parts that may not be damaged but have nearly completed their recommended lifetime. (When parts availability is bad, service centers avoid such recommendations to reduce service lead time).
Once local customers around the catchment area of the service center begin experiencing the improved services, the footfalls should improve. Improved productivity brings in additional sales (achieved with same operating expense) resulting in improved ROI. With improved ROI, the network of service centers can be widened, thereby improving the geographical reach.
The chronic conflict between bottom line and service excellence stands resolved!