The Economic Times, July 25, 2014 A couple of decades ago, frequent visits to garages to get one’s car repaired were the norm. Car owners were familiar with 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 evident not only in <a target="_blank" rel="noopener noreferrer" href="https://www.vectorconsulting.in/en/industries/auto-and-auto-components/">automobiles</a> but also in <a target="_blank" rel="noopener noreferrer" href="https://www.vectorconsulting.in/en/industries/consumer-goods-retail/">consumer goods</a> and <a target="_blank" rel="noopener noreferrer" href="https://www.vectorconsulting.in/en/industries/equipment-manufacturing/">industrial equipment</a> industries. 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 centre. Negative word of mouth from these customers can hurt 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 centres should provide exemplary service regardless of the product’s reliability. The turnaround time (TAT) for repairs or planned service work should not only be low but also provide a consistent customer experience for all customers.   Service centres are also a source of highly profitable revenues; the captive customer base allows companies to price spares and services at a much higher gross contribution percentage than even the main product. Hence, to get additional focus, many companies create a separate division with top-line and profit targets for spares and services.  The twin objectives of providing excellent service and earning high profits, however, are conflicting. Actions taken to meet one can come in the way of the other.    <h2>Understanding the conflict</h2>One of the major sources of cost pressure in service centres is parts inventory. To meet the crucial customer requirement of the lowest possible downtime, service centres prefer to stock parts. However, when there are many end-product models, each with numerous parts, and consumption is erratic, forecasting errors for spare parts can be high. This is primarily because there are few parts within a product that are periodic consumables; bulk 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 standardisation to drive aggregation benefits at the component level is well understood.   Yet, the pressure to create new product platforms and introduce new competitive product features forces design departments to introduce new components, which, in turn, makes spare-parts inventory management challenging, especially when parts manufacturers impose minimum order quantity (MOQ) limitations.  The resultant impact can be seen in the inventory profile of parts in service centres or spare stocking points. Here, it is common to find inventory which is as old as a few years; at the same time, these exact stocking locations may not have certain other parts when required. The level of inventory is high, and so is the level of stockouts.  A stockout of parts at a service centre delays the completion of a service case, particularly when it requires multiple parts. Even if a single part in the kit is unavailable, the service resolution lead time increases. This locks up key resources such as bays or experienced mechanics. Keeping the incomplete job aside adds to work-in-progress (WIP). When the parts arrive, there are urgencies and priority changes. Service centres have to expedite customer requests.  Delays in one job can lead to cascading delays in several others; the overall productivity of mechanics and the service centres drops - service centres 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 repairs increases, the reliability of service drops.    <h2>The bigger damage</h2>When authorised service centres face parts shortages, a parallel market of non-official brands and freelance mechanics quickly steps in. Positive customer experiences with these alternatives often lead to a permanent shift away from 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 supply of parts to authorised 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. By joining forces with third-party service providers, they create a parallel market for parts and services.  This phenomenon impacts the potential sales of approved service centres. Poor sales, coupled with high unwanted inventory, affect the profitability of a service centre. With the drop in ROI, the ability to open service centres is also jeopardised. This, in turn, curtails the main brand’s service reach.  Surprisingly, brand companies do not see the enormity of the problem as experienced by their front-end centres. This is primarily because the wrong measure, fill rate, is used to indicate performance. 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 the supply point tries to fulfil all orders to improve the 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. <figure class="image"><img style="aspect-ratio:4000/4070;" src="https://web-assets.vectorconsulting.in/storage/editor_uploads//copy-of-vcg-auto-article-20-after-sales-service-not-a-lip-service-changes_1758278061.jpg" width="4000" height="4070"></figure>The chronic stock availability problems might present a great business opportunity for multi-brand service centres, which can stock parts from as many brands as they desire. They are free to source parts from anywhere, unlike the authorised service centres, which are allowed to take parts only from the main brand. However, a multi-brand service centre can face a greater challenge when there are many brands, each with 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 face long, unreliable service times because the time required to source parts after logging a case is included in the total service lead time.  <h2>The way out</h2>The key leverage point to resolve the conflict between earning higher profits and providing exemplary service lies in the inventory management of parts. 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 on-time delivery performance. However, when there are numerous parts to be stocked and the demand pattern is erratic, trying to maintain stock levels based on a forecast would be injudicious. The way out is not to try to predict variability with a 'better' forecasting tool, but to use mechanisms of variability dampeners in managing inventory.   <h2>Variability dampeners</h2><h5>1. Shift to consumption-based ordering:</h5>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, assortment-based ordering, which in turn prevents stock mismatches across locations. It also helps stocks stay aggregated at a central hub. It allows parts suppliers to have flexible MOQs 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 v/s norms), helps in better allocation of stocks and production capacity.   <h5>2. Aggregation centres:</h5>The service lead time is the shortest when parts are readily available at the service location. However, as parts move away from the supply stocking point to geographically dispersed service centres, mismatches in stock multiply throughout the entire distribution chain. The solution is to stock very high fast movers, mostly consumables, at the service centres, 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 centre.  This distribution structure may look more expensive as it involves additional transportation costs. However, these costs are more than offset by a dramatic reduction in inventory across all locations (lead time decreases when a decoupled stocking point is 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 logistics costs actually comes down significantly as a percentage of sales from parts and services. This also requires the supplying location to move away from the ‘fill rate’ as a 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 all volume-based schemes.    <h2>Portfolio restriction</h2>Variability dampeners help minimise the impact of demand variability on stock management, allowing 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 <a target="_blank" rel="noopener noreferrer" href="https://www.vectorconsulting.in/en/research-and-publication/blogs/transforming-demand-into-sales-how-supply-chain-completes-the-missing-link/">supply chain’s</a> inherent capabilities has to be incorporated into the service promises to the end customer. For example, when new product introductions are frequent, and demand for older parts dips 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 recognise the limitations and announce it upfront while the customer is purchasing the product. Portfolio restriction is also required for multi-brand service centres. This is crucial, more so, for multi-brand service centres which want to expand rapidly. If they try to service every case as well as the brand service centres, the multi-brand service centres will end up with huge parts inventory that will lock up working capital leading to poor return on capital employed (ROCE) in the business.  <h2>Service operations management</h2>Once parts availability is taken care of, it is important to ensure there are processes to improve the productivity of critical resources at the service centres. The key to high productivity is to ensure that work starts with a complete kit. The 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 centres increases significantly as TAT decreases dramatically. The decoupled improved parts assessment and improved parts availability also allow one to proactively increase the service ticket size to include parts that may not be damaged but are nearing the end of their recommended lifetime. (When parts availability is bad, service centres avoid such recommendations to reduce service lead time.)   Once local customers in the service centre’s catchment area begin experiencing improved services, footfalls should improve. Improved productivity brings in additional sales (achieved with the same operating expense), resulting in improved ROI. With improved ROI, the network of service centres can be widened, thereby improving the geographical reach.  The chronic conflict between the bottom line and service excellence stands resolved!

Key Takeaways

Service centres are a double-edged sword for auto companies; they are both - a source of revenue and customer dissatisfaction. Can they deliver a positive result on both?

After-sales not a lip service

The Economic Times, July 25, 2014 A couple of decades ago, frequent visits to garages to get one’s car repaired were the norm. Car owners were familiar with 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 evident not only in <a target="_blank" rel="noopener noreferrer" href="https://www.vectorconsulting.in/en/industries/auto-and-auto-components/">automobiles</a> but also in <a target="_blank" rel="noopener noreferrer" href="https://www.vectorconsulting.in/en/industries/consumer-goods-retail/">consumer goods</a> and <a target="_blank" rel="noopener noreferrer" href="https://www.vectorconsulting.in/en/industries/equipment-manufacturing/">industrial equipment</a> industries. 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 centre. Negative word of mouth from these customers can hurt 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 centres should provide exemplary service regardless of the product’s reliability. The turnaround time (TAT) for repairs or planned service work should not only be low but also provide a consistent customer experience for all customers.   Service centres are also a source of highly profitable revenues; the captive customer base allows companies to price spares and services at a much higher gross contribution percentage than even the main product. Hence, to get additional focus, many companies create a separate division with top-line and profit targets for spares and services.  The twin objectives of providing excellent service and earning high profits, however, are conflicting. Actions taken to meet one can come in the way of the other.    <h2>Understanding the conflict</h2>One of the major sources of cost pressure in service centres is parts inventory. To meet the crucial customer requirement of the lowest possible downtime, service centres prefer to stock parts. However, when there are many end-product models, each with numerous parts, and consumption is erratic, forecasting errors for spare parts can be high. This is primarily because there are few parts within a product that are periodic consumables; bulk 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 standardisation to drive aggregation benefits at the component level is well understood.   Yet, the pressure to create new product platforms and introduce new competitive product features forces design departments to introduce new components, which, in turn, makes spare-parts inventory management challenging, especially when parts manufacturers impose minimum order quantity (MOQ) limitations.  The resultant impact can be seen in the inventory profile of parts in service centres or spare stocking points. Here, it is common to find inventory which is as old as a few years; at the same time, these exact stocking locations may not have certain other parts when required. The level of inventory is high, and so is the level of stockouts.  A stockout of parts at a service centre delays the completion of a service case, particularly when it requires multiple parts. Even if a single part in the kit is unavailable, the service resolution lead time increases. This locks up key resources such as bays or experienced mechanics. Keeping the incomplete job aside adds to work-in-progress (WIP). When the parts arrive, there are urgencies and priority changes. Service centres have to expedite customer requests.  Delays in one job can lead to cascading delays in several others; the overall productivity of mechanics and the service centres drops - service centres 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 repairs increases, the reliability of service drops.    <h2>The bigger damage</h2>When authorised service centres face parts shortages, a parallel market of non-official brands and freelance mechanics quickly steps in. Positive customer experiences with these alternatives often lead to a permanent shift away from 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 supply of parts to authorised 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. By joining forces with third-party service providers, they create a parallel market for parts and services.  This phenomenon impacts the potential sales of approved service centres. Poor sales, coupled with high unwanted inventory, affect the profitability of a service centre. With the drop in ROI, the ability to open service centres is also jeopardised. This, in turn, curtails the main brand’s service reach.  Surprisingly, brand companies do not see the enormity of the problem as experienced by their front-end centres. This is primarily because the wrong measure, fill rate, is used to indicate performance. 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 the supply point tries to fulfil all orders to improve the 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.   <figure class="image"><img style="aspect-ratio:4000/4070;" src="https://web-assets.vectorconsulting.in/storage/editor_uploads//copy-of-vcg-auto-article-20-after-sales-service-not-a-lip-service-changes_1758278043.jpg" width="4000" height="4070"></figure>The chronic stock availability problems might present a great business opportunity for multi-brand service centres, which can stock parts from as many brands as they desire. They are free to source parts from anywhere, unlike the authorised service centres, which are allowed to take parts only from the main brand. However, a multi-brand service centre can face a greater challenge when there are many brands, each with 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 face long, unreliable service times because the time required to source parts after logging a case is included in the total service lead time.  <h2>The way out</h2>The key leverage point to resolve the conflict between earning higher profits and providing exemplary service lies in the inventory management of parts. 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 on-time delivery performance. However, when there are numerous parts to be stocked and the demand pattern is erratic, trying to maintain stock levels based on a forecast would be injudicious. The way out is not to try to predict variability with a 'better' forecasting tool, but to use mechanisms of variability dampeners in managing inventory.  <h2>Variability dampeners</h2><h5>1. Shift to consumption-based ordering:</h5>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, assortment-based ordering, which in turn prevents stock mismatches across locations. It also helps stocks stay aggregated at a central hub. It allows parts suppliers to have flexible MOQs 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 v/s norms), helps in better allocation of stocks and production capacity.   <h5>2. Aggregation centres:</h5>The service lead time is the shortest when parts are readily available at the service location. However, as parts move away from the supply stocking point to geographically dispersed service centres, mismatches in stock multiply throughout the entire distribution chain. The solution is to stock very high fast movers, mostly consumables, at the service centres, 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 centre.  This distribution structure may look more expensive as it involves additional transportation costs. However, these costs are more than offset by a dramatic reduction in inventory across all locations (lead time decreases when a decoupled stocking point is 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 logistics costs actually comes down significantly as a percentage of sales from parts and services. This also requires the supplying location to move away from the ‘fill rate’ as a 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 all volume-based schemes.    <h2>Portfolio restriction</h2>Variability dampeners help minimise the impact of demand variability on stock management, allowing 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 <a target="_blank" rel="noopener noreferrer" href="https://www.vectorconsulting.in/en/research-and-publication/blogs/transforming-demand-into-sales-how-supply-chain-completes-the-missing-link/">supply chain’s</a> inherent capabilities has to be incorporated into the service promises to the end customer. For example, when new product introductions are frequent, and demand for older parts dips 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 recognise the limitations and announce it upfront while the customer is purchasing the product. Portfolio restriction is also required for multi-brand service centres. This is crucial, more so, for multi-brand service centres which want to expand rapidly. If they try to service every case as well as the brand service centres, the multi-brand service centres will end up with huge parts inventory that will lock up working capital leading to poor return on capital employed (ROCE) in the business.  <h2>Service operations management</h2>Once parts availability is taken care of, it is important to ensure there are processes to improve the productivity of critical resources at the service centres. The key to high productivity is to ensure that work starts with a complete kit. The 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 centres increases significantly as TAT decreases dramatically. The decoupled improved parts assessment and improved parts availability also allow one to proactively increase the service ticket size to include parts that may not be damaged but are nearing the end of their recommended lifetime. (When parts availability is bad, service centres avoid such recommendations to reduce service lead time.)   Once local customers in the service centre’s catchment area begin experiencing improved services, footfalls should improve. Improved productivity brings in additional sales (achieved with the same operating expense), resulting in improved ROI. With improved ROI, the network of service centres can be widened, thereby improving the geographical reach.  The chronic conflict between the bottom line and service excellence stands resolved!

<h4>After-sales not a lip service </h4>

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Solve the conflict between inventory costs and parts availability. Learn how pull-based systems reduce turnaround time (TAT) and eliminate stock-outs in automotive after-sales to boost customer loyalty.