Optimizing the Service Supply Chain: Part II

 

This article is the second in a three-part thought leadership series focused on unlocking the potential of the service supply chain for enhanced revenue potential. Click http://www.sdcexec.com/article/10416675/optimizing-the-service-supply-chain-part-i to read the first article in the series.

As discussed in our first article, there are three opportunities for profit within the service supply chain that do not require significant capital expenditures or large investments in terms of people, process and technology:

  1. Selling a service contract at the time of sale – which can create improved customer intimacy and loyalty and earn high margins.
  2. Embracing service as a revenue generator rather than a cost center – helps a company earn and retain a valuable asset -- customers’ long term loyalty.
  3. Protecting the installed customer base by securing service contract renewals – helps maintain customer relationships efficiently, reduce sales acquisition costs and maintain market share.

By focusing on these three customer service initiatives now, a company can begin to leverage its existing service supply chain to reap recurring profits throughout the lifecycles of its products.

This article will examine methods for evaluating and improving the service process from the ground up, while exploring the tactical and strategic elements of reverse logistics.  It will also look at a number of key requirements to more effectively manage and execute service contracts during a product’s lifetime, and how organizations should optimize the repair and replenishment process making it easier on the customer.

Creating good experiences at every point of customer interaction during the product’s life cycle, helps drive higher satisfaction and safeguards customer loyalty. An effective reverse logistics program within the service supply chain is key to managing the customer experience. The seemingly simple process of exchanging a defective part during the product’s life cycle can “make or break” a customer’s long-term relationship with the technology provider. A customer’s satisfactory experience during the product’s lifetime can trigger an early (and relatively low cost of sale) service contract renewal, resulting in a number of benefits—protecting the installed customer base; enhancing long-term revenue; and maintaining market share.

 

Evaluating and improving a company’s reverse logistics function— which every organization has, whether formally or informally —requires examining the process from the bottom up. The goal is to create a simple and standardized process; and it requires attention to a broad array of details. A suggested methodology is to answer some essential questions about the organization’s reverse logistics function:

 

• Should the part be returned?

 

• Does the process identify and track the parts to be returned?

• Does the process capture all the right information?

• Does the process optimize repair and replenishment?

• Does the process make it easier for the customer?

Should the part be returned?

To guard against the unnecessary expense and the unwelcome inconvenience to the customer of having to exchange a part that should be replaced, an effective reverse logistics program identifies parts eligible for exchange. While this seems relatively straightforward, it is frequently ignored— at a considerable cost in time and money.

The expense associated with international returns, for example, might be greater than the value of the exchange part, or the time required to make the exchange might impose unacceptable operating constraints on the customer. Typically, many companies lack the ability or technological sophistication required to assign part attributes at a regional level. As a result, these companies often establish a single global model for each part in the system, leading to added supply chain cost and added customer inconvenience.

 

Does the process identify and track the parts to be returned?

The backbone of an effective reverse logistics effort is a data design and systems integration initiative to develop a set of consistent and meaningful identifiers. The organization can identify specific return transactions and discrete spare parts wherever they are in the reverse logistics process. Unique identifiers are required for parts, customers, and other participants in the process.

Capturing data to track open and returned spare parts can be a significant challenge that often requires synchronization across resellers, manufacturers, carriers, logistics partners, customs officials, and providers of repair refurbishment—and the company’s customers.

Does the process capture all the right information?

Prior to a new part being shipped to the customer, the system must identify the customer making the request and determine if that customer is entitled to return the part for exchange. This step is critical. The ability to expedite a transaction that helps the customer get a system or product up and running is essential to the customer’s positive experience and to the health of the customer relationship. Just knowing a customer returned a defective part on the 15th of last month may not offer enough detail to drive operational efficiencies. Companies can actively and accurately manage inventory-repair float by capturing such data as:

• When the defective part was identified for return

• When the new part was shipped

• When the defective part reached the consolidation point

• When the part was shipped to the repair facility

• When it was returned to refurbished inventory.

Obtaining such vital information as a phone number, e-mail address, location, and shipping address helps ensure processing accuracy and the capability of personal follow-up for quick resolution and customer satisfaction. While this, too, seems straightforward, companies often don’t have the right processes and systems in place to track customer entitlement.

 

Does the process optimize repair and replenishment?

By accelerating the return and repair of defective parts or components, a company can reduce its inventory repair float and spend related to the provision of hardware services to its installed base.

The faster defective parts can be refurbished and reallocated, the less total inventory required.

 

A company may not want returned parts shipped directly to one repair facility. More likely, the process will feature a range of regional consolidation points. In this situation, it is incumbent upon the process to return parts to facilities according to geography (which is closest to the customer?) or function (what facility repairs which parts?).

 

The answers are not as straightforward as they might seem. For example, for a company operating only within the United States, maintaining one or two collection or consolidation points could be appropriate. However, to capitalize on the possibilities of reduced taxes and non-tax related benefits, a global business might utilize collection points in key countries—or in facilities within those countries. Some functions and services might be outsourced for maximum efficiency, customer convenience, and revenue enhancement.

 

Beyond consolidating parts for shipment to a repair facility, a timely repair process and efficient redistribution of refurbished parts should help reduce overall carrying costs. To derive the most value from the entire process, repair inventory can be integrated into the organization’s global or regional parts strategic planning process. Additionally, the sale of surplus, off-lease, and returned hardware should not be overlooked as a revenue generator, especially as the product nears the end of its life cycle.

 

 

Does the process make it easier for the customer?

Having captured all the necessary information at the start of the process, the system can simplify the transaction’s completion. In addition to a replacement part, the customer should receive all the necessary commercial documentation, which can include a return packet or a return airway bill. Simplifying the process for the customer also makes it easier for the company by accelerating returns, reducing the number of non-returned items, improving the identification of defective returns, and mitigating product damage while in transit.

While organizations may not typically view part returns as anything more than a necessary service, the examples above illustrate that this overlooked area can help maintain and grow a company’s customer (and revenue) base. Organizations that take steps to make the returns process more efficient and easier for the customer will likely reap rewards over time.

The next article in the series will examine methods for evaluating and improving the service process from the ground up, while exploring the tactical and strategic elements of reverse logistics.  It will also look at a number of key requirements to more effectively manage and execute service contracts during a product’s lifetime, and how organizations should optimize the repair and replenishment process making it easier on the customer.

Grant Gordon is a managing director in KPMG Advisory’s Business Effectiveness practice, based in the Silicon Valley. He can be reached at ggordon@kpmg.com.

Charles Withrow is a director in KPMG Advisory’s Business Effectiveness practice, based in the Silicon Valley. He can be reached at cwithrow@kpmg.com.

The views and opinions are those of the author and do not necessarily represent the views and opinions of KPMG LLP. All information provided is of a general nature and is not intended to address the circumstances of any particular individual or entityNo one should act on this information without appropriate professional advice after a thorough examination of the particular situation.

 


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