September 2003 | Commentary | Viewpoint

Getting a Grip on Service Parts Operations

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Companies have been under tremendous price and volume pressure in the finished goods business for quite some time, but services and parts is the logical next opportunity to improve revenue, boost profits, and directly impact customer satisfaction. In fact, Piper Jaffrey U.S. Bancorp estimates that spare parts represent $700 billion in spending and eight percent of the GDP in the United States.

Capitalizing on this market will require companies to have an adaptive supply chain that is responsive to consumer demands. Unfortunately, companies have historically under-invested in their service and parts operations, and many are now faced with hurdles such as these:

  • 20-year-old legacy systems.
  • Lack of an ERP system.
  • Supply chains with multiple competing distribution channels.
  • Large product portfolios with a high number of SKUs to manage.
  • Reverse logistics issues that are related to returns and components manufacturing.

The Proactive Approach

Because of the apparent resiliency of service parts organizations—profiting despite lack of attention, for example—it may be tempting to look at service parts and think: "If it ain't broke, don't fix it." But the prospective benefits of service parts performance initiatives are quite compelling. These include:

  • Inventory reductions of 30 to 50 percent.
  • Fill rate lifts from the low 90s to the high 90s.
  • Revenue increases of five to seven percent.
  • Warehouse productivity gains between 20 and 30 percent.
  • Transportation cost reductions of eight to 15 percent.
  • Field service productivity improve-ments of five to 10 percent.
  • Return on investment as high as 60 percent.
  • Annual benefits reaching five to 10 times the up-front investment.

An adaptive value chain is key to the success of a service parts network. It enables participants to react quickly to changes in the marketplace and the supply chain. To do this efficiently and effectively, the value chain has to accomplish the following three things very quickly:

1. Recognize what is happening. Have real-time knowledge of the entire market and supply chain with an understanding of end-consumer demand, product performance, competitors, distribution channels, and supply networks.

2. Determine the most appropriate response. Quickly evaluate the various options and plan the most appropriate tactical and strategic responses.

3. Take corrective action. Once the appropriate response is identified, the value chain must translate the plan into action quickly and effectively. To operate this way, a company must establish planning and execution capabilities that stretch beyond its borders to customers, suppliers, and supply chain partners. This is a relatively new concept; many companies have not yet figured out how to do it effectively.

Real Solutions

Discount Auto Parts realized that it needed a fact-based analysis to identify, justify, and prioritize improvement opportunities when it experienced rapid growth. The company determined that it had to focus on value across three key areas: growth, efficiency, and capital management.

The approach the company took produced a prioritized improvement portfolio, including "quick hits" that enabled near-term value attainment. These opportunities provide the basis for the retailer to achieve a competitive position across key operating benchmarks with some of the following results:

  • $56.5 million in freed-up working capital.
  • $1.52 EPS increase over three years.
  • $106 million in cost reductions over four years.
  • A collective estimated total savings of $85 million.
  • 409 percent ROI.

A leading global computer manufacturer wanted to reduce the complexities and costly redundancies in its reverse logistics process while maintaining customer service levels. It also wanted to reduce its 30-day parts disposition cycle time and 90-day parts backlog.

Visibility and event management capabilities enabled the company and its suppliers to react quickly and actively across their service parts fulfillment network. Results include eliminating an internally run service parts distribution center network, and shifting responsibility for executing supply chain fulfillment onto suppliers. Customer returns go directly to the supplier while the manufacturer employs new software technology to track the movement of goods from its command center.

The best way to get started with operational improvements is with a Transformation Blueprint, which prioritizes activities aimed at producing a fact-based change agenda and emotional energy around the blueprint.

Once this blueprint is completed, the organization is implementation-ready and can begin reaping the rewards of a tightly managed service parts supply chain.

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