Deolitte Manufacturing Service Revolution in Global Manufacturing 012006

8/8/2019 Deolitte Manufacturing Service Revolution in Global Manufacturing 012006

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A Report by the Indian School of Business, New York University,Purdue University, and Deloitte Research

The Service Revolution

in Global ManufacturingIndustries

A Deloitte Research Global Manufacturing Study


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Table of Contents

Executive Summary ...................................................................1

Driving Proftable Growth Through the Service Business ......3

The role o the service business in global industries ............. ...4

The impact on protability and growth .............. .............. ......5

Building a Block-Buster Business Through Service

Excellence: Challenges and Opportunities ..............................7

Strategy and business design: Laying the oundation ............ 7

Operations planning and management: Enabling

service excellence ..................................................................9

Execution: Delivering service excellence one customer

at a time .............................................................................0

Leaprogging through process collaboration and

technology maturity ............................................................2

Why Now: Chasing the Changing Basis o Competition

in Manuacturing .....................................................................15

Conclusion ................................................................................16

Appendix: Survey Methodology and Respondent Profle ....17

About Deloitte Research

Deloitte Research, a part o Deloitte Services LP, identies,analyzes, and explains the major issues driving todays

business dynamics and shaping tomorrows globalmarketplace. From provocative points o view about strategyand organizational change to straight talk about economics,regulation and technology, Deloitte Research deliversinnovative, practical insights companies can use to improvetheir bottom-line perormance. Operating through a networko dedicated research proessionals, senior consultingpractitioners o the various member rms o Deloitte ToucheTohmatsu, academics and technology specialists, DeloitteResearch exhibits deep industry knowledge, unctionalunderstanding, and commitment to thought leadership. Inboardrooms and business journals, Deloitte Research is knownor bringing new perspective to real-world concerns.


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Deloitte ResearchThe Service Revolution in Global Manuacturing Industries

A business absolutely devoted to service will have only one

worry about prots. They will be embarrassingly large, HenryFord, ounder o one o the worlds largest manuacturing

companies, once said. Decades later, however, companies

are still struggling to heed this advice. Manuacturers are

looking or growth and prots in all corners o the globe, but

they oten neglect the very large opportunities much closer to

homein their own service businesses.

Conronted by low-cost competitors, the escalating complexity

o their global supply chains, and ever-increasing customer

demands, manuacturers ignoring the needs o the service

business do so at their peril.2 As the basis o competition in

manuacturing continues its shit towards service excellencethe ability to drive business perormance through excellence

in service and parts managementthey are eectively putting

their entire business models at risk.

Over the last year, we have benchmarked the service

businesses o many o the worlds largest manuacturingcompanies with combined revenues reaching more than

US$.5 trillion. In industries ranging rom aerospace and

deense and automotive to high technology and diversied

manuacturing, we have studied the strategies, operations, and

processes, as well as the tools and technologies being adopted

to drive service excellence. By exploring the actors underlying

success, we are able to provide a perspective on the challenges

and opportunities or building and sustaining protable growth

through excellence in service and parts management.3

Across the manuacturing companies we have benchmarked,

services revenues today represent an average o more than

25 percent o the total business. In many companies, as or

Rolls-Royce plc and Xerox Corporation, the service business

contributes 50 percent or more o total revenues.

Even more importantly, the average protability o the service

businesses benchmarked is more than 75 percent higher

than overall business unit protability, and accounts or an

estimated 46 percent o total prots generated today.4 In act,

in many manuacturing companies there would be little or no

protability without the service business.

Our analysis suggests the untapped potential or growing

prots through the service business is immense. But mostcompanies ail to grow their service business. More than

two-thirds (67 percent) o companies are growing their service

businesses at the same rate as, or slower than, their overall

business. In essence, they are managing a high growth

potential star business as a slow-growth cash cow. The

median company benchmarked secures only 40 percent o

the ater-sales service market and 75 percent o the ater-

sales spare parts market in servicing its own installed base o

Executive Summary


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products (the captive market). For many companies, such

as automotive original equipment manuacturers (OEMs),

these shares are oten much lower. In addition, only a ew

OEMs have made signicant inroads in servicing non-captive

customersa market that is typically 2 to 0 times larger than

the captive market. The challenges are many:

Instrategy and business design, most companies

struggle to build the oundation or service excellence.

Few have sucient insight into the barriers and

opportunities or driving protable growth through

services, which makes it dicult, at best, to develop the

right strategies, identiy the right priorities and invest

suciently in the service business. Yet some companies,

such as Siemens AG Medical Solutions, make the service

business central to their corporate strategy: they design

the service business around customer requirements in

order to drive customer satisaction, loyalty and business

perormance.

In operations planning and management, companies

with complex service operationsthose with thousands orhundreds o thousands o parts, services that need to be

delivered around the clock and oten in remote parts o the

world, and service liecycles that can stretch or decades

oten lack the capabilities to realize service excellence. The

experiences o some o the worlds leading manuacturing

companies, such as Caterpillar, show that persistent

investment in, and ocus on, improving the service and

logistics operations can drive outstanding customer service,

resulting in enhanced customer loyalty and a oundation

or protable growth.

In execution, the last mile to the customer wherebattles or customer loyalty are won or lost, the majority

o companies are still unable to provide customers with

excellent and cost-eective service. Overall, our analysis

o the benchmark results suggest that customers are likely

to get exactly what they want, at the right time and place,

less than 75 percent o the timea dismal perormance

in a global economy where customers have more options

and more inormation than ever beore to prompt a switch

to competitors products and services. Ensuring service

excellence, however, is core to the business model or

many companies, such as Hyundai Motor Company and

Kia Motors Corporation, where service guarantees, such

as extended warranties, are an essential part o the value

provided to the consumer.

There are great opportunities or companies to improve

what should be an engine or protable growth in many or

most manuacturing organizations. Some companies are

championing the service revolution to drive perormance.

Twenty-ve percent o the benchmarked companies report an

on-time delivery perormance to customers o 96 percent or

higher. Caterpillarwith more than 600,000 spare parts, and

an installed base o equipment that oten needs service or 40

years or longeris able to ship its customers exactly what they

want, within just 24 hours, 99.7 percent o the time.5

While the challenges are numerous, our research suggests that

companies can make strategic and operational investments in

processes and technologies that will enable them to leaprog

the competition and drive continuous improvement in the

operational and nancial perormance o their global service

businesses.

First, companies can adopt collaborative processes

across the service supply chain, rom suppliers to

customers, that are well-documented, proven, and ready

or implementation. Indeed, our analysis indicates a

strong relationship between the level o implementation

o processessuch as collaborative planning, orecasting,

and replenishment with customerswith the benets

achieved rom the implementation. Across the service

businesses benchmarked, the more extensive the level oimplementation, the higher the benets reported rom

adoption o key processes. Volkswagen AG experienced

rst-hand in its North American operations the benets

o implementing robust processes or service parts

management. It drove dramatic improvements in customer

order ll rates over just six months while reducing annual

cost by over US$25 million.

Second, information systems or designing, planning,

managing and executing the service and parts business

are maturing rapidly and can now support most o the

requirements o even the worlds largest and most complexservice businesses. These systems are no longer the weak

links on the road to service excellence that they were 5,

0, or 20 years ago. In act, without sucient technology

support it will be increasingly dicult, i not impossible,

to manage and optimize the service business as customer

requirements increase and the service business grows more

complex. While adoption rates are still abysmally low in

many areas, our analysis points toward a strong correlation

between inormation systems implementation and benets

achieved. Some companies, such as Rolls-Royce, are

capitalizing on improved technology, sometimes going

beyond what would have been thought possible just a ew

years back.

With protability and growth levels in many cases ar

exceeding the main business, it is abundantly clear that the

service revolution in global manuacturing is well underway.

For most manuacturers, it is now a matter o eectively

embracing the service revolution or risking being let behind.


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Deloitte ResearchThe Service Revolution in Global Manuacturing Industries3

For many o the worlds largest manuacturers, atermarket

service and parts operations essentially dene the business.For example, or Rolls-Royce, one o the worlds largest jet

engine and gas turbine makers, service revenue is about 55

percent o the more than US$ billion in total revenues;6

and or Xerox Corporation, the US$6 billion technology and

services giant, post-sale and other service revenues amount to

more than 65 percent o total sales.7

Driving Protable GrowthThrough the Service Business

Indeed, ndings rom our ongoing Global Service and Parts

Management Benchmark Survey show that the service businessaccounts or an average o nearly 26 percent o revenues

across the industries we have studied (Figure ). In 9 percent

o the companies benchmarked the service business accounted

or 50 percent or more o total revenues (Figure 2).


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The Role o Service Businesses in

Global IndustriesThese ndings are not surprising in light o the crucial role

service and parts management plays across industries.

In aerospace and deense, maintenance, repair and

overhaul is the cornerstone o selling airrames, jet

engines, and many other big-ticket items. Like many

other industries, the aerospace and deense industry is

moving towards perormance-based service and logistics

agreements with customersproviding guaranteed

availability and reliability o equipment, modules and

entire platorms (such as jet propulsion) over an extended

period o time. For example, Rolls-Royce has long

been ocused on selling Power By The Hour: Major

airline and deense customers can pay a xed warranty

and operational ee or the hours engines are running,

which means that Rolls-Royce must ocus on the entire

packageproducts, installation, ater-sales maintenance,

repair and overhaul (MRO), and overall service and partsmanagementto ensure protable growth o its business

over the long haul.8 While many companies base their

aggressive growth plans on securing these types o

agreements with customers, their uture protability

depends on their ability to deliver the promised service

levels in a cost-eective manner, which can be a challenge

even or the best companies.9

In automotive and commercial vehicles, some

companies have built the reputation o their brands and

their business models on the back o excellence in service

and parts management. For Lexus, the luxury-vehicledivision o Toyota Motor Corporation, service excellence

helped propel the upstart brand to market-share leadership

in North America less than two decades ater its launch

in 989.0 For Hyundai Motor Company and Kia Motors

Corporation, the emerging automotive giants based in

South Korea, service parts management, through Hyundai

Mobis Service Parts Sales Business, is an integral part o

the corporate strategy. As many vehicles are sold with

warranties o up to 0 years/00,000 miles, the service

and parts operation must unction at the highest level o

eciency to avoid customer service problems excessive

warranty costs, and sustain protable growth.

In the cut-throat consumer goods markets, top business

perormance is oten driven by combining product quality

and perormance with service excellence. Apple Computer

is going urther by elegantly mixing physical product

sales with digital services. Apples iPod portable music

and video player oering has leapt in just our years rom

being yet another consumer gadget to block-buster status

with quarterly sales reaching more than 6 million units.

Perhaps more importantly, Apple is selling services with

the product to the tune o 2 million music downloads per

day while also establishing ast-growing online video sales.

Some analysts estimate Apples share o the global online

music market at an impressive 80 percent or more.2

In diversifed manuacturing and industrial products

companies, such as General Electric, the service business

is an integral part o the business in the eyes o the

customers. According to Jerey Immelt, chairman and

chie executive ocer o GE, Services represent about

30 percent o our industrial sales and have the potential

to grow at double-digit rates or the oreseeable uture.

Services are a powerul growth engine because our

technology is long-lived and we ocus on making the

customer more protable.3 In industrial automation,

customers are under pressure to reduce costs and time to

market, and to increase quality and saety. At ABB, the

response has been to move towards selling perormance

service oerings, which allows the tailoring o servicesto customers exact needsrom simple, product-

ocused maintenance and eld services to customer-

ocused servicescalled Automation Perormance

Managementwhere ABB guarantees the perormance

level (and assumes the related risk) o the customers

automation equipment over its liecycleindependent o

whether it was original ABB equipment or not.4 Ensuring

the right pricing and the cost eectiveness o ullling

such comprehensive service contracts is bound to set new

standards or service excellence in the years ahead.

In the lie sciences and medical device industry, the

most demanding customers keep raising the bar or service

excellence. Customer requests or same-day (instead o

overnight or slower) service ulllment combined with

service-level agreements that put the risks (and rewards)

on the back o the manuacturer will be more and more

common. For some companies, such as Siemens Medical

Solutions, these demands typically require the creation o

more complex and costly distribution and service network

in order to get closer to customers and enable aster

response. The enhancements needed in processes and

systems or managing and optimizing these networks

will challenge even the leading service businesses in thecoming years.

For industrial customers o high-tech technology and

telecommunications equipmentmanuacturers,

machine downtime can cost US$00,000 or more per

hour. Indeed, or major semiconductor equipment makers,

like Applied Materials, service and parts management

is at a premium and a core eature in selling the main


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products in the rst place. For manuacturers o printers

or both consumer and commercial uses, such as Hewlett-

Packard and Xerox Corporation, there is oten more

revenue and prot in selling ink and ater-sales services

than in initial printer sales.5 For companies like these,

the service business is an integral part o the corporate

strategy. In addition, with continued consolidation through

mergers and acquisitions, many companies are let with

an unwieldy base o installed hardware and sotware thatoten needs to be serviced or decades. Doing this cost

eectively, without losing customers and damaging brands,

is a top service business challenge or many companies.

The Impact on Proftability and

GrowthThe service business typically is a more protable operation

than the primary product business. Our analysis suggests that

the average protability o service and parts operations (SPO)

benchmarked is more than 75 percent higher than overall

business unit protability (Figure 3).6 The most protableservice businesses benchmarkedthe top 25 percentare

more than three times as protable as the average business

unit.

In addition, the average annual growth rate o the service

businesses benchmarked is about 0 percent higher than or

the business units overall. The astest-growing service parts

operationsthe top 25 percentare growing at more than

twice the rate o the average business unit.

On average, we estimate that 46 percent o total prots o

the companies benchmarked are due to the service and parts

businesses.

The total impact o the service business, however, varies

dramatically across the companies benchmarked. A majority

are struggling to join the service revolution. Despite the many

opportunities or improvement, more than hal o the service

businesses benchmarked (55 percent) have prot levels lower

than or on par with their business units. For more than two

thirds (67 percent), their service businesses grow slower than

or at the same rate as their overall businesses. The missed

opportunities are signicant.


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Companies oten ail to capture the market share potential or

servicing their own installed base o productsthe captive

service market. The median benchmarked companys captive

market share is just 40 percent in pure services, such as eld

services, and about 75 percent in spare parts (Figure 4).

For numerous companies these captive market shares are much

lower. For example, many automakers spare parts sales are

heavily concentrated on supplying parts to authorized dealers

or vehicles during the manuacturers warranty period, which

typically covers 3 years or so. But as the vehicles age and the

warranties expire, automakers captive market shares or parts

typically dropexactly when the need or parts and service

increase. Without a warranty in place, consumers shop around

or the best value in parts and service. Competitors attack the

customer base and manuacturers (and dealers) lose out on a

large market opportunity.

In addition, the total market potentialwhich also includes

the potential o selling services and parts to customers who did

not buy the original product (the non-captive market)is

typically 2 to 0 times larger than the captive markets. Ouranalysis shows that the service businesses o most companies

today reach only a small share o this market, which suggests

an even larger growth opportunity.

Some companies have grabbed these growth opportunities

with gusto. Caterpillar has extended its internal excellence

in service parts management and logistics to external

customersthrough the creation o Cat Logisticsin turn

building a global growth business and capturing a much

larger share o the available market or those types o business

services.8 From its inception in 987, the success o Cat

Logistics has been remarkable. Today, Cat Logistics has morethan 9,000 logistics proessionals operating in over 00

locations across 25 countries and 6 continents, managing

more than 8 million stock keeping units (SKUs), and shipping

more than 60 million orders and 6 billion pounds o reight

per year. The client list is impressive with companies such

as DaimlerChrysler, Ford, Saab, Toshiba, and Honeywell, and

the growth opportunities are large. According to Jim Owens,

chairman and chie executive ocer o Caterpillar: Cat

Logistics has been generating growth o 25 percent annually in

revenues rom external customers, and massive opportunities

remain or creative third-party logistics providers in this $70

billion industry.9

Given that most companies have yet to ully exploit very large

opportunities, the growth potential o the service business

oten will be signicantly higher than that o the primary

business. Indeed, some companies are showing that it is.

Rolls-Royces services revenue increased by more than 60

percent over the last 5 years and has nearly tripled over the

last decademore than double the growth o the overall

business. The business value is immense. As Sir John Rose,

chie executive ocer o Rolls-Royce, has said: Every time that

Rolls-Royce sells an engine, we have signicant opportunities

to secure uture revenues or services that will add value

or our customer and add predictability to our own uture

earnings.20

Most companies, however, are late out o the gate. Not only

do companies lose growth and prot opportunities, they

jeopardize their business models. Inviting competitors to exploit

captive markets or service and parts is a dangerous game.

As manuacturers ace increasing pressures rom lower-cost

competitors that may be able to provide products and service

parts at signicantly lower costs, the link to the nal customers

will become the ultimate battleground or competitiveness. I

established manuacturers lose the service business battle, the

eld is wide open or emerging low-cost competitors to charge

ahead. Losing that battle could very well mean losing the war.

In addition, major companies, in the automotive and other

industries, are gradually outsourcing pieces o their core

manuacturing operations, including parts production and

assembly. They are, in eect, relying more and more upon thesuccess o their customer-acing, service-oriented businesses,

which oten lack the capabilities needed to succeed.2

Furthermore, success in servicing sold product is typically a

crucial component in building a manuacturing brand. Failure

in the service businessthrough unresponsive customer

complaint handling, inecient warranty management, or

reactive, slow and expensive service deliverycan mean the

slow (or sometimes not so slow) death o a brand.

The costs o missing out on the service revolution, thereore,

can be enormous.


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Behind the persuasive statistics o the inherent growth

and prot opportunities in service and parts management,however, a more uncomortable reality is evident. Despite

renewed eorts by companies to improve, our research

suggests most companies are still treating the global service

and parts business as an aterthought.22

Strategy and Business Design:

Laying the FoundationAt the most strategic level, senior executives oten neglect

to improve the service and parts business based on a lack o

understanding o the potential. They oten see the service

business as a cost center or cash cow rather than as a veryprotable growth business that can lead, rather than lag,

enterprise growth.

At the heart o the problem is a lack o insight into the real

opportunity. For example, ew o the companies benchmarked

said they had extensive visibility into service protability

(20 percent), parts protability (23 percent), sales channel

protability (0 percent), customer protability (6 percent), and

market share growth metrics (6 percent) (Figure 5). Without

good visibility into the perormance and potential o the service

and parts business, executives are oten let with a limited

understanding o the business and unable to justiy or prioritize

major investments or improvement.

Building a Block-Buster Business

Through Service Excellence:Challenges and Opportunities


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The ability to develop a strategy and an ecient design o

the overall service business is a challenge or the majority

o the companies benchmarked. While nearly 40 percent

o executives say that continuous optimization o the

overall supply chain design o the service business is o the

highest importance over the next three years, only one in 0

companies ( percent) have high perormance in this area

today (Figure 6). Similarly, ew respondents say they have

achieved high perormance in balancing cost and service levelto customers (8 percent), and building scenario planning into

network modeling (5 percent). Even worse, more than 30

percent o respondents say they are not doing well in building

global tax eciency into network modeling, andrather

unsettlinglyanother 40 percent said they did not even know

how they were doing in this area. Taking a holistic view o

the business, including issues o tax and other regulatory and

compliance issues, is o crucial importance to most complex

companies struggling to get the value out o their global

investments.23

Building service excellence into the design o the business

is dicult. Building it into the product design is perhapseven harder. But it is important. The cost and eectiveness

o delivering customer service is typically heavily dependent

on the design o the product being serviced. Yet only a ew

companies have eectively built service management into

product innovation and liecycle management decisions

(Figure 7).

Another actor that requently contributes to sub-optimal

service businesses is ineective organizational design, witha low level o investment in the people and competencies

needed to drive top perormance. Some companies invest

up to 0 times more in their sales people than in their service

sta. Given the strategic importance, protability and

growth potential o the service business relative to that o the

overall business, the ability to attract and develop the right

talent or the service business should be a key issue or top

management. 24

For some companies, like Siemens Medical Solutions, a leader

in providing imaging systems, therapy equipment, molecular

diagnostics and hearing instruments, the service business is a

strategic priority. Its customers increasingly expect to pay or

equipment uptimethe time equipment is available or use

by the customer. To achieve this, Siemens Medical Solutions is

using state-o-the-art technologies, coupled with sophisticated

processes and work fows, to deliver excellent customer service

to its health care customers while controlling cost.25 It is

combining on-line, real-time repair inormation, inventory

management, pricing, and invoicing with advanced logistics

to equip service technicians with the right inormation and


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parts at the right time and place. For example, the company

is using simple drop-o points (DOPs) or lock-boxes to

stage parts near customers, reducing the travel (or wasted)

time or high-cost and highly valued service technicians. The

lever or optimizing the eciency o the eld service engineers

is combining the predictability o when a part will arrive at the

drop-o point with the scheduled service job o the engineer

at the client site. For Siemens, service capabilities like these

have been critical in making the 8 billion Siemens MedicalSolutions one o its most protable business groups.26

But the company realizes that the drive to maintain and

enhance service excellence is an ongoing battle. For example,

it expects many customers demands on response time to

move rom next-day service to same-day service in key markets

around the world. This means that parts must be moved

even closer to customers through one or more additional

tiers o distribution centers, which will increase signicantly

the complexity o the service network. To reliably and cost-

eectively meet customer requirements in a more complex

network, inormation systems and business processes needto be strengthened urther to ensure a precise global view o

parts available to service specic customers within a short time

rame.

Operations Planning and

Management: Enabling Service

ExcellenceA lack o capabilities or planning, managing, and monitoring

the service business more eectively is holding back the

perormance o many o the companies we have studied.

Planning is a challenge. Among the companies responding,the median orecast accuracy or parts demand is less than

80 percent; or 25 percent o the companies it is lower than

52 percent. Even less encouraging: nearly 70 percent o

the companies surveyed are unable to report on the orecast

accuracy or the service and parts business, suggesting

signicant problems in managing demand, inventories, and

capacities.

Many companies considered supplier responsiveness (49

percent) and long lead times (37 percent) major barriers to

service excellence. With median on-time delivery rates rom

suppliers at a dismal 80 percent, this is understandable(Figure 8).


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It is no surprise that one third (34 percent) o the executives

indicate that inadequate inormation systems are a major

obstacle to service excellence. In addition, more than 30

percent indicated that supply chain visibility was a major

obstacle. Executives at many companies said they had no

or very limited visibility into key operational metrics, such as

inventory at dealers/customers (72 percent); demand and

sales orecast at all distribution levels (46 percent); and global

available-to-promise inventory to commit to customer orders(40 percent). (See Figure 9)

Experiences at companies such as Caterpillar show that

processes and systems that create visibility across the supply

and distribution network are undamental to building service

excellence. As ar back as the 970s, Caterpillar built a central

global database or tracking inventory across its network,

initially with a ocus on parts originating rom Caterpillars

central distribution centers. In 2002, the system was extended

to include parts obtained locally to ensure global visibility

to all parts in the distribution network.27

With more than600,000 spare parts and components, products that oten

need service or 40 years or longer, and complex global fows

o parts and inormation, no improvement comes easy. But

visibility provides a cornerstone to make it happen. With

the benet o this improved visibility, together with better

processes, and better technologies, Caterpillar has since the

late 980s been able to reduce its service parts inventories

by hal while improving its already highly regarded customer

service. Caterpillar can ll and ship an order in 24 hours or

less 99.7 percent o the time. For Caterpillar, customer service

levels rate as the top actor in generating repeat business. In

addition, these improvements are saving the company in excess

o US$460 million annually.28

Despite impressive results to date, Caterpillar is not resting

on its laurels. Recognizing that its core competency is

supply chain management and logistics, and not in sotware

development, the company is developing its next-generation

global service and parts management system in joint

collaboration with SAP, Ford Motor Company, and Deloitte

Consulting.

Execution: Delivering Service

Excellence One Customer at a

TimeAt the execution level, the last mile to the customer,companies typically lack the necessary capabilities to build

protable customer interactions that sustain customer

satisaction and loyalty. Getting the right parts and the right

service to the right place at the right time is no small task.

Doing this at the right level o overall cost and at the right

price makes it even more challenging. Few companies master

this.

Underlying the challenges o execution are the common

problems o low visibility, lack o timely and accurate

product, inventory, and transaction data, ineective process

collaboration internally and with customers and suppliers, andsub-standard capabilities or optimizing and dierentiating

customer service levels based on customer requirements.

In the ace o all o these challenges, the likelihood o being

able to respond appropriately to customer demand is quite

low. High customer-acing inventory levels will not satisy the

customer i it is o the wrong kind and in the wrong place. The


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median company benchmarked keeps inventories worth more

than our months o sales in stock, but median on-time order-

line item delivery to customer o only 93 percent. Because the

median line items per customer order is 4 across the service

businesses benchmarked, there is typically less than a 75

percent chance customers get exactly what they ordered on

time.29 This is a worrisome statistic on its own, and or many

companies and in many industries the inventory turns and

on-time delivery rates are much lower (Figure 0). Across thecompanies benchmarked, however, our ndings do indicate

that some companies are able to reach higher on-time delivery

rates and higher inventory turns at the same time.

Putting the processes and technologies in place or delivering

service excellenceone perect customer interaction at

a timeis a signicant challenge. Exacerbating the gap,

customers keep raising the bar or service excellence by

requesting shorter lead times, higher service levels, lower cost,

and better customer service support. Not surprisingly, perhaps,

ew companies report exceptional perormance on their goals

or customer satisaction (6 percent) and customer loyalty and

retention (9 percent).

But there are some companies that take service execution to

new heights. Twenty ve percent o companies report that

more than 95 percent o their service orders are resolved

and closed on the rst call. Likewise, a quarter o the

service businesses benchmarked are able to deliver on time

to customers more than 96 percent o the time. Doing this

cost eectively is dicult at best, but some companies, like

Hyundai Mobis, are building their businesses on a oundation

o excellence in this area.

Hyundai Motor Company and Kia Motors Corporation are

selling their passenger vehicles with warranties o up to 0years/00,000 miles in key markets around the world. To do

this cost eectively, not only must the cars be o high quality,

but the service and parts operation must operate at the highest

level o eciency. Hyundai Mobis Service Parts Sales Business

is responsible or supplying service parts to Hyundai and Kia

Motors vehicles worldwide. This involves stocking more than

890,000 parts or 37 vehicle types. It has built a US$55

million, 2.2 million square-oot spare parts center in Asan,

south o Seoul, to help do this more eectively and support its

global distribution network.30 The center is piloting the use o

item-level radio-requency identication (RFID) tagging coupled

with a central computer system using articial intelligence or

managing and optimizing the spare parts business. Customers

can, in real time, remotely track the status o the shipment at

any time between order and delivery.

According to Park Jeong-in, ormer CEO o Hyundai Mobis, the

new acility will play a key role in the companys global supply

network: With the Asan center, we will be able to provide

improved service or our customers in the United States, China

and other markets in the world, as well as those in South

Korea.3 Capturing a larger share o the servicing o Hyundai

and Kias more than 24 million vehicles in operation worldwide

is a crucial part o the growth strategy o Hyundai Mobis

Service Parts Sales Business.32

Service level agreements (SLAs) with customers are gaining

ground across industries, including the aerospace and deense

industry where the ability to sell through perormance-based

service and logistics contracts rapidly are becoming table

stakes. However, many companies are running into signicant

challenges ullling them. Because they oten have very

limited access to critical customer data, they are unable to

appropriately assess, quantiy and manage contractual risks

and typically lack an understanding o the critical capabilities

they need to put in place to satisy customers real needs at an

aordable cost. Essentially, they are struggling to develop and

manage a business model that they do not ully understand.

Not surprisingly, the median on-time customer response

or SLAs is just 90 percent and, or many companies, ar

less. Given the high cost o equipment downtime in many

industries, such as semiconductor manuacturing or mining,

low service levels are a costly problem and unlikely to generate

much in the way o customer loyalty.


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Leapfrogging Through Process

Collaboration and Technology

MaturityIn reviewing the shortcomings o companies eorts to drive

the service business to new levels, two actorsprocess

collaboration and technologydeserve special attention.

Despite the possibility o adopting well-established processes

and greatly enhanced and maturing technologies and tools

to support the service business appropriately - rom strategy

and organizational design, to operations management and

transactional executionmost companies have a long way to

go.

In the area o process collaboration, a majority o companies

benchmarked have signicant work remaining on building the

road or delivering service excellence. For example, only one

in seven service businesses benchmarked (4 percent) provided

customers with extensive visibility into their order statusa

capability that can improve the customer experience and lower

customer service costs (Figure ). Similarly, just 7 percent

have implemented extensive collaborative planning, orecasting

and replenishment (CPFR) with customers and with suppliers.

And while vendor-managed inventory (VMI) processes with

customers oten can take customer service levels to new

heights by providing better visibility, reducing inventory levels

and stock-out risks, as well as increasing customer order

ulllment rates, satisaction, and loyalty, only percent

o the companies included in this study have undertaken

extensive implementations. Nearly 70 percent o executives

say they have no implementation o VMI or do not know the

implementation status.Despite their rudimentary level o implementation in many

areas, the value o improved processes and collaboration with

customers and suppliers is evident.33 Our research suggests a

strong correlation between the level o adoption o processes

or collaboration and the benets achieved (Figure 2).

As the experiences o some o the worlds largest

manuacturing companies show, the value o implementing

tried and true processes and tools or service and parts

management is hard to overstate. The Parts and Accessories

division o Volkswagen AG, the US$89 billion automobile

manuacturer, experienced this rst-hand in its North Americanoperations.34 With supplies coming rom Europe and South

America, more than 60,000 dierent parts, serving 000

dealers with parts and accessories, and more than 2 million

order line items per year, it is perhaps no surprise the company

was struggling with excessive and oten incorrectly located

parts inventories across the distribution network, and low

customer order ll rates. Volkswagen resolved to assess the

entire service parts network. By deploying a new business

design, processes and planning techniques (including lean

warehouse management), VW has reduced its structural

cost, improved inventory management and productivity, and

dramatically increased customer service levelsall within just

six months. Customer order ll rates directly rom inventory

have been increased rom 76 percent to 94 percent and ll

rates using the entire network have increased to 98 percent.Beyond the hety improvement in customer service levels, VW

is reporting reductions in inventory and warehousing costs

reaching more than US$25 million per year, conservatively

estimated.

In the technology area, many companies are neglecting

to upgrade their inrastructure to enable dierentiating

perormance in the service business. In act, executives

asked to list the top barriers to operational excellence in their

service business requently cited inadequate and infexible

inormation systems. (See Figure 8 on page 9.) This is not

surprising. Across a range o capabilities, most companiesstill have considerable ground to cover to ully exploit the

power o new technologies and systems.35 While enterprise

resource planning (ERP) sotware, warehouse management

systems (WMS), and demand planning and orecasting

sotware tools have achieved extensive adoption in up to

30 percent o the companies studied, many other tools and


15/24


technologies have yet to gain acceptance (Figure 3). Few

service operations have extensive implementations o systems

or customer relationship management ( percent), product

data management (0 percent), and advanced planning and

scheduling (6 percent).

Yet, technologies and systems or designing, managing, and

optimizing service and parts operationssuch as advanced

planning and scheduling, eld service management tools, and

customer relationship management systemshave improved

dramatically over the last decade. They are no longer the

obstacle to transorming the service and parts operations theymay have been 5, 0, or 20 years ago. Indeed, as experiences

across a range o industries show, the benets that can be

realized rom adoption o new technologies and systems or

managing and optimizing the service business are substantial.

Our analysis shows a strong correlation between inormation

system adoption and the benets achieved. (See Figure 2

above.)

The adoption o radio-requency identication (RFID) and

related technologies or real-time sensing and communication

is still only nascent in most o the companies benchmarked.

Barriers to adoption o RFID mentioned by executives

include issues relating to the costs and benets o adoption,

technology maturity, and systems integration and industry

communication standards (Figure 4). Interestingly, ewcompanies saw signicant problems around inormation

sharing with suppliers and customers around their service

business, indicating a potential or taking a collaborative

approach to adoption o these technologies.


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While most companies are taking a wait-and-see approach,

a select ew have started signicant deployment o leading-

edge technologies, such as RFID and other sensing and

communications technologies, to help support integrated

product and service strategies. For some companies, these

technologies provide much needed capabilities or enhancing

customer service levels while maintaining or even reducing

the cost o delivery. General Electric, the US$52 billion

diversied technology, media and nancial services company, is

applying RFID to manage and optimize equipment installation

and use. It is using RFID technologies to tag large-scale

power-generation equipment parts and modules or easieridentication and assembly at customer sites.36 In 995,

General Motors created OnStar to provide customers in-vehicle

saety, security, and inormation services called telematics,

serving nearly 4 million customers by the end o 2005. The

OnStar Vehicle Diagnostics system provides customers with

both instant and periodic diagnostic checks o key areassuch

as engine and transmission, brake system, and air bagsand

will send status reports to customer via e-mail so they can

schedule any needed service visits.37

Rolls-Royce uses state-o-the-art sensing and communication

technology to provide exemplary customer service.38 In one

example a Rolls-Royce jet engine on a passenger airplane

in fight over the Pacic was hit by lightning. While the

engine shut down and restarted appropriately, this kind o

incident normally would require an unscheduled maintenance

inspection on landing in Los Angeles, which would cost bothtime and money due to a signicant delay. Because Rolls-

Royce sensor and communications systems could access the

data eed rom the engine monitors in fight, Rolls-Royce was

able to temporarily build in a variance to the maintenance

program and schedule the maintenance at a more suitable

time. With its strong capabilities or real-time service, Rolls-

Royce handled the incident with fying colors and estimates

the savings or the airline customer rom this event alone

were US$ million or more. As the A&D industry moves

towards perormance based services, a US$ million event

like this could become an un-billable cost under a service

level agreement (SLA) contract. The ability to increase

customer service levels at lower cost by reducing the number

o unscheduled engine removals is rapidly becoming a core

capability or survival and success in the industry.


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There are a number o critical reasons why top executives

need to prioritize the service business among their strategicinitiatives and investments

First, the business model o many global manuacturers

is under attack due to changing customer and consumer

demands, maturing home markets, and competition rom

low-cost manuacturers. This is taking its toll on growth and

margins in primary product sales and threatening even the

service and parts business. In developed markets, main-line

products are being commoditized through increased pricing

pressures, particularly rom low-cost country sourcing. Service

businesses are typically more resistant to attack by low-cost

competitors, because they involve considerable local presence

and customer intimacy, which is dicult and expensive or

newcomers to copy. In emerging markets, such as China

and India, service and parts operations are under attack by

price competition, and countereit and will-t (and sometimes

ill-t) parts, in turn jeopardizing prots, growth, and brand

reputation. Protecting the business through service excellence

is one way o keeping out the competition while improving

customer satisaction and loyalty.

Second, the increased requency o new product introductions

and shorter liecycles or main products make service

excellence even more important. The combination o short

sales cycles due to product prolieration and long service liecycles is a recipe or escalating costs, parts obsolescence, lost

customer ocus, and deteriorating customer service quality,

i not properly managed. Among the benchmarked service

operations, the median inventory obsolescence rate stood at

5 percent and in many cases exceeded 0 percent or morea

costly symptom o service business problems.39

Why Now? Chasing the

Changing Basis of Competitionin Manufacturing

Third, quality issues and problems with service and parts can

exact a staggering toll in terms o both warranty costs andbrand damage. No wonder, then, that analysts estimate

industrial equipment makers will invest a total o US$ billion

over the next ve years to overhaul warranty management and

spare parts logistics.

Fourth, service businesses can be very resilient. In times o

economic downturn, service and parts sales are oten ar

more robust than the main business. For example, during the

economic and nancial crisis in Korea rom 997 to 999, sales

o new vehicles by Hyundai and Kia Motors dropped nearly 36

percent, but Hyundai Mobis Spare Parts Sales Business posted a

5.6 percent sales increase.40

And, nally, the increasing complexity o the businesse.g.,

through business expansion into new markets, mergers and

acquisitions, continued outsourcing o parts production,

logistics, and service delivery, more and more new products,

shorter initial product sales cycles but long service-cycles

combined with more complex demands rom customers or

comprehensive service-based contractswill make the business

challenges and risks even more daunting.4 Customers are

likely to demand better tailored and better managed service

solutions, oten combined with risk-sharing agreements, rom

their suppliers. Ensuring the right customer experiencethe

right product, the right service, the right branding, the right

price, all delivered to the right place at the right timewill

become even more dicult in the years ahead. But or those

able to manage the complexity, the cost and the risks, the

results can be remarkable.


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With signicantly higher protability and a growth potential

that is still under-exploited in a majority o the companies

benchmarked, the service and parts business is the overlooked

jewel o many corporate portolios, rarely receiving the

attention it deserves. Joining the service revolution in

manuacturing industries may be one o the most undamental

steps companies can take to ensure their uture survival and

success.

Conclusion


19/24


This study is based in part on our ongoing Global Service and

Parts Benchmark Survey, encompassing nearly 80 companies

and business units to date across Europe (62 percent), North

America (34 percent), and Asia-Pacic (4 percent) (Figure A).

Appendix: Survey Methodology

and Respondent Prole

Companies rom a wide range o industries have participated,

including aerospace and deense (6 percent), automotive and

commercial vehicles (32 percent), diversied manuacturing

and industrial products (30 percent), high technology and

telecommunications (2 percent), and lie sciences (0 percent)

(Figure B).


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O all reporting companies, 77 percent have corporate

revenues larger than US$ billion, and 23 percent have

revenues ranging US$50 million to US$ billion (Figure C).

Nearly two-thirds (65 percent) o the service and parts

businesses benchmarked have global coverage and another 7

percent have regional (multi-national) coverage. The remaining

9 percent ocus on national or local markets (Figure D.)


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End Notes

In this study we use the terms service business, service operation,service and parts business, and service and parts operation (SPO), andother similar terms interchangeably, unless otherwise indicated.

2 For more on the global trends in manuacturing, innovation, and supplychain management, see e.g. Deloitte Research, Mastering Complexity inGlobal Manuacturing: Powering Profts and Growth through Value ChainSynchronization (New York and London: 2003); Deloitte Research, MasteringInnovation: Exploiting Ideas or Proftable Growth (New York: 2004); and

Deloitte Research, Unlocking the Value o Globalization: Profting throughContinuous Optimization (New York and London: 2005).

3 Service and parts management reers to the management o a service andparts operations ater the initial sale o the main products are made, andincludes installation sales and services, spare parts distribution and sales, andpost-sales services.

4 Protability is measured as earnings beore interest and taxes (EBIT) as apercentage o sales revenue.

5 See Michael Schmidt and Steve Aschkenase, The building blocks o serviceexcellence, Supply Chain Management Review, July/August 2004.

6 Source: Rolls-Royce, www.rolls-royce.com.

7 For Xerox, service revenue share is calculated as the share o post-sale andother revenue in total revenues. Post-sale and other revenue includesservice, outsourcing and rentals, supplies, paper and, other sales. SeeXeroxAnnual Report 2004.

8 See also Rolls-Royce, http://www.rolls-royce.com/civil_aerospace/overview/deault.jsp; and Deloitte Research, Making Customer Loyalty Real: Lessonsrom Leading Manuacturers (New York, 999). For more on the ater-sales service business in the commercial airline market, see also Mark DixonBnger and Henry H. Harteveldt, Overhauling Airline Maintenance,Forrester, October 3, 2004.

9 See Deence Acquisition University; http://www.acc.dau.mil.com.

0 See Ian Rowley, Lexus to the rescue: Losing luster in the luxury marketat home, Toyota is rolling out the marque to ght European imports,BusinessWeek, July 11, 2005. See also, Frederick Reichheld, The LoyaltyEect: The Hidden Eect Behind Growth, Profts, and Lasting Value(Boston, MA: Harvard Business School Publishing, 996). Anotherexample is Saturns prowess in service and parts management, which isgenerating higher customer satisaction, loyalty and, ultimately, retentiono protable customers. See M.A. Cohen, C. Cull, H. Lee, and D. Willen,Saturns supply chain innovation: High value in ater-sales service, Sloan

Management Review, Summer 2000. Apple shipped 6,45,000 iPods during its ourth quarter ended September

24, 2005. See Apple reports ourth quarter results: Apple concludes bestquarter & best year in company history, October , 2005. See www.apple.com. See also Paul Taylor, Demand or iPod and Nano help Applequadruple prots, Financial Times, October 2, 2005.

2 See The resurrection o Steve Jobs - Face value, The Economist, September7, 2005.

3 See Letter to stakeholders, General Electric Annual Report 2004.

4 See e.g.ABB Services Executive Review 2005. See also www.abb.com.

5 See Ken Spencer Brown, New marketing tack, Investors Business Daily,August 2, 2005.

6 Protability is measured as earnings beore interest and taxes (EBIT) as apercentage o sales over the last scal year. Revenue growth is measured as

the average annual increase in sales revenue over the past three scal years.Other research suggests that ...atermarket service and parts account or20 percent to 30 percent o revenues and about 40 percent o prots ormost manuacturers. See Tim A. Minahan, Unlocking Value and Prots inthe Service Chain Service Parts Management, Aberdeen Group, September2003.

7 Other analysis suggests that ... atermarket service and parts accountor 20% to 30% o revenues and about 40% o prots or mostmanuacturers, according to Tim A. Minahan, Service parts management:Unlocking value and prots in the service chain, Aberdeen Group, 2003.


9 See Caterpillar2004 Annual Report.

20 See Rolls-Royce Annual Report 2004.

2 See e.g. Extinction o the predatorThe global car industry, TheEconomist, September 0, 2005.

22 See Deloitte Consulting,Atermarket, Aterthought: Getting More Valuerom Your Service Parts Supply Chain (New York, 2003).

23 See Deloitte Research, Unlocking the Value o Globalization: Profting romContinuous Optimization (New York, 2005).

24 See also Deloitte Research, Its 2008: Do You Know Where Your Talent Is?(New York: 2005).

25 See presentation by Frank Elssner, Siemens AG Medical Solutions, UptimeServices: Siemens Medical Solutions, Service Parts Management with SAP,

Berlin, 28-29 September, 2005.26 See Siemens Annual Report 2005. See also Jack Ewing and Diane Brady,

Siemens New Boss, BusinessWeek, January 24, 2005.



29 Calculated based on a 93 percent on-time ll-rate per order line. Given thatthere are typically 4 line items per order, the complete on-time order ll rateis less than 75 percent (or 0.93 raised to the power o 4 and expressed as apercentage).

30 See e.g. Mobis opens logistics center in Asan. Center dedicated toenhanced ater-sales service. W54.7 bil. spent to combine logisticsunctions, Hyundai Mobis, June 6, 2005. See www.mobis.co.kr.

3 See Mobis opens logistics center in Asan. Center dedicated to enhanced

ater-sales service. W54.7 bil. spent to combine logistics unctions, HyundaiMobis, June 6, 2005. See www.mobis.co.kr.

32 Estimate. See Hyundai Mobis Annual Report 2004.

33 Indeed, the value o better processes or managing the service and partsbusiness is well understood. See e.g. Deloitte Consulting,Atermarket,Aterthought: Getting More Value rom Your Service Parts Supply Chain(New York, 2003). See also Morris A. Cohen and Hau L. Lee, Out otouch with customer needs? Spare parts and ater sales service, SloanManagement Review, Winter 990.

34 See Volkswagen AG Annual Report 2004.

35 Research indicates that spending on service and parts management IT is 60percent below main line business and that automation o service liecyclemanagement is important. According to one study ocused primarily onNorth American companies, the 65 percent o businesses that have notautomated to support service lie-cycle management (SLM) are twice as likely

to lose customers as are SLM leaders. See Marc McCluskey, Judy Bijesse,David OBrien, and Lindsey Sodano, Service liecycle management (Part 2):building a roadmap or investments, AMR Research, September 24, 2002.Other analysis suggests that ...manuacturers service supply networksare ten years behind their product supply networks in terms o processsophistication and use o packaged applications. See Brian Albright,Industry rises to atermarket parts challenges, Frontline Solutions, July2004.

36 Presentation by Joseph Salvo, Pervasive Decision Systems Laboratory,Inormation & Decision Technologies, General Electric Company, at theMassachusetts Institute o Technology Forum or Supply Chain Innovation,June 5, 2004.

37 See P. Koudal, H. L. Lee, B. Peleg, P. Rajwat, and S. Whang, OnStar:Connecting to Customers through Telematics, Stanord Graduate School oBusiness Case GS-38, October 2004. See also www.gm.com.

38 Source: Miles Cowdry, DirectorServices, Rolls-Royce plc, at SAPPHIRE

Europe, Copenhagen, Denmark, April, 2005. For more on Rolls-Roycecustomer service capabilities, see also Stanley Reed, Diane Brady, and BruceEinhorn, Rolls-Royce at your service: Careul attention to customers is keyto its rebound in commercial jet engines, BusinessWeek, November 4,2005.

39 The inventory obsolescence rate is dened as the percentage o inventoryclassied as obsolete (non-sellable or out-o-date) on an annual basis.

40 See Hyundai Mobis Annual Report, 2004.

4 On the current and uture complexity trends, see e.g. Deloitte Research,Mastering Complexity in Global Manuacturing: Powering Profts andGrowth through Value Chain Synchronization (New York: 2003); and DeloitteResearch, Unlocking the Value o Globalization: Profting rom ContinuousOptimization (New York: 2005).


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AuthorPeter Koudal

Director

Deloitte Research

Deloitte Services LP

Tel: + 22 436 2647

Email: [email protected]

AcknowledgementsDeloitte Research is grateul or the contributions, comments,

and suggestions received or this global study rom Abiodun

Adegoke, Deloitte Consulting LLP (United States); Steven

Aschkenase, Deloitte Consulting Overseas Services LLC

(China); Srinivasan Bangalore, Deloitte Consulting LLP (United

States); Bob Boehm, Deloitte Consulting LLP (United States);

Michael Clements, Deloitte MCS Ltd (United Kingdom);

Vineet Chhabra, Deloitte Consulting LLP (United States); Gary

Coleman, Deloitte Touche Tohmatsu (United States); Christian

Combes, Deloitte Consulting (Belgium); Jonathan Copulsky,

Deloitte Consulting (United States); Eric Desomer, Deloitte

Consulting (Belgium); Richard Eagles, Deloitte Consulting

LLP (United States); Doug Engel, Deloitte & Touche USA LLP

(United States); Mark Frank, Deloitte Consulting LLP (United

States); Je Glueck, Deloitte Consulting LLP (United States);

Kevin Gromley, Deloitte Consulting LLP (United States);

Alexander Hager, Deloitte Consulting GmbH (Germany);

Craig Hanson, Deloitte Consulting LLP (United States); Jim

Harms, Deloitte Consulting LLP (United States); Dan Haynes,

Deloitte Consulting LLP (United States); Timothy Johnson,

Deloitte Consulting LLP (United States); Ajit Kambil, Deloitte

Research, Deloitte Services LP (United States); Greg Kling,

Deloitte Consulting LLP (United States); Carl Lay, Deloitte

Consulting LLP (United States); Mimi Lee, Deloitte ToucheTohmatsu (United States); Kevin Lynch, Deloitte Consulting

LLP (United States); Vikram Mahidhar, Deloitte Research,

Deloitte Services LP; Michael Marrero, Deloitte Consulting LLP

(United States); Steven Moors, Deloitte Consulting (Belgium);

Keith Nash, Deloitte Consulting LLP (United States); Martin

Nonnenmacher, Deloitte Consulting GmbH (Germany);

Dirk Pesch, Deloitte Consulting GmbH (Germany); Sergio

Ratmiro, Deloitte Consulting LLP (United States); Sanjiv

Shahrawat, Deloitte Consulting LLP (United States); John

Simrose, Deloitte Consulting LLP (United States); Joseph

Slota, Deloitte Consulting LLP (United States); Siddharth

Sonrexa, Deloitte Consulting LLP (United States); Thomas

Swem, Deloitte Consulting LLP (United States); Wim Vaessen,Deloitte Consulting GmbH (Germany); Esther Wamae,

Deloitte Consulting LLP (United States); Jon Warshawsky,

Deloitte Research, Deloitte Services LP; Stean Weiss,

Deloitte Consulting GmbH (Germany); Christoph Wellinger,

Deloitte Consulting (Switzerland); Bruce Westbrook, Deloitte

Consulting LLP (United States); and Tristan Whitehead,

Deloitte Consulting LLP (United States).

ISBN -892383-48-9


Recent Thought Leadership Growing the Global Corporation: Global Investment

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Please visit www.deloitte.com/research or our latest thoughtleadership or contact us at: [email protected].

For more inormation about Deloitte Research, please contactthe Global Director, Ajit Kambil, Deloitte Services LP, at+ 67 437 3636 or via Email: [email protected].


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