Supply Chain Performance Based Strategies for Customer Value Delivery : Supply Chain Performance Based Strategies for Customer Value Delivery Morris A. Cohen
Matsushita Professor of Manufacturing and Logistics
Co-Director Fishman Davidson Center for Service and Operations Management
The Wharton School
&
Chair, MCA Solutions Inc.
September 2004
Agenda : Agenda Value creation is a service
The shift towards a service-centric strategy
Dynamic Asset Deployment (DAD) strategies
A risk based approach to effective service delivery
Implementation Observations
Key takeaways
Slide3 : Products are acquired to generate value through their use
It is not necessary to own a product to derive value from it
Product performance throughout the period of ownership and use is necessary to generate value
Supply chains support the generation of such value at each stage in a product’s life cycle and throughout each stage of each customer’s relationship cycle
Focus on after-sales service supply chain
Value Creation
What are Service Supply Chains? : What are Service Supply Chains? Service supply chains consist of all assets needed to manage the availability of service to support maintenance contracts and warranties.
Assets include parts, warehouses, call centers, repair depots, customer engineers, etc. Supplier
Network Repair
Network OEM
Network Field
Network Customer
Network
Slide5 : Strategic Challenges Margin pressure on sale of products
commoditization in some industries
Service provision at little or no profit no longer viable
Design and deliver high margin service products
Retain market share for after-sales business
Develop service centric go-to-market strategy
- differentiate service market segments
- outsource decisions (3PL, 4PL, repair, etc.)
- optimize material and human asset management
- implement dynamic, intelligent execution systems
Evolution of service-centric strategies : Evolution of service-centric strategies Product Centric Customer Centric Product Focus Service Focus PRODUCT SERVICE Source: M. Cohen, N. Agrawal, V. Agrawal, V. Deshpande
Aftermarket service represents a tremendous opportunity : Aftermarket service represents a tremendous opportunity Service revenue contribution is growing.
Revenue over the Service Life of a Installed Product is high margin, low risk.
Pressure continues to mount on Service Revenue streams to match “Product” profit contributions.
In many industries Service lags.
While pressure mounts for Service to achieve the same contribution, investment in IT Solutions lags.
Service contribution provides some down cycle - insulating performance.
Source of differentiation, customer acquisition & retention Source: AMR Research “Delivering profitable customer satisfaction in the service supply chain is the key to competitive success.”
… Service Function Manager, Semiconductor Equipment Manufacturer
Source: M. A. Cohen
After-Sales Service Profitability : Relationship Time Sales relationship Service relationship While sales interaction peaks over a short time, the service relationship is ongoing. < Total Profit From Sales < Total Profit From Service After-Sales Service Profitability Xelus Systems
Labor productivity growth in services lags that in goods : Labor productivity growth in services lags that in goods Manufacturing output per hour up 50% since 1992
All non-farm businesses’ output per hour up 25% since 1992 Source: US Bureau of Labor Statistics.
Slide10 : Poor performance in spite of substantial technology investments in the last two decades However, performance in service supply chains remains a challenge Source: MCA Solutions Benchmark Study, 2001
www.mcasolutions.com
Slide11 : Service Business Models Are Changing
So why are service supply chains complex to design and manage? : So why are service supply chains complex to design and manage?
Slide13 : UPS
1. Service is fundamentally different from a tangible product : 1. Service is fundamentally different from a tangible product Service products represent commitments to customers that installed product will be restored/maintained within specified response time, quality and cost targets
Customer support is a product that cannot be stored in inventory
Service products are produced at the time of consumption & customer is directly involved in production
Service support is enabled by assets that must be deployed in advance of “service event” occurrence
These assets are consumed/utilized in the production of a service product to fulfill service product demand (I.e. parts to repair a machine that is down)
Source: M. A. Cohen
Unscheduled Service Event : Unscheduled Service Event
2. Demand profile mix is highly varied, and often consists of low consumption: Forecasting, therefore, is extremely challenging. : 2. Demand profile mix is highly varied, and often consists of low consumption: Forecasting, therefore, is extremely challenging. Of the 15,000 Active parts we plan 75% have had 1 demand or less in the last 12 months.
Of the 5,000 Parts with demand, 3,000 have had 3 or less pieces requested in the last 12 months. High Mix, Low Volume Environment
20,000 Installed tools, 256 Models, 50,000 P/N’s Source: M. A. Cohen
3. Service SC are more complex than SC for direct materials : 3. Service SC are more complex than SC for direct materials Global Delivery Reach
116 Countries/ 40 Languages 24 X 7 Advance Service Parts Replacement
24 X 7 Tech Assistance 24 X 7 Self-service Software
Range of Services: Traditional to Advanced
Technical Assistance Center (TAC) Rapid Deployment Services
Web-site Technical Assistance Engineering Staff Augmentation
Advance Hardware Replacement Carrier Class Availability
Software Updates & Upgrades Professional Services Consulting
On Site Field Engineer Services
Knowledge Transfer Services
Contractual service levels supported:
2 to 4 hour delivery next business day delivery
8 to 10 day delivery 10 day delivery for return-to-factory
consigned / on-site spares
Service Delivery Capacities
600+ Replacement Inventory Locations (rapid fulfillment depots)
6 major depots
13 country depots
Follow the Sun Technical/Logistics Centers- 5 major sites
180K cases/mo (70K via TAC) For example, at Cisco Systems:
F-35 Joint Strike Fighter Autonomic Logistics Supply Chain: Lockheed-Martin : F-35 Joint Strike Fighter Autonomic Logistics Supply Chain: Lockheed-Martin Prime Contractors
Depots
OEMs Pratt & Whitney
General Electric
BAE Northrop Grumman Lockheed Martin F-16 Locations F/A-18 Locations AV-8B Locations LM JSF Team Program Information
Cleared for public release under the provision of PIRA AER200301010 Mmddyy-18
Briefing Name
4. High part variety with wide variations in part consumption/ failure, costs, lead times & criticality : 4. High part variety with wide variations in part consumption/ failure, costs, lead times & criticality e.g., Telco company
700 locations X 10K parts X 1000s customers X Millions of contracts
This requires an exorbitant number of asset deployment decisions to be made frequently
Slide20 : 5. It is difficult to influence demand for service which is driven by equipment utilization
e.g., advertising or pricing can not be used to stimulate demand as in case of original products
6. Dynamic customer specific parts network & product configurations, service entitlements subject to continuous engineering change and upgrades
7. It is crucial to manage detailed databases on installed base of equipment (current & past), location, machine type, repair histories and maintenance contracts
8. Intelligent planning/execution solutions are missing
ERP based methodologies do not work
Slide21 : Product Service
Service On-time delivery Product up-time
Metric
Revenue Sale of product Service contract
Source Parts & Labor sales
Resources Material, Components Parts inventory
Product inventory Service Logistics
Manufacturing Process Field Engineers
Inbound/Outbound Logistics Repair depots
Flow of Goods One Way Multiple Directions
Transportation Freight Same or Next Day
Customer Days, weeks Years
Interaction
Profit Margin Low High
Asset Utilization High Low Products vs. Services Supply Chains
Key elements of Dynamic Asset Deployment (DAD) strategy : Key elements of Dynamic Asset Deployment (DAD) strategy Service Asset Management
Recognize and quantify the key tradeoffs associated with service delivery
Understand how asset deployment influences these tradeoffs
Service Demand Fulfillment
Need dynamic and flexible demand fulfillment strategies
Comprehensive, recourse-based asset planning
Plan assets knowing in advance that contingent actions will be taken
Service Product Design
Key tradeoffs for service delivery : Key tradeoffs for service delivery
The Service Support Gamble : The Service Support Gamble Place your bets – position resources throughout the supply chain
You have limited resources to invest – inventory investment & new buy (cash flow) budgets
Roll the dice – can’t forecast asset demand to a specific time and quantity
Deal with the outcome event – re-deploy, pool, expedite
Collect Payoff – Increased product availability with more efficient use of resources -> customer satisfaction
Learn and survive to play again, (or quit) - adaptive models and systems
Service Supply Chain Risks : Product Field Failures
Supplier Lead Time Delays
Installed Base Changes (growth, replacement)
Product Use Change (intensity, environment)
New Product Introduction
Part Re-engineering - (redesign – supercession)
End of Support Life
Cost Changes
, , , Service Supply Chain Risks
Service Planning & Optimization Suite (SPO) Interactive Decision Hierarchy : Service Planning & Optimization Suite (SPO) Interactive Decision Hierarchy time X EVENT
Global search and sourcing of resources required to restore customer.
Automated detection, diagnosis, repair. BUDGET
Design and pricing of service “products”
Re-design of products.
Re-design of processes.
Outsourcing of non-core functions. TACTICS
Control new buy & repair replenishment, incoming stock allocations, stock transshipments. STRATEGY
Position inventory investment, field engineer capacity
for all parts, locations,
customers, contracts. T t
Interaction of assets : Interaction of assets End Product (Computer, Weapon System/Aircraft)
Major Module (Field Replaceable Unit - FRU)
Sub-Module (Shop Replaceable Unit - SRU)
Piece Part (Consumable) PRODUCT HIERARCHY GEOGRAPHIC HIERARCHY
The Service Engineer Network : The Service Engineer Network Multi-echelon network
Each node services tools installed within a pre-specified customer base
The central node services its locally assigned tools as well as unmet demand from forward nodes. CENTRAL NODE FORWARD NODES INSTALLED TOOLS UNMET SERVICE DEMAND
Event Complexity and Engineer Capabilities : Event Complexity and Engineer Capabilities Service events can be classified into complexity categories
There are multiple Levels of engineers, based on training, experience, certification
High Level: certified to handle calls of high complexity
Lower Level: certified to handle calls of category of lower complexity
Thus, it is possible for high level engineers to substitute for a lower level engineer, but not the vice versa
Complexity Level 1
Low
Low Complexity Level n
High
High Degree of difficulty Degree of risk
Flexible demand fulfillment : Flexible demand fulfillment
Design of Saturn System Facilitates Pooling : Design of Saturn System Facilitates Pooling Suppler (plant) - SPO integration
Dealer part stocking lists provided by Supplier
Obsolescence protection for dealers
All stock requirements are driven by real-time consumer demand
Off-the-shelf availability is measured by repair type application by supplier at field locations
Sharing of parts inventories among Dealers supported by Supplier through system-wide pooling groups © 2003 – Morris A. Cohen
Service product design : Service product design Optimize product portfolio
Product rationalization
Understand and classify customers based on service needs PLATINUM
GOLD
SILVER
PRICE
RESPONSE TIME
Service products should be defined based on a price-service tradeoff
MCA’s SPO Risk Management Approach : MCA’s SPO Risk Management Approach 1. Determine Probability of Demand 2. Determine Optimal Inventory Position 3. Manage Risk by Re-Deploying / Executing the Optimal Plan Demand
History Mean
Slide34 : © 2003 M. Cohen, N. Agrawal, V. Agrawal, V. Deshpande - Do Not Reproduce or Distribute ﴀ 34 © 2003 MCA Solutions - Confidential Information Strategy Problem Formulation Decisions:
- deployment of parts inventory
- field engineer capacities
- design of repair depot, warehouse and logistics system
Goal:
- minimize cost of service delivery
- maximize customer service performance
Constraints:
- multi-echelon, multi-indenture relationships
- probabilistic resource requirements forecasts
- budget for parts and people
- service agreement entitlements (availability, delay, fill)
- engineering change (supercession)
- …
Tactics Problem Formulation : Decisions:
- Replenishment, Allocation and Trans-shipment requests
- Material Flow Request Priorities, Alerts, Interventions
- Customer Engineer dispatch, schedule and routing
Goal:
Minimize Total Cost (New Buy, Repair, Transportation, Shortage, Travel)
Manage risk of shortage and delay
Constraints:
Confirmed Material Availability and pipeline status
Service Targets (Up-time, Delay, Fill Rate)
Target Stock Levels
Engineering staffing
Effectivity
Availability of defective goods (reverse logistics
Material flow constraints
Vendor/Depot Capacity
Tactics Problem Formulation
Slide36 : Repair
Lead
Time Firm Orders Planned Orders Current
Position Purchase
Lead
Time Expedite Tactics Risk Management Fill
Rate/
Available
MCA Product Suite Integration with Enterprise Systems : Tactics Strategy MCA Product Suite Integration with Enterprise Systems Forecasting Inventory Optimization Replenishment, Allocation, and Transshipment MCA SPO
Key Modules Legacy or ERP Systems OUTPUTS:
Optimized Stock Levels
Forecasts
MTBF updates
Stockout Risk OUTPUTS:
New Buy Orders
Repair Orders
Replen. Orders
Transshipments
Boeing’s Supply Chain System Functionality (Key Capabilities) : ERP
Software Boeing’s Supply Chain System Functionality (Key Capabilities) Tactical Planning Strategic
Planning Reliability-Based
Logistics Transportation Demand
Planning Warehouse
Management Supply Transaction (inc. Inventory) SCM Work
Queue Forecasting & Planning
INTEGRATEDDATA SYSTEM
Data Cleaning Total Asset Visibility Customer Collaboration Supplier Collaboration Source: Boeing Corporation
Benefits of Deploying Dynamic Asset Deployment : Benefits of Deploying Dynamic Asset Deployment
Slide40 : Customer
Value Creation Product
Life Cycle Design Support Produce/Sale Impact of Managerial Actions on Customer Value Varies Across Product Life Cycle
Slide41 : Service Centric Strategy:
Requirements for Success Maximize customer value generation over use cycle:
Use service metrics that drive satisfaction, e.g. product “up-time”
Optimize asset management decisions to deliver maximum service at the lowest cost
Risk management
Integrated decision support tools
End-to-end, real time visibility
Feedback lifecycle support performance data to new product development – “Design for Service”
Design, manage service supply chain to support long term strategy goals
location, capacity facilities & infrastructure
3PL, 4PL “make vs. buy”
Key takeaways : Key takeaways Service delivery is different from original product delivery
Profitability in the service supply chain requires
Flexible demand fulfillment
Comprehensive, recourse-based asset planning & management
Effective product design