Spare-parts Service Management: Cost Center or Profit Center?

While many companies once considered spare-parts service management a necessary evil, most now realize that it can and should be a profit center — as well as a way to differentiate themselves from their competitors.

“Being able to fulfill the demand for spare parts at the time they are needed is a key element of customer satisfaction and retention,” explains David Barboro, general manager, service network solutions, for Click Commerce.

More than ever, manufacturers these days look for ways to increase growth and profits. But many of them neglect one important opportunity—their own service business.

With the challenges of low-cost competitors, increasing business complexity and increasing customer demands, one way manufacturers can differentiate themselves is via service excellence, especially in the area of replacement and spare-parts management.

Research suggests that service-related parts operations can achieve 40% to 50% operating margins. In fact, the service of product, if managed efficiently, can often be more profitable than the initial sale of the product itself.

And there’s something else to consider: In times of economic downturns and slowdowns, service and parts sales are often far more active and important than original manufacturing and sales.

A report published by Deloitte Research in 2006, titled “Service Parts Management: Bringing Industry Leadership to Your Service Parts Business,” benchmarked the service businesses of some of the world’s largest manufacturing companies representing a combined revenue of $1.5 trillion. For these companies, service revenues represented an average of 25% of their total business. For some companies, it was as high as 50%.

The report noted that the average profitability of the service businesses was more than 75% higher than overall business-unit profitability, accounting for about 46% of total profits. In fact, for many companies, there would be little or no profitability without the service business.

But 67% of companies were growing their service businesses at the same rate, or slower than, their overall businesses, according to the report.

Things are changing, though. The report estimated that industrial equipment makers would invest a total of $1 billion over the next five years to overhaul warranty management and spare-parts logistics.

Creating a responsive service-parts management process stand to build customer loyalty. And those that design such processes efficiently can reap huge profits.

But with the push toward more responsive parts service, many companies have to deal with the complexities and enormity of the situation. For example, the way to provide the best service is to stock parts as close to customers as possible.

There are actually some industries in which parts availability is so critical that it needs to be measured in hours, not days. In attempting to meet these ever-increasing requirements, there is a risk of excess costs resulting from overstocking—trying to have all parts available in all locations.

“The goal is to achieve the service level and business outcomes through well executed, daily tactical decisions regarding what to buy and where to stock it,” says Barboro. “This means managing the tradeoff between the investment in inventory and the customer-service levels.”

What’s more, while finished goods inventories tend to be somewhat predictable, service-parts demand can be difficult to forecast accurately without the right tools because inventories can be irregular and intermittent.

A third challenge is that parts often need to be available for years after initial manufacturing of a specific product has ended. For example, a product that was manufactured for one year may need to have parts available for 10 years or longer.

As a result, companies must maintain inventories of these parts long after original manufacturing has ceased. Ultimately, this can lead to the need to have tens of thousands, if not hundreds of thousands, of parts available in various locations around the country to ship to customers who insist on virtually immediate delivery.

“It can be a significant challenge for companies to manage the size of their inventory in a rapidly changing business environment,” adds Barboro.

To excel in spare-parts service management, companies need to create processes that guarantee a number of things, especially accurate information on inventory that is available to ship, easy ordering, multiple shipping options, real-time order tracking, real-time shipment tracking, timely and accurate invoicing, easy returns and effective post-sale follow-up.

“In addition, it is very important to maintain and even increase the service levels to your customers, which continue to evolve due to changing business needs and other contractual arrangements that companies have with their end customers,” says Barboro.

How can a company make these things happen consistently and cost effectively? Without automation, the analysis and planning of service-parts inventory management can become unmanageable.

For more information about managing service-parts inventories, read Click Commerce’s “Service Parts Networks: Eight Strategies for Dramatic Improvement.” To download a copy of the report, click here.

William Atkinson, a freelance writer based in Carterville, IL, has written for Apparel and Risk Management magazines.

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