By failing to take steps to improve the strategies, operational design, and information systems underlying the services and spare parts aspects of their businesses, many manufacturing companies are missing a prime opportunity to grow revenues and dramatically increase profitability, according to a research report recently released by Deloitte Services LP.
As a result of this failure, manufacturing companies "are effectively putting their entire business models at risk," says the study, entitled "The Service Revolution in Global Manufacturing Industries."
The study, based on interviews with representatives from 80 large manufacturing companies with combined revenues of $1.5 trillion, notes that as competition from low-cost, offshore manufacturers drives down profit margins on manufactured goods, it is becoming increasingly critical for manufacturing companies to capture more post-sales service and spare parts business. In fact, the study finds, the profitability of service operations is, on average, 75% higher than overall manufacturing operations. Services now account for 46% of manufacturing companies' profits, the study says.
But that's lower than it could be, according to the study. The median company benchmarked by the study gets only 40% of the services-related business and only 75% of the spare parts business available from its primary customers. Few manufacturers have made any progress in selling service or spare parts to non-captive customers, the report finds.
The primary reason for those failures, the study says, is that many manufacturers tend to view services as an afterthought or a cost center rather than an opportunity to drive revenue and profitability. Service-related processes often are not integrated with other parts of the organization in ways that could drive revenue. About half of the companies studied, for example, have few or no collaborative processes that allow the services organization to participate in new product development.
Moreover, many manufacturing companies have not implemented information systems that could help them increase visibility into key service processes and drive revenue and profitability. Just under half of the companies studied had no field service or technical documentation management system. Only slightly more had implemented any kind of service order dispatch or warranty management system. And fewer than 10% had applied advanced planning and scheduling technologies to service parts, according to the study.
As a result, the study found, many manufacturers have little or no visibility into key aspects of their service business, and many fail to monitor even basic key performance indicators that could help them improve service efficiency. Over 70% of manufacturers studied, for example, have little or no visibility into service parts inventory at customer or dealer locations. Almost half have little or no visibility into demand and sales forecasts throughout the distribution channel.
Manufacturers can begin to improve their services operations, said Jeff Glueck, a principal consultant at Deloitte, by collecting and tracking information on KPIs such as on-time service delivery, fill-rate performance, first-call fix rates, and service level agreement response times.
This article originally appeared in the April 2006 issue of Managing Automation magazine.