Strategic Service Management: An Integral Part of Cost-Reduction

Sun Microsystems saved $47 million in its first year after implementing Service Parts Management by reducing inventory and eliminating purchases.

"Doing more with less" is a common refrain among companies across the globe in the current economic climate of increasing costs and slowing top-line growth. As a CFO, it's my responsibility to do exactly that. In fact, most CFOs of global companies -- whether they are high-tech, aerospace and defense or motor vehicles -- are struggling to deliver increasing value to shareholders as pressure on profits increases. So how do best-in-class companies deliver more with less -- especially in this client when shrinking profit margins means companies need to wring out bottom line cost savings?

That's the value proposition of Strategic Service Management. Companies need not sell more finished goods to increase margins. Instead, they can look internally, especially at service operations. By optimizing service parts inventory, proactively managing prices based on anticipated market response, efficiently scheduling and routing service technicians and leveraging Web-based knowledge (aka case-based reasoning) to circumvent unnecessary service calls, companies not only significantly reduce overhead costs, but they can also increase profit margins on service.

According to a recent report by AMR Research, Service Parts Planning and Optimization alone can:

  • Decrease spare parts inventory by up to 66%.
  • Increase first-time fill rates by up to 26%.
  • Drive service levels up to 98%.

And companies that align service labor and inventory processes through software are nearly three times more likely to have first call service order resolution rates of greater than 85%.

Recently I spoke to an executive at a leading transportation company who complained that due to rising fuel costs, he had to reduce overall spending by about 20%. How could he possibly invest in Strategic Service Management solutions if his edict is to cut spending and reduce costs? I pointed out that with consistently short time-to-value experiences and proven return-on-investments, SSM should be an integral part of the cost-reduction program. Temporary cuts in discretionary spending and headcount reductions result in short-term cost savings that most often make a gradual return. Yet, permanent improvements in the way businesses deliver on-going services result in long-term cost savings that continue to deliver value long after the initial investment is made.

However, like most CFOs, the proof of the pudding is the eating.

Sun Microsystems, a manufacturer of servers, storage devices, and microelectronics, realized $47 million in its first year after implementing Servigistics Service Parts Management by reducing inventory and eliminating purchases. Avaya reduced inventory from $250 million to $160 million. A heavy industrial manufacturer realized a 17% improvement in months-on-hand inventory, a 20% inventory reduction at the central depot, and a reduction in returns and freight costs.

And all of that is just the parts piece of the puzzle. When one of the world's largest multi-billion dollar manufacturer of agricultural and construction equipment implemented Service Part Pricing technology, it realized an increase of $25 million in annual profit.

On the service technician side, consider that the average service van or truck that gets about 10 mpg (miles per gallon). At $4 per gallon, the truck averages $.40 per mile. Toss in an additional $.13 for miscellaneous costs (maintenance, depreciation, etc.) and now you're paying $.53 per mile for every truck that rolls. If the average fleet vehicle travels about 39,000 miles per year and the average company rolls at least 250 vehicles, that'll cost a company more than $5 million per year. However, optimizing the scheduling and routing of technicians can save 28% of those costs, which means a yearly savings of almost $1.5 million.

As for knowledge management, the term has been kicked around for decades, but until recently, it has not been an integral part of service delivery. The results have been promising. A France-based home appliance company improved first call resolution rates by 30%, cut agent training from eight weeks to four weeks, and realized a five percent reduction in operating costs.

Imagine the significant savings opportunity for the entire service operation if it ran on a single data model that included the field technicians, parts prices, customer commitments and service knowledge -- that's the promise of Strategic Service Management.

After all, energy costs aren't going down orders for new goods are not going up any time soon. The silver lining is that customers still need service -- and they're willing to pay for it.

Doug Guess is CFO of Servigistics, which is a strategic service management solution provider, offering service parts management, workforce management, knowledge management and pricing solutions that operate together on a single data model to enable companies to transform their global service operations by dramatically increasing profitability, cash flow, and customer loyalty. www.servigistics.com

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