March 3, 2006    Volume 13, No. 5

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Service Is An Overlooked Ingredient For Success In Manufacturing



BY RICHARD McCORMACK richard@manufacturingnews.com


Manufacturing companies that do not pay close attention to the potential growth that exists on the service side of their business are "putting their entire business models at risk," says a new study from Deloitte Research's Global Manufacturing Industry Practice. "Confronted by low-cost competitors, the escalating complexity of their global supply chains, and ever-increasing customer demands, manufacturers ignoring the needs of the service business do so at their peril."

In benchmarking the services offered by global manufacturers with combined revenues of $1.5 trillion, Deloitte found that some of the best performing companies are generating 50 percent of their revenue from services. The average revenue generated from services is 26 percent.

But services generate far greater profits for companies -- more than 75 percent higher than the rest of the business; and services represent 46 percent of all profits being generated by the large companies.

"In fact, in many manufacturing companies there would be little or no profitability without the service business," says the Deloitte study. "In addition, the average annual growth rate of the service businesses benchmarked is about 10 percent higher than for the business units overall. The fastest-growing service parts operations -- the top 25 percent -- are growing at more than twice the rate of the average business unit."

Yet most companies view services as an afterthought, believing that if they do their main business well everything else will flow naturally, says study author Peter Koudal. But that's not the case. "You have to make services as part of your strategy for the overall business," he says. "You can't assume it's going to happen by itself. It's amazing how important it is and how little attention it gets."

The services side of a manufacturing operation should be "second nature to any discussion about corporate strategy, profitability and national competitiveness," Koudal argues. "It's a matter of looking at what creates value in society."

For most -- if not all -- manufacturing companies, it is service offerings that create value for their customers, thereby keeping them competitive. "It's not necessarily having the cheapest part, but having the best service solution for customers," Koudal notes.

When Deloitte analyzed manufacturers' overall profitability recently, it found that more than 50 percent of companies are not generating enough profit to meet their cost of capital. Enhanced services could make these firms profitable.

The "untapped potential for growing profits through the service business is immense," says the study. Yet more than two-thirds of the companies benchmarked are growing their services businesses either at the same rate or slower than the rest of their enterprise. "In essence, they are managing a high growth potential 'star' business as a slow-growth 'cash cow,' " says the report. "The median company benchmarked secures only 40 percent of the after-sales service market and 75 percent of the after-sales spare parts market in servicing its own installed base of products (the 'captive market'). For many companies, such as automotive original equipment manufacturers, these shares are often much lower. In addition, only a few OEMs have made significant inroads in servicing 'non-captive' customers -- a market that is typically two to 10 times larger than the captive market."

Most companies have not designed their services business into their corporate culture. But some have. Siemens AG Medical Solutions built its service business around customers' requirements "in order to drive customer satisfaction, loyalty and business performance," says Deloitte.

Other companies have such a vast base of customers scattered throughout the world that they can't put in place a system to provide spare parts or services. But some have. Caterpillar's ability to deliver spare parts anywhere in the world within 24 hours 99.7 percent of the time shows that "persistent investment in, and focus on, improving the service and logistics operations can drive outstanding customer service, resulting in enhanced customer loyalty and a foundation for profitable growth," says Deloitte.

Most companies are not able to deliver service to individual customers, due to the complexity of such an operation. But some do. "Ensuring service excellence is a core business model for many companies such as Hyundai Motor Co. and Kia Motors Corp., where service guarantees such as extended warranties are an essential part of the value provided to the customer."

It is possible for companies to leapfrog their competition by making the right investments in processes and technologies, as well as by entering into strategic alliances across their service supply chain from suppliers to customers. These collaborative processes are well documented, proven and ready for implementation, says Deloitte. "Our analysis indicates a strong relationship between the level of implementation of process -- such as collaborative planning, forecasting and replenishment with customers -- with the benefits achieved from implementation," says the benchmarking study.

Companies must implement information technology systems that can design, plan, manage and execute the services and parts businesses. Such systems "are no longer the weak links on the road to service excellence that they were five, 10 or 20 years ago," says the study. "While adoption rates are still abysmally low in many areas, our analysis points toward a strong correlation between information systems implementation and benefits achieved."

Companies that effectively implement a service strategy can also add recurring revenue and earnings to their ledgers. Signing a multi-year service contract for uptime -- as opposed to simply providing parts and spares -- can generate long-term revenue. Products designed with RFID, remote monitoring and Internet hook-ups can be maintained in a way that makes a service contract profitable.

"If you do it well, you understand the customer very, very well," says Koudal. If executed poorly, with penalties associated with downtime, services can cost a company dearly. Moreover, companies that don't service their products well tend to lose repeat customers.

Given that services are generating profits and growth levels that far exceed those of the main business, "it is now a matter of effectively embracing the service revolution or risking being left behind," the report concludes.

Adds Koudal: "For every company out there, there are a lot of things every day in the press about what they should do to improve, but here is one that is a really large growth and profit opportunity for companies yet it's being overlooked from a strategic, operational and transactional aspect. It's very difficult to copy if you do this well. That is the kind of business you want to be in, a business that is difficult to copy rather than being in one that is easy to copy."

For information about the study, "The Services Revolution in Global Manufacturing Industries," send an e-mail to Koudal at pkoudal@dc.com.



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