December 5, 2006
sponsored by Assurant
ISSN 1550-9214         
Editor's Note: This column by Deb Unzicker and Cheryl Harrity
of APQC is the latest in a series of contributed editorial columns. Readers
who are interested in authoring future contributed columns can click here
to see the Guidelines for Editorial Submissions page.



Service After Sales:

Getting the biggest bang for your buck in
after-sales solutions through benchmarking.


By Deb Unzicker and Cheryl Harrity of APQC.

Organizations have learned that it is far less costly to retain current customers than it is to find new ones. The question is how to do it. While there isn't a secret formula, high performing companies have found that investing in their service after sales function is a big step in the right direction. In addition to customer loyalty, service after sales has also been shown to be essential in boosting revenue. Studies in this area show that on average, the service after sales area contributes 24% of a firm's revenue, but as much as 45% of its gross profits.

Service after sales has become an integral part of the best-practice organization's overall offering when it comes to building loyalty, improving customer satisfaction, reducing costs, improving product design and discovering new market opportunities. In addition, as mentioned above, it is also profitable. Spare parts and after-sales services are estimated to account for approximately 8% of the United States' annual GDP.

Service after sales encompasses a variety of actions, from the development of strategies and managing customer calls to service delivery and the liquidation of refurbished items. Such aftermarket needs necessitate a global focus on the entire customer/supplier experience. They also require easily repeatable processes.

The Service After Sales Operation

This article will take a close look at a variety of factors that go into considering a service after sales operation:

  • What performance measures are key in tracking service after sales effectively?
    • Examining cost effectiveness;
    • Examining process efficiency; and
    • Examining cycle time.
  • Why do the measures matter?
    • Improving response times.
  • Using the measures.
    • Cisco example; and
    • Whirlpool example.
  • A chance to benchmark your own service after sales organization
    • Participate in a new, no cost survey from APQC's Open Standards Benchmarking Collaborative research and WarrantyWeek
    • Visit www.apqc.org/warrantyweeksurvey

"It's good to know that your organization can get these benchmarking answers," said Tom Bellinger, a strategist in IBM Systems and Technology Group Operations. "You may be way off the mark compared to the best in your industry."

Performance Measures

To better understand how to assess your firm's service after sales function through benchmarking, a few key measures should be evaluated.

Benchmarking hinges on specific measures: cost effectiveness, process efficiency, and cycle time. Figure 1 lists the measures used in the current assessment level research by APQC, a 30-year old, non-profit global resource for process and performance improvement through benchmarking and research. The Service After Sales research project is a part of its new Open Standards Benchmarking Collaborative (OSBC) research.


Figure 1
Key Measures for
Service After Sales Benchmarking

APQC Figure 1

     Source: APQC



Keeping service after sales cost-effective presents a challenge to many organizations, said Bellinger. Two cost measures from the current research that are helpful in assessing the service after sales function are in-warranty costs as a percentage of sales revenue (and/or total revenue) and cost per contact.

"You don't want sales deals that are money losers," Bellinger said. "You have to make a judgment on whether a deal is profitable."

"One of the things you want to do is track how well you're selling your services up front," said Bellinger. The current research will report on the percentage change in services revenue over the past three years.

Meanwhile, process efficiency measures effectively monitor how quickly service after sales activities are carried out. Measures from the current research addressing process efficiency are percentage of support requests resolved remotely and percentage of support requests that go through a pre-authorization process.

Bellinger continues, "Parts management is really critical. Obsolescence occurs so quickly. An estimated 23% of parts become obsolete each year. Avoiding obsolescence depends on a keen eye toward inventory, Bellinger added. The current research measures the percentage of parts on back-order and spare part obsolescence rate.

In addition to obsolescence, the reasons for returns play a big role in service after sales. The more components are vended out, the more an organization expects its suppliers to carry a warranty. Also, because most commodities come with intrinsic failures, Bellinger said, it is especially important to quickly identify problems and track how long it takes to find the failure.

"If you've replaced a part, how do you apply that to your value?" Bellinger asked. "If your products become more complex and your diagnostics aren't also developed, then those [return] numbers will go up."

"We want to know if we've made the right problem determination," he said. Therefore, the current research measures not only the number and value of returns, but also the percentage of units accepted for return for reasons other than product damage or failure and the percentage of repairs where no fault was found.

Last but certainly not least, cycle time measures are valuable tools for process assessment. In both the depot repair and end-user exchange environments, a certain level of expectation exists for average turnaround time performance. Oftentimes, an organization will announce service level response times to its customers, such as one day, one week, and so on. The current research will report on the replacement cycle time for customer mail-in returns.

Overall, added Bellinger, the objective is to get the asset returned as quickly as possible.

"The more timely you can be, the better off you are," he said.

Why the Measures Matter

Service after sales has accounted for a large portion of organizations' profits in recent years. A 1999 report published by AMR Research (see Figure 2) indicated that businesses earn 45% of their gross profits in the aftermarket, while it accounts for 24% of revenues.


Figure 2
Aftermarket Earnings, 1999

APQC Figure 2

     Source: APQC



The measures do more than simply provide a snapshot of an organization's service after sales operation. They provide valuable insight into where a company can develop service after sales. Important components like customer interaction, product return management, product service performance, service repair parts management, value-added service offerings, and product refurbishment could all stand improvement once benchmarks are introduced into the equation.

Response times over the years are a good indicator of how service after sales has evolved. For instance, while semiconductor manufacturers might have expected two-day response times from their suppliers in the 1980s, today they expect responses to help requests in less than 15 minutes. The quality of after-sales service in many instances has proved to have a direct correlation with customers' decisions to purchase again. Consequently, automakers such as Lexus and Saturn have beat out the likes of Ford and Chrysler when it comes to repeat purchases.

No two organizations handle service after sales in exactly the same way. At IBM's Systems and Technology Group, most service after sales efforts are handled in house. An automotive manufacturer, however, conducts its after-sales services primarily through its dealerships.

"Depending on the company's business model, some of these questions may be more important or key," Bellinger said. "Perhaps a company is focused on services and not product profits, or many of the warranty chain activities are outsourced."

Using the Measures

Bridging the gap from understanding after-sales measures and implementation can be a lofty challenge for any organization. Some interpret service after sales as a problematic means to a more important end, not to mention an unnecessary expense. Service after sales at one time was extremely difficult to manage -- production and sales functions were treated as lowly divisions.

The automotive industry offers telling examples of how service after sales once bore the ire of its managers. When the Harvard Business Review studied the service after sales network of a major automotive manufacturer a few years ago, it discovered that its spare parts warehouses and dealers had little to no coordination. About half of its customers faced problems like unnecessary delays with vehicle repairs due to dealerships lacking the correct spare parts.

Even if an organization funnels a significant portion of its working capital into service after sales, it can still face challenges. Network equipment manufacturer Cisco Systems offers such services as hardware and software support for the hundreds of products it builds. Cisco's warranty program requires the company to offer spare parts and service contracts as needed.

Cisco utilizes field engineers from Dimension Data, Hewlett-Packard Co., and IBM Corp., while it uses Choice Logistics Inc., DHL International, FedEx Corp. and other partners for logistics. Meanwhile, its repair services are handled through Celestica Inc., Foxconn Electronics Inc., and Jabil Circuit Inc., to name a few. The infrastructure encompasses 800 fulfillment centers, seven country distribution centers, 18 repair centers, and five materials return-processing centers.

Previously, Cisco managed service after sales with easily implementable heuristics. It met nearby high-priority customer demands while warehouses took care of requests from other customers. Cisco failed to coordinate stocking policy between its forward and central locations, causing the network to become less flexible and subject to rising inventory levels.

As a result, Cisco executives implemented a new spare-parts inventory system by using demand histories to create probability-based forecasts of parts requirements. It began calculating resource allocation options on a daily basis and accounted for interactions between its forward and central stocking locations. That resulted in faster resource deployment, lower costs, and better response times.

Whirlpool Corp. faced another service after sales dilemma in finding a claims processing solution. The company previously utilized more than two dozen employees to process claims paperwork, translating into delays and extra costs incurred by its customers. Today, Whirlpool's service after sales program utilizes a service directory that automates partner data updates, thereby enabling service companies to be paid more quickly.

The properly functioning service after sales initiative has given Whirlpool a more global vision of why repairs have been instituted, down to the level of model and serial number. While quality information is filtered to engineers, the service after sales system also tracks how long it takes partners to file claims. The first-time fix measure mentioned above is an important one to Whirlpool -- its service after sales function offers information on specific parts so that partners can make sure their repair trucks have the appropriate parts when they are dispatched.

Collect Your Own Measures

APQC's OSBC assessment project offers a complimentary and powerful tool in benchmarking research. The Service After Sales assessment research project gives organizations valuable insight into how they perform across a variety of performance measures. OSBC research supports improvement and change through the identification of common measures and definitions, access to reliable benchmarks, and access to best practices and high-performance drivers.

The Service After Sales assessment benchmarking study also supplies crucial performance benchmarks and best practices involved in financial, operational, and service-and-support processes that make up aftermarket services. Furthermore, with sufficient enough response, specific industry questions related to aerospace and defense, automotive, electronics, retail, and general industry will help focus the research.

Even though an estimated 80% of a product's costs is incurred upon its design, customer support (i.e. service after sales) commands the longest portion of the product's life. And buyers expect businesses to fix their problems quickly (even if they don't expect perfection). As more executives begin to see that service after sales provides the revenue source with the most longevity (with the smallest required investment), after-sales will become a more important touchstone in the overall supply chain of the best-practice organization.

Visit www.apqc.org/warrantyweeksurvey to learn more about APQC's Service After Sales assessment benchmarking research, download the key measures list, and view the survey online. By participating in this complimentary research, you'll receive a comprehensive report detailing the demographic profiles of participating companies as well as tables and graphs depicting levels of achievement by the study participants on the study measures, all packaged in easy-to-read format. The data charts will feature your the aggregate performance of companies in the high, median and low performance segments.


Resources:

Morris A. Cohen, Narendra Agrawal, and Vipul Agrawal. "Winning in the Aftermarket." Harvard Business Review, May 2006.

Carolyn Dunn. "Beyond the Sale: Getting the Most from Service After Sales." APQC, July 2006.

Reed Business Information. "Stand by your brand." Manufacturing Business Technology, September 2005.


Click here to register for the APQC Webinar
Assurant

 

This Week’s Warranty Week Headlines

Costs related to the Sarbanes-Oxley Act increasing for small businesses, report says.
CFO Magazine, December 5, 2006
Despite embargo, Dubai serves as trade gateway to Iran, but warranty services prove problematic.
ITP Technology, December 5, 2006
Analyst at Friedman, Billings, Ramsey & Co. says Dell's under-accruals are what led to SEC investigation.
Computer Business Review, December 4, 2006
Dell's accounting practices are no cause for concern.
Seeking Alpha, December 4, 2006
NARDA counters Consumer Reports' extended warranty warning.
This Week in Consumer Electronics, December 4, 2006
 

More Warranty Headlines below



4CS iWarranty

 

Warranty Headlines (cont’d)

Washington Attorney General lists factors to consider when deciding whether to purchase a service contract
The Columbian, December 4, 2006
Automotive Service Association opposes expansion of California Air Resources Board's emission warranty regulations.
Automotive Body Repair News, December 4, 2006
Lehman Trikes Inc. to offer three-year unlimited mileage warranties on its motorcycle conversions.
Press Release, December 4, 2006 (PDF file)
Lenovo ThinkPad T60 has only a one-year warranty while most business laptops have three-year coverage.
CNET, December 4, 2006
Home warranty insurance takes the fear out of buying and makes the house more appealing.
Porterville Recorder, December 4, 2006
 

More Warranty Headlines below



SAS Institute

 

Warranty Headlines (cont’d)

Total North American RFID market in 2005 for manufacturing and logistics was $74.8 million, study says.
Frost & Sullivan, December 4, 2006
Research firm says Dell's warranty accounting leads to "at least three troubling conclusions."
CRN, December 1, 2006
GM says increased fuel efficiency and longer warranties behind recent sales gains for light truks and SUVs.
Associated Press, December 1, 2006
Bankruptcy judge approves Delphi's settlement of accounting fraud charges with the SEC.
Associated Press, December 1, 2006
Magazine's annual capital equipment spending survey finds warranty a top 5 target for cost reduction.
Assembly Magazine, December 1, 2006
 

More Warranty Headlines below



ServiceBench for Service Administrators

 

Warranty Headlines (cont’d)

Getting the best forecast by combining judgmental and statistical methods.
APICS Magazine, December 2006
Aon Corp. completes the sale of the Aon Warranty Group and the Virginia Surety Co. to an Onex Corp. affiliate.
Press Release, November 30, 2006
Onex Corp. completes the acquisition of the Aon Warranty Group for CA$800 million (US$710 million).
Press Release, November 30, 2006
Opel and Vauxhall warranty costs since 2000 are down 70% overall and are down 36% per vehicle.
Business Week, November 30, 2006
Warranty Direct UK says 19% breakdown rate for year-old cars jumps to 28% for 7-year-old vehicles.
Press Release, November 30, 2006 (Word file)
 

More Warranty Headlines below



Sign up for a free subscription to Warranty Week:
     subscribe     change of address     unsubscribe


 

Warranty Headlines (cont’d)

Toys "R" Us allegedly bundles Nintendo Wii with three games and extended warranty for $450.
WMAQ-TV Chicago, November 30, 2006
GAP Support introduces home warranties across the Middle East and North Africa.
AME Info, November 30, 2006
Siemens Business Services to do all warranty work for Xerox copiers in the U.S.
Press Release, November 29, 2006
Subaru aftermarket extras keep warranty valid.
Detroit News, November 29, 2006
AGCO's SisuDiesel engines approved for up to 100% biodiesel blends with no change in warranty.
Press Release, November 29, 2006
 

More Warranty Headlines below



AMT Warranty Corp.

 

Warranty Headlines (cont’d)

Philippines propose tax breaks for ethanol and coco methyl ester diesel blends, but car companies balk at warranty implications.
Manila Bulletin Online, November 28, 2006
ServiceMaster Co. appoints Morgan Stanley and Goldman Sachs as its financial advisors to explore strategic alternatives.
Press Release, November 28, 2006
ServiceMaster CEO expects the American Home Shield warranty business to double within the next five years.
Bloomberg News, November 29, 2006
Snap-on Inc. completes acquisition of ProQuest Business Solutions
Press Release, November 28, 2006
Seagate Technology lengthens the warranty on Maxtor internal hard drives to three years.
Press Release, November 28, 2006
Consumer Reports says 10% of rear-projection TVs need repair in first two years, making extended warranties worth considering.
WRAL-TV Raleigh, November 27, 2006
Blood Diamond film producer suggests consumers ask to see the Kimberley warranty before buying.
Diamond Intelligence Briefs, November 27, 2006
Russian commander says use of converted ICBMs for satellite launches helps it lengthen the remaining fleet's warranties.
RIA Novosti, November 27, 2006
Postini study says 91% of all email now junk mail.
BPM Today, November 27, 2006
Reporter shops for Canon, LG & Sony products, along with extended warranties for each.
Charlotte Observer, November 26, 2006
 

More Warranty Headlines