Service Matters from MCA Solutions

Traditional Supplier collaboration is transaction-based.  As the article "Enabling Collaboration," in Aviation Week describes, supplier collaboration in its basic form is a valuable tool for communicating orders and forecasts to suppliers and receiving a commitment, shipment notification or exception back from the supplier.  However in the aftermarket supply chain space, are traditional collaboration tools sufficient to meet the unique challenges of collaborative planning in this environment which is much more challenging than finished good production planning?

What are the critical attributes of collaboration platform for the aftermarket supply chain? 
Some of the challenging characteristics of the service supply chain to be addressed by a prime service provider and its suppliers include: demanding contracts with performance-based service level commitments, large numbers of parts with intermittent demand driven by unpredictable product failures, and global supply networks that must be highly responsive to restore product uptime. 

In response to the needs of key aftermarket service leaders, MCA has developed a process and next generation platform for customer collaboration that addresses these challenges.  Here are some key elements of a successful aftermarket collaboration framework:

• Shared incentives:  Aftermarket service contracts may specify a demanding customer-focused metric such as part fill rate, response time to repair, or equipment uptime.   If the prime's supplier has incentives for performance that are aligned with the objectives of both the prime service provider and the end customer, it is possible to create a "win-win" outcome where the supply chain moves towards an optimal solution.
• Secure information sharing: Information to enable advanced collaboration goes beyond orders and shipments and must include detailed product information such as failure rate observed in the field, supersession data, , customer forecast and causal data  that can help achieve mutual objectives.  Maintaining security and partitioning data to the appropriate suppliers is critical to a successful relationship.
• Coordinated decision making:  When each supplier optimizes its sub-set of the supply chain in isolation there are material flow and information lags which lead to a "bullwhip effect" across the supply chain.  To help alleviate this, the prime supplier must coordinate optimization across all of the suppliers and allocate metrics, appropriate service levels, and planning priorities through a global view of the supply chain and with the end customer objectives in mind.
• Supplier asset ownership:   The trend of Performance Based Logistics contracts has been to shift ownership away from the end customer and closer to the service provider and, by extension, onto its suppliers.  Determining who should own what level of inventory and providing the appropriate information to facilitate effective management of this is a critical decision that requires cooperation and trust.
• Closed loop performance management:  Appropriate performance metrics that monitor compliance to the contract terms are required across the extended supply chain.  The mechanism not only to monitor exceptions to performance, but to act upon and correct them on a real time basis, must be tightly integrated with the planning process.

Going from "combative" to "super collaboration" requires more than a "transaction-focused" collaborative IT tool.  MCA's planning and collaboration solution includes a consistent set of models to support planning, allocation, and execution decisions.   This platform allows sharing of information that includes the product structure and location hierarchy; and coordinated decision making across a complex network in different planning horizons, ranging from long term strategic and medium term tactical to short term event planning.

To ensure success, the collaborative process and platform must share risks and rewards across all of the parties to create a "win-win," with clearly defined outcomes for performance with a long-term view that generates an atmosphere of trust among all of the parties.

Last week, Supply Chain Brain featured an insightful article titled "Service Parts Management-Delivering Value in a Topsy-Turvy Market," by Will McNeill, an AMR Research (now a division of Gartner) analyst who does great coverage of service lifecycle management topics.  The article was bullish on the potential of the market, stating "We continue to see companies adopting service parts management software successfully, saving millions of dollars in inventory costs."

AMR says that the service parts management market weathered the storm better than most software markets in 2009, but still saw a 6 percent to 8 percent downturn.  MCA actually did see an upturn in revenue in 2009 and an increasing interest in aftermarket service and suspect the market downturn may be due to consolidation of some of the players in the market.  We do agree with the AMR statement that the industry suffered the downturn better than most because of the "quantifiable benefits delivered through the use of service parts management software." 

McNeill highlights two notable trends in the market.  The first is tighter integration of service parts management functionality with order management. As spares forecasting is driven by an understanding of customer demands, it's certainly true that a service parts planning solution must be tightly integrated with order management..  Equally important from our perspective,  is that customer service and order fulfillment strategies are aligned with service parts planning as follows:

• The expectations set in customer contracts for service levels may vary by customer, location and product group and should drive the stocking levels in the planning process
• The logic for fulfillment of customer orders and for positioning parts must share a common view of the customer.  This means that the assignment of the customer forecast in the planning process must use the same information as in the fulfillment process, both for the primary assignment, and for the emergency fulfillment in case of stockout.

This approach to customer-driven planning was described in our recent Service Matters entry "Inventory Optimization and Service Level Planning from SP Plan"

The second trend is the incorporation of service parts management into performance-based logistics.  McNeill notes that the incorporation of service parts logistics into performance-based contracting is extending past its origin of A&D into automotive, high tech, medical devices, and other verticals where contracts that sell the use or uptime of a product are increasingly common.  MCA has been working with Boeing Integrated Defense Systems since 2002 and Lockheed Martin Aeronautics since 2004 and is helping to support some of the largest military PBL programs.  Capabilities developed specifically for MCA's A&D customers are now being used by our customers in a broad range of industries. These capabilities include:

• The ability to optimize inventory to product uptime, fill rate, customer wait time, and budget constrained objectives
• The ability to perform rapid what-if scenario planning to understand the cost to support a new contract, and to test the impact of changing service level, lead time, and product reliability on inventory level and support cost

While many manufacturers have incorporated performance-based contracting (PBC) into their support offering, the results have been kept confidential and the benefits are often anecdotal.   As discussed in another Service Matters post, research done by MCA founder Morris Cohen at Wharton has helped to demonstrate the positive impact of PBC and the shared benefits for support providers and their customers.

Investment in service parts management solutions has shown tremendous return. As thought leaders such as AMR publicize the opportunity for saving and better customer service in articles like this one, we will likely see acceleration in the adoption by corporate executives who are increasingly recognizing the potential of aftermarket service. 

The week of February 7^th, I attended the Reverse Logistics Association (RLA) conference in Las Vegas.  As Mike Blumberg reported in his Reverse Logistics Today blog, the RLA conference is a key industry event for Reverse Logistics and Aftermarket Service Professionals.  With over one thousand attendees the conference provides a tremendous opportunity to share ideas and make contacts, and the enthusiastic participation and interaction are testaments to the value that businesses are placing on aftermarket service.

The chart below from RLA illustrates the key characteristics of reverse logistics and the differences from forward logistics. RLA further defines "reverse logistics" as:

"all activity associated with a product/service after the point of sale, the ultimate goal to optimize or make more efficient aftermarket activity, thus saving money and environmental resources."

The conference included interesting discussions in all of the inter-related areas defined in the chart, and a key focus for me were those around service parts management.  I participate in the Service Parts Management Committee and participated in or attended all of the service parts related panels and presentations.

One of the most interesting discussions was in the panel led by Mike Blumberg on "Service Supply Chain Challenges and Best Practices for High Value and Long Life Cycle Requirements." The panel included participants from Applied Materials, Motorola, and LTX/Credence, and their discussion centered on both the importance and difficulty of planning aftermarket service for long life cycle products. 

As products extend beyond the production lifecycle and the ready internal source of supply is removed, determining adequate stocking levels and end-of-life buys require consideration of multiple factors which include:

• Length of service support
• Introduction of new products that replace the old ones
• Upgrades and retrofits
• Failure and return rates of products in the field
• Coordination of engineering changes
• Cost of small lot cycle production
• Alternate part supplies which vary depending on the proprietary nature of the part

One of the conclusions of the panel was that planning effectively is critical not only in managing costs but also in customer service and requires an effective planning tool as well as coordinated processes that extend beyond service into sales, engineering, and supply management.

I recommend participation in Reverse Logistics events to those who are in aftermarket service.  You can learn more about the organization and upcoming events here and to learn more about the service parts management committee, contact Roy Steele, committee chair at rjsteele@rosharassociates.com.

We are very pleased to have completed MCA's 10^th year since our founding in 1999 by Drs Morris Cohen & Vipul Agrawal.   As service has become a major priority for many companies, especially during the economic downturn, we were fortunate to increase our customer base by 20% and achieve record revenues.  However, what MCA is most proud of achieving in the past 10 years has been the developement of innovative new functionality that helps deliver service value while enabling customer success.  

At our annual user conference held in November, we reflected on this, and as usual, had updates from a number of customers.  What became clear is that our focus has been driven by our customers with their emphasis on service best practices.  This in turn has sparked the continued innovation of product development from MCA.   It is illustrative and of value to highlight some of the best practices that were discussed during the conference:

• Better management of inventory reserves:  Management of inventory reserves is extremely challenging and is a critical financial function.  An MCA customer is using their planning tool to not only reduce the risk of excess & obsolescence but also to more accurately forecast the financial risk.  The process was approved by external auditors and has been recognized at the C-level as a best practice within the company.
• S&OP Integrated with Service Planning:  Especially in the dynamic ups and downs of the recent economy, historical forecasting approaches may not be responsive enough to rapid demand shifts.   Service businesses have developed a collaborative sales and operations planning (S&OP) process to gather market data from the sales team to better understand demand trends and apply that appropriately to product groups and regions.  When a well defined S&OP  process is integrated with robust casual based forecasting, it provides the ability to more quickly react to changes in business conditions
• PBL Management:   MCA customers have over 15 major platform Performance-Based Logistics (PBL) programs under management and a much larger number of component level PBL's.  These companies are now managing the entire lifecycle from initial quoting of PBL's to end-of-life, ensuring consistency and accuracy of plan. 
• "Closed Loop" Service Performance Management:   There is a high demand for visualization of real time information of the service supply chain, along with the ability to respond rapidly to correct and ensure compliance to the plan.  An MCA customer has created a command center to provide global visibility to issues & alerts by region and planner, with a drill down to corrective action.  The command center not only measures but also improves performance in what Gartner calls "Closed Loop Performance Management." 

In upcoming blogs, we will continue to report on best practices in service both within and outside the MCA customer base - we look forward to hearing from our readers on what they see as best practices also.

In our posting on "Blogs About Service" one of the blogs we mention is Shaun Snapp's SPPlan, covering Service Parts Planning and Service Management software. Shaun is an independent consultant formerly of Deloitte who has done a number of implementations of service parts planning software. 

In his post titled "Inventory Optimization or Service Level Planning Software," notes that the term "inventory optimization" has been "generalized" or diluted to mean "basically any inventory method which improves inventory."   We completely agree with Shaun's comment that "whether the functionality is actually capable of performing optimization is somewhat of an afterthought to a number of supply chain vendors." It has been interesting to see many vendors use "inventory optimization" to draw readers to their site, only to find them using traditional DRP and inventory management approaches.

The post introduces the alternate and what might be a more approachable term of "service level planning." As shown in the diagram at the left from SPPlan, "service level planning" means that the service level is driven by the contractual entitlements which have been committed to the customer.  The planning organization should not over or under invest in the ability to deliver in a way that does not match the customer contract.  The service level is an objective rather than a result.

Some other attributes of service level planning that are important include:

• The ability to set service level objectives at any location or level in the supply network and for different segments of product or part
• An interactive interface that allows what-if scenario analysis to quantify in $'s and visualize the inventory impact of different service level scenarios
• Multi-echelon Optimization approach that determines the optimal mix of inventory within a location and across locations, and accurately models the mullt-echelon interactions and determine appropriate inventory levels

In addition to requiring an appropriate planning tool, the article notes that service level planning must be driven by effective communication between sales and planning in an Sales & Operations Planning (S&OP) process.   We have seen an increasing use of a Service S&OP process from our customers, especially to respond more quickly in today's dynamic economic downturns and upturns.   

This is a critical topic for any company who hopes to improve their inventory management and customer service levels, and you can expect to see some more posts on how MCA uses service level planning and how it plays a role in a successful S&OP process to promote better service.

Bob Bowman of Supply Chain Brain recently did a great write-up of his interview with MCA's CEO Robert Salvucci to discuss our executive survey on how service businesses are faring in the recession.  (See Morris Cohen's blog entry, "Will Aftermarket Service Save the Manufacturing Industry?")

Bob reported on the importance of service revenue for companies who are seeing a decline in new equipment sales.  As was noted, extremely cyclical industries such as semiconductor equipment have seen the most impact, with service accounting for over 50% of sales for some companies, and other industries, such as medical equipment, have been affected but not as severely.

In a related article in GSA (Global Semiconductor Alliance) Forum, titled "Semiconductor Equipment Service Supply Chain - Anticipating the Upturn," John Nunes of MCA reports on data that shows that the semiconductor industry may be seeing an upturn, and provides some suggestions on how service businesses should be preparing for it.

Based on interviews with semiconductor equipment service executives and leading companies in other industries, John defines four focus areas that will help equipment manufacturers position their service supply chain for short-term flexibility and build capabilities for long-term aftermarket revenue growth as the semiconductor business moves into an upturn.

• Use leading indicators and causal-based forecasting tools to react to changes in business.
• Assess the service supply chain to understand risks and develop contingency plans.
• Develop new service products that are suited to the changing business cycle.
• Develop performance-based contracts as a way to redefine your relationship with both customers and suppliers.

While focused on the semiconductor equipment industry, the advice is applicable to any service business that has to be able to respond quickly to changes in the market.

In his article "Inventory:  Getting more from less with inventory optimization" in Modern Materials Handling, Bob Trebilcock provides a great overview of inventory optimization software and how it's delivering rapid payback to companies who implement it.

According to a recent inventory optimization study done by IDC's Manufacturing Insights, inventory optimization is among the top three priorities for many supply chain organizations as they seek to increase efficiences during the continued global recession.

Bob writes that the service parts industry was one of the first adopters of multi-echelon inventory optimization.  He notes some of the unique challenges in service parts planning that include long product support lifecycles, unpredictable demand, and requirements for rapid delivery of service to delivery to contract requirements. 

Because of this, the decision of what to stock is critical and by doing it well, users of inventory optimization software can reduce inventory by 15% to 40% over traditional planning approaches.  Equally important, inventory optimization automates the planning process, making planners much more productive than those doing the extensive manual analysis that traditional techniques require.

Included in the article is a description of MCA's perspective on how inventory optimization can work in a service environment :

A multi-echelon optimization tool allows maintenance organizations to balance financial considerations and service-level requirements, says Andreae, by factoring in the variability and unpredictability associated with service parts into the inventory planning equation. They do this by looking at everything from the design of the network to the parts required for scheduled maintenance programs to a multi-year history of unscheduled maintenance for every part. In addition, the system can be tied into a product lifecycle management system (PLM) to factor in any changes to the product or to be notified when a new part can be used to replace a prior part. "The system takes all of that information in to set stock levels for every part, and to determine where in the supply chain to locate those parts," says Andreae.

I must add that inventory optimization is a critical and high value added capability, but is only one component of a service parts planning platform.  Other integrated components include forecasting and demand management, tactical planning & execution, and infrastructure for what-if scenario analysis and analytics/performance management, which are tightly integrated into an ERP & service management transactional systems such as SAP or Oracle. 

Our blog entry on the acquisition of Servigistics & Click Commerce  was the most viewed and most commented on in the short history of Service Matters.  The comments became so heated that they prompted us to post a disclaimer on the site noting that we are not responsible for the content of any of the comments made on the site, and while the blog is a venue for discussion including opinions that may differ from ours, we reserve the right to delete comments (which we have not yet done).

In addition to our posting, a number of analysts and bloggers have written on the acquisition.  Given that this seems to be a topic of interest to service parts planning community, and at the risk of over-analysis, we thought it worthwhile to compile the comments into one place.

In AMR's "Future of Enterprise Software" Blog, Bruce Richardson's post was the first, coming out on the day of the announcement, echoing the positive messaging of the Servigistics release, with no concerns for customers or prospects of the two companies, and suggesting that the combined company may branch into finished goods planning.  Subsequent postings from Bob Ferrari of "Supply Chain Matters" and Jason Busch of "Spend Matters" were not as rosy, and reinforced the concern expressed in the Service Matters blog that any prospect looking to buy a solution from the acquired companies should proceed with caution given the uncertainty of the product roadmap.

The most comprehensive write-up was from PJ Jakovljevic of Technology Evaluations, who in his entry "Will Servigistics Click on More Service Cylinders" presented a balanced view with coverage of all sides of the debate which is too extensive to summarize here. It did conclude with a question around the viability of a platform strategy for a group of disconnected solutions in a very competitive market.

No matter what any of us say now, the true test will be in the market that unfolds over the next few months and years. Our hope, which is already becoming reality, is growth for the overall market as manufacturers continue to recognize the importance of their service businesses and cautiously invest in solutions that deliver real value.

Service Management 365 just published an article by Graham Best, Managing Director of MCA partner The Service Business titled Implementing Lean in the Field Service Supply Chain.  The Service Business is a UK consultancy dedicated, as the name implies, to the aftermarket supply chain.  Graham notes that lean principles have been applied to production processes by many leading manufacturers, and makes a compelling case for its value in creating a "lean, mean, successful customer service machine.  The article highlights 3 key principles of lean and how they apply to service:  process mapping, eliminating waste, and a lean organization, and the article is very worthwhile in aligning service improvement with broader lean initiatives. 

While there are some principles of lean that can be applied to a service supply chain, the approach is a bit different than in a manufacturing environment.  Wikipedia provides a history of lean manaufacuturing that goes back to Benjamin Franklin!, Henry Ford, and more recently to the Toyota Production System (TPS).  A key component of the TPS process is reducing process variability to improve flow, and reducing waste, typically in the form of inventory.  

As a former manufacturing consultant at PRTM, I did several implementations using lean or "Just-in-time" techniques in manufacturing environments. While inventory reduction isn't easy, in a repeatable manufacturing process with a limited number of steps and processes, buffers can be reduced significantly, and a 'manual' kanban approach can be very effective.

In aftermarket service, demand is extremely variable, the volume of parts is high, and depending on the type of service entitlement, many stocking locations may be required to ensure rapid response to equipment downtime.  In this environment, determining the inventory stocking levels or buffers is impossible to do with manual techniques, and even with traditional planning techniques, inventory is much higher than it needs to be.  Inventory optimization in an automated process combined with effective service design can be of significant benefit in minimizing the "buffer" to position inventory to ensure desired service levels in an environment of very unpredictable demand.

So while lean techniques of waste reduction and flow improvement apply in many areas of service, a "just-in-time" approach must be tempered with tools that can determine optimal inventory buffers across a global service network.  The CFO must realize that because of the nature of the business, aftermarket inventory will never turn as quickly as production inventory, but organizations who have applied inventory optimization to aftermarket spares have seen significant results in inventory reduction while improving customer service.  Combining this approach with lean process consulting from companies like The Service Business can result in even greater benefits to the service business.

On July 28th John Nunes from MCA is participating in a webinar hosted by our partner Vendavo titled:  "Leveraging Improved Planning & Pricing to Generate Value from Aftermarket Service Businesses."  (note: link updated July 31, 09 to link to registration to see archived session of webinar).

Vendavo has a powerful solution for service parts and contract pricing which has been implemented in the aftermarket business for several large manufacturers resulting in substantial increases in service profitability.  Like MCA, Vendavo is an SAP partner and its solution has tight integration to SAP ERP.

Pricing & Planning are key levers in aftermarket profitability, and there are several integrated workflows that are important in an integrated service strategy.  An example is that in parts sales environments in which there is price sensitivity, a price change recommended to increase margins will impact part demand and the resulting forecast will impact required stocking levels.  In defining service contracts, a change in service entitlements will have a cost impact which can be simulated by a planning tool, and be used as an input into contract margin analysis.

The webinar will describe these scenarios as well as provide an overall approach to developing a differentiated service strategy differentiated to unique customer needs.  It should be of interest to manufacturers in a broad range of industries.  To go to the registration page, you can click here.  If you can't make the webinar, it will be archived so that you can play it later.