If you want to find new opportunities to optimize Service Experience and maximize Customer Lifetime Value, then look no further than your Service Parts Logistics operation. This is because Service Parts Logistics represents the single, largest investment and second largest operating expense for Durable Products Manufacturers or Service Providers.
Service parts also represents one of the most critical resources required for ensuring high first-time fix rates and recurring revenue. Therefore, anything that a company can do to improve the productivity, efficiency, or quality of the service parts logistics pipeline will have a dramatic positive impact of financial performance and customer satisfaction.
To understand how to improve service parts management, let’s first examine a few critical issues that impact financial performance of the service parts function. Our research indicates that 60% to 75% percent of all service requests require spare parts. As a result, companies likely to experience low inventory fill rates and/or low first-time fix rates if they do not have adequate systems or procedures in place to ensure parts availability where and when needed.
Another issue is that nearly 50% of the value of parts inventory can be found below manned parts depots or warehouses (i.e., vans/trunks, branch offices, or consigned to the customer site). The problem is that many companies don’t know exactly where this inventory is located or what the dollar value is at each location. Without this understanding, companies run the risk of having too much inventory in manned warehouses to compensate for their lack of information.
One reason why the spare parts are often located below manned warehouses is because the manufacturer or service provider has not implemented the appropriate controls to track these parts. Another is because the parts have not been returned through the manufacturer’s reverse logistics and/or depot repair operations when it is deemed defective or no longer required. Approximately 80% of the value of spare parts in the logistics pipeline fall into this category. However, it is also important to consider that 30% to 35% of parts returned to depot repair operations are good parts. The reason they are returned, if at all, is because either the service technician misdiagnosed the problem or used the spare part as a test procedure. In other words, replacing a spare part in a problem unit to determine if the problem is indeed due to a defective spare part.
As a result of these issues, spare parts management becomes a complex task. Having too many spare parts on hand can have a negative impact on the balance sheet and income statement; too few parts can result in degradation of service quality and customer satisfaction. Fortunately, there are several best practices that manufacturers and service providers can implement to avoid these challenges. These include:
Benchmark research indicates that significant improvements in efficiency and productivity can be achieved by implementing the strategies identified above. The average percentage improvement by key performance indicator is as follows:
By implementing these best practices, companies will also find they operate a stronger balance sheet, healthier profit margins, and higher levels of customer satisfaction. These strategies all have several things in common, namely a heavy reliance on data, technology (i.e., information systems), and process improvements. Companies that operate asset-intensive field service operations, in other words those that maintain a high investment in spare parts, should give serious consideration to implementing the strategies identified above.