10 SCS:VIEWPOINT NOVEMBER 2008 SUPPLY CHAIN STANDARD
www.supplychainstandard.com
PROCUREMENT
View from
10,000ft
How high-tech can learn
from aerospace
and defence.
KEVIN TINGEY
We all spend our days immersed in our own industry,
looking for ways of improving the way we do things
from within. But what if there were lessons to be
learnt from outside that could have a more dramatic
impact on our business – and leapfrog the
competition in the process?
Traditionally, high-tech companies would focus
their efforts on improving product, leveraging its
potential for differentiation. But such potential has
been eroded by advances in technology and
reduced manufacturing costs, commoditised
products forcing even the leaders in this field to
search for new means to claim the high ground.
This has led to an increased appreciation of the
strategic value of service, as companies have moved
towards offering their customers improved aftersales
support as a means of differentiation. So far,
this change has evolved from within the industry.
But is there further untapped potential for
complementary strategies that thought-leading
companies can explore from an industry whose
offering couldn’t be more different, but whose
challenges offer surprising commonalities? Can hightech
learn from aerospace and defence?
The A&D industry is witnessing a dramatic increase
in PBL (performance-based logistics)
contracts. These place the responsibility
for performance back with the
original supplier, who is no
longer merely providing
product, rather
guaranteeing
uptime over an agreed period of time. This means that
any problems arising with a critical part such as an
engine are no longer the concern of the customer: the
supplier must repair or replace the item immediately or
incur contractually agreed financial liabilities, which, in
A&D, can easily run into hundreds of thousands of
pounds. Suppliers can therefore no longer stand back
and cash in on repairing their own products: they must
be proactive in ensuring uptime, providing the right
part at the right time with the right engineer before the
problem even arises. Moreover, for the model to work
they must price these contracts both competitively and
profitably: a huge challenge in itself, when PBL
contracts typically run for several years. They are asked
to predict parts and labour availability and cost over
the long-term… but is that not a reasonable price to
pay for customer loyalty?
Let us now move out of the cockpit, and into the
office. The copier is on the blink (again); there’s a PC
in finance that’s always crashing, with the accounts
due for filing next week; and that new projector,
bought especially because a major prospect is due in
this afternoon, seems to have a faulty bulb. Things
always go wrong at the most critical junctures, don’t
they? Yet surely you’ve shelled out enough for this to
be someone else’s problem… if someone made it
their problem, would you not consider becoming a
customer of theirs? How much do you really care
whether their copier is slightly faster or slower, or
indeed slightly cheaper or more expensive? If they
committed to having an engineer on site within two
hours of your call to either fix or replace, and to be
liable for the costs of it being out of operation,
wouldn’t that give you near-priceless peace of mind?
PBL contracts address a basic human desire and
project it into the business world: the desire for a
problem outside our comfort zone to be someone
else’s problem. Companies that satisfy that need stand
to gain faithful, long-term customers:
challenging as they are, the
demands of meeting PBL
obligations compare
quite favourably with the costs of acquiring new
customers and retaining their business. In October
2006’s “The Service Parts Management Update
Benchmark Report”, the Aberdeen Group stated that,
“profit margins for aftermarket service and parts range
from 25 per cent to 1,000 per cent higher than
margins for initial products”. It is hard to imagine a
more compelling argument to ensure customer
relationships are strong, rather than fleeting.
High-tech companies must ensure they are
equipped with the required tools. They need to
empower their service division with leading-edge
visibility and planning capability to successfully
tackle, over numerous years, the perils of
obsolescence, parts chaining and supersession that
they already struggle with over a matter of months.
With margins tighter than ever, positive ROI depends
as much on reliable lifecycle planning as it does on
innovative R&D and marketing. Companies require
tools to plan their service parts requirements from
product launch to withdrawal, as well as to optimise
their service parts pricing strategy throughout that
entire lifecycle. Improving pricing by just one per
cent has a 7.8 per cent impact on gross profit – far
more than an identical increase in sales (2.8 per cent)
or reduction in cost of sales (4.9 per cent). This
highlights that, while the potential of wellconstructed
PBL contracts is clear for all involved,
suppliers cannot afford to either price themselves out
of the market or make commitments they cannot
honour – and therefore require proven solutions,
capable of addressing both high-tech and A&D, to
help them meet their new challenges. The PBL model
A&D has mastered definitely holds valuable potential
for high-tech companies to differentiate themselves
on a basis that is not product.
As for enabling them to leapfrog
the competition… if executed
correctly, this is a strategy that
might just enable smart players
to jet all the way past it.
KEVIN TINGEY IS
VICE PRESIDENT AND
GENERAL MANAGER,
SERVIGISTICS EMEA.
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