Strategic Services Management

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Strategic Service Management

Managing the Value Chain

Strategic Service Management (SSM) is a proactive approach to satisfying the customer in a manner that is both efficient and profitable while balancing organizational strategy, resources, commitments, and pricing. Strategic Service Management supports the integration, optimization, and management of core business processes, adds to your overall business solution, and helps to differentiate your offering from that of your competitors.

The value that Strategic Service Management has to offer is probably the reason that the topic is plowing its way to the forefront in boardroom discussions across the globe. With raw material costs skyrocketing, labor costs on the rise, and inflationary pressures forcing manufacturers and retailers to keep pricing flat or risk not selling any product at all, Strategic Service Management is now the only option that many firms have to increase profits. Not only does it allow premium prices to be charged for quality services that are perceived as valuable by the customer, but it can substantially reduce the cost of service when the right product is in the right place at the right time to be put in the hands of the right technician for the job. Poor service translates into real losses which go beyond any financial penalties specified in your SLAs; real losses which can be prevented with a good Strategic Service Management Solution.

The Complexity of Strategic Service Management

Strategic Service Management is complex because it involves the intersection of parts management, price management, workforce management, and knowledge management which must be seamlessly blended into a holistic discipline that provides outstanding customer service and value. This is complicated because parts, price, and workforce management involve forecasting, inventory management, and optimization and service management requires having the right technicians on staff with the right availability to not only install the parts but get the repair right on the first try. Thus, the solution also has to contain scheduling, routing, and workforce planning capabilities. In addition, the technician will require access to the knowledge she needs when and where she needs it, as well as at the appropriate level of detail.

Strategic Service Management needs to address all aspects of the service value chain (that may also include other suppliers, distributors, OEMs, dealers / value added resellers, and after market services) and not just the part or the price of the service. Strategic Service Management has to go beyond the short term issues of problem diagnosis, replacement part location and delivery, technician scheduling and dispatch, and price optimization and address the long term issues of regular part re-orders when inventory reaches threshold levels, appropriate workforce training and staffing, and performance monitoring to insure that price levels and service quality remain at an optimal level.

To make matters even more difficult, it has to be done across geographies, diverse customer segments, product types, various types of SLAs, various levels of customer commitments, and both company-owned and third-party resources. That's why the only way to effectively achieve Strategic Service Management is to either implement a dedicated SSM solution that addresses your issues or contract with your suppliers or a third party (who has such a solution) to do it for you. A spreadsheet is not enough - and, for that matter, neither is your ERP. (See The Complexities of Strategic Service Management for an explanation of why.)

Strategic Service Parts Management

Strategic Parts Management is the first area of Strategic Service Management that you have to master. When we break down right part at right place at right time at right price, we see that the first three parts of our definition revolve around parts management. Without a part to sell, there is no service, and price is irrelevant. Furthermore, it does no good to have a technician available if she doesn't have the parts she needs.

Strategic Parts Management is the alignment of planning, forecasting, and inventory management to make sure you can respond to customer needs as they arise, without costly expedited shipping, unnecessary wait times, or financial losses (that can result from service level guarantees or losing a sale because you can't meet the demand).

Strategic Parts Management might not sound that critical, until you consider aerospace or automotive. In aerospace, new commercial aircraft cost hundreds of millions of dollars, and it's critical that a plane spend as many hours in the air as possible to recover that cost, and even more critical that it not miss a scheduled flight and that all maintenance and repairs are able to be completed during scheduled downtime. Without extremely good parts planning, a plane can be grounded for days and cost a company millions of dollars in losses. Furthermore, it's not just the planes that are expensive - it's the parts as well. Many parts cost in the thousands, or tens of thousands, of dollars. This means that you don't want to be stocking more parts in inventory than you need because, in a squadron of 15 fighter jets or a fleet of 25 commercial airliners, excess inventory can lock up sufficient funds to literally buy another plane!

In automotive, production lines cost hundreds of millions of dollars, if not billions of dollars, and can easily cost a few million in lost labour, sales, and person-effort required to get the line operational again. In addition, if a line does fail, it's often the case that entire machines need to be replaced to get the line up and running again (because it can take too long to diagnose the component or part that caused the failure). These machines can easily cost hundreds of thousands of dollars and an inventory that is not optimized can lock up tens of millions of dollars in a warehouse, and chances are that money could be better utilized if it was part of the cash flow of the business.

This also brings up another key component of service parts management, the ability to manage replaced components and parts so that repairable components can be refurbished and re-used and defective parts returned to the original manufacture for credit, when applicable.

In addition, products can break down anywhere, and not necessarily in a location that is near your central warehouse. Therefore, if you have multiple storage locations and multiple service locations, you need to optimize the storage location for each part as well as the quantity. If it's a large fifty-thousand dollar part, and you only need three a year on average, you'll probably want to keep all of them in a central warehouse as express delivery is much cheaper than attempting to store one in the east, one in the west, and one near your biggest customer in the north, because it could happen that all four incidents that require an instance of the part happen in the south. However, if it's a small and relatively inexpensive part that you need ten thousand of them a year at customer sites all over the country, you'll probably want to store a portion of the inventory at each of your warehouses, but without a sophisticated forecasting and optimization solution, you'll likely come up with a solution that costs you more in re-distribution costs than it would have cost to just store them at the central warehouse and ship as needed.

A good Strategic Service Parts Management solution will enable you to model your entire multi-echelon demand network, which will likely include your primary (warehouse) locations, forward locations, forward-foward locations, etc. and allow you to include as many levels as you need in the model. The software will also allow you to specify your estimated demand at each location as this allows the software to come up with an inventory plan that optimally balances the storage cost of choosing a particular location against the expected shipment cost and the service level agreements that your company has in place.

Strategic Service Price Management

If the product isn't available, or is priced too high when a customer wants it, that can result in a lost sale as well as dissatisfaction that may prevent the customer returning to you in the future, but even if a part is available, you can still lose money if it's priced to high, or if your installation service is priced too high and you lose the sale. Similarly, if the product or service is priced below what an average customer is willing to pay, you're losing money. In order to maximize profit, your products, and particularly, your service offerings around the products you offer, have to be priced just right.

Strategic Service Price Management is the next are of service management that needs to be managed because, done properly, it will insure that your company's products and services are priced to maximize total profit. This component of strategic service management is critical because a well run service organization can produce margins of 20% to 50% and turn that overlooked post-sales service center, that used to be cost center, into a valuable profit center that enhances the total value of your company's offerings.

Price management requires the ability to employ optimization-based sophisticated pricing techniques and adaptive business logic because charging the most you can get restricts your market-base while charging the most competitive price could stretch your organization too thin. In addition, charging what was the right price yesterday might not be the right thing to do because market conditions constantly shift and it might not be the right price today.

The right price is hard to find because it's a function of how many potential customers could, and likely would, buy your product or service at a given price and the economies of scale you are able to leverage at a given volume. Furthermore, the function is often non-linear. For example, if you ran some advanced forecasting models and found out that you could sell 1000 widgets at $11, 2000 widgets at $10, and 2500 widgets at $9, but it cost $2000 to set up a production run that could produce up to 2,000 widgets at a variable cost of $5 per widget, the best price is actually $10 per widget (and not the high price or the low price) because that maximizes your profit. (You'd collect $11,000 in the first case, $20,000 in the second case, and $22,500 in the third case, but since it costs you $7,000 to make 1000 widgets, $12,000 to make 2000 widgets, and $16,500 to make 3000 widgets, you find that your profit of $8,000 on the sale of 2,000 moderately-priced widgets is 50% more than the $6,000 you'd make on 2,500 low-price widgets and 100% more than the $4,000 you'd make on 1,000 high-priced widgets.)

Furthermore, with services there is the added complication that service costs vary not only with the number of support staff (call center, technicians, supervisors) that you have to maintain, but the rate at which you are able to keep them utilized. In addition, services levels can vary with different levels of support staff utilization, which could affect future business. So, not only do you have the problem that you will lose business if you overcharge for your services, as your customers will go to a third party instead, but you also have the problem that if you undercharge, you may find yourself over-committed and unable to maintain your service levels and keep your customers who will get dissatisfied and still go to a third party. Plus, you lose money when your technicians are under-utilized or over utilized. When they're under-utilized, you're paying them to sit around all day doing nothing, like the lonely MaytagTM Repairman, and when they're over-utilized, you're either paying them expensive overtime, or, even worse, forced to bring in third party contractors to meet demand, which might cost you more than what you are being paid to deliver the service.

Strategic Service Workforce Management

Workforce management, as defined by Wikipedia, is a business process that encompasses all the responsibilities for maintaining a productive and happy workforce. A workforce management solution is a software-based solution that optimally plans and dispatches field service technicians and their properly stocked vehicles to a customer's location in a timely manner in order to deliver on their service commitments. Such a system will typically addresses demand management, workforce scheduling, workforce dispatching, and mobility solutions.

A workforce management solution should contain a planning component that forecasts workload to determine the appropriate workforce size, a scheduling engine that can automatically set and adjust optimal assignments based upon available data and available rules and update those assignments in real-time if a higher-priority service call enters the system, a web-based appointment request feature that allows customers to self-schedule, and a service mobility solution that not only enables workforce communication, but also allows the technicians to remotely indicate where they are in the delivery and repair cycle.

The scheduling engine should be built on an advanced modeling and optimization engine that can take into account dozens of variables that might include contract / SLA type, service level, customer priority, ticket type, visit number, severity, customer inquiry, and the length of time the service has been outstanding as well as transit times - which should be automatically computed based upon optimal routes computed by a GIS-aware engine that integrates with a leading third party mapping engine.

The workforce management solution must allow the user to define priorities and scheduling rules and take those into account in its computations, as well as alerts if a technician gets stuck in traffic (which can be detected automatically if the technicians vehicle has a GPS chip installed and the system monitors the current location against expected location on a regular basis) or an SLA is missed (because the technician wasn't able to make the repair on the first visit). If an alert is received, the user must be able to not only escalate the issue, but also be able to pull up the corresponding customer location so that she can alert a customer when a technician might be late or when the repair might not be able to be completed in the estimated time. Prompt issue notification and interaction goes a long way to keeping the customer happy as they know the service provider is on top of the situation. The administrators must be able to tweak the computation rules and algorithms to achieve maximum performance, which is obtained when the percentage of scheduled jobs that have to be manually adjusted is minimized. (In a good implementation, this should be less than 2%.)

The schedule viewer should support multiple types of user friendly views which should include your classic GANTT chart view with drill down for details into specific tasks, classic list and grid views with the ability to order the tasks on any dimension, and modern map views that allow the jobs to be viewed overlaid on a geographic area. In addition, the viewer should support multiple filter options that will include, at a minimum, period, priority, job type, and technician as well as color codes that can be associated with a key dimension, such as priority. When filters, color codes, and map views are combined, the user is able to quickly get a handle on the current status of all jobs he or she is responsible for, without having to wade through multiple multi-page reports. This not only substantially increases the productivity of a service manager, but insures that important issues are not overlooked until an SLA is missed or a customer gets irate and complains.

Finally, the workforce management solution should either come with an extensive built in reporting facility, or make it easy to export the data in a standard format (such as XML) for import into a Business Intelligence tool with an extensive reporting facility so that the service manager can track service level improvements and trends and insure that both service levels and cost reductions are trending in the right direction.

Strategic Service Knowledge Management

Knowledge Management is the process of identifying, creating, representing, and distributing knowledge to those who need it. It's a broad subject with definitions that focus on the technology, organizational, and sometimes even ecological aspects. As noted by Wikipedia, schools of thought include those that focus on intellectual capital, social planning, information theory, value networks, and even complexity while concepts tend to revolve around the dimensions of knowledge, the different stages of a knowledge-related activity where knowledge is required, and both structured and unstructured, planned and ad-hoc knowledge access.

The reality is that any definition of knowledge management will be contingent on the knowledge you need to manage and the definition that is right for you will be the one that not only addresses your issues but allows you to define and measure value. With respect to strategic service management, a knowledge management solution is one that allows your service personnel to access the knowledge they need, when they need it, and to contribute new knowledge quickly and easily to the knowledge base. It should also allow your customers to access the knowledge that is appropriate to them when they need it, in a format that makes sense to them. And it should be very easy to manage and maintain.

Specifically, it should make problems easy to diagnose and identify by a technician so that the technician can quickly get to a solution. To this end, it should support free search for advanced users, guided search for novice users, and direct solution access for expert users who know the system well. It should also support multimedia so that users can identify problems visually, and, if appropriate, audibly as well. The indexed solutions should be structured to not only allow information display at various levels of detail, but to allow a user to quickly jump to the portion of the solution that they need.

In addition, if the user has the right permissions, the user should be able to update the knowledge store on the spot - as this allows expert technicians to capture their knowledge as soon as they identify a new problem and a new solution. It should also include your standard "rate the usefulness of this solution" feature that not only allows users to give their feedback, but affects the order in which solutions are displayed, or queries asked, in future guided searches as the system should learn with each access. It should also incorporate natural language processing which allows a solution to be found even if the search terms aren't used as it is capable of identifying similar terms and concepts.

Strategic Services Sourcing

Sometimes the right answer is to maintain certain strategic and value-add services in house, and sometimes the right answer is to source those services, from a company that has mastered strategic service management. Thus, when it comes to services, the first question you need to ask yourself is when do I need to source services? To answer this question, you start by looking at the products you are sourcing and ask the following questions:

  • How strategic or mission critical are they?
  • Are they for us or an end-customer?
  • Are they simple or complex?
  • What expertise do we have with respect to their maintenance and repair?
  • What is our capacity?
  • How cost-effective is it for us to service these products?

If you were to answer:

  • Not strategic or mission critical.
  • Internal use only.
  • They're standard products available from half a dozen vendors.
  • It's more cost efficient just to replace them when they wear out.
  • We have enough support staff to handle replacement when necessary.
  • We need the office manager for other tasks anyway, so there's no real cost.

... as you might if we were talking about off-the-shelf laptops, then you would not need strategic services. But if you were to answer:

  • If it fails, a customer's production line goes down.
  • They are for our end customer.
  • It is very complex electronics.
  • We have two technicians who understand the products, and that's it.
  • Low (capacity). Our technicians spend most of their time doing initial installations and quality assurance testing.
  • Not very (cost effective). Our technicians are at the home office and most of our customers are in different cities.

... as you would if it was a custom-made control board for your custom-made machinery that ran part of a customer's production line, then you would definitely need strategic services. But if you were to answer:

  • They are strategic assets, and they would temporarily prevent the delivery of certain services if they go down, but they are not mission critical.
  • They are for our internal use.
  • They are moderately complex.
  • At least half-a-dozen of our technicians can repair them.
  • Our technicians have system maintenance as their primary jobs and with typical failure rates, we have the capacity to service these products ourselves.
  • Our costs for service are industry average.

..., as you would if we were talking about servers, SANs, and rack components in your data center, you probably wouldn't need the vendor's technicians, but you would need quick replacement of parts when they failed, as some of your internal, and external, services, as well as service levels, would be affected. In this case, you would need some strategic services, but not all of the strategic services the vendor was offering you.

Only once you figure out what you need with respect to strategic services management, will you know the answer to when do I source strategic services, which is when I figure out what strategic services I need, and only what strategic services I need. Then you can begin to address the how do I source strategic services question. In order to address the how do I source strategic services question, you start by separating out the different types of services that are available into those you can do effectively in house and those you cannot. Then, for those services you can manage in-house, you figure out the average cost of offering those services, as well as the average resolution time. The reason for this is that even though you can do the work in house, if it's not your core competency or core offering, if your provider can do it cheaper and better, you should outsource it. Then you insure that your supplier not only breaks out it's value added services from its core product offerings, but breaks down it's services into as many discrete offerings as possible and quotes each service offering separately. It's true that you will get a better deal if you buy service packages, but you first need to figure out what the right service packages are for you and, more importantly, whether or not the supplier is capable of offering at least the services you absolutely need at the levels you need them. For example, let's say that you are a Technology Consulting and Services Firm that supports big clients with their technology needs, be it desktop needs or data center needs, including outsourced data center management. Let's also say that some of your customers have mission critical services that need to be available 24/7 and that your technicians are certified on HAL and IQ but not on Moon, and that you only have enough HAL technicians on staff to confidently service the percentage of your customer base with platinum SLAs (Service Level Agreements) in house. This says that if you set up a customer's new data center on HAL technology, you probably won't need many services, but that you will take them if they are more economical than maintaining those services in house (which might require overtime or adding staff), that if you go with IQ, you will probably need some of their services and support, and that if you go with Moon, you will probably need a lot of their services. The following table breaks down what services you might need from each vendor:

Service Moon IQ HAL
24/7 support line X    
1 day on site service call X X  
guaranteed 4 hour part replacement X X X

Now that you know what services you can do in house, you need a cost. Let's define the costs as average cost per year, based on your internal metrics. Now our table might look like:

Service Moon IQ HAL
(A) 24/7 support line X $50K $40K
(B) 1 day on site service call X X $160K
(C) guaranteed 4 hour part replacement X X X

Now that you know what you will need, and might need, from each supplier, you can ask for quotes on what you will need by individual service and service package, by each vendor, and do an informed total cost of ownership analysis on each bid and select the right product and service package for your business.

In this simplified example, you'd ask Moon to quote on each service individually and as a package; you'd ask IQ to quote on each service individually, a package for the two services you need, and a package for all three services; and you might ask HAL to quote on each service individually, a package for the service call and 4 hour part replacement, and a package for everything. After this, you would have something along the lines of the following:

Service Moon IQ HAL
(A) 24/7 support line $40K $60K $50K
(B) 1 day on site service call $175K $125K $150K
(C) guaranteed 4 hour part replacement $35K $25K $30K
(B) and (C)   $140K $160K
All 3 services $225K $180K $210K

You'd then compare these total costs to hybrid costs where you kept some services in house, which would give you:

Service Moon IQ IQ w/ Int. Support HAL HAL w/ Int. Support HAL w/ Int. Support & Services
(A) 24/7 support line $40K $60K $50K $50K $40K $40K
(B) 1 day on site service call $175K $125K $125K $150K $150K $160K
(C) guaranteed 4 hour part replacement $35K $25K $25K $30K $30K $30K
(B) and (C)   $140K -- $160K -- --
All 3 services $225K $180K $200K $210K $220K $230K

And finally combine these costs with the hardware costs, which might be 240K for Moon, 270K for IQ, and 250K for HAL to get a total acquisition cost:

Service Moon IQ IQ w/ Int. Support HAL HAL w/ Int. Support HAL w/ Int. Support & Services
(A) 24/7 support line $40K $60K $50K $50K $40K $40K
(B) 1 day on site service call $175K $125K $125K $150K $150K $160K
(C) guaranteed 4 hour part replacement $35K $25K $25K $30K $30K $30K
(B) and (C)   $140K -- $160K -- --
All 3 services $225K $180K $200K $210K $220K $230K
Hardware Costs $240K $270K $270K $250K $250K $250K
Total Hardware & Service Cost $465K $450K $470K $460K $470K $480K

And conclude that, if all things were equal, the best deal would be to single source all hardware and services from IQ. However, we are talking hardware, where the total cost of operation usually exceeds the cost of acquisition when you add up all the energy requirements to run a server for a year AND keep it cool, so you'd also have to add an adjustment cost for expected energy consumption to find the very best deal, but you get the point.

I should also note that, as you saw from even this simple example, this is calculation heavy, error-prone if done by hand, and not spreadsheet friendly. That's why you'd use strategic sourcing decision optimization software to do this analysis, as you could define, for each supplier, which services you'd need from that supplier if the supplier was selected (because you can't do them in house), and which services could be done in house. You can also define the cost of each service individually and then define discounts for different packages offered by the vendor. And building in cost adjustments for the differences in energy consumption would be a snap.


Author(s)

Michael Lamoureux, Ph.D. Sourcing Innovation

References

Complexities of Strategic Service Management
Michael Lamoureux, Sourcing Innovation, June 19, 2008

MCA Solutions - A Strategic Service Parts Management Platform
Michael Lamoureux, Sourcing Innovation, April 24, 2008

Servigistics - Tomorrow's Strategic Service Management Today
Michael Lamoureux, Sourcing Innovation, February 20, 2007

Strategic Service Knowledge Management a la Servigistics
Michael Lamoureux, Sourcing Innovation, ??? ??, ????

Strategic Service Management
Michael Lamoureux, Sourcing Innovation, February 19, 2007

Strategic Service Parts Management
Michael Lamoureux, Sourcing Innovation, February 23, 2008

Strategic Services Sourcing I
Michael Lamoureux, e-Sourcing Forum, ??? ??, ????

Strategic Services Sourcing II
Michael Lamoureux, e-Sourcing Forum, ??? ??, ????

Workforce Management: A Servigistics Approach

Michael Lamoureux, Sourcing Innovation, June 24, 2008

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