By Jim Tompkins, CEO, Tompkins Associates
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Hello, this is Jim Tompkins, CEO and President of Tompkins Associates and Tompkins International back with you today for the 4th podcast in our 10-part series on Profitable Growth.
Today I am pleased to have with me Shibesh Banerji, a Principal at Tompkins Associates. Shibesh will be discussing with us how Service Supply Chain could be strategically positioned in your organization to support profitable growth.
Shibesh, glad to have you with us. Let’s get right to the topic.
Jim:
Can you first help clarify the term Service Supply Chain vs. Reverse Logistics?
Shibesh:
Jim, this is a classic debate about defining the scope. However, it is a great question to kick off this discussion.
Service Supply Chain incorporates all the activities which take place prior to or after a product is sold to the customer. They are required to support the product during its useful life and beyond. For example, in case of return of a product receiving, capturing its manufacture number / lot number etc, inspecting, sorting, despositioning, transporting, repairing, refurbishment, components recovery demanufacturing, recycling and all the down stream activities. Reverse logistics technically is just a small part of the service supply chain i.e. logistics to support returns.
However, people who have spent a lot of time in the industry can relate to all the earlier mentioned activities under Reverse Logistics; however that is not true for everybody. Therefore, it is for the benefit of all we would like to clarify that service supply chain incorporates everything from “womb to tomb” where as reveres logistics could have different meaning for different people.
Jim:
Shibesh, I am not sure that managing returns is where companies want to focus their energy. Don’t you think this is too much of a headache? Isn’t it just as easy outsource that piece and stay away from the entire process?
Shibesh:
You just touched upon the most important reason why most organizations pass up this great opportunity and outsource these key activities. Receiving returns, processing broken boxes, dispositioning them and all other downstream activities are not very exciting for many businesses. In many of organization these activities are performed by lowest paid resources.
Now let’s, for a second, dissect the anatomy of profit - you need to first have happy and satisfied customers in order to sell a product and in-turn make profits. After the sale of a product where do you get an opportunity to interact and delight the customer so that you not only retain that customer for future but also recruit a spokesperson for your product and services by serving their post sale needs.
Therefore, in order to constantly interact with existing customer and delight those with positive experience organizations need to have better control over the processes which enable those interactions. These processes could be warranty support, out of warranty repair, real time problem resolution, fields service support etc. Service Supply Chain organizations ensure that all back-end processes are executed and measured for optimum results.
By no means am I suggesting here that companies bring these activities in-house. I am suggesting that every company needs to make decisions considering their long term strategy. If they decide to outsource these activities, it should not be done with intent to achieve short term financial gains, but with intent to developing long term sustainable and consistent quality solution centric towards customers.
Jim:
Shibesh, what data points do you have which could help businesses consider service supply chain to be part of profitable growth strategy?
Shibesh:
We have data collected and analyzed by researchers thatsuggests profit margins for a traditional product oriented organizations normally range between 3% - 7%. Whereas margins for service line of the business within the same company could range as much as three to five times higher. In one of my previous organization services represented less than 7% of revenues while contributing more than 40% of profit margins.
Therefore, these numbers suggest that if a company would like to grow while making more profits, Service Supply Chain presents a great opportunity to achieve both, not to mention its positive impact on customer delight and retention, as discussed earlier.
Also, companies may choose to bring in some part of service supply chain in-house and outsource other parts. With many organizations working with limited resources, at times they may need external help to make these decisions.
Based on their decision there could be multiple paths to implementing the solution e.g. if a company decided to bring in repair and refurbishment in house, they could accomplish this by either acquiring an existing industry player or developing these capability organically. Both the decisions may require implementation support.
Currently, many companies are on “wait and watch” mode. However, it may be too late for few of them if they try to postpone their decisions and other pro-active companies grab the opportunities.
Jim:
Can you please give me some examples that can help me understand why organizations are not able to see the potential of this “golden goose”?
Shibesh:
We finished a focused survey which suggested that only 40% of the companies have dedicated organization for service supply chain. Others have these activities either performed by multiple organizations or by forward supply chain departments. Also, very few companies in our survey tracked their cost by activity. This means they could not tell how much they spent to receive a returned product, process it, transport it, etc. In essence, if you do not know your cost, then how do you expect to control it?
Second, most organizations treated their services organizations as cost center instead of profit center. As you may be aware, Best Buy identified the potential of the space and transformed its service organization by bringing many activities in-house and in-turn converting the organization from a cost center to a profit center.
Thirdly, most organizations do not realize the differences between Service and Manufacturing supply chains. Implication of service supply chain on new product design, manufacturing and post sale support are critical. Automotive industry is a great example where a single product modification could result into increase in inventory across the supply chain worldwide.
The issue gets more and more involved as you add considerations for packaging, repair and sustainability.
Jim:
That was great, as I see the same thing happen in many other industries as well. What are you seeing as future trends?
Shibesh:
I am seeing an increased interest among Fortune 500 companies to explore the service supply chain space, be it for repair, refurbishment, recycling, component harvesting or any other downstream activity. Not only to improve their top and bottom line but also to contribute towards their sustainability commitments.
As you may be aware, the Environmental Protection Agency (EPA) is working to help limit harmful exports that are happening under the name of legitimate reuse, refurbishment and recycling. They are doing this through a combination of legislation and regulations.
This is going to open up many opportunities for US businesses for recycling and harvesting precious metal and other commodities. Even with evolution and growth of battery technology, industries supporting battery disposition are going to undergo an unprecedented growth cycle. Therefore, this is the time for companies to be part of action rather than watch from sidelines.
Jim:
Shibesh thank you for being with us today. I look forward to speaking to everyone again in about two weeks as we continue our Growth series. Joining me at that time will be Darius Zand, an expert on Enhancing your Supply Chain, out of our office in Germany. Speak to you soon.
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