Incorporate strategic service management and
reverse logistics into your cost-reduction program
You’ve pared your operating costs to the bone, your logistics and supply chains are thrumming like well-oiled machines, and your workforce is sized to perfection. You’ve maxed out your production capacity and streamlined your lines. What else can you do to reduce costs while continuing to grow profits?
A few answers: Don’t try to sell more product lines — try to reduce the number of products that are returned and stop thinking that customer service ends at the loading dock. In other words, incorporate strategic service management and reverse logistics into your cost-reduction program.
Strategic service management
One of the core principles in strategic service management is that post-sales service and support can be a manufacturing profit center. Companies that use strategic service management see customer retention and service response time as key performance indicators.
For example, simply optimizing the routing and scheduling of service technicians can lead to significant savings and improved service. If you pay an average of 50 cents per mile for every service truck on the road, and you have a fleet of 250 vehicles traveling an average of 39,000 miles per year, you’re spending $4,875,000 annually to keep them rolling.
If you can cut 25% of those costs by ensuring your technicians don’t spend half their time backtracking on their routes, you’ll save $1,218,750 in vehicle costs alone. Add the time savings and the additional calls the technicians can make as a result, and the savings are even more impressive.
And if, on top of that, you can improve your service teams’ first-call resolution rates, you’ll be approaching best-in-class performance.
Effort required
Achieving strategic service management nirvana is not effortless. It requires significant up-front work and frequent follow-up measures.
A senior-level service executive must lead the process. Under his or her direction, your customer service team should develop systematic processes to capture customer-specific information that can be used to determine requirements and allocate resources.
Ask customers what they expect from your company, as well as what they need, and then devise service agreements and align internal business processes to meet those requirements. Next, tie what you learn to employee compensation. Set financial, operational and customer retention/service goals and reward employees for meeting them.
For example, perhaps your customers want to receive their orders faster. Offer your shipping and loading dock workers a bonus for cutting 10% from the time it takes them to package and load orders.
For greatest improvement, consider automating functions such as service parts management or warranty management. Anything you can do to make repairs and returns more convenient for your customers can pay big dividends in customer satisfaction.
Reverse logistics
Speaking of returns, the best way to make them more efficient is to eliminate them. The Aberdeen Group estimated in 2008 that product returns cost U.S. companies up to $100 billion a year — an estimate that may be low, as reverse logistics costs often are hidden among business functions. According to Aberdeen, some manufacturers have established separate returns management groups to reduce the costs associated with returns that can run as high as 30% in some instances.
In conjunction with reducing product defects and shipping miscues that cause unnecessary returns, examine how returns are handled when they do occur. Standardized processes can help avoid misrouting and attendant transportation costs and delays.
Also consider an automated system as the cornerstone of your returns gatekeeping process. If a customer is returning a cell phone because it’s three years old and due for an upgrade, you may want to route it to a site different from those designated for phones being returned because they’re defective. Asking the customer to tell you the reason for the return up front enables you to send the proper address labels or other information the first time.
Change your perspective
As you become more adept at improving production and operations, you should look beyond the tried-and-true in your efforts to stay competitive. Strategic service management and reverse logistics programs may offer the first glimpse of a bright future.
Chris Green, CPA
Partner, Manufacturing & Distribution Service Team Member
