Spending time with very diverse sets of businesses—from Combatant Commanders in the military to a dishwasher repair business, the obvious facts continue to haunt me—and probably a huge amount of business people—is the lack of real information about what happens to products once they leave the manufacturer. From a hot bumpy ride (RFID sensors, anyone) to a lost shipment bound for Iraq, everything that happens has some kind of relevancy to a host of business people, product designers, quality engineers, logistics firms, aftermarket managers... oh, and did you mention the customer? Everyone seems to want the data, yet so little is known.
There is a whole series of structural reasons for this.
First, many user organizations have a stovepipe procurement process where the purchaser (or the original equipment) is not the same person maintaining it. So information about performance on the plant floor or in the field may not be known in headquarters. Also, many products don't stay with their original owners, making their way to new buyers—from huge used car networks to ebay. The recent commercial where the father is quizzing the automobile to determine if it will take good care of his daughter highlights this issue.
The converse of this is also true. The OEM's service business is disconnected in process, systems philosophy, accounting, etc. In fact, today much of the last mile service businesses may be outsourced. Though best practice says we get connected for the total life cycle of the product, only the very best and very rare of entities can boast this.
Lack of integration between logistics and repair. Getting the stuff to the point of breakdown is a nontrivial exercise. Vision of FedEx packages with laptops might be great for consumer electronics, but large components of aircraft, power generators, even autos—well they don't get there in a mailer—may require a hard day's night, or weeks of travel to get to where it is needed.
Performance-Based Management Philosophy Will Transform Business
In recent years we have gone through a life cycle of improvements in the service infrastructures. And with more and more manufacturing moving offshore, the need for still more local service providers is evident. Long life products are particularly expensive not only to repair, but many businesses maintain significant backup parallel equipments just to offset the vagaries of downtime. But that stuff's expensive! And the tolerance for this is wanning, with economic pressures increasing. We just don't have an unlimited amount of capital—and it is possible to get much better performance. Imagine the average household buying a backup auto, dishwasher, TV, and all their appliances, because the uptime on these products was less than 50 percent and they had to have a backup while their furnace was in for repair.
Moving to a performance-based business model will have huge implications for the whole value chain. Firstly, it's giving customers what they really want. As someone once said, "our customers don't want drills, they want holes!" Having said that, it means architecting your processes and technology, from the point of performance back. Rather than pushing our parts through distribution networks, it's predicting performance, building products better and sensing or predicting when they will fail—before they fail—and then averting downtime.
The implications are profound and don't make everyone feel happy about this.
More uptime means less sales of original equipment.
The DoD, for example, is beginning to write contracts for these "Performance-based Logistics" weapons systems, like the Joint Strike Fighter, etc. Performance-based Logistics is a leading-edge approach to managing complex supply chains. Its principle is to manage for outcomes—procure performance rather than parts and people. It requires total business process reorientation from servicea and maintenance through procurement techniques, as well as the IT platform for integration. Technologies that allow predictive management dramatically improve the DoD's ability to predict and prevent weapon system failures. This includes the addition of sensing and monitoring technologies for both new and legacy weapon systems, and incorporates consideration of operational and environmental factors in preventative maintenance. It also includes data gathering and transmission in a distributed environment, and represents an integrated approach to driving weapon systems availability.
Many IT-focused businesses already have this approach as a core tenant. If you outsource your data center to SUN, Unisys, etc., you are not particularly interested in details, you expect uptime. SUN has done a good job of marketing this approach—access anywhere—total performance to their customers. Real-time sensing tools, performance analyses, and remote diagnostics have all been part of this model for some time.
Owning or managing more of the logistics process.
So, an OEM will sell less parts—less original equipment, but increase service. Less parts can mean JIT Logistics, if you will. So planning systems like multi-echelon planning play a prominent role here as well. What is the best network and how do I position inventory best? Many OEMs are starting logistics businesses, either with partners or moving into them on their own. Good product companies who may not have overly thought about supply chain excellence, now have to be just that—excellent.
The IT business.
Performance-based management is an information-intensive play. The information at the point of performance is key to so many partners, processes, etc., but the challenge will be how to get that data. On-boarding diagnostics technologies embedded within the product, and then integrating that intelligence through a network provides not only the pinpoint data, but also allows the various entities who need the information access to synchronize the whole execution process as well as feed demand, product quality, etc.
Change in Revenue Model:
Many firms will also need more knowledge—not just on what to do—but how to make money at it. From selling equipment and systems to leasing and transaction fees, in businesses where they may not adequately understand the business model—what to say, what it takes to provide stellar performance—will challenge firms who will attempt this. Understanding the path and practices of firms who already deliver in the model—at least at a foundation—will provide some guideposts. But managing an industrial facility, versus a data center versus an automobile repair center versus a thirty year weapons system, all have their unique attributes, as well as winning the supply chain components to ensure the complete seamless efficient model.
There is gold in this model, though, not just in added services to charge for, but in customer retention and an exclusive feedback loop to your product developers for the next generation of 'satisfiers' in the killer product.
The Value Shift:
Managing performance—sustained, responsive, and customer centric—changes the way we think about, procure, and manage supply chains. This value shift to the real desired outcomes, performance-based management (PBM), has a dramatic impact on the design and cost of supply chains, as well as how core suppliers and OEMs design, build, and service their products. It changes the business models of the enterprise. Policies, processes, and IT systems that are designed around building, buying, and moving assets with material as their core will change to performance as the core. Integrated, visible processes allow the sensing and seeing of what is needed, rather than over procuring equipment or overstocking inventory. Technology innovation is creating capabilities supporting the next shift toward this performance-based approach.
Partnerships in the value chain—sharing of knowledge, process innovations, and technology concepts, as well as the building of agreements, will be bedrock to the success of performance-based business models. The data is housed in too many locations, in too many enterprises, in all level of aggregation, formats, etc., for partnerships not to be essential to performance-driven business models.
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