Wednesday, January 13, 2010

58,976 – Transformational Objectives For 2010, Part 2

By Harry Hollenberg and Michael Sachs

You will recall that last week we started the discussion about transformational objectives. The key message was that it is more important to set an aggressive but plausible target than to endlessly debate which one is right or whether the one chosen is perfectly relevant. We set out to tackle target-setting for the entire service parts enterprise. To that end, we covered the following topics last week:
  • Supply Chain
  • Sales and Marketing
  • Service Engineering
This week, we will wrap up this topic by discussing the following topics:
  • Service
  • Revenue Management
Service – Service is the most secretive and introverted of the aftersales subcultures. It is probably the most important organization in a motor vehicle organization – simply because stuff breaks and customers want it fixed now. What are the transformational metrics here?
  • Owner service satisfaction impacts whole goods, parts, and service repurchase loyalty: best-in-class as measured in the North American Service Operations Forum (NASOF) for customer pay work is 83%. (Surveys vary among OEMs and there is no concerted effort to eliminate dealer “gaming” of the surveys. So, we have a long way to go in this area – but, in keeping with the spirit of Cat’s 58,976, we should not skip this one because it is flawed.)
  • Fixed-right-the-first time ratios have a direct impact on customer satisfaction and customer retention. Here, the metric is not FRFT, so lower is better: best in class at NASOF is 4.4% of vehicle visits .
  • Overall dealer service manager satisfaction is a pretty good surrogate for how well things are going with dealer service support: best-in-class overall NASPC service manager satisfaction is 97.6%.
  • The litmus test satisfaction survey response for service managers is technical support – this is critical in fixing it right the first time: The BIC for the NASPC service manager survey is 96.7% satisfaction with overall technical support.
We hear a lot about service capacity as being a key transformation factor. However, the numbers do not support this. Service technician capacity and efficiency certainly can be a choke point at the dealer and impact service satisfaction and repurchase loyalty. However, there is really no correlation between capacity and owner satisfaction. The company with the highest reported level of customer service satisfaction has “best-in-class” 300 new-to-7 year old UIOs per dealer service bay. If your number is less than this, you don’t have a service bay capacity issue.

Revenue Management (RM) – This area is too often overlooked. Each OEM needs to regularly price what could be over a half-million part numbers in a manner that optimizes its margins. What do “optimized” parts prices mean? It means that customers are OK with it, any possible volume losses are acceptable, and the margin improvement potential dwarfs anything else we could do. How do we know if we are any good at it? We tend to go to our pricers and ask them how good we are. They typically respond that they are doing everything they should be doing and can respond brilliantly to a long list of “are we?” questions.

The problem here is that gross margins are terrible metrics to use for setting transformational objectives – they are the result of a simple arithmetic calculation relating costs (might be too high or too low) to sales (might be too high or too low). Rather than results metrics, we need to focus here on process metrics – sort of like a Seventeen magazine 10-question quiz about the quality of boyfriends. Few have organized revenue management as a core competency. Here’s the 10-question quiz – best-in-class score is 10.
  1. Segmentation enables you to optimize revenue for like-acting parts. Do you use rules driven categorization of parts into competitive, internal, and less competitive segments (Possible metric: Split of competitive/less competitive parts/revenue)?
  2. Market Research enables you to check on how well your prices and margins match with relevant competition – the operative word here is “relevant.” Do you have a consistent process to collect market research data and use it in pricing decisions (Possible metric: % of parts with market research/competitive info)?
  3. Pricing Strategy should be developed for each separate segment with incredible precision to optimize margins. Do you use a defined pricing strategy to price parts in each segment (including dealer margins), driven by pertinent market data (Possible metrics: % parts above and below target/benchmark price; average price premium or discount relative to market benchmarks)?
  4. Revenue Management Organization that is highly capable, skilled, and well equipped is the only way to get all the work done – hotels and airlines have really focused a lot of investment here. Do you have defined roles and responsibilities for pricing (Possible metric: part numbers per pricing headcount)?
  5. Life Cycle Management is critical for optimizing margins, because it recognizes that parts transition from one RM segment to another over time. Do you move parts from one segment to another based on specific triggers, such as volume changes, age, etc.?
  6. Pricing Workflow Management is critical for effectively managing the sheer enormity of the RM process. Do you have alerts and approvals?
  7. Margin Management by Segment provides a cross-check of the outcomes of pricing strategy (#3). Do you have relatively higher margins on less competitive parts and lower margin on competitive parts?
  8. Promotions Management must be incorporated into revenue management and pricing, because of the impact this has on the bottom line. Do you have a rule book and process to structure and evaluate future promotions?
  9. Terms and Conditions Management also must be included as a part of revenue management because of its huge bottom line impact. Do you consider the costs and benefits of your terms and conditions in managing your revenue?
  10. Product Coverage Effectiveness allows you to climb on top of the mountain and assess the competitive landscape. Do you actively track market size and share by key product segments?
Bottom line. We’ve provided you with a set of metrics that you can use to set transformational objectives across the OEM aftersales business. Your job now is to identify those areas most in need of transformational change, set objectives, and strive to achieve them. Pick your metrics and objectives with care, but don’t spend weeks arguing over the details.

To help you get started, NASPC conference participants can email Brian Crounse ( and ask for our Transformational Objectives Scorecard. It is a spreadsheet with these (and last week’s) metrics, with BIC and worst-in-class (WIC) filled in. Key in your numbers and see how well you do. Non-participants are also welcome to call to learn more.

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