The relationship between customers and suppliers of mission critical products is evolving, becoming much more focused on product performance and the value that products deliver.  While traditional contracting mechanisms are based on the sale of the product and of high margin support services, performance-based approaches allow customers to pay only for actual use or “up-time” of the products. 

In the commercial world, performance-based contracts have emerged, perhaps most visibly by companies like Rolls Royce and GE Aircraft engines in their “power by the hour” contracts.  The military world is rapidly turning to performance-based relationships, commonly called performance-based logistics (PBL).  For example, (the) Boeing IDS and the U.S. Navy have a PBL contract for supporting F/A-18 E/F aircraft.  Under the contract, availability increased from 67 to 85 percent.  Europe’s aerospace and defence industry has realised comparable results, and interest in PBL programmes continues to grow throughout the global maintenance and support sector.

Development of a product performance-based service support business model requires consideration of several factors, which include:

• The service support environment
• The resource planning framework
• Organisational coordination

This article will review these areas and introduce a framework for resource planning and service product design that has been developed to support both performance-based and more traditional service level based support environments.

Organisations that pursue a performance-based approach see a significant value proposition for both the end customer and the supplier.  The end customer outsources maintenance of the product to a supplier who can leverage efficiencies in the supply chain and maintenance processes, and who is financially incentivised to improve performance and utilisation of the system.  The supplier develops an ongoing revenue stream for maintenance of the product that is tied to the value that the product generates.  The supplier also gains increased insight into the use of the product, driving valuable feedback to sales and product development. 

This connection to the end customer is critical in Europe as deregulation in some industries has reduced the end customers’ dependence on the OEM manufacturer for aftermarket spares and support, creating a much more competitive environment.  The trend toward more outsourcing is also well established with the MRO industry worldwide and Europe in particular.  As airlines and military customers look to providers to own assets and operate support processes, often through highly decentralised supply chains, performance-based relationships hold the promise of allowing all players to work together to reduce costs and increase customer value.

Environment

The service support environment is incredibly complex, evident by the following diagram: Figure 1

It shows a multi-echelon service supply chain with inventory positioned at central locations for efficiency and at forward locations near the customer to ensure rapid responsiveness to product failure and increased product uptime.  Determining the appropriate deployment of support resources (such as parts stocking levels and repair capacity) is critical to customer satisfaction.

Some of the other elements unique to the service supply chain are:
• Reverse logistics and repair flow
• Demand for high levels of uptime
• Attention to the complete product lifecycle
• The need for coordination across suppliers

As the industry moves toward a customer-centric, performance-based paradigm, we will see performance metrics moving from internally focused measures such as distribution center part fill rate, to product up-time as experienced by the customer.  The level of coordination required between supply chain players will also escalate.  Customers, OEMs, service providers and suppliers of components and support services will all be measured on how they contribute to the end goal of customer value generation. 

Framework

There has always been a high level of uncertainty and risk associated with the management of resources needed to support products in the post-sales environment.  In the performance-based world, ownership and responsibility for decision making will shift as all players in the supply chain seek to maximise their benefit (i.e. profit for suppliers, value for customers) while meeting contractual commitments.  Regardless of the incentive structure, it is critical that organisations adopt a resource-planning framework appropriate to this new environment. 

Budget Planning drives the overall service strategy and decision making for after-sales service support, with typical timeframes in months or years.  Budget planning helps answer the following questions:
• What are the terms of the (performance or traditional) contract offering and what will be the costs to deliver to it?
• What are the optimal product and supply chain configurations to cost-effectively deliver service?
• What products should be supported and at what level?
• What is the correct relationship among suppliers, customers, and service providers?

A key requirement for long-term budget planning, contract negotiation and resource investments is the ability to rapidly predict the impact of alternative strategies and programs.  In order to effectively do that, budget planning must be coordinated with shorter-term decision-making processes, including:
• Strategic planning – the positioning of resources such as service parts inventory and labor resources to meet service objectives
• Tactical planning – the deployment decisions associated with re-positioning resources to meet the service objectives and resource levels defined in the strategic plan
• Event management – the fulfillment of post-service event-based demands for resources (part failure leading to the demand for replacement)

As more companies move toward performance-based environments, an effective resource planning framework will become even more important.  Failing to meet service support resource requirements will immediately affect the customer’s ability to generate value from the product.  And if the product isn’t working, the supplier doesn’t get paid.

Coordination

Having appropriate tools to manage a performance-based service support environment is necessary but not sufficient to effectively manage this challenging environment.  In addition organisational coordination is needed in areas including the following:

Sales:  In selling performance-based contracts, the sales team must be tightly aligned with the service organisation to ensure that commitments made are achievable, and that the contract is profitable for the company.  Sales success is more tightly linked to customer satisfaction, ensuring that the entire company is focused on increasing the value that the customer gets from the product through its lifetime.

Product Development:  In performance-based contracts, higher reliability from the product reduces the cost to support and is borne by the supplier.  In shorter term, product improvements are made because the supplier gets immediate feedback on failure and its causes, and longer term, reliability is considered in new products to ensure lower long-term supportability costs.

Performance-based support can drive tremendous benefits for companies who design, implement, and manage them effectively, and puts the service organisation in the drivers seat for ensuring customer satisfaction, providing valuable feedback to organisations, and ensuring long-term growth and profitability for the company.

Bottom Line

Linking supplier rewards to customer performance will change everything.  Incentives will be aligned leading to new investments to enhance performance and improve planning and execution processes to deliver value.   This new approach to post-sales support has the potential to revolutionise service supply chain planning in Europe, and across the world.