Six years ago, Sean D. Perry was practically swimming in oil filters. The inventory and parts manager for Subaru of New England Inc., a network of 63 independent auto dealers, had clear orders to follow: Keep no fewer than 100,000 of the $3 cylinders on hand at any time. After all, they were his shops' most heavily used part. Yet even as he stocked up, delays and shortages for other, less in-demand parts still cropped up. And the expense of holding so many filters was huge: Perry had $300,000 tied up, part of an inventory of components worth about $15 million.
To get a handle on the 40,000 different parts Subaru carries, the company invested in software from Atlanta-based Servigistics Inc. Using databases, statistical models, and forecasts, the software told him how many of each spare he had, how many he needed, which ones broke down most frequently, and when to reorder them. Suddenly, Subaru's New England parts operation went from pad-and-pencil guesswork to an automated system. Today the number of oil filters on hand hovers around 17,000. The total value of inventory has dropped to about $7 million. And service sales at the 57 dealerships using the software jumped 30%. "Our dealers have increased their sales because they have so many more of [the right] parts on hand," explains Perry.
Nestled quietly in depots and warehouses across America is an industrial niche that few people have heard about: the maintenance and repair services market. From truck giant Volvo (VOIVY) to PC king Dell Inc. (DELL), thousands of companies have billions of dollars tied up in service parts inventory. Yet few have learned how to manage their service departments -- and the parts they use -- with the same efficiency that characterizes their supply chains or factories. Servigistics and a handful of other software outfits such as Xelus and MCA are out to change that. In the process, they're turning many service departments from black holes into savings leaders and even profit centers. "Service parts management has become much more critical to profitability," says Dwight Klappich, global trade analyst at Gartner Inc. (IT)
Led by Eric Hinkle, a former McKinsey consultant with a Harvard MBA, and founder Mike Landry, a math wizard from the Georgia Institute of Technology, Servigistics is a parts management masterpiece, say customers. In the company's Web-based software, so-called optimization routines can scan massive amounts of data on stock levels, parts costs, and sales across many locations, and spit out practical advice about how much to reorder and what to charge for it.
Buoyed by about 50 blue-chip clients, including Sun Microsystems (SUNW), Honeywell, Maytag, and General Motors (GM), sales at the privately held six-year-old business are expected to approach $25 million this year, up more than 60% from 2004. Says Hinkle, 45, Servigistics' chief executive: "The service side of the business is tremendously underinvested in technology."
That's bound to change as the success stories multiply. At corporate phone network operator Avaya Inc. (AV), Servigistics software has helped slash the number of raging e-mails the company's CEO would get when big clients such as General Electric Co. (GE) had trouble with their Avaya phone systems. With 2,000 stocking locations worldwide processing 8,000 phone and network parts, Avaya's service department managed a huge logistics spiderweb. Until three years ago, however, parts were tracked on a simple Excel spreadsheet -- which meant that Avaya technicians had the right ones in stock just 39% of the time. "It was an absolute disaster," says Jeffrey S. Gardner, Avaya's director of global service operations.
Today, it's a different story. Servigistics' software lets Avaya see what parts are in stock in key locations around the world -- and radically cut inventory. That has sent Avaya's fill rate (the percentage of customers' orders filled from stock) above 95% and cut gross parts inventory from $250 million to about $160 million, a drop of 36%.
Quick results and big cost savings from smart service parts management is turning the software segment into a hot commodity. And it's helping companies such as Dell boost service revenues. All told, sales of service parts planning software jumped 20%, to $140 million, in 2004. Analysts forecast an additional 24% uptick this year. In contrast, sales of supply chain management software from the likes of SAP (SAP) and Manugistics Group Inc (MANU)., which generally streamlines the flow of new materials to assembly lines, expanded just 3% last year, to $2.1 billion, according to Gartner Inc.
Software to support after-sales services will continue to grow quickly. More and more companies are selling a service contract together with every product, says Kenneth L. Ruggles, research director at AMR Research Inc. in Boston: "Companies are installing the same discipline in service parts that they have in the supply chain."
For its next act, Servigistics will focus on pricing. The company recently integrated a newly acquired program into its software platform that allows clients such as Kia Motors America Inc. to know if it's charging too much or too little for parts. Servigistics software can compare prices on parts in the Kia Spectra sedan against competitors such as Toyota's Corolla and parts retailers like Pep Boys. This year, Kia is raising the sticker on some underpriced Spectra bumpers and wheel bearings to match the competition, and expects to net $300,000 in extra profits in the process. That means the once helter-skelter business of service parts management could become slicker still.
By Brian Grow in Atlanta