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A Report by the Indian School of Business, New York University,Purdue University, and Deloitte Research
The Service Revolution
in Global ManufacturingIndustries
A Deloitte Research Global Manufacturing Study
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Table of Contents
Executive Summary ...................................................................1
Driving Proftable Growth Through the Service Business ......3
The role o the service business in global industries ............. ...4
The impact on protability and growth .............. .............. ......5
Building a Block-Buster Business Through Service
Excellence: Challenges and Opportunities ..............................7
Strategy and business design: Laying the oundation ............ 7
Operations planning and management: Enabling
service excellence ..................................................................9
Execution: Delivering service excellence one customer
at a time .............................................................................0
Leaprogging through process collaboration and
technology maturity ............................................................2
Why Now: Chasing the Changing Basis o Competition
in Manuacturing .....................................................................15
Conclusion ................................................................................16
Appendix: Survey Methodology and Respondent Profle ....17
About Deloitte Research
Deloitte Research, a part o Deloitte Services LP, identies,analyzes, and explains the major issues driving todays
business dynamics and shaping tomorrows globalmarketplace. From provocative points o view about strategyand organizational change to straight talk about economics,regulation and technology, Deloitte Research deliversinnovative, practical insights companies can use to improvetheir bottom-line perormance. Operating through a networko dedicated research proessionals, senior consultingpractitioners o the various member rms o Deloitte ToucheTohmatsu, academics and technology specialists, DeloitteResearch exhibits deep industry knowledge, unctionalunderstanding, and commitment to thought leadership. Inboardrooms and business journals, Deloitte Research is knownor bringing new perspective to real-world concerns.
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A business absolutely devoted to service will have only one
worry about prots. They will be embarrassingly large, HenryFord, ounder o one o the worlds largest manuacturing
companies, once said. Decades later, however, companies
are still struggling to heed this advice. Manuacturers are
looking or growth and prots in all corners o the globe, but
they oten neglect the very large opportunities much closer to
homein their own service businesses.
Conronted by low-cost competitors, the escalating complexity
o their global supply chains, and ever-increasing customer
demands, manuacturers ignoring the needs o the service
business do so at their peril.2 As the basis o competition in
manuacturing continues its shit towards service excellencethe ability to drive business perormance through excellence
in service and parts managementthey are eectively putting
their entire business models at risk.
Over the last year, we have benchmarked the service
businesses o many o the worlds largest manuacturingcompanies with combined revenues reaching more than
US$.5 trillion. In industries ranging rom aerospace and
deense and automotive to high technology and diversied
manuacturing, we have studied the strategies, operations, and
processes, as well as the tools and technologies being adopted
to drive service excellence. By exploring the actors underlying
success, we are able to provide a perspective on the challenges
and opportunities or building and sustaining protable growth
through excellence in service and parts management.3
Across the manuacturing companies we have benchmarked,
services revenues today represent an average o more than
25 percent o the total business. In many companies, as or
Rolls-Royce plc and Xerox Corporation, the service business
contributes 50 percent or more o total revenues.
Even more importantly, the average protability o the service
businesses benchmarked is more than 75 percent higher
than overall business unit protability, and accounts or an
estimated 46 percent o total prots generated today.4 In act,
in many manuacturing companies there would be little or no
protability without the service business.
Our analysis suggests the untapped potential or growing
prots through the service business is immense. But mostcompanies ail to grow their service business. More than
two-thirds (67 percent) o companies are growing their service
businesses at the same rate as, or slower than, their overall
business. In essence, they are managing a high growth
potential star business as a slow-growth cash cow. The
median company benchmarked secures only 40 percent o
the ater-sales service market and 75 percent o the ater-
sales spare parts market in servicing its own installed base o
Executive Summary
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products (the captive market). For many companies, such
as automotive original equipment manuacturers (OEMs),
these shares are oten much lower. In addition, only a ew
OEMs have made signicant inroads in servicing non-captive
customersa market that is typically 2 to 0 times larger than
the captive market. The challenges are many:
Instrategy and business design, most companies
struggle to build the oundation or service excellence.
Few have sucient insight into the barriers and
opportunities or driving protable growth through
services, which makes it dicult, at best, to develop the
right strategies, identiy the right priorities and invest
suciently in the service business. Yet some companies,
such as Siemens AG Medical Solutions, make the service
business central to their corporate strategy: they design
the service business around customer requirements in
order to drive customer satisaction, loyalty and business
perormance.
In operations planning and management, companies
with complex service operationsthose with thousands orhundreds o thousands o parts, services that need to be
delivered around the clock and oten in remote parts o the
world, and service liecycles that can stretch or decades
oten lack the capabilities to realize service excellence. The
experiences o some o the worlds leading manuacturing
companies, such as Caterpillar, show that persistent
investment in, and ocus on, improving the service and
logistics operations can drive outstanding customer service,
resulting in enhanced customer loyalty and a oundation
or protable growth.
In execution, the last mile to the customer wherebattles or customer loyalty are won or lost, the majority
o companies are still unable to provide customers with
excellent and cost-eective service. Overall, our analysis
o the benchmark results suggest that customers are likely
to get exactly what they want, at the right time and place,
less than 75 percent o the timea dismal perormance
in a global economy where customers have more options
and more inormation than ever beore to prompt a switch
to competitors products and services. Ensuring service
excellence, however, is core to the business model or
many companies, such as Hyundai Motor Company and
Kia Motors Corporation, where service guarantees, such
as extended warranties, are an essential part o the value
provided to the consumer.
There are great opportunities or companies to improve
what should be an engine or protable growth in many or
most manuacturing organizations. Some companies are
championing the service revolution to drive perormance.
Twenty-ve percent o the benchmarked companies report an
on-time delivery perormance to customers o 96 percent or
higher. Caterpillarwith more than 600,000 spare parts, and
an installed base o equipment that oten needs service or 40
years or longeris able to ship its customers exactly what they
want, within just 24 hours, 99.7 percent o the time.5
While the challenges are numerous, our research suggests that
companies can make strategic and operational investments in
processes and technologies that will enable them to leaprog
the competition and drive continuous improvement in the
operational and nancial perormance o their global service
businesses.
First, companies can adopt collaborative processes
across the service supply chain, rom suppliers to
customers, that are well-documented, proven, and ready
or implementation. Indeed, our analysis indicates a
strong relationship between the level o implementation
o processessuch as collaborative planning, orecasting,
and replenishment with customerswith the benets
achieved rom the implementation. Across the service
businesses benchmarked, the more extensive the level oimplementation, the higher the benets reported rom
adoption o key processes. Volkswagen AG experienced
rst-hand in its North American operations the benets
o implementing robust processes or service parts
management. It drove dramatic improvements in customer
order ll rates over just six months while reducing annual
cost by over US$25 million.
Second, information systems or designing, planning,
managing and executing the service and parts business
are maturing rapidly and can now support most o the
requirements o even the worlds largest and most complexservice businesses. These systems are no longer the weak
links on the road to service excellence that they were 5,
0, or 20 years ago. In act, without sucient technology
support it will be increasingly dicult, i not impossible,
to manage and optimize the service business as customer
requirements increase and the service business grows more
complex. While adoption rates are still abysmally low in
many areas, our analysis points toward a strong correlation
between inormation systems implementation and benets
achieved. Some companies, such as Rolls-Royce, are
capitalizing on improved technology, sometimes going
beyond what would have been thought possible just a ew
years back.
With protability and growth levels in many cases ar
exceeding the main business, it is abundantly clear that the
service revolution in global manuacturing is well underway.
For most manuacturers, it is now a matter o eectively
embracing the service revolution or risking being let behind.
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For many o the worlds largest manuacturers, atermarket
service and parts operations essentially dene the business.For example, or Rolls-Royce, one o the worlds largest jet
engine and gas turbine makers, service revenue is about 55
percent o the more than US$ billion in total revenues;6
and or Xerox Corporation, the US$6 billion technology and
services giant, post-sale and other service revenues amount to
more than 65 percent o total sales.7
Driving Protable GrowthThrough the Service Business
Indeed, ndings rom our ongoing Global Service and Parts
Management Benchmark Survey show that the service businessaccounts or an average o nearly 26 percent o revenues
across the industries we have studied (Figure ). In 9 percent
o the companies benchmarked the service business accounted
or 50 percent or more o total revenues (Figure 2).
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The Role o Service Businesses in
Global IndustriesThese ndings are not surprising in light o the crucial role
service and parts management plays across industries.
In aerospace and deense, maintenance, repair and
overhaul is the cornerstone o selling airrames, jet
engines, and many other big-ticket items. Like many
other industries, the aerospace and deense industry is
moving towards perormance-based service and logistics
agreements with customersproviding guaranteed
availability and reliability o equipment, modules and
entire platorms (such as jet propulsion) over an extended
period o time. For example, Rolls-Royce has long
been ocused on selling Power By The Hour: Major
airline and deense customers can pay a xed warranty
and operational ee or the hours engines are running,
which means that Rolls-Royce must ocus on the entire
packageproducts, installation, ater-sales maintenance,
repair and overhaul (MRO), and overall service and partsmanagementto ensure protable growth o its business
over the long haul.8 While many companies base their
aggressive growth plans on securing these types o
agreements with customers, their uture protability
depends on their ability to deliver the promised service
levels in a cost-eective manner, which can be a challenge
even or the best companies.9
In automotive and commercial vehicles, some
companies have built the reputation o their brands and
their business models on the back o excellence in service
and parts management. For Lexus, the luxury-vehicledivision o Toyota Motor Corporation, service excellence
helped propel the upstart brand to market-share leadership
in North America less than two decades ater its launch
in 989.0 For Hyundai Motor Company and Kia Motors
Corporation, the emerging automotive giants based in
South Korea, service parts management, through Hyundai
Mobis Service Parts Sales Business, is an integral part o
the corporate strategy. As many vehicles are sold with
warranties o up to 0 years/00,000 miles, the service
and parts operation must unction at the highest level o
eciency to avoid customer service problems excessive
warranty costs, and sustain protable growth.
In the cut-throat consumer goods markets, top business
perormance is oten driven by combining product quality
and perormance with service excellence. Apple Computer
is going urther by elegantly mixing physical product
sales with digital services. Apples iPod portable music
and video player oering has leapt in just our years rom
being yet another consumer gadget to block-buster status
with quarterly sales reaching more than 6 million units.
Perhaps more importantly, Apple is selling services with
the product to the tune o 2 million music downloads per
day while also establishing ast-growing online video sales.
Some analysts estimate Apples share o the global online
music market at an impressive 80 percent or more.2
In diversifed manuacturing and industrial products
companies, such as General Electric, the service business
is an integral part o the business in the eyes o the
customers. According to Jerey Immelt, chairman and
chie executive ocer o GE, Services represent about
30 percent o our industrial sales and have the potential
to grow at double-digit rates or the oreseeable uture.
Services are a powerul growth engine because our
technology is long-lived and we ocus on making the
customer more protable.3 In industrial automation,
customers are under pressure to reduce costs and time to
market, and to increase quality and saety. At ABB, the
response has been to move towards selling perormance
service oerings, which allows the tailoring o servicesto customers exact needsrom simple, product-
ocused maintenance and eld services to customer-
ocused servicescalled Automation Perormance
Managementwhere ABB guarantees the perormance
level (and assumes the related risk) o the customers
automation equipment over its liecycleindependent o
whether it was original ABB equipment or not.4 Ensuring
the right pricing and the cost eectiveness o ullling
such comprehensive service contracts is bound to set new
standards or service excellence in the years ahead.
In the lie sciences and medical device industry, the
most demanding customers keep raising the bar or service
excellence. Customer requests or same-day (instead o
overnight or slower) service ulllment combined with
service-level agreements that put the risks (and rewards)
on the back o the manuacturer will be more and more
common. For some companies, such as Siemens Medical
Solutions, these demands typically require the creation o
more complex and costly distribution and service network
in order to get closer to customers and enable aster
response. The enhancements needed in processes and
systems or managing and optimizing these networks
will challenge even the leading service businesses in thecoming years.
For industrial customers o high-tech technology and
telecommunications equipmentmanuacturers,
machine downtime can cost US$00,000 or more per
hour. Indeed, or major semiconductor equipment makers,
like Applied Materials, service and parts management
is at a premium and a core eature in selling the main
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products in the rst place. For manuacturers o printers
or both consumer and commercial uses, such as Hewlett-
Packard and Xerox Corporation, there is oten more
revenue and prot in selling ink and ater-sales services
than in initial printer sales.5 For companies like these,
the service business is an integral part o the corporate
strategy. In addition, with continued consolidation through
mergers and acquisitions, many companies are let with
an unwieldy base o installed hardware and sotware thatoten needs to be serviced or decades. Doing this cost
eectively, without losing customers and damaging brands,
is a top service business challenge or many companies.
The Impact on Proftability and
GrowthThe service business typically is a more protable operation
than the primary product business. Our analysis suggests that
the average protability o service and parts operations (SPO)
benchmarked is more than 75 percent higher than overall
business unit protability (Figure 3).6 The most protableservice businesses benchmarkedthe top 25 percentare
more than three times as protable as the average business
unit.
In addition, the average annual growth rate o the service
businesses benchmarked is about 0 percent higher than or
the business units overall. The astest-growing service parts
operationsthe top 25 percentare growing at more than
twice the rate o the average business unit.
On average, we estimate that 46 percent o total prots o
the companies benchmarked are due to the service and parts
businesses.
The total impact o the service business, however, varies
dramatically across the companies benchmarked. A majority
are struggling to join the service revolution. Despite the many
opportunities or improvement, more than hal o the service
businesses benchmarked (55 percent) have prot levels lower
than or on par with their business units. For more than two
thirds (67 percent), their service businesses grow slower than
or at the same rate as their overall businesses. The missed
opportunities are signicant.
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Companies oten ail to capture the market share potential or
servicing their own installed base o productsthe captive
service market. The median benchmarked companys captive
market share is just 40 percent in pure services, such as eld
services, and about 75 percent in spare parts (Figure 4).
For numerous companies these captive market shares are much
lower. For example, many automakers spare parts sales are
heavily concentrated on supplying parts to authorized dealers
or vehicles during the manuacturers warranty period, which
typically covers 3 years or so. But as the vehicles age and the
warranties expire, automakers captive market shares or parts
typically dropexactly when the need or parts and service
increase. Without a warranty in place, consumers shop around
or the best value in parts and service. Competitors attack the
customer base and manuacturers (and dealers) lose out on a
large market opportunity.
In addition, the total market potentialwhich also includes
the potential o selling services and parts to customers who did
not buy the original product (the non-captive market)is
typically 2 to 0 times larger than the captive markets. Ouranalysis shows that the service businesses o most companies
today reach only a small share o this market, which suggests
an even larger growth opportunity.
Some companies have grabbed these growth opportunities
with gusto. Caterpillar has extended its internal excellence
in service parts management and logistics to external
customersthrough the creation o Cat Logisticsin turn
building a global growth business and capturing a much
larger share o the available market or those types o business
services.8 From its inception in 987, the success o Cat
Logistics has been remarkable. Today, Cat Logistics has morethan 9,000 logistics proessionals operating in over 00
locations across 25 countries and 6 continents, managing
more than 8 million stock keeping units (SKUs), and shipping
more than 60 million orders and 6 billion pounds o reight
per year. The client list is impressive with companies such
as DaimlerChrysler, Ford, Saab, Toshiba, and Honeywell, and
the growth opportunities are large. According to Jim Owens,
chairman and chie executive ocer o Caterpillar: Cat
Logistics has been generating growth o 25 percent annually in
revenues rom external customers, and massive opportunities
remain or creative third-party logistics providers in this $70
billion industry.9
Given that most companies have yet to ully exploit very large
opportunities, the growth potential o the service business
oten will be signicantly higher than that o the primary
business. Indeed, some companies are showing that it is.
Rolls-Royces services revenue increased by more than 60
percent over the last 5 years and has nearly tripled over the
last decademore than double the growth o the overall
business. The business value is immense. As Sir John Rose,
chie executive ocer o Rolls-Royce, has said: Every time that
Rolls-Royce sells an engine, we have signicant opportunities
to secure uture revenues or services that will add value
or our customer and add predictability to our own uture
earnings.20
Most companies, however, are late out o the gate. Not only
do companies lose growth and prot opportunities, they
jeopardize their business models. Inviting competitors to exploit
captive markets or service and parts is a dangerous game.
As manuacturers ace increasing pressures rom lower-cost
competitors that may be able to provide products and service
parts at signicantly lower costs, the link to the nal customers
will become the ultimate battleground or competitiveness. I
established manuacturers lose the service business battle, the
eld is wide open or emerging low-cost competitors to charge
ahead. Losing that battle could very well mean losing the war.
In addition, major companies, in the automotive and other
industries, are gradually outsourcing pieces o their core
manuacturing operations, including parts production and
assembly. They are, in eect, relying more and more upon thesuccess o their customer-acing, service-oriented businesses,
which oten lack the capabilities needed to succeed.2
Furthermore, success in servicing sold product is typically a
crucial component in building a manuacturing brand. Failure
in the service businessthrough unresponsive customer
complaint handling, inecient warranty management, or
reactive, slow and expensive service deliverycan mean the
slow (or sometimes not so slow) death o a brand.
The costs o missing out on the service revolution, thereore,
can be enormous.
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Behind the persuasive statistics o the inherent growth
and prot opportunities in service and parts management,however, a more uncomortable reality is evident. Despite
renewed eorts by companies to improve, our research
suggests most companies are still treating the global service
and parts business as an aterthought.22
Strategy and Business Design:
Laying the FoundationAt the most strategic level, senior executives oten neglect
to improve the service and parts business based on a lack o
understanding o the potential. They oten see the service
business as a cost center or cash cow rather than as a veryprotable growth business that can lead, rather than lag,
enterprise growth.
At the heart o the problem is a lack o insight into the real
opportunity. For example, ew o the companies benchmarked
said they had extensive visibility into service protability
(20 percent), parts protability (23 percent), sales channel
protability (0 percent), customer protability (6 percent), and
market share growth metrics (6 percent) (Figure 5). Without
good visibility into the perormance and potential o the service
and parts business, executives are oten let with a limited
understanding o the business and unable to justiy or prioritize
major investments or improvement.
Building a Block-Buster Business
Through Service Excellence:Challenges and Opportunities
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The ability to develop a strategy and an ecient design o
the overall service business is a challenge or the majority
o the companies benchmarked. While nearly 40 percent
o executives say that continuous optimization o the
overall supply chain design o the service business is o the
highest importance over the next three years, only one in 0
companies ( percent) have high perormance in this area
today (Figure 6). Similarly, ew respondents say they have
achieved high perormance in balancing cost and service levelto customers (8 percent), and building scenario planning into
network modeling (5 percent). Even worse, more than 30
percent o respondents say they are not doing well in building
global tax eciency into network modeling, andrather
unsettlinglyanother 40 percent said they did not even know
how they were doing in this area. Taking a holistic view o
the business, including issues o tax and other regulatory and
compliance issues, is o crucial importance to most complex
companies struggling to get the value out o their global
investments.23
Building service excellence into the design o the business
is dicult. Building it into the product design is perhapseven harder. But it is important. The cost and eectiveness
o delivering customer service is typically heavily dependent
on the design o the product being serviced. Yet only a ew
companies have eectively built service management into
product innovation and liecycle management decisions
(Figure 7).
Another actor that requently contributes to sub-optimal
service businesses is ineective organizational design, witha low level o investment in the people and competencies
needed to drive top perormance. Some companies invest
up to 0 times more in their sales people than in their service
sta. Given the strategic importance, protability and
growth potential o the service business relative to that o the
overall business, the ability to attract and develop the right
talent or the service business should be a key issue or top
management. 24
For some companies, like Siemens Medical Solutions, a leader
in providing imaging systems, therapy equipment, molecular
diagnostics and hearing instruments, the service business is a
strategic priority. Its customers increasingly expect to pay or
equipment uptimethe time equipment is available or use
by the customer. To achieve this, Siemens Medical Solutions is
using state-o-the-art technologies, coupled with sophisticated
processes and work fows, to deliver excellent customer service
to its health care customers while controlling cost.25 It is
combining on-line, real-time repair inormation, inventory
management, pricing, and invoicing with advanced logistics
to equip service technicians with the right inormation and
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parts at the right time and place. For example, the company
is using simple drop-o points (DOPs) or lock-boxes to
stage parts near customers, reducing the travel (or wasted)
time or high-cost and highly valued service technicians. The
lever or optimizing the eciency o the eld service engineers
is combining the predictability o when a part will arrive at the
drop-o point with the scheduled service job o the engineer
at the client site. For Siemens, service capabilities like these
have been critical in making the 8 billion Siemens MedicalSolutions one o its most protable business groups.26
But the company realizes that the drive to maintain and
enhance service excellence is an ongoing battle. For example,
it expects many customers demands on response time to
move rom next-day service to same-day service in key markets
around the world. This means that parts must be moved
even closer to customers through one or more additional
tiers o distribution centers, which will increase signicantly
the complexity o the service network. To reliably and cost-
eectively meet customer requirements in a more complex
network, inormation systems and business processes needto be strengthened urther to ensure a precise global view o
parts available to service specic customers within a short time
rame.
Operations Planning and
Management: Enabling Service
ExcellenceA lack o capabilities or planning, managing, and monitoring
the service business more eectively is holding back the
perormance o many o the companies we have studied.
Planning is a challenge. Among the companies responding,the median orecast accuracy or parts demand is less than
80 percent; or 25 percent o the companies it is lower than
52 percent. Even less encouraging: nearly 70 percent o
the companies surveyed are unable to report on the orecast
accuracy or the service and parts business, suggesting
signicant problems in managing demand, inventories, and
capacities.
Many companies considered supplier responsiveness (49
percent) and long lead times (37 percent) major barriers to
service excellence. With median on-time delivery rates rom
suppliers at a dismal 80 percent, this is understandable(Figure 8).
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It is no surprise that one third (34 percent) o the executives
indicate that inadequate inormation systems are a major
obstacle to service excellence. In addition, more than 30
percent indicated that supply chain visibility was a major
obstacle. Executives at many companies said they had no
or very limited visibility into key operational metrics, such as
inventory at dealers/customers (72 percent); demand and
sales orecast at all distribution levels (46 percent); and global
available-to-promise inventory to commit to customer orders(40 percent). (See Figure 9)
Experiences at companies such as Caterpillar show that
processes and systems that create visibility across the supply
and distribution network are undamental to building service
excellence. As ar back as the 970s, Caterpillar built a central
global database or tracking inventory across its network,
initially with a ocus on parts originating rom Caterpillars
central distribution centers. In 2002, the system was extended
to include parts obtained locally to ensure global visibility
to all parts in the distribution network.27
With more than600,000 spare parts and components, products that oten
need service or 40 years or longer, and complex global fows
o parts and inormation, no improvement comes easy. But
visibility provides a cornerstone to make it happen. With
the benet o this improved visibility, together with better
processes, and better technologies, Caterpillar has since the
late 980s been able to reduce its service parts inventories
by hal while improving its already highly regarded customer
service. Caterpillar can ll and ship an order in 24 hours or
less 99.7 percent o the time. For Caterpillar, customer service
levels rate as the top actor in generating repeat business. In
addition, these improvements are saving the company in excess
o US$460 million annually.28
Despite impressive results to date, Caterpillar is not resting
on its laurels. Recognizing that its core competency is
supply chain management and logistics, and not in sotware
development, the company is developing its next-generation
global service and parts management system in joint
collaboration with SAP, Ford Motor Company, and Deloitte
Consulting.
Execution: Delivering Service
Excellence One Customer at a
TimeAt the execution level, the last mile to the customer,companies typically lack the necessary capabilities to build
protable customer interactions that sustain customer
satisaction and loyalty. Getting the right parts and the right
service to the right place at the right time is no small task.
Doing this at the right level o overall cost and at the right
price makes it even more challenging. Few companies master
this.
Underlying the challenges o execution are the common
problems o low visibility, lack o timely and accurate
product, inventory, and transaction data, ineective process
collaboration internally and with customers and suppliers, andsub-standard capabilities or optimizing and dierentiating
customer service levels based on customer requirements.
In the ace o all o these challenges, the likelihood o being
able to respond appropriately to customer demand is quite
low. High customer-acing inventory levels will not satisy the
customer i it is o the wrong kind and in the wrong place. The
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median company benchmarked keeps inventories worth more
than our months o sales in stock, but median on-time order-
line item delivery to customer o only 93 percent. Because the
median line items per customer order is 4 across the service
businesses benchmarked, there is typically less than a 75
percent chance customers get exactly what they ordered on
time.29 This is a worrisome statistic on its own, and or many
companies and in many industries the inventory turns and
on-time delivery rates are much lower (Figure 0). Across thecompanies benchmarked, however, our ndings do indicate
that some companies are able to reach higher on-time delivery
rates and higher inventory turns at the same time.
Putting the processes and technologies in place or delivering
service excellenceone perect customer interaction at
a timeis a signicant challenge. Exacerbating the gap,
customers keep raising the bar or service excellence by
requesting shorter lead times, higher service levels, lower cost,
and better customer service support. Not surprisingly, perhaps,
ew companies report exceptional perormance on their goals
or customer satisaction (6 percent) and customer loyalty and
retention (9 percent).
But there are some companies that take service execution to
new heights. Twenty ve percent o companies report that
more than 95 percent o their service orders are resolved
and closed on the rst call. Likewise, a quarter o the
service businesses benchmarked are able to deliver on time
to customers more than 96 percent o the time. Doing this
cost eectively is dicult at best, but some companies, like
Hyundai Mobis, are building their businesses on a oundation
o excellence in this area.
Hyundai Motor Company and Kia Motors Corporation are
selling their passenger vehicles with warranties o up to 0years/00,000 miles in key markets around the world. To do
this cost eectively, not only must the cars be o high quality,
but the service and parts operation must operate at the highest
level o eciency. Hyundai Mobis Service Parts Sales Business
is responsible or supplying service parts to Hyundai and Kia
Motors vehicles worldwide. This involves stocking more than
890,000 parts or 37 vehicle types. It has built a US$55
million, 2.2 million square-oot spare parts center in Asan,
south o Seoul, to help do this more eectively and support its
global distribution network.30 The center is piloting the use o
item-level radio-requency identication (RFID) tagging coupled
with a central computer system using articial intelligence or
managing and optimizing the spare parts business. Customers
can, in real time, remotely track the status o the shipment at
any time between order and delivery.
According to Park Jeong-in, ormer CEO o Hyundai Mobis, the
new acility will play a key role in the companys global supply
network: With the Asan center, we will be able to provide
improved service or our customers in the United States, China
and other markets in the world, as well as those in South
Korea.3 Capturing a larger share o the servicing o Hyundai
and Kias more than 24 million vehicles in operation worldwide
is a crucial part o the growth strategy o Hyundai Mobis
Service Parts Sales Business.32
Service level agreements (SLAs) with customers are gaining
ground across industries, including the aerospace and deense
industry where the ability to sell through perormance-based
service and logistics contracts rapidly are becoming table
stakes. However, many companies are running into signicant
challenges ullling them. Because they oten have very
limited access to critical customer data, they are unable to
appropriately assess, quantiy and manage contractual risks
and typically lack an understanding o the critical capabilities
they need to put in place to satisy customers real needs at an
aordable cost. Essentially, they are struggling to develop and
manage a business model that they do not ully understand.
Not surprisingly, the median on-time customer response
or SLAs is just 90 percent and, or many companies, ar
less. Given the high cost o equipment downtime in many
industries, such as semiconductor manuacturing or mining,
low service levels are a costly problem and unlikely to generate
much in the way o customer loyalty.
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Leapfrogging Through Process
Collaboration and Technology
MaturityIn reviewing the shortcomings o companies eorts to drive
the service business to new levels, two actorsprocess
collaboration and technologydeserve special attention.
Despite the possibility o adopting well-established processes
and greatly enhanced and maturing technologies and tools
to support the service business appropriately - rom strategy
and organizational design, to operations management and
transactional executionmost companies have a long way to
go.
In the area o process collaboration, a majority o companies
benchmarked have signicant work remaining on building the
road or delivering service excellence. For example, only one
in seven service businesses benchmarked (4 percent) provided
customers with extensive visibility into their order statusa
capability that can improve the customer experience and lower
customer service costs (Figure ). Similarly, just 7 percent
have implemented extensive collaborative planning, orecasting
and replenishment (CPFR) with customers and with suppliers.
And while vendor-managed inventory (VMI) processes with
customers oten can take customer service levels to new
heights by providing better visibility, reducing inventory levels
and stock-out risks, as well as increasing customer order
ulllment rates, satisaction, and loyalty, only percent
o the companies included in this study have undertaken
extensive implementations. Nearly 70 percent o executives
say they have no implementation o VMI or do not know the
implementation status.Despite their rudimentary level o implementation in many
areas, the value o improved processes and collaboration with
customers and suppliers is evident.33 Our research suggests a
strong correlation between the level o adoption o processes
or collaboration and the benets achieved (Figure 2).
As the experiences o some o the worlds largest
manuacturing companies show, the value o implementing
tried and true processes and tools or service and parts
management is hard to overstate. The Parts and Accessories
division o Volkswagen AG, the US$89 billion automobile
manuacturer, experienced this rst-hand in its North Americanoperations.34 With supplies coming rom Europe and South
America, more than 60,000 dierent parts, serving 000
dealers with parts and accessories, and more than 2 million
order line items per year, it is perhaps no surprise the company
was struggling with excessive and oten incorrectly located
parts inventories across the distribution network, and low
customer order ll rates. Volkswagen resolved to assess the
entire service parts network. By deploying a new business
design, processes and planning techniques (including lean
warehouse management), VW has reduced its structural
cost, improved inventory management and productivity, and
dramatically increased customer service levelsall within just
six months. Customer order ll rates directly rom inventory
have been increased rom 76 percent to 94 percent and ll
rates using the entire network have increased to 98 percent.Beyond the hety improvement in customer service levels, VW
is reporting reductions in inventory and warehousing costs
reaching more than US$25 million per year, conservatively
estimated.
In the technology area, many companies are neglecting
to upgrade their inrastructure to enable dierentiating
perormance in the service business. In act, executives
asked to list the top barriers to operational excellence in their
service business requently cited inadequate and infexible
inormation systems. (See Figure 8 on page 9.) This is not
surprising. Across a range o capabilities, most companiesstill have considerable ground to cover to ully exploit the
power o new technologies and systems.35 While enterprise
resource planning (ERP) sotware, warehouse management
systems (WMS), and demand planning and orecasting
sotware tools have achieved extensive adoption in up to
30 percent o the companies studied, many other tools and
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technologies have yet to gain acceptance (Figure 3). Few
service operations have extensive implementations o systems
or customer relationship management ( percent), product
data management (0 percent), and advanced planning and
scheduling (6 percent).
Yet, technologies and systems or designing, managing, and
optimizing service and parts operationssuch as advanced
planning and scheduling, eld service management tools, and
customer relationship management systemshave improved
dramatically over the last decade. They are no longer the
obstacle to transorming the service and parts operations theymay have been 5, 0, or 20 years ago. Indeed, as experiences
across a range o industries show, the benets that can be
realized rom adoption o new technologies and systems or
managing and optimizing the service business are substantial.
Our analysis shows a strong correlation between inormation
system adoption and the benets achieved. (See Figure 2
above.)
The adoption o radio-requency identication (RFID) and
related technologies or real-time sensing and communication
is still only nascent in most o the companies benchmarked.
Barriers to adoption o RFID mentioned by executives
include issues relating to the costs and benets o adoption,
technology maturity, and systems integration and industry
communication standards (Figure 4). Interestingly, ewcompanies saw signicant problems around inormation
sharing with suppliers and customers around their service
business, indicating a potential or taking a collaborative
approach to adoption o these technologies.
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While most companies are taking a wait-and-see approach,
a select ew have started signicant deployment o leading-
edge technologies, such as RFID and other sensing and
communications technologies, to help support integrated
product and service strategies. For some companies, these
technologies provide much needed capabilities or enhancing
customer service levels while maintaining or even reducing
the cost o delivery. General Electric, the US$52 billion
diversied technology, media and nancial services company, is
applying RFID to manage and optimize equipment installation
and use. It is using RFID technologies to tag large-scale
power-generation equipment parts and modules or easieridentication and assembly at customer sites.36 In 995,
General Motors created OnStar to provide customers in-vehicle
saety, security, and inormation services called telematics,
serving nearly 4 million customers by the end o 2005. The
OnStar Vehicle Diagnostics system provides customers with
both instant and periodic diagnostic checks o key areassuch
as engine and transmission, brake system, and air bagsand
will send status reports to customer via e-mail so they can
schedule any needed service visits.37
Rolls-Royce uses state-o-the-art sensing and communication
technology to provide exemplary customer service.38 In one
example a Rolls-Royce jet engine on a passenger airplane
in fight over the Pacic was hit by lightning. While the
engine shut down and restarted appropriately, this kind o
incident normally would require an unscheduled maintenance
inspection on landing in Los Angeles, which would cost bothtime and money due to a signicant delay. Because Rolls-
Royce sensor and communications systems could access the
data eed rom the engine monitors in fight, Rolls-Royce was
able to temporarily build in a variance to the maintenance
program and schedule the maintenance at a more suitable
time. With its strong capabilities or real-time service, Rolls-
Royce handled the incident with fying colors and estimates
the savings or the airline customer rom this event alone
were US$ million or more. As the A&D industry moves
towards perormance based services, a US$ million event
like this could become an un-billable cost under a service
level agreement (SLA) contract. The ability to increase
customer service levels at lower cost by reducing the number
o unscheduled engine removals is rapidly becoming a core
capability or survival and success in the industry.
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There are a number o critical reasons why top executives
need to prioritize the service business among their strategicinitiatives and investments
First, the business model o many global manuacturers
is under attack due to changing customer and consumer
demands, maturing home markets, and competition rom
low-cost manuacturers. This is taking its toll on growth and
margins in primary product sales and threatening even the
service and parts business. In developed markets, main-line
products are being commoditized through increased pricing
pressures, particularly rom low-cost country sourcing. Service
businesses are typically more resistant to attack by low-cost
competitors, because they involve considerable local presence
and customer intimacy, which is dicult and expensive or
newcomers to copy. In emerging markets, such as China
and India, service and parts operations are under attack by
price competition, and countereit and will-t (and sometimes
ill-t) parts, in turn jeopardizing prots, growth, and brand
reputation. Protecting the business through service excellence
is one way o keeping out the competition while improving
customer satisaction and loyalty.
Second, the increased requency o new product introductions
and shorter liecycles or main products make service
excellence even more important. The combination o short
sales cycles due to product prolieration and long service liecycles is a recipe or escalating costs, parts obsolescence, lost
customer ocus, and deteriorating customer service quality,
i not properly managed. Among the benchmarked service
operations, the median inventory obsolescence rate stood at
5 percent and in many cases exceeded 0 percent or morea
costly symptom o service business problems.39
Why Now? Chasing the
Changing Basis of Competitionin Manufacturing
Third, quality issues and problems with service and parts can
exact a staggering toll in terms o both warranty costs andbrand damage. No wonder, then, that analysts estimate
industrial equipment makers will invest a total o US$ billion
over the next ve years to overhaul warranty management and
spare parts logistics.
Fourth, service businesses can be very resilient. In times o
economic downturn, service and parts sales are oten ar
more robust than the main business. For example, during the
economic and nancial crisis in Korea rom 997 to 999, sales
o new vehicles by Hyundai and Kia Motors dropped nearly 36
percent, but Hyundai Mobis Spare Parts Sales Business posted a
5.6 percent sales increase.40
And, nally, the increasing complexity o the businesse.g.,
through business expansion into new markets, mergers and
acquisitions, continued outsourcing o parts production,
logistics, and service delivery, more and more new products,
shorter initial product sales cycles but long service-cycles
combined with more complex demands rom customers or
comprehensive service-based contractswill make the business
challenges and risks even more daunting.4 Customers are
likely to demand better tailored and better managed service
solutions, oten combined with risk-sharing agreements, rom
their suppliers. Ensuring the right customer experiencethe
right product, the right service, the right branding, the right
price, all delivered to the right place at the right timewill
become even more dicult in the years ahead. But or those
able to manage the complexity, the cost and the risks, the
results can be remarkable.
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With signicantly higher protability and a growth potential
that is still under-exploited in a majority o the companies
benchmarked, the service and parts business is the overlooked
jewel o many corporate portolios, rarely receiving the
attention it deserves. Joining the service revolution in
manuacturing industries may be one o the most undamental
steps companies can take to ensure their uture survival and
success.
Conclusion
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Deloitte ResearchThe Service Revolution in Global Manuacturing Industries7
This study is based in part on our ongoing Global Service and
Parts Benchmark Survey, encompassing nearly 80 companies
and business units to date across Europe (62 percent), North
America (34 percent), and Asia-Pacic (4 percent) (Figure A).
Appendix: Survey Methodology
and Respondent Prole
Companies rom a wide range o industries have participated,
including aerospace and deense (6 percent), automotive and
commercial vehicles (32 percent), diversied manuacturing
and industrial products (30 percent), high technology and
telecommunications (2 percent), and lie sciences (0 percent)
(Figure B).
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O all reporting companies, 77 percent have corporate
revenues larger than US$ billion, and 23 percent have
revenues ranging US$50 million to US$ billion (Figure C).
Nearly two-thirds (65 percent) o the service and parts
businesses benchmarked have global coverage and another 7
percent have regional (multi-national) coverage. The remaining
9 percent ocus on national or local markets (Figure D.)
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Deloitte ResearchThe Service Revolution in Global Manuacturing Industries9
End Notes
In this study we use the terms service business, service operation,service and parts business, and service and parts operation (SPO), andother similar terms interchangeably, unless otherwise indicated.
2 For more on the global trends in manuacturing, innovation, and supplychain management, see e.g. Deloitte Research, Mastering Complexity inGlobal Manuacturing: Powering Profts and Growth through Value ChainSynchronization (New York and London: 2003); Deloitte Research, MasteringInnovation: Exploiting Ideas or Proftable Growth (New York: 2004); and
Deloitte Research, Unlocking the Value o Globalization: Profting throughContinuous Optimization (New York and London: 2005).
3 Service and parts management reers to the management o a service andparts operations ater the initial sale o the main products are made, andincludes installation sales and services, spare parts distribution and sales, andpost-sales services.
4 Protability is measured as earnings beore interest and taxes (EBIT) as apercentage o sales revenue.
5 See Michael Schmidt and Steve Aschkenase, The building blocks o serviceexcellence, Supply Chain Management Review, July/August 2004.
6 Source: Rolls-Royce, www.rolls-royce.com.
7 For Xerox, service revenue share is calculated as the share o post-sale andother revenue in total revenues. Post-sale and other revenue includesservice, outsourcing and rentals, supplies, paper and, other sales. SeeXeroxAnnual Report 2004.
8 See also Rolls-Royce, http://www.rolls-royce.com/civil_aerospace/overview/deault.jsp; and Deloitte Research, Making Customer Loyalty Real: Lessonsrom Leading Manuacturers (New York, 999). For more on the ater-sales service business in the commercial airline market, see also Mark DixonBnger and Henry H. Harteveldt, Overhauling Airline Maintenance,Forrester, October 3, 2004.
9 See Deence Acquisition University; http://www.acc.dau.mil.com.
0 See Ian Rowley, Lexus to the rescue: Losing luster in the luxury marketat home, Toyota is rolling out the marque to ght European imports,BusinessWeek, July 11, 2005. See also, Frederick Reichheld, The LoyaltyEect: The Hidden Eect Behind Growth, Profts, and Lasting Value(Boston, MA: Harvard Business School Publishing, 996). Anotherexample is Saturns prowess in service and parts management, which isgenerating higher customer satisaction, loyalty and, ultimately, retentiono protable customers. See M.A. Cohen, C. Cull, H. Lee, and D. Willen,Saturns supply chain innovation: High value in ater-sales service, Sloan
Management Review, Summer 2000. Apple shipped 6,45,000 iPods during its ourth quarter ended September
24, 2005. See Apple reports ourth quarter results: Apple concludes bestquarter & best year in company history, October , 2005. See www.apple.com. See also Paul Taylor, Demand or iPod and Nano help Applequadruple prots, Financial Times, October 2, 2005.
2 See The resurrection o Steve Jobs - Face value, The Economist, September7, 2005.
3 See Letter to stakeholders, General Electric Annual Report 2004.
4 See e.g.ABB Services Executive Review 2005. See also www.abb.com.
5 See Ken Spencer Brown, New marketing tack, Investors Business Daily,August 2, 2005.
6 Protability is measured as earnings beore interest and taxes (EBIT) as apercentage o sales over the last scal year. Revenue growth is measured as
the average annual increase in sales revenue over the past three scal years.Other research suggests that ...atermarket service and parts account or20 percent to 30 percent o revenues and about 40 percent o prots ormost manuacturers. See Tim A. Minahan, Unlocking Value and Prots inthe Service Chain Service Parts Management, Aberdeen Group, September2003.
7 Other analysis suggests that ... atermarket service and parts accountor 20% to 30% o revenues and about 40% o prots or mostmanuacturers, according to Tim A. Minahan, Service parts management:Unlocking value and prots in the service chain, Aberdeen Group, 2003.
8 See Michael Schmidt and Steve Aschkenase, The building blocks o serviceexcellence, Supply Chain Management Review, July/August 2004.
9 See Caterpillar2004 Annual Report.
20 See Rolls-Royce Annual Report 2004.
2 See e.g. Extinction o the predatorThe global car industry, TheEconomist, September 0, 2005.
22 See Deloitte Consulting,Atermarket, Aterthought: Getting More Valuerom Your Service Parts Supply Chain (New York, 2003).
23 See Deloitte Research, Unlocking the Value o Globalization: Profting romContinuous Optimization (New York, 2005).
24 See also Deloitte Research, Its 2008: Do You Know Where Your Talent Is?(New York: 2005).
25 See presentation by Frank Elssner, Siemens AG Medical Solutions, UptimeServices: Siemens Medical Solutions, Service Parts Management with SAP,
Berlin, 28-29 September, 2005.26 See Siemens Annual Report 2005. See also Jack Ewing and Diane Brady,
Siemens New Boss, BusinessWeek, January 24, 2005.
27 See Michael Schmidt and Steve Aschkenase, The building blocks o serviceexcellence, Supply Chain Management Review, July/August 2004.
28 See Michael Schmidt and Steve Aschkenase, The building blocks o serviceexcellence, Supply Chain Management Review, July/August 2004.
29 Calculated based on a 93 percent on-time ll-rate per order line. Given thatthere are typically 4 line items per order, the complete on-time order ll rateis less than 75 percent (or 0.93 raised to the power o 4 and expressed as apercentage).
30 See e.g. Mobis opens logistics center in Asan. Center dedicated toenhanced ater-sales service. W54.7 bil. spent to combine logisticsunctions, Hyundai Mobis, June 6, 2005. See www.mobis.co.kr.
3 See Mobis opens logistics center in Asan. Center dedicated to enhanced
ater-sales service. W54.7 bil. spent to combine logistics unctions, HyundaiMobis, June 6, 2005. See www.mobis.co.kr.
32 Estimate. See Hyundai Mobis Annual Report 2004.
33 Indeed, the value o better processes or managing the service and partsbusiness is well understood. See e.g. Deloitte Consulting,Atermarket,Aterthought: Getting More Value rom Your Service Parts Supply Chain(New York, 2003). See also Morris A. Cohen and Hau L. Lee, Out otouch with customer needs? Spare parts and ater sales service, SloanManagement Review, Winter 990.
34 See Volkswagen AG Annual Report 2004.
35 Research indicates that spending on service and parts management IT is 60percent below main line business and that automation o service liecyclemanagement is important. According to one study ocused primarily onNorth American companies, the 65 percent o businesses that have notautomated to support service lie-cycle management (SLM) are twice as likely
to lose customers as are SLM leaders. See Marc McCluskey, Judy Bijesse,David OBrien, and Lindsey Sodano, Service liecycle management (Part 2):building a roadmap or investments, AMR Research, September 24, 2002.Other analysis suggests that ...manuacturers service supply networksare ten years behind their product supply networks in terms o processsophistication and use o packaged applications. See Brian Albright,Industry rises to atermarket parts challenges, Frontline Solutions, July2004.
36 Presentation by Joseph Salvo, Pervasive Decision Systems Laboratory,Inormation & Decision Technologies, General Electric Company, at theMassachusetts Institute o Technology Forum or Supply Chain Innovation,June 5, 2004.
37 See P. Koudal, H. L. Lee, B. Peleg, P. Rajwat, and S. Whang, OnStar:Connecting to Customers through Telematics, Stanord Graduate School oBusiness Case GS-38, October 2004. See also www.gm.com.
38 Source: Miles Cowdry, DirectorServices, Rolls-Royce plc, at SAPPHIRE
Europe, Copenhagen, Denmark, April, 2005. For more on Rolls-Roycecustomer service capabilities, see also Stanley Reed, Diane Brady, and BruceEinhorn, Rolls-Royce at your service: Careul attention to customers is keyto its rebound in commercial jet engines, BusinessWeek, November 4,2005.
39 The inventory obsolescence rate is dened as the percentage o inventoryclassied as obsolete (non-sellable or out-o-date) on an annual basis.
40 See Hyundai Mobis Annual Report, 2004.
4 On the current and uture complexity trends, see e.g. Deloitte Research,Mastering Complexity in Global Manuacturing: Powering Profts andGrowth through Value Chain Synchronization (New York: 2003); and DeloitteResearch, Unlocking the Value o Globalization: Profting rom ContinuousOptimization (New York: 2005).
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AuthorPeter Koudal
Director
Deloitte Research
Deloitte Services LP
Tel: + 22 436 2647
Email: [email protected]
AcknowledgementsDeloitte Research is grateul or the contributions, comments,
and suggestions received or this global study rom Abiodun
Adegoke, Deloitte Consulting LLP (United States); Steven
Aschkenase, Deloitte Consulting Overseas Services LLC
(China); Srinivasan Bangalore, Deloitte Consulting LLP (United
States); Bob Boehm, Deloitte Consulting LLP (United States);
Michael Clements, Deloitte MCS Ltd (United Kingdom);
Vineet Chhabra, Deloitte Consulting LLP (United States); Gary
Coleman, Deloitte Touche Tohmatsu (United States); Christian
Combes, Deloitte Consulting (Belgium); Jonathan Copulsky,
Deloitte Consulting (United States); Eric Desomer, Deloitte
Consulting (Belgium); Richard Eagles, Deloitte Consulting
LLP (United States); Doug Engel, Deloitte & Touche USA LLP
(United States); Mark Frank, Deloitte Consulting LLP (United
States); Je Glueck, Deloitte Consulting LLP (United States);
Kevin Gromley, Deloitte Consulting LLP (United States);
Alexander Hager, Deloitte Consulting GmbH (Germany);
Craig Hanson, Deloitte Consulting LLP (United States); Jim
Harms, Deloitte Consulting LLP (United States); Dan Haynes,
Deloitte Consulting LLP (United States); Timothy Johnson,
Deloitte Consulting LLP (United States); Ajit Kambil, Deloitte
Research, Deloitte Services LP (United States); Greg Kling,
Deloitte Consulting LLP (United States); Carl Lay, Deloitte
Consulting LLP (United States); Mimi Lee, Deloitte ToucheTohmatsu (United States); Kevin Lynch, Deloitte Consulting
LLP (United States); Vikram Mahidhar, Deloitte Research,
Deloitte Services LP; Michael Marrero, Deloitte Consulting LLP
(United States); Steven Moors, Deloitte Consulting (Belgium);
Keith Nash, Deloitte Consulting LLP (United States); Martin
Nonnenmacher, Deloitte Consulting GmbH (Germany);
Dirk Pesch, Deloitte Consulting GmbH (Germany); Sergio
Ratmiro, Deloitte Consulting LLP (United States); Sanjiv
Shahrawat, Deloitte Consulting LLP (United States); John
Simrose, Deloitte Consulting LLP (United States); Joseph
Slota, Deloitte Consulting LLP (United States); Siddharth
Sonrexa, Deloitte Consulting LLP (United States); Thomas
Swem, Deloitte Consulting LLP (United States); Wim Vaessen,Deloitte Consulting GmbH (Germany); Esther Wamae,
Deloitte Consulting LLP (United States); Jon Warshawsky,
Deloitte Research, Deloitte Services LP; Stean Weiss,
Deloitte Consulting GmbH (Germany); Christoph Wellinger,
Deloitte Consulting (Switzerland); Bruce Westbrook, Deloitte
Consulting LLP (United States); and Tristan Whitehead,
Deloitte Consulting LLP (United States).
ISBN -892383-48-9
Deloitte ResearchThe Service Revolution in Global Manuacturing Industries
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