A profitable service model in the fastener industry

by NIck Frank on July 5, 2010

In this article I would like to review the start-up of a Fastener Full Service Supplier business for which I was responsible against the 4 steps to services profitability described by W. Reinartz and W. Ulaga in their 2008 HBR article “How to sell services more profitably”. The article outlines 4 key steps an industrial business must follow, if it is to develop a profitable and sustainable services business.

The four steps are:

  1. Recognize you are already a service company
  2. Industrialise the back office
  3. Create a service savvy sales force
  4. Focus on customer processes to create value.

The business of this case study in was a $30 million business set up by the then leading supplier of fasteners to the automotive industry. Its primary mission was to provide Ford Motor Company at Dagenham and Cologne with all their fasteners to line-side on a JIT basis, as well as Engineering Services to the Product Development teams.

Step 1: Recognize you are already a service company

The leading fastener companies achieve premiums of 5-10% by providing in addition to the basics of quality, delivery and technical support the following basic services:

  • The expertise and systems to manage a high number of part numbers and transactions within the OEM supply chain process
  • Quality management
  • The ability to provide fastener engineering support and prototyping skills
  • Some basic supplier consolidation.

In other words their competitive advantage was already very much based on services.

Step 2: Industrialise the back office

To be profitable, some key business processes needed to be developed and made transferable to other markets and customers:

  • IT systems needed to be developed that could not just deliver goods from manufacturing plants, but could also schedule parts in from other suppliers, as well as integrate warehousing and transportation management. These were required to achieve:
    • Low inventory in the supply chain
    • Efficient Buying so as to focus on cost reduction
  • Purchasing that could drive down part costs and develop new suppliers in order to remain competitive. This required:
    • Wide knowledge of global sourcing
    • Effective Supplier Quality Management
    • Development of partnerships
  • The project management around application engineering, that could be integrated into the OEMs engineering team
  • Logistics professionals that understood the demands and requirements of just-in-time supply, where inventory is measured in terms of hours and not days, or months.

In truth although we did a great job developing processes suitable for 2 or 3 companies, we were never able to industrialise the back office and so establish a business model that could be transferred to Automotive Tier 1 & 2 suppliers.

Step 3: Creating a Service Savy Sales force

These contracts fitted very well with the key Acct teams for the large OEMs which were already dealing with accounts in the range of €10 – 100million. They understood how to sell the concepts and just required the support of service specialists for the detail.

In the Tier 1 & 2 accounts, which are smaller by nature, the same was true. What the business lacked was that step 2 was never completed to allow the business to be transferred into the Tier accounts and win business against focused JIT distributors.

Step 4: Focus on customer processes to create value

The change of the business environment was driven by customers who saw the potential savings in ‘inviting in’ trusted suppliers into the product development and manufacturing process. It was only those suppliers who were open to this change in paradigm and willing to take on the resulting risk that have benefited.

In summary, we saw that the benefits to the supplier of becoming so entwined with the customer’s processes can be a win-win situation, sustainable over many years. This was a successful business to a point, but by not succeeding in industrialising the back office and make it transferable between customers, the growth potential of the business was severely limited.

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