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 / Winter 2004 / Issue 37(originally published by Booz & Company)


The Lean, Green Service Machine

We believe that organizations that apply these manufacturing principles in service environments can achieve profound improvements in operational cost structure, service levels, and end-product quality, while also enhancing product time to market and increasing revenue. In our experience, savings will vary significantly by company and industry, but it is realistic to expect reductions of 25 percent in costs and 50 percent in response time and in-process errors. In addition, revenue gains of 5 percent annually are not unusual.

To assess how far the manufacturing industry has come and how far the service sector still has to go, we compared U.S. Bureau of Labor Statistics data on productivity growth since 1970 for manufacturing industries and a group of service companies — financial services, insurance, and real estate. (See Exhibit 1.) In the past three decades, productivity among U.S. manufacturing firms has nearly tripled, while U.S. service company productivity is up only about 40 percent.

The potential value of a leaner service model is best demonstrated by the similarity of the challenges faced by service organizations today and those already addressed by many manufacturers. Among these challenges are the need to:

  • Improve operations and reduce costs by engineering business processes for speed and quality
  • Separate common from unique product characteristics to extract the most value from commoditized processes and to maximize the gains from variety
  • Adopt tailored business streams to segment simple and complex offerings and to industrialize the routine while saving more flexible processes for products targeted at the few customers who demand them (and will pay for them)
  • Push decision making and responsibility to frontline managers who interact directly with customers

Speed and Quality
By increasing the speed of operations, businesses become more flexible and are able to respond more quickly to evolving market conditions and customer demands. And by focusing on quality, businesses can significantly reduce the time spent on reworking projects, fixing or replacing broken products, and handling customer complaints. Both strategies lead to sharply lower cost structures. Just as important, improved products cement customer loyalty, which increases revenue potential.

But speed and quality need to be linked.

Among manufacturers, Ford’s highly successful quality program in the early 1980s is the best illustration of this approach. The automaker dramatically reduced defect rates by investing heavily in quality controls in internal assembly operations. It also qualified incoming parts and suppliers, initially by inspecting samples of components, and later by giving its seal of approval to suppliers who demonstrated a high standard of process control. In parallel, Ford sped up the cycle for moving from concept to production, so it could respond faster to changes in consumer tastes. This strategy broke down only when the company, in a rush to expand internationally, began to emphasize speed at the expense of quality.

Dell’s AI-based customer service system shows how a successful service strategy can similarly be built on speed and quality. The effectiveness of the system is predicated on Dell’s using the information culled from service calls to manufacture better products, which, in turn, should lead to fewer calls (lower service costs) and more satisfied customers (higher revenue).

A product’s architecture, whether it is a service or a physical product, is most cost-effective and efficient when it is designed to maximize the market value of variety. By separating the common from the customized, companies can use scalable, modular platforms to squeeze the greatest profit margins out of the commoditized portions of their products, while also supporting more customization where the potential return justifies the cost. When businesses fail at this — that is, when companies are unable to exercise enough discipline over their architecture to keep complexity from incrementally creeping in — waste and cost add up quickly. For instance, it is wasteful for a bank to offer everything from basic credit card support to high-asset banking through one telephone call center. Too much is spent on servicing a routine customer base when a lower-cost channel like the Internet would be fine for this group. Meanwhile, high-value clients don’t get the attention they should.

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