Two areas of business, when synergized, can have a significant impact on your overall business efficiency: collaboration between product and services divisions can optimize the whole company; and, in the supply chain, “engineering + manufacturing + supplier” can be the formula for collaborative success.

Nearly every collaboration helps you grow. Effective collaboration brings powerful synergies that often not only improve the sum of all parts, but improve the individual parts themselves as well.

An obvious area for improving collaboration lies in the way most companies treat their product and services businesses; that is, treating them independently and failing to create synergies between the two. Even companies that attempt to comingle the two functions — treating the two divisions as integrated — at a strategic level struggle to operate that way.

The potential result is each group sub-optimizes the whole company.

So how can a company that sells products and post-sale services maximize returns and strengthen market position? Collaboration holds the key. According to APICS, the company first must determine if the strategy for its service business is to support/enhance product sales, or if it is an independent growth engine. If the service business is intended as an independent growth engine, both strategy and operations become complex, as the service business still needs to support the product business but should also pursue independent growth.

“Depending on the path, your organizational structure, market positioning, sales force and pricing strategies, among a host of other considerations, will vary,” the association for operations management said earlier this month.

After you’ve determined the strategic purpose of the service business, consider the following:

1. Organizational structure
If service is intended to support/enhance product sales: Unify the reporting structure up to the executive team for both the product and service groups. A single senior executive must have operational responsibility and be accountable for growth and profitability of the two businesses.

However, if the service business is intended as an independent growth engine: Create independent reporting structures for the product and service business — but with matrix relationships between the two. This provides the autonomy for independent growth while providing sufficient synergy between the two businesses.

2. Market positioning
If service is intended to support/enhance product sales: Position your products as complete solutions. This may include giving away products to sell services or vice versa. In niche markets where complete solutions are not a competitive feasibility, ensure your market offerings and pricing do not create arbitrage (where customers buy specific products/services and build the solution at a lower cost than you offer).

If the service business is intended as an independent growth engine: Position both products and services independently and competitively. Customers may match either your product or service with complementary competitive offerings.

3. Sales force
If service is intended to support/enhance product sales: Create a single sales force that is responsible for selling complete solutions and is qualified to maximize revenue/profits. Be wary of the sales force focusing on selling the product (with higher upfront revenue) and not realizing the value of the service revenue stream (often a long-term annuity).

If the service business is intended as an independent growth engine: Create separate sales forces for the product and service businesses. While they go to market independently, there is enough interaction set up in the organization structure so as to not undermine the company’s own products and services. Each sales group should have sufficient knowledge of the other’s market offerings to integrate the two for any customer.

4. Pricing strategies
If service is intended to support/enhance product sales: Develop pricing strategies that reflect the complexities of bundled solutions. They should consider the differences between volume and customized services.

If the service business is intended as an independent growth engine: Develop pricing strategies that maximize revenue and profits for both the product and the service businesses. Giving away services to sell products or vice versa is not an option. Pricing should be simpler than in bundled strategies.

Once you have determined your integrated product-and-service strategy, you are ready to begin to determine the detailed strategic and operational planning of each of the businesses.

A second area of needed collaborative improvement is larger in scope and lies in overall management of the supply chain.

According to a second APICS source (pg. 7), collaboration should exist between three areas of the chain: engineering is judged for the new product’s time to market and innovative product features and functionality; manufacturing is judged for the new product’s time to ramp and manufacturing costs; and the supplier, which is judged for component price and delivery, supplies the “missing linkages” that make the relationship work.

Engineering plus manufacturing plus the supplier is the threesome formula for collaboration success, writes William Walker, CFPIM, CIRM and author of “Supply Chain Architecture: A Blueprint for Networking Material, Information and Cash.”

Says APICS:

Engineering’s innovative product features depend on the supplier’s component specifications, but only if the component price fits manufacturing’s cost target. Manufacturing’s time to ramp depends on the supplier’s ability to deliver components in volume, but only if component samples are available early enough to fit engineering’s tight design cycle.

While engineering knows the complete application context of the component, manufacturing knows the complete supply chain logistics to handle the component, and the supplier knows the complete fabrication process and costs behind the component. As such, and to minimize inflated time to market and time to ramp, the three groups should synergize.

When engineering gets behind schedule and over cost, it may be that the supplier or manufacturing has a good solution to the predicament. When manufacturing has low production yields, it may be the supplier or engineering that has a fix. When the supplier has ramp capacity issues, it may be engineering or manufacturing with a resolution.

Yet if such metrics are not measured and shared early and often, then at least one of the threesome may be hurt financially.

Likewise synergizing products and services divisions to fully optimize the whole company, this second collaboration strategy — manufacturing + engineering + supplier — is successful only when the new product is brought to market on time and within cost and benefits the customer. Through collaboration, the twosome’s non-intuitive approach of adding a third player to the mix completes a set of linkages that make all three players whole.

Resources

Does the Right Hand Know What the Left is Doing?
by Srini Bangalore
APICS e-News, June 6, 2006

Manufacturing + Engineering + Supplier = Collaborative Threesome
by William T. Walker
APICS newsletter, Downeast Chapter, May 2006

Additional

Integrating the Factory Floor with Information Systems
by Kevin Roach
A-B Journal, April 2006