This presentation shows various aspects on service business development in the Chinese market. It highlights approaches for spare parts logistics and human resource management to increase the service revenues and profits.

1. Service Business in China
Optimized spare parts logistics for improving the service
performance in the Chinese market
PD Dr Heiko Gebauer, Eawag
29. November 2013

2. Over 15 years of experience on service business in
manufacturing companies
International service
management
Service strategy
Service organization
Commercializing industrial services
Service offerings & value propositions
Service innovation
Controlling industrial services
1996
2013

3. Experiences on service business in China as part of the
international service management
Focus group
Topics
Chinese culture /
negotiation styles
Service offerings
Human resource
management
Participants
Kuka Robotics, Bühler
Diecasting, Jakob
Müller Machine AG,
Studer ….
Action research
Topics
Commercializing
service offerings
Service process
documentation
Human resource
management and
Participants
Witschi Electronic,
Oerlikon, Bystronic,
Bosch Packaging …
Individual projects
Topics
Setting up of a spare
parts logistic hub in
China
Participant
GFAgieCharmilles
…

4. Agenda

What makes services in China so complex?

What are typical service requirements of Chinese customers?

How can spare parts logistics be organized in the Chinese market?

5. East meets West
Boss
Handling problems
Contacts
Opinions
Source: Yang Liu (2010)

6. Chinese characteristics influencing business culture
Forces shaping …
Confucian values
Communist ideologies
… Chinese business culture
Guanxi, Mianzi, Renqing are embedded in a social hierarchy
system (limào), which provides internal harmony
Long-term orientation versus short-term orientation, High
power distance versus low power distance, Collectivistic
versus individualistic, uncertainty avoidance versus risk
seeking, masculinity versus femininity
Working hard (chángzhēng), volunteering for working tasks,
family orientation, Work-units (danwei)
Western values
Source: Gebauer (2007)
Expatriate executives, Chinese managers trained in
international business, individualistic attitudes (e.g., breaking
with the harmony orientation, team diversity, individual
preferences, performance based salary and bonus systems

7. Chinese business culture shapes the service
management
Service revenue as a percentage of
total revenue (%)
25
21.2
20
15
10.3
10
5
0
European
Chinese
Sales companies of Swiss
manufacturing firms
Source: Gebauer (2007)
Service managersdeliberatelyuse
"free" customerservicesforestablishing
a guanxinetwork and "giving face" to
theircustomers
The high power distance in China limits
the empowerment of service managers
and service technicians to offer
product-related services proactively.
Service managers and service
technicians are highly reluctant to
change their mindsets.
The fact that the base economic actor
is the family rather than the firm leads
to a high fluctuation among service
staff.

8. Agenda

What makes services in China so complex?

What are typical service requirements of Chinese customers?

How can spare parts logistics be organized in the Chinese market?

9. Service growth in China
 China as a hyper market for services
–
>40% annual sales growth and installations
–
High staff requirements to keep up with the market
–
Medical equipments (e.g., Carl Zeiss Medical)
 China as a continuous growth market for services
–
20 to 40% annual sales growth and installations
–
Large installed base and long-term history
–
High staff requirements to keep up with the market
–
Textile, printing equipments (e.g., Rieter, Heidelberger Printing Machines)
 China as stagnating market for services
–
<20% in annual sales growth and installation
–
Installed based attacked by competitors and service specialists
–
Reorganizing and downsizing the sales and service organizations
–
Vacuum systems and vehicle market (e.g., OerlikonVacuumSegment and Volvo Cars)

10. Service needs - Willingness to pay for services
Company example
Optimize the capital investments
• Operational of services
• Taking-over the maintenance function
• Financial services
Optimize the uptime of the machines (MTTR and
MTBF)
• Inspections
• Advanced training
• Preventive maintenance
Ensure the proper machine
functionality
• Spare parts
• Troubleshooting
• Repair and hotline
Description
A Chinese companies that manufacture only for the
Chinese market
B Chinese companies are that manufacture for the
International markets
C International companies (joint ventures)
C
B
A
0-1%
1-2%
2-3%
3-4%
Willingness to pay for services in percent of
the investments in machines and pieces of
equipment per year

11. Individual analysis of service offerings and service
processes (company example)
Differentiation in the service
offerings
Service processes
Standard service
Spare parts
Repair
Installation
Basic operator training
European processes
Spare part orders
Spare part deliveries
Field services
Premium service
Maintenance
Preventive services
Validation & process consulting
Future services
Advanced training and
education services
Chinese processes
Spare part offerings (including
negotiations)
Spare part deliveries
Machine installation
Free parts process
Free service arrangement (VIP
customers)
Payment handling

12. Individual analysis of service offerings and service
processes (company example)
Differentiation in the service
offerings
Standard service
Spare parts
Repair
Installation
Basic operator training
Premium service
Maintenance
Preventive services
Validation & process consulting
Future services
Advanced training and
education services
Service processes
Documented spare part quotation process
in China does not include the identification
European processes
of parts
Input information for
Spare part orders quotation seems to
always be necessary in
Spare part deliveries China
The spare parts quotation process in
Field services “VIP customers” resulting
China considers
in negotiations with sales deptartment
Chinese processes
Spare part offerings (including
negotiations)
Spare part orders
Machine installation
Documented spare
Free parts process part order process in
China does not include an availability
Free service arrangement
check
Payment handling parts in China is done
Invoicing for spare
before parts delivery
Spare part order process in China seems
very time consuming through “invoice first
policy” and supplier contact afterwards

13. Spare parts delivery performance
Current situation and definition of parts distribution for Asia
Customs
CSC-Europe
Local
warehouse
Delivery time CSC-Europe to local warehouses incl.
customs
Customer
/ dealer
Delivery time from the local
warehouse to the end
customer / dealer
Local availability of
spare parts
CSC availability of
spare parts
Calculation of current average delivery performance in hour (h)
Average
delivery
performance
Delivery time
=
CSC to local
warehouse
Delivery time
+
Local warehouse
to end user
X 1 -
Availability at
Local warehouse
+
Availability at
Local warehouse
e.g. : Average delivery performance for a Chinese province
46 h = ( ( 72 h + 20 h ) X ( 1 – 64 % ) ) + ( 64 % X 20 h )
Delivery time
X
Local warehouse
to end user

14. Agenda

What makes services in China so complex?

What are typical service requirements of Chinese customers?

How can spare parts logistics be organized in the Chinese market?

15. Advantages and disadvantages of current logistics
concepts for spare parts
(1) Direct export of spare parts from Europe to
customers in China
Description
Companies run a central warehouse carrying
spare parts in Europe and have no local
(2) Providing spare parts from local warehouses, and
warehouses replenished from Europe, to customers in
China
Companies have a central warehouse and also run
decentralised (local) warehouses in different regions of
warehouses in China
Inventory planning and control are conducted by
the central warehouse based on state-of-the-art
methods
Inventory planning and control are the responsibility of
local warehouses that use relatively unsophisticated
methods
Parts are exported and delivered directly to the
Chinese customers from the central European
Parts are delivered from the local warehouse to the
customer if they are available locally
warehouse
Advantages
China
Parts are exported from the central warehouse if they
are not available locally
Short delivery times for parts that are available locally
Low inventory and working capital costs
Low operating costs for the central warehouse in
Europe
High availability of spare parts at the central
warehouse
Disadvantages
High customer satisfaction due to short delivery times
Low logistics costs: bulk replenishment from Europe is
more cost-efficient than single express deliveries
High logistics costs due to express transport mode
High inventory and working capital costs
Long delivery times caused by customs clearance
High costs for operating and maintaining a network of
delays
local warehouses
Low customer satisfaction due to long delivery
times
Limited availability of spare parts held by the local
warehouses
Source: Fischer, Gebauer and Fleisch (2012)

16. Typical logistic situation for spare parts delivery to
China
Increasing installed base of machines in Asia
China often represents approx. 50% of the installed base (concentrating on three regionsBeijing, Shanghai, and Shenzhen
There is no spare parts hub in China, parts are normally managed and stored by the
sales companies, import of parts often with the machine
Customersatisfaction decreasing due to parts availability (spare parts (SP) 15-80%, wear
parts (WP) 50-95%) and long delivery times
Beijing
Shanghai
Korea Japan
Hong Kong
Taiwan
Business Center
Thailand
India
Singapore

17. Potential solutions for spare parts logistics (1)
Singapore as the central Asian hub (bonded and non-bonded (e.g.,
Sandvik)
CSC-Europe
Beijing
Korea
Shanghai
Hong Kong
Taiwan
Thailand
India
Singapore
Delivery to sales & service agents:
Malaysia
Vietnam
India
Philippines
Pakistan
Myanmar
Indonesia
Australia
New Zeland
Japan

18. Potential solutions for spare parts logistics (2)
Extended and optimized local warehouses established at wach sales and
service company
CSC-Europe
Beijing
Korea
Japan
Shanghai
Hong Kong
Taiwan
Thailand
India
Singapore
Delivery to sales & service agents:
Malaysia
Vietnam
India
Philippines
Pakistan
Myanmar
Indonesia
Australia
New Zeland

19. Potential solutions for spare parts logistics (2)
Two semi-central hubs (e.g. Singapore as the Asian hub and Shanghai as
the China hub (bonded and non-bonded)
CSC-Europe
Beijing
Shanghai
Korea
Hong Kong
Taiwan
Thailand
India
Singapore
Delivery to sales & service agents:
Malaysia
Vietnam
India
Philippines
Pakistan
Myanmar
Indonesia
Australia
New Zeland
Japan

20. Solution for spare parts logistics in China (Asia)
Spare parts & service
centre in Europe
(CSC Customer
Service Centre)
Beijing
Korea
Japan
Shanghai
Taiwan
Hong Kong
India
CSC Europe
Thailand
Regular replenishment of parts
CSC Shanghai
Customers
Bonded stocks
• Parts stocked at
manufacturing
cost
• No VAT & duty
Asian
customers
Singapore/
Malaysia
Parts delivered to Asian or Chinese
customers (90% availability)
Parts returned (unused, used for testing
purposes and repairable)
Source: Fischer, Gebauer and Fleisch (2012)
Non-bonded
stocks
• Postcustoms
clearance
• Temporary
borrowing
Chinese
customers

21. Detailed solution for spare parts logistics in China
(Asia)
IT-Link
Invoice for services
CSC Europe
SAP
Delivery
Customsaut
horities
Logisticspa
rtner / WMS
Bondedstoc
k
Value1
End User
Delivery
Temporary
Customs border
Invoice (USD) Value 2
Value1 + freight + margin
Defective part by log. partner
Credit note (USD)
For defective part
Document / Value transfer
Payment
VAT +
duties
Virtual
transfer of
part
Borrowing (only China)
Invoice (local currency)
Non-bonded
stock
Value3+freight+margin+VAT
Value 3 =
Value 2 + duty + fees
Defective part
Sales Co.
Delivery (physically)
Daily process
Monthly/weekly process process

22. Organizational roles & responsibilities
CSC Europe
CSC Asia
Sales Co
Location
Switzerland
Shanghai
10 different locations
Role
Planning Center
Distribution Center
Customer Access
Responsibility
Inventory
ownership
• Define strategic guidelines • Implement strategic
for parts business in Asia
guidelines
• Plan inventory levels
• Make logistic knowhow
accessible to all Sales Cos
• Define and monitor spare &
wear parts business KPI
• Match customer demands
(delivery times) with
performance
• Select carriers
• Monitor logistic partner
running Hub warehouse
• Manage return process
• Monitor overall inventory
levels
• Manage escalation process
• Sell spare and wear parts
• Forecast wear part needs
• Inventory of consumables
• Inventory responsibility for
local warehouse
• Operational organization of
country warehouse
• Monthly availability meetings
with Parts Manager CSCAsia
CSC Europe
Sales Co

23. Improving the human resource management
for service staff
Recruiting personnel
Developing personnel
Integrate a Chinese HR
function in the selection of
service managers and
technicians
Take small steps for
continuous development
Ensure adequate
interpretation is made of
the feedback from the
Chinese HR function
Concentrate on practical
learning
Describe the role profiles
of service managers and
service technicians
Do not use criticism in
discussions between
service managers and
service technicians
Educate service managers
in the selection of service
technicians
Apply the “tandem”
concept
Source: Fischer, Gebauer and Fleisch (2012)
Use the role descriptions
to guide development
Work in small groups
Educate service managers
in using appraisal
interviews
Retaining and rewarding
personnel
Establish personal
relationships between
service managers and
service technicians
Define budgets for
establishing personal
relationships
Use shares as an incentive
Find a balance between
non-monetary and
monetary incentives
Award an annual increase
in basic wages too, and
not only for attaining
further qualifications

24. Thank you