The Evolving Model in Electronics Reverse Supply Chains

Reverse Logistics Magazine, Fall 2006

by Steve Manning, Solectron Global Services

Think of aftermarket services or reverse supply chain and you probably think warranty repair. If that is the case, you wouldn’t be completely wrong. But in the past 18 months, the industry has undergone a quiet but profound transformation.

While warranty repair continues to be a key area of focus in reducing costs and improving the customer experience, the trend toward providing an end-to-end services supply chain continues to evolve with the potential to create even greater value for OEMs, their channels, partners and end customers. However, a drive toward end-to-end services requires improved efficiency throughout the entire reverse supply chain to realize maximum benefits.

Let me illustrate with an example.

For several years, a prominent PC manufacturer had achieved significant business benefits by outsourcing warranty repair. The key factor that drove the company toward outsourcing was the rise in warranty costs as a percentage of cost of goods sold (COGS), and its need to look for ways to maintain or improve warranty services while reducing costs.

By working with an electronics manufacturing services (EMS) partner, the company reduced warranty repair costs significantly while maintaining service level agreements and quality metrics.

But as the OEM took a deeper look into the entire services supply chain, it found an opportunity to increase efficiency, accomplish greater cost reductions and improve customer experience at lower costs through an end-to-end approach.

As the firm evaluated its services supply chain, it recognized that old systems contained a lot of waste, creating inefficiencies. These systems were not viable when compared with those in the company’s peer group. Additionally, costs were not predictable and there was little room for change. This led to inconsistent customer experience and created an additional drain on the IT infrastructure.

Today, the new model revolves around aftermarket partnerships that cover the entire supply chain, each partner executing its own role in concert to achieve a leaner, more flexible supply chain.

In this model, the customer experience is owned and delivered by the OEM while the partner delivers whole unit repair plus spare units and parts. Commodity suppliers are linked directly to the outsourcing partner creating a unified relationship with the OEM.

What are the results of such an approach? Let’s take a look at some of the success metrics. One, by collaborating together, the OEM and its EMS partner dramatically reduced inventory carrying costs and excess and obsolete (E&O) levels. Hard drive support inventory reduced by over 60%, with overall inventory going from 60 days of supply to 14 days. Second, reductions occurred while maintaining best-in-class service level order fill rates of at least 98%. Lastly, no fault found on all commodities reduced by 50%.

What we learn from this illustration is that the true value of aftermarket services is growing well beyond warranty repair.

Drivers of Change
Like many OEMs, speed and customer expectations are rapidly changing the aftermarket services industry. Today, several market drivers are creating opportunities to lean out the entire services supply chain.

• For one, product price erosion continues to accelerate and products are becoming more complex. To stay ahead of the competition, OEMs are introducing new products at ever-faster rates, adding more products to the channel which is creating greater service challenges.
• Meanwhile, growing global environmental regulation is forcing OEMs to look for ways to turn costs associated with disposing of products into profit opportunities through refurbishment, remarketing and parts harvesting.
• Of course there is the ongoing challenge of protecting the quality of all the products in the channel – new and old – around the world.
• And if that were not enough, end customers are demanding greater product reliability and uptime.

As a result of these market drivers, there are several aftermarket services trends to watch as the services supply chain demands increased efficiency through the optimization of the services ecosystem.

• End-to-end services are replacing siloed solutions, such as warranty repair
• Global outsource solutions are emerging
• Lean outsource approaches require involvement from all aspects of the same ecosystem, including retail service, parts management, repair, asset recovery and remarketing

Aftermarket Services – Taking a Playbook from EMS Sector
There are a lot of parallels between the reverse supply chain today and where the EMS sector was 15 years ago. In the 1980s, competition for electronics devices rose sharply. With the increase in demand came an increase in waste and inefficiencies within the supply chain. By the early 1990s, as competition among major electronics firms increased, OEMs looked for every opportunity to reduce costs by enhancing efficiency through a lean supply chain.

Over the past 15 years, EMS providers have offered streamlined operations and cost reductions achieved through global scale, improved efficiencies and productivity gains. Consultants saw the problems within the forward supply chain as a huge growth opportunity to sell services, and greatly increased customer supply chain capabilities to address the challenges facing the industry. Technology and software firms also introduced new products to automate processes.

Similar patterns exist in aftermarket services. At Solectron, we see aftermarket services as the last mile of the supply chain desperately in need of greater efficiency. This has been a key focus of ours for a long time. Meanwhile, major consulting firms have begun to invest heavily in offering services to help OEMs revamp the reverse supply chain, much like they have in the forward supply chain. Additionally, more tools are being developed to address automation of reverse supply chain challenges from the factory floor out to the enterprise.

What this suggests is that the reverse supply chain has tremendous opportunities to reduce waste and variability within the extended ecosystem of partners. It means the aftermarket must adapt to ever-changing customer, business and competitive needs through a leaner environment.

Extending the Outsourcing Model
To win in today’s hyper-competitive global landscape, it’s not enough to be fast. It’s not enough to be innovative. It’s not enough to be better.

For an OEM to have a successful services supply chain, it will need to pursue an end-to-end service outsourcing model, work across the company to reduce waste, leverage best-in-class capabilities, never lose focus on improving customer satisfaction, and ruthlessly simplify.

Remember, the reverse supply chain ecosystem is always changing. As it evolves, so must the members within the environment to maintain balance. Success will be predicated on driving improved customer value by leaning out the entire services supply chain, focusing on a complete end-to-end services strategy and having the right partners in place to execute results.

About the Author: Steve Manning joined Solectron in 1999, with extensive finance, sales and executive management experience. Manning is senior vice president of strategy, marketing and business development for Solectron Global Services. Manning is responsible for overall business management and development of the company’s global services accounts.

Reverse Logistics Magazine, Fall 2006