Quantifying the Business Cost of Repair and the Impact on Service Quality

by Michael R. Blumberg, CMC - Blumberg Advisory Group

Reverse Logistics Magazine, Nov/Dec 2007

Strategic Considerations

Aftermarket Service of electronic equipment (e.g., computers, telecommunications, medical electronics, etc.) represents one of the largest operating expenditures for end-user organizations. If one considers that the typical end-user spends up to 20% of the total system acquisition price annually for maintenance and repair, moves/add/changes, and other support services over the installed lifecycle (estimated at 6 to 8 years on high end technology) of the equipment, it is easy to understand that the total lifecycle service expenditures can be as much as two to three times the initial acquisition cost of the equipment.. End-users are thus advised to pay very close attention to the value and quality of services they receive from their Reverse Logistics Providers.

Unfortunately, end-user organizations face serious challenges with respect to understanding the total lifecycle costs associated with operating and maintaining high tech systems. The basic fact is that the market for Aftermarket and Reverse Logistics services such as depot repair, spare parts, and asset recovery acts independently from the market for products. The supply and demand for these services do not remain constant over time and are subject to change according to the size of the equipment population and the financial performance and capabilities of suppliers. As a result, it is difficult to predict pricing levels and service offerings from suppliers at the point of product purchase.

Another challenge for end-users is the fact that they often do not consider issues regarding the quality and cost of aftermarket service in the initial product selection process. For the most part, end-users do not have visibility to the types of reverse logistics and repair issues they may encounter over the equipment lifecycle, and tend to focus primarily on product features and, to some extent, the support they may need to install and operate the systems they purchase. In essence, reverse logistics issues tend to become an after-thought in the mind of the end-user during the initial purchase period. However, these issues become increasingly more important in later stages of the product lifecycle as end-users desire to continue to maintain the useful life of the product. Indeed, the longer the product is in use the higher the probability that reverse logistics and repair services will be required.

Critical Issues in Repair Vendor Selection

Given the inability to predict total lifecycle costs, it is important that end-users do not make their purchase decisions for repair and reverse logistics services based solely on the basis of price. It is essential that end-users have a good understanding of their service requirements and have established very specific criteria for selecting qualified vendors to ensure optimal product performance and lowest overall cost for the lifecycle of the equipment. In order to achieve this outcome, it is critical that end-users take a strategic approach to vendor selection as opposed to solely on the basis price. Although a segment of the market is highly price sensitive, the vast majority will make an informed decision between price and quality. Nevertheless, it is important to distinguish between the repair transaction price and the total lifecycle service costs. Although determination of total lifecycle service costs is difficult, it is not exactly impossible either.

There are essentially three (3) factors which impact total lifecycle service costs. These include the direct costs associated with the 1) transaction price and 2) cost of downtime, and the indirect costs associated with 3) performance and reliability issues. The transaction price is the easiest concept to understand; it is basically the price paid to perform a specific service task such as a repair. The transaction price is very simple to determine and is often made available, in published format, by the vendor prior to completing the transaction. The remaining two cost components are more difficult to determine which explains why they are often not considered in the selection process at all.

The cost of downtime is basically the lost worker productivity or lost revenue associated with equipment downtime and can be extremely high in some markets. The cost of downtime is not necessarily difficult to calculate; it is the factors which impact downtime which need to be addressed in order to ensure lowest overall cost. In the repair market, the surrogate for downtime is repair Turnaround Time (TAT) which is defined by the length of time it takes for the repair provider to receive a defective unit from the customer and then return it back to the customer in proper working condition. Sometimes the vendor may provide an advanced exchange or replacement unit; In which case, TAT is measured in terms of delivery time. End-customers will often carry extra inventory in order to prevent the occurrence of a stock-out situation from a long TAT. As such, inventory holding costs should also be considered in the cost of downtime measurement.

A second key factor which may cause downtime as a result of outages has to do with performance and reliability issues. In the event that products are not repaired properly the first time, the end-user may experience performance issues. Performance issues due to poor repair quality has the most significant impact on lifecycle costs In the telecommunications industry, the cost of performance issues are measured in terms of the transaction price to fix the problem, the cost of downtime associated with the performance issue(s), and the lost revenue associated with lost customers due to Quality of Service (QoS) issues. A review of these lifecycle cost factors are identified in Figure 1.

Key Criteria for Optimal Success

With this understanding of lifecycle cost drivers, the case can now be made to support the argument that the technical capabilities and resources of the repair vendor will ultimately have a significant impact on actual lifecycle costs. Let's first look at the issues associated with the cost of downtime. A repair vendor with limited technical capability will not be able to handle a high volume or high complexity of repairs in a timely manner. This will result in longer TAT times for the customer; as such, the operators' may stock additional inventory to off-set these delays resulting in high inventory holding costs and inventory turns. However, in order to handle high volumes the repair vendor must not only have the capacity to do so, but must also have the capability to handle repair on a highly efficient and productive basis. This would require the repair vendor to possess in-depth product knowledge, diagnostics, documentation, and spare parts/components to achieve this outcome.

End-User organizations thus place themselves at risk by utilizing repair vendors who lack necessary resources to maintain high quality levels. The resources which are critical to high quality repairs include:

• Genuine certified replacement components (i.e., RoHS compliant and manufactured by OEM)
• Schematic Diagrams
• Diagnostic Software
• Hardware/Software/Firmware (HW/SW/FW) upgrades
• Test Equipment, Jigs & Procedures
• Knowledge of equipment operating standards and certifications

For example in the telecom industry, the service provided by an Independent Repair Vendor (IRV) may seem to cost lower in comparison to the Original Equipment Manufacturer's (OEM) published repair price, but without the proper repair tools and technology, their repair processes may expose the end-user to additional costs including but not limited to:

• Lost Revenue Opportunity (e.g., lost customers and loss of airtime) due to telecom network outages
• Increased field engineering visits and costs due to high dead on arrival (DOA) rates
• Higher long term service and support expenditures and repair costs due to early life failures
• Increase in emergency dispatch calls and associated field engineering costs
• Decreased network performance quality due to compatibility issues with respect to quality of repairs, firmware and software improvements and interface with other components and systems

In essence, as the case example in Figure 2 shows, the potential cost savings from an independent can be offset and even result in higher costs due to repair quality issues identified above. Furthermore, the risk associated with independent repair vendor is quite high. Many OEMs have established service policies which negatively impact operators if repair vendor processes are not up to par. Examples of such policies include refusing end-of-line support obligations, voiding network performance penalties and contractual obligations that ensure product quality and rejecting repair if evidence of third party tampering exists.

Summary Evaluation Recommendations

In summary, end-users are advised to give careful consideration to the follow vendor selection criteria as they could be the difference between success and failure in the aftermarket:

• Demonstrated knowledge of equipment operating standards and certifications
• Evidence of substantial investment in Test Equipment &Test procedures
• Ability to provide a precise and detailed definition of test procedures and work flows
• Access to genuine certified replacement components (i.e., RoHS compliant and manufactured by OEM)
• Possession of original Schematic Diagrams
• Access to up-to-date and accurate Diagnostic Software and Hardware/Software/Firmware (HW/SW/FW) upgrades
• Capability to provide complete services for all equipment

Careful considerations to these factors will ensure that risks associated with low quality repairs are minimized and avoided. It will also avoid any unnecessary costs and liabilities further down the road. It is important to realize the price is never the only criteria in the selection of repair vendors, and not all repair vendors are the same. Ultimately, there is always a trade off between price and quality in the aftermarket repair business.

Reverse Logistics Magazine, Nov/Dec 2007