Technical Trends

Cost Savings Through Quality Alignment of New and Refurbished/Repaired Wirelesss Devices

by L. Bryant Underwood and Heather Steer

Reverse Logistics Magazine, July/Aug 2008

 

Outline:

Wireless carriers (carriers) and Original Equipment Manufacturers (OEMs) often mandate that the quality outcomes for repaired product must exceed the quality performance for new products in order to be acceptable. The basis for the disconnect between quality targets and measures for refurbished/repaired handsets and the designed quality of the new product equivalent is complicated. There are many aspects of the Reverse Logistics (RL) processes that directly impact the cost of bringing the refurbished/repaired handset up to quality targets. First, realize that these are long standing issues and there is no intent to cover all of the complexity surrounding this problem in a single magazine article. Rather, our objective is to frame this quality problem in terms of RL processes and provide some thoughts to foster further discussion. Because of the RL supply chain intricacies, solutions must manage to address issues that touch almost every element of the RL supply chain and also bridge some uncharted political turf. The benefits, however, are worth the effort.

The Problem:

For most mobile devices, quality requirements for refurbished/repaired products will exceed quality expectations for new product equivalent. Both carriers and OEMs negotiate static quality levelrequirements for repaired product with their third party repair providers (3PSPs). Whether it is for simplicity sake when writing contract terms or due to an idealized vision of actually reaching a standard quality level across all OEMs and all device types, the disparity between quality requirements for new versus refurbished/repaired product drives significant costs into the repair process. For example, for a typical carrier, the AQL for a new product may be 1%-1.5% per month whereas the AQL for a refurbished/repaired product is 0.4%-0.5%. The primary repair cost driver results from the attempt by the 3PSPs to try meet quality requirements that were never designed into the new product.

Intuitively, a product that is "used" should be expected to perform similar to like-new or perhaps slightly lower standards due to general wear and tear. Rarely do used products perform at a significantly higher quality level than the designed level for new product. Trying to drive quality into a used product that was never designed in the new product is an expensive goal, as there is no easy fix or possibly no fix at all. Despite this uphill battle, this is exactly what the 3PSPs are trying to achieve for some devices today and most will tell you they are struggling to meet the objectives on a consistent basis. Successes are transient particularly with changes in product mix.

What Strategies Do 3PSPs Use To "Create Quality? "

Product Quality is tied closely with designed attributes. Examples of these can be as obvious as minimizing openings that could catch rain and promote corrosion to moving very small chip capacitors away from locations close to the PCBA edge. There is some opportunity to further promote design improvement once product is in the RL cycle by integrating product fixes and updates from the OEM, particularly as issues become known. When a specific problem becomes apparent, there can be an assessment of where in the supply chain process its fix can be integrated. These process entry points can include new product going forward, new product at the warehouse, new product in the field, seed stock, product already sold, already refurbished product, etc. Depending on where the integration of these corrective measures take place, there is a small potential the refurbished product quality could match or slightly exceed some older new product that has not received the most current updates. For example, if the fix is not incorporated into product that has already left the manufacturing plant, then the refurbished/repaired product could be of higher quality than the new product still flowing through the supply chain. This is a rare occurrence that most often is exposed as product goes into EOL (end of life).

Outside of these exceptions, repaired product will have a tough time producing quality outcomes that exceed the same model of new product. However, the targets are still there and the 3PSPs work hard to meet the goals. Most 3PSPs have been trying to meet these targets by implementing excessive inspection and re-inspection processes to cull out the potential marginal product and thus creating pallets of product that meet the AQL targets they are held accountable for. The marginal product (or potentially the whole lot) is then sent through additional screening processes and could be held until the OEM or the carrier provides direction for resolution or just sent back as Return Un-Repaired (RUR), Return To Manufacturer (RTM) or Scrap. This effort to inspect in quality that the product was not designed to possess drives costs in several major areas, including;

• Longer supply chain from idle product (i.e. working capital)
• Manpower expense from all of the additional handling
• Materials spoilage and waste as process steps are repeated
• Product that is scraped from over-work
• This assessment does not even include an examination of the additional incoming screening that is occurring at the OEM or carrier's warehouse to validate the repaired product meets the AQL targets and its related expense.
• If the repaired/refurbished product's quality requirements were tied to the quality performance of the equivalent new product's quality outcome, then arguably these process-driven costs could be removed or reduced from the RL supply chain. The reduction in cost is primarily realized because the recurring labor and movement of product is removed through reductions in costly re-inspections.
  
  

How Much Cost Savings Does This Really Represent?

To frame this consider that new product has three primary failure modes;

• DOA or less than 30 days (return for credit)
• Normal repair failure (return for repair/refurbishment)
• Abuse/corrosion

A typical DOA limit might be 1% and the upper limit for acceptable monthly returns is typically 1-1.5% per month/installed warranty base or 12-15% per year. Typically, the negotiated AQL rate for repaired/refurbished product is 0.4-0.5% per month/installed warranty base. Depending on how the calculation is made and the vectors of non-conformity are mapped, the expected quality outcome from repair might be twice the level as deemed acceptable from new product.

With that data in mind consider a typical US wireless carrier with 54M subscribers. Assuming that 80% of the customer base has current product, the in-warranty population is then 43M phones. At an average 15% return rate per year and an average material cost of $25 per phone, the full service cost (counting inventory, logistics, swap stock, etc.) can be as high as $60-70 per repair. This means that $453 million in repair expenses is being born either by the carrier, the OEM or a combination of both.

By reducing the over inspection noise to achieve like-new quality (versus better-than-new quality) outcomes, $6.50/repair can be removed from just the depot side of the supply chain. For our mythical carrier, this savings represents a conservative estimate of $42 million/1st Yr for the RL supply chain, which is obviously very real dollars. There would be additional and corresponding savings for the actual inventory and the labor/freight that is used to control it.

How Can a Carrier or OEM Start Realizing These Savings?

First, review the terms and conditions with your 3PSPs for quality level targets to see if they already align with new product calculations. If they do already align, make sure that your company has a dynamic monitoring process to manage the fluctuations that occur through the lifecycle of a device and a process to monitor that the repaired/refurbished product is tracking to these dynamic expectations. Many times what is written in a contract is not what is actually happening on the warehouse floor.

If the terms and conditions do not align the new product quality with the repaired/refurbished product target AQL, appropriate actions should include;

• Put in place solid monitoring systems that track new product performance
• Negotiate an alignment structure and methodology with the 3PSPs
• Develop reporting systems for the repair operations to ensure the processes are complied with
• Communicate with internal and external champions to promote the understanding needed to embrace the changes

Monitoring systems are critical components to this process improvement and are usually performed by a Quality Engineering group connected to Product Development. This involves the Supply Chain organization for a Carrier or the Manufacturing Engineering group for an OEM. The information from Quality Engineering will allow quality levels and design targets to be established that will match the productÕs initial design. This capability must be mirrored at the 3PSPs supporting the repair/refurbishment process.

Next, the organization needs to establish a regular communication (daily recommended at first, weekly after processes are in-control) between itself and the 3PSP to track the quality outcomes being achieved by both the new and refurbished/repaired product and to assure the contractual alignment terms are being met. There should also be contractual provision made for the opportunity to adjust the refurbished/repaired product quality standards as quality shifts in the new product. Ideally the quality targets should get higher and higher as the product evolves throughout its lifecycle and improvements are made (e.g. software patches are made available).

Conclusion:There is a very real opportunity to reduce costs across the entire equipment supply chain by reducing unnecessary procedures and aligning quality goals in a realistic way. Reducing costs does not mean lost revenue to 3PSPs. Cost reduction allows 3PSPs to focus their efforts on more intelligent, value-added revenue opportunities by freeing up the manpower consumed in these wasteful Òquality creationÓ operations. We have further content with greater detail that we would be happy to share on the website if there is interest.

 

L. Bryant Underwood is Director, North Americas Service at Foxconn Technology Group. Bryant’s past positions include GM, Director and VP level assignments in support of Operations, CRM, Materials and IT.

 

 

 

Heather Steer was most recently Vice President of Chainnovations, a boutique consulting firm specializing in service-based industries. Prior to that she was Senior Director of Reverse Logistics for Cingular Wireless and AT&T Wireless. Heather has a robust background in supply chain strategic operations, process re-engineering and finance operations and has worked in the wireless sector for seven years.