RL Magazine
The challenges and opportunities for mobile phone After-Sales in 2012. Part 2 – Device Manufacturers
by David Cope, MGH Consulting

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Never before has there been so much change in the mobile phone market. Market share numbers over the last five years have changed massively with some household names now struggling for survival, whilst other new entrants struggle to keep pace with sales. Add to this the rapid change in the device portfolio and the result is turmoil in the After-Sales service landscape. Centralised exchange / repair models from RIM, Apple and HTC have changed the landscape further. This article explores the effect of these dramatic changes and the challenges they bring to device manufacturers in After-Sales.

This article is the second of three which review the mobile phone After-Sales market, challenges and opportunities, from three perspectives. The first article, found in Edition 37, focussed from the perspective of the Mobile Phone Operators, MVNOs and Retail. This second article considers the device manufacturer’s perspective. The third article will focus on repair and third party logistics organisations.

COSTS AND COST DRIVERS

Manufacturers have often seen After-Sales as a necessary evil, the unfortunate by product of successful sales and marketing. In many organisations the head of After-Sales or repair does not sit on the board, but reports into Supply Chain or even Finance. If we were to draw a comparison with the IT industry we would expect to see this change over time. As After-Sales in the mobile industry moves from base warranty into revenue generating services, we would expect After-Sales to be increasingly seen as a core focus for manufacturers. Today, device manufacturers tend to focus on After-Sales when sales drop and the real cost of supporting the warranty population becomes evident. The current market turmoil means that many manufacturers are now taking a keen interest in their After-Sales operations and there is a willingness to question their end to end After-Sales strategies.

That said, the mobile After-Sales market has matured. Over the last 10 years manufacturers have focussed on controlling their After-Sales costs and much of the fraud, prolific in the mid 2000’s, has been eliminated. Most manufacturers have robust warranty claim management tools and reasonable control over material usage.

Once an organisation has put the basic warranty controls in place;

  • Centralised / semi automated warranty validation,
  • Proof of device repair,
  • Coupled or semi-coupled material flows (controlled by a Material Return Centre),
  • Fraud detection and management,

then the focus on cost control needs to shift elsewhere.

RELIABILITY, SUPPORTABILITY AND REPAIRABILITY

It goes without saying that the biggest driver of After-Sales costs for a manufacturer is product failure rate and therefore the greatest opportunity to drive down costs is to focus on design for reliability, supportability and repairability.

However, whether it is the continuous pressure to bring devices to market, or the lack of a seat at the top table, most organisations do not have a cohesive strategy dealing with these key cost drivers. Time and time again we see devices brought to market with evident software and sometimes hardware issues. Product return rates across manufacturers vary massively with the highest being twice that of the best. In terms of both cost and brand perception manufacturers need to give this area the focus it deserves.

Pushing warranty costs back up the Supply Chain is common practice in IT, but almost unheard of in the mobile market, somewhat surprising given the convergence of product in terms of functionality and increasingly price. Often organisations have the failure data and material analysis they need through their warranty control system and material return centres, but they fail to leverage the value of this data with the sub-component manufacturers. As the costs of components such as LCDs continues to drive up the Average Unit Price of devices, so we expect to see the leading After-Sales operations engage with sub-component manufacturers. With the high level of damage on mobile phones this needs to cover both the opportunities for sub-component rework as well as warranty reclaim.

Increasingly, we are seeing manufacturers taking more interest in repair avoidance. Having realised the costs of putting large volumes of No Fault Found devices through an expensive reverse supply chain, there is increasing focus on customer self help through the web and retail and in some areas increasing collaboration with operators and retailers. Software / Firmware Over The Air is also increasing and thereby reducing the number of software faults seen in repair centres, but there are very few signs of this moving into in-device diagnostics and proactive device support. Increasingly manufacturers are also looking at how social networking can be fully utilised in both reactive and proactive support.

SERVICE MODELS

The manufacturer’s service model is the next key driver of cost and there is a huge range of these across the manufacturers / geographies. From the completely centralised, back to manufacturer model (Apple) to the highly decentralised / local repair (Nokia). The relative cost drivers, of these different models, are illustrated in Figure 2.

As the table shows there are strengths and weaknesses to all models. However, a highly localised model only works with volume and therefore these tend to be built over time and only by the most dominant players. For new market entrants the most suitable solution is highly centralised, as low initial volumes are viable and the solution is easily managed. With time, as new entrants grow the tendency is for them to move more towards a hybrid solution. However, this migration needs to be part of a well thought through strategy with a coordinated approach across geographies. There are several examples of networks that have grown organically with little country control and no central control. These networks rarely optimise customer satisfaction or cost, but one thing is certain is they are far harder to unwind than they are to watch grow.

Figure 3 shows the largest manufacturers and their relative position between localised and centralised support. The arrows depict the direction of change with Apple moving to being less centralised and Nokia, Samsung and HTC reducing the number of service partners.

Each service model has its strengths and weaknesses in both costs as shown above and in terms of business customer service. The traditional model of Authorised Service Partners was easy for operators and retailers to manage with the financial responsibility for warranty being managed between the OEM and the ASP. The level of customer service (TAT, Exchange, Loan, OOW costs etc.) was managed between the Operator / Retailer and the ASP.

The more centralised model takes away much of the Operator / Retailers ability to shape the level of customer service. The TAT is typically set by the manufacturer, as are OOW costs. As Operators & Retailers have had to deal with service models from such a broad spectrum it has progressively raised the question as to what their level of involvement should be. As with most other technology sectors the warranty support is pushed back to the manufacturer completely and the end customer receives the level of service that the manufacturer delivers. Over time, if this is poor, it impacts on their sale and market share.

FUTURE MODEL

The drivers for change need to be considered in turn. These are;

  1. Increasing opportunity to drive down return volumes through self help, web support and retail support – resulting in a reduction in overall volume
  2. Mixed manufacturer service models for operators & retailers to deal with – resulting in the end of a single point solution
  3. Increasing device complexity and high entry costs for board component level repair
  4. Increasing need for manufacturers to engage with sub-component suppliers

This leads logically to a model where the manufacturers take greater responsibility for repair and the Operators & Retailers interface with the manufacturers through a 4PL. This model is depicted in Figure 4. Taking each area in turn;

FRONT END SUPPORT

Although it has been slow in coming customer self help through multiple channels is now a reality. We see greater coordination between device manufacturers and repair companies as the need grows for both multi-vendor as well as manufacturer specific solutions. FOTA is the first step in proactive support but over the next few years we expect to see far greater in-device diagnostics and a greater use of remote device support.

OPERATOR AND RETAIL FRONT END

There is an increasing focus on customer value added services, with a walk out working approach on upgrades and both free of charge and chargeable services. Logically these are expanding into remedial after sales services with SW flashing in retail and increasingly the screening out of NFFs. There is also growth in retail support with returns avoidance centres supporting the front end in filtering out NFFs.

DISTRIBUTION NETWORK

Given the retail coverage in most countries of Retailers & Operators it is logical that this is the primary network for After-Sales as it offers a low cost rapid Turn Around Time solution. With the utilisation of the Operator & Retailer front end and distribution network we envisage that handling fees for this front end activity will continue to be the industry norm.

4PL

Already many traditional repair companies find themselves in a pseudo 4PL type role. The percentage of repairs they conduct has dropped rapidly and the front end management of their customer’s end to end service delivery has increased, as has their need to manage the manufacturer repair solution. One of the key questions in the industry today is who will fulfil this role long term and whether there is a place for the “player-manager” either from a 3PL or from a repair company. Ultimately the successful organisation has to show clearly the ability to add value to their customer and in doing so the ability to select service partners, without bias, across a wide range of services, from call centre technical support, to repair. The full 4PL role with stock ownership and higher levels of risk will, most probably take some time to develop. However, there is certainly a developing 4PL role with increasing levels of risk / reward payment.

REPAIR

With manufacturers taking an increasing role for both in-warranty and out of warranty repair there is a growing responsibility to deliver a consistent high quality service to their Retailers & Operators and to finance swap stock when things go wrong. With this increased responsibility and potential cost we envisage the manufacturers increasing their focus on how they manage After-Sales. For manufacturers to not have to supply a full exchange / refurbish model there will be increasing pressure for them to supply fast TAT same IMEI repair. In order to do this consistently they will need to take more of a partnering approach with repair organisations and to make sure the commercials they set up work for both parties. Most repair companies work on very thin margins and progressively little of this margin comes from the manufacturers. Potentially we see the possibility that manufacturers will offer their customers a range of services, from rapid same IMEI to refurbish swap. It will be interesting to see how the commercials of such a range of services will work out.

REWORK

With ever larger screens and AUPs there is an increasing financial and environmental pressure to rework sub-components. This non TAT dependent repair will be done in low cost territories and progressively we see the manufacturers working closer with the sub-component manufacturers on both how and where these repairs occur. This also ties into the sub-component manufacturer responsibility for in warranty failures discussed in the reliability, supportability and repairability section.

SUMMARY

In today’s market, device manufacturers cannot afford to not have a well thought through After-Sales strategy. The level and speed of change demands that the manufacturers make sure they have the right people in the right place. This is also true for the repair companies and 3PLs. They need to position themselves with the right services, capabilities, IT and cost base to benefit from the changes. Over the next two to three years there will be two groups of companies, those who made it happen and those sitting there saying “what happened”?

David Cope, Founder, MGH Consulting. Managing Director of MGH Consulting with 21 years experience in After Sales Service and Supply Chain Management. Major operational roles in Xerox and ICON with multi-million Euro P&L responsibility. Global Consultancy experience as a Principal in Pricewaterhouse Coopers. Successful delivery of major change initiatives in some of the largest global service operations.

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