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After-sales service necessary evil or strategic opportunity?Milind M. LeleAbstract:In response to questions about how to provide the correct level of after sales service in the face of shifting customer needs and expectations, SLC Consultants, Inc. has developed an after-sales service framework, which examines the costs customers absorb when their equipment fails. Describes a framework which helps manufacturers identify the most cost-effective service strategies for different customer segments, and determine how these strategies should influence equipment design. Suggests that the framework can also be used to predict how product and service strategies must change in response to new technologies and evolving customer needs.How should equipment manufacturers respond to shifting customer needs, to provide after-sales service that sustains the competitive advantage of a complete product offering? What changes should they make in product design and support strategy? Which technological developments, such as modularity, redundancy, and greater component reliability, will be critical to their success?To answer these questions, we at SLC Consultants Inc. have developed our aftersales service framework, which examines the costs customers absorb when their equipment fails. Our approach helps manufacturers identify the most cost-effective service strategies for different customer segments, and determine how these strategies should influence equipment design. We also use the framework to predict how product and service strategies must change in response to new technologies and evolving customer needs.Customers costsWhen equipment fails, customers incur two types of cost: fixed and variable. Fixed costs occur regardless of the duration of equipment downtime. Usually these are the expense of parts and labour involved in fixing a malfunction. They might include the cost of the entire repair process, including, for example, the effort of ordering parts or sending an inoperative component to the manufacturer for service. Fixed costs are often out-of-pocket costs, especially for consumer goods when a product is no longer under warranty. Variable costs, which change according to the duration of equipment downtime, can be either out-of-pocket expenses pay for idle workers, for example or the opportunity costs of diverted resources and production time lost until repairs are completed.Basic service strategiesWe can classify service strategies into three basic groups: those that are product or design related, those that concentrate on the service support system, and those that reduce customer risk.Product design-related strategiesThese focus on increasing product reliability, building in redundancy, and adopting a modular product design.Reliability improvement reduces customers total costs. This is usually the first approach used by firms to improve service support.Modular design can reduce variable costs both by making equipment easier to repair and by allowing customers to replace modular components themselves. The entire product is divided into modules or components, many or all of which can be removed for repair or replacement. This approach is often referred to as “swap-out” maintenance.Built-in redundancy, products or systems designed with two or more of each critical component, allows a backup to take over if apart fails. Mission-critical non-stop computing applications are a prime example.Support system-related strategiesThese concentrate on changing the way manufacturers provide service. These approaches can address either improvements in system design or reductions in equipment repair.Improved system response time. Support systems often react slowly to equipment failure. Providing additional service technicians, moving them closer to customers or even on-site, and filling orders for emergency parts more rapidly will improve service response.Reduction in equipment repair time. Complementing reduced response time, improved service technician training, on-site or built-in diagnostic equipment, better-equipped mobile repair vans, and designing equipment for fast module swap-outs can cut repair time.Reducing or minimizing customer risk strategiesSome support strategies reduce buyer risk chiefly through warranties and service conracts. Warranties minimize customer out-of-pocket costs during the immediate post purchase period, allaying any fears regarding equipment reliability. Service contracts reduce or eliminate buyer uncertainty over maintenance costs.The frameworkManufacturers can use these three basic service strategies in combinations that vary according to customer needs and willingness to pay, available and affordable technology and equipment design. Choosing the best service approach for a given product is a complex balance, however, between buyers costs and requirements.The characteristics of customer costs and expectations allows us to determine the most cost-effective design and support strategy for a given situation. Any product can be assigned to one of four after-sales service segments: disposable, repairable, rapid response and never fail. Figure 1 illustrates the relationship between types of cost, the four market segments, and representative products in each category.Appropriate strategiesEach segment has corresponding optimal support strategies manufacturers should employ.DisposableWhen product failure produces relatively modest customer fixed and variable costs, a disposable product design is the best option. The manufacturer strives to build in reliability, concentrating less on product designs amenable to replacement or repair. The product lasts, minimizing the buyers risk of premature failure. But when it fails, it is discarded.Small household appliances, such as toasters and inexpensive office and industrial maintenance-repair-operations (MRO) equipment, fall into the low-fixed, low-variable cost corner of the market shown in Figure 1.Timex, particularly in its earliest years, provided a classic case of catering to the disposable segment. Its watches were inexpensive, had a one-year warranty, and lasted long enough to keep buyers from complaining when replacing them. Swatch currently uses a similar approach.RepairableIn this segment, customer fixed costs are high relative to the variable costs of failure. Consequently, the best strategy is reasonable (at least competitively comparable) reliability with product and service system designs that minimize customer out-of-pocket repair costs. Do-it-yourself repair kits, low-cost third-party repair service, and design simplicity epitomize successful design options.Such strategies are appropriate for products such as personal computers, PC peripherals and other expensive desk-top equipment, as well as large household appliances and high-ticket entertainment gear.Customer requirements play a critical role in the producers strategy choice, however. When a business customer has several computers, for example, the failure of one of them is not a disaster. Downtime could incur onerous opportunity costs, however, for an office relying on one computer for customer records, financial controls, communication, etc. In those cases, variable costs of downtime skyrocket, dwarfing fixed costs and making the strategies discussed in the rapid response segment more appropriate.Rapid responseWhen the variable costs of failure assume prime importance, the favoured strategy is arapid response with designs and service systems that minimize total downtime when a breakdown occurs. Reliability is of course important, but the key task for the manufacturer is balancing the expense of rapid response (via owned or outsourced field service infrastructures and loaners) with the cost of design facilitating quick problem diagnosis (remote read-outs, for example) and repair (such as modular replacement).IBM and AT&T are leaders in implementing such balanced strategies, as are farm and construction equipment makers Caterpillar and Deere. For example, just a few hours downtime can be critical to a crop harvest or a construction sites deadline.Never failWhen the fixed and variable costs of equipment breakdown are both relatively high, failure is not an acceptable option for customers, and “never fail” design and service strategies are best. Building the customers trust in the relationship with the manufacturer is essential. Component or system-level redundancy is a typical design solution. When that is not feasible, service providers turn to strategies such as stringent uptime maintenance, continuous monitoring, and on-site repair personnel. Large mainframes, PBXs, and central office telecommunications switches are examples of products sold to this segment.However, whenever a firm uses redundancy, it becomes the dominant strategy for all competitors serving this segment. For example, Tandem Computers fault-tolerant designs have supplanted more conventional approaches in mission-critical computing applications where uninterrupted performance is essential.Key conclusionsBecause the SLC after-sales service framework covers all instances where service is important, any conclusions we draw from it have broad application.Evolving customer expectations and technological change determine the characteristics of service segments. Segment shapes are therefore fluid and will change as well. A product catering to the repairable segment today might need to adopt strategies for the disposable segment tomorrow.The keys for success are substantially different in each of these segments, as summarized in Figure 2. Strategic emphasis shifts considerably from segment to segment as well. For example, with disposables it is essential to bring total price below the threshold at which customers will no longer pay for a repair. On the other hand, sustaining advantage in the rapid response segment requires the ability to improve total system performance: design, manufacturing, and service.Shifts from one segment to another are of crucial importance because they signal potentially major changes in the industry. Tandem shifted one segment of mainframes from rapid response to never fail, creating a new niche not dominated by IBM.Strategic implicationsIn the past, changes in technology and customer needs occurred gradually, permitting product design and marketing strategy to evolve at an equally slow pace. Manufacturers no longer have that luxury of time. Managers must anticipate how the accelerating rate of technological development and rapid shifts in customers priorities will affect their product strategies.They will find their products shifting positions among the fixed-to-variable cost relationships shown in Figure 1, changing market segments and appropriate strategies in the process. The SLC after-sales service framework thus is an early warning system, advising management to change course in advance of major upheavals. Companies can determine how future generations of equipment should be designed by analysing likely changes in customers costs and projecting future technological developments.Such forecasting is vital for products that are now on the edge of a segment, such as larger disk drives, medium-sized copiers, and super mini-computers. Yet, anticipating change is critical for established product types as well. Declining prices have caused small office copiers, for instance, to shift from the repairable segment towards the disposable. Lower prices no longer justify major repair costs, and major small copier components such as drum cartridges are themselves fully disposable.Similarly, personal computers have moved from the rapid response segment towards the repairables as those machines proliferate, minimizing the average users high variable cost of failure. It is cheaper for the customer to purchase a spare PC (or go to a printing centre such as Kinkos) and rely on carry-in repair shops rather than pay for on-site service. Rapid obsolescence nudges specific PC models closer to the disposable segment as well.Conventional strategies will falterThe net effect in those and other high-volume product categories will be to reduce substantially the size of the rapid response segment. Fewer customers will demand fast repair, leading to major alterations in those products service strategies:* Service contracts will become an endangered species. Once a product moves into the never fail or disposable segments, customers will no longer be willing to payanywhere from 2 to 10 per cent of the purchase price for service. For example, most owners of personal computers now opt for an extended warranty; ten years ago. they would have chosen the more expensive. on-site maintenance contract. Also, lowend home and small-office computer printers have become reliable and cheap enough to make service contracts unnecessary.* Support services will be unbundled. Equipment makers will be forced to set separate prices for parts, warranties, training, and walk-in service to meet the dissimilar needs of different groups of customers.* Profits will be squeezed. Service and support revenue once represented a major source of total corporate profits. Competitive pressures are already eroding profits on equipment sales, and changing service requirements will take away companies last source of relief. In the future, manufacturers face the unpleasant prospect of being squeezed in both areas.Preparing for changeThe SLC after-sales services framework is an invaluable diagnostic tool for equipment manufacturers. Managers can use it to identify potential weaknesses quickly in their current product or service strategies, redirect long-term plans for product development, and determine whether to act as reactors or initiators of change.Diagnostic toolAnalysing customers fixed and variable costs will allow companies to determine rapidly which of the four segments their products should pursue. They then should compare their current approaches to design and service to the strategies appropriate to chosen segments, determining how well they are positioned today. Managers must be careful to use customers perceptions of costs and evaluate service and product design along the lines of the keys for success shown in Figure 2.The analysis might reveal some common mistakes, such as
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