Consolidating Repair Services Purchasing to Eliminate Non-Value Processes
Bill Lasniewski, C.P.M.
Bill Lasniewski, C.P.M., Senior Supplier Business Manager Sequent Computer Systems, Inc., 15450 SW Koll Parkway, Beaverton, OR 97006, (503) 578-3852.
Lee Buddress, C.P.M.
Lee Buddress, C.P.M., Assistant Professor Portland State University, PO Box 751 SBA Portland, OR 97207, (503) 725-4769.
80th Annual International Conference Proceedings - 1995 - Anaheim, California
Whenever repetitive purchases occur, a managerial goal will be the reduction of administrative cost through process simplification. Commonality of product or component across models or product lines only accentuates both the need for improvement and the magnitude of the result. Component repair services are needed by most manufacturers, yet often receive little process improvement attention. This paper will address this deficiency by examining the way Sequent Computer Systems, Inc. developed its innovative system.
Sequent Computer Systems, Inc. is a major manufacturer of integrated on-line transactional processing computer systems for business applications. One of the components of its systems is the power supply, which it typically acquires from a number of suppliers in several sizes. Two important requirements accrue; field replacement of failed units, and remanufacture of failed units at a service center. To address both of these needs, while minimizing administrative costs, Sequent personnel devised an innovative process.
Problems inherent in the traditional forms of this sort of repair/remanufacturing process include repetitive purchase orders, inventory tracking and location, receiving, warranty administration and cost estimation. Each of these contributes to excessive costs for administration of service requirements.
Prior to the introduction of the new process, Sequent purchased power supplies, in several different sizes, from a number of manufacturers. When a computer problem arose, a service representatives was dispatched to the customer's location. Often, rather than going through lengthy test procedures to determine the actual failed part, several parts, including the power supply were replaced simultaneously by the service technician as the fastest way to return the customer's computer to service. Since each different unit had its own unique mounting and connection, the service technician had to replace a failed unit with another identical unit. This required large inventories at several locations across the country.
After replacement, the unit was returned to Sequent, where the service department conducted preliminary tests to sort out those units with no defects from failed units. Serviceable units were returned to the several service stocking locations across the nation. Failed units were accumulated by the service department until several of the same brand were on hand. A purchase order was prepared, and the units were shipped back to the manufacturer for repair.
Three outcomes were possible. First, if the unit was economically repairable, that was done. If the unit was beyond repair, or if the cost of repair was prohibitive, the unit was scrapped. If the unit was still under warranty, Sequent relied on the manufacturer to make that determination and take appropriate action.
Costs for the various repair services were unpredictable, as each manufacturer had its own means of determining repair costs. Some billed strictly on an hourly charge basis. Others had different flat rates for each model of power supply. All of this resulting in mismatched paperwork in the accounts payable department. Repair bills could range from large amounts for complete overhauls to warranty repairs at no charge. Consequently, delays in payment of suppliers' invoices and excessive administrative costs were common.
Tracking became difficult, as units were shipped, repaired, scrapped or stored in several locations. Determinations of the status of a specific unit and just where in the system it was located, were often faulty. Beyond that, the determination of each unit's warranty status was questionable at best.
To address these and related difficulties, Sequent set about developing a new service purchasing method. Total annual expenditures for power supply repairs were approximately $70,000. While this is not an extremely large amount, it is significant enough to make it worthwhile to both reduce actual repair costs and attendant administrative expenses. Objectives of the Sequent process simplification include:
- Elimination of repetitive purchase orders through establishment of a long term contract with a single repair service supplier.
- Inventory of repaired power supplies to be maintained at a single, central location.
- Simple method for invoice reconciliation in accounts payable.
- Simple, yet foolproof warranty tracking and administration.
Sequent hoped to remove as many of the non value-adding elements from the repair process as possible. Toward that end, Sequent hoped to find a supplier who had the capability to repair all brands of power supplies, and would provide a satisfactory warranty for repairs. In addition, the supplier should have the capability to minimize transshipment and inventory costs for both units requiring repair and remanufactured units. Sequent wanted to explore the possibility of flat rate or standardized pricing to both remove the accounts payable paperwork mismatch problem and facilitate process monitoring.
With the assumptions that repair requirements would remain relatively constant, and that mix of power supplies to be repaired would do likewise, suppliers were invited to submit proposals to include the following:
- Cost to repair power supplies.
- Cost to add cables.
- Repair firm to assume responsibility for returning failed units still under warranty to original manufacturers for repairs.
- Cost for inspection of units where no trouble was found.
- Form and duration of warranty offered.
- Itemized non-recurring engineering or start-up costs.
- The method by which the supplier would maintain and account for Sequent-owned inventories of both repaired units and those in need of repair.
To facilitate supplier proposals, Sequent accumulated historical data on the average percentage of "no trouble found" units, product mix and the percentage of units requiring cabling.
After identifying several suppliers who appeared to have the necessary capabilities, Sequent invited proposals from three. From the responses, it was apparent that one firm - Zytec, was best suited to Sequent's needs. As a Baldridge Award winner and Minnesota Quality Award recipient, their quality processes were widely known. During contract negotiations, Zytec became ISO 9000 registered. It was clear that customer satisfaction was their primary focus. They had the capability to repair all brands of unit, and offered a warranty longer than those offered by the original equipment manufacturers. In addition, they were willing to negotiate a flat rate pricing system which would address Sequent's goals.
Negotiations were concluded between Zytec and Sequent Computer. At this time, the following features are implemented:
- Flat rate pricing for repairs.
- Zytec will maintain records, by serial number, of all units processed.
- Sequent personnel will also track all units by serial number to maintain current status and availability records.
- Sequent arranged for Zytec to buy cable requirements from Sequent's supplier at Sequent's prices, which were better than any Zytec could obtain.
- The one year warranty offered by Zytec for repaired units was far superior to the original manufacturers' industry standard warranty of 90 days.
As contract experience grows, the following features are planned:
- Field service personnel will remove faulty units as required, and return them directly to Zytec for analysis and repair.
- Zytec will return repaired units to field service locations directly.
The chart below illustrates typical cost saving results following the implementation of Sequent's flat rate contract with Zytec. The figures shown are representative of the broad impact of this agreement across the variety of brands and sizes of power supplies that it covers.
In addition to the savings shown above, Sequent anticipates the following results:
- Units to be shipped directly between Zytec and field service locations, without going to Sequent. Freight savings: 48%.
- A standard cost has been established which facilitates repair expense forecasts.
- Total anticipated annual savings of 30% of repair costs.
- Reduction of repair lead times by 43%.
- Administrative cost reduction of 75 %.
- Valuable warehouse space previously required for power supply storage now available for alternative uses.
- One year warranty for repaired units.
CONCLUSION AND RECOMMENDATIONS. Most firms experience logistical and administrative problems similar to those encountered by Sequent when addressing remote site repair requirements. Repetitive purchases from multiple suppliers inflate administrative expense and invite accounts payable problems. Multiple inventory locations increase inventory carrying costs. Long and complex logistics chains result in excessive freight costs. Warranty tracking is often either poorly done or not done at all. In all, this sort of activity demands large amounts of administrative time and creates unnecessary expense.
Sequent's experience with the warranty negotiated with Zytec illustrates the advantage of selecting a supplier with an exemplary quality record, as Zytec was willing to warrant its repaired units for four times as long as original manufacturers. This is one of the key elements which should be included in discussions with suppliers of repair services.
Fixed rate agreements have advantages for suppliers, as well. Their administrative cost of invoicing is significantly reduced. In the early stages of this sort of contract, both parties must carefully monitor its operation to assure a fair price to the buyer while maintaining a reasonable profit level for the repair firm. Original estimates of product mix or repair complexity may need to be adjusted based on actual experience.
While there may be many ways to resolve some of these difficulties discussed above, the Sequent solution provides a cost-effective resolution of all of them.