I read an interesting build log recently from an engineering student. The student, Andrzej Surowiec is studying electrical engineering at Warsaw University in Poland. He outlined how he was able to adapt a Retina Display to work on a PC. The interesting thing about the article was how inexpensive the process was. For less than $100 in materials he was able to get a 2048 X 1536 pixel retina display connected to a PC using a Display Port interface. That $100 cost included the retina display itself, the power supply, connectors, cables and backlight electronics.
The display Andrzej used was from the third generation iPad. That product was released in late Q1 of 2012. Consider that in a little more than a year the cost for this key part has dropped to the point that a retina-type display can be purchased from eBay for less than $60 retail! I share this story because I believe the financial managers in Reverse Logistics should work to normalize our ability to recognize the small and shrinking window of time when a product is worth repair. That window of time, I term the “repair half-life”. This is the point when after repair the total repair cost including margin and the product value is less than one-half of the new wholesale product cost.
Key to understanding the repair half-life is in measuring the delivered-value after repair. The worth of any repair process is the value that is added to the underlying asset to become salable. The repair service cost must be low enough to allow the product to be sold at retail with acceptable margins and good Customer demand. There will be some variation as to where this cost inflection point is. It will vary according to the structure of the business. A small owner proprietor shop will have much less of a delivered-value hurdle than a large Contract Manufacturer with US or European labor. In general however when you consider all the costs from the repair process:
- Residual product value
- All ramp costs
At the end of that repair process there should be the opportunity for the retailer to double their money with a retail product sale. If the retailer cannot, then you should seriously question if the repair offering is a truly viable business for the product in question.
Most of that logic is pretty clear and you already know this at least experientially. The real danger zone is how fast the market moves. The market trend is such that you need to consider the repair half-life not just for a single point in time when the repair process is stable, but across the entire ramp period.
The iPad 3 was on the market for just over six months before its replacement was announced. Just a few short years ago, products were routinely in production for over a year. Not today. If you started to perform warranty repair at product launch, you may spend two of six months getting the process stable and profitable. This is followed by three months of production with good margins. Then a higher cost long-tail production wind down. After that you just hope there are no write-offs from excess materials. To avoid this trap we must consider the complete area under the cost curve for the entire product life. The number one reason I have seen RL service providers struggle with profit is because they did not consider the hidden costs latent in the beginning and ending of a product life cycle. On top of this risk the production cycles are becoming so short that there are many products that can never have any hope of economical repair in the country of sale. For these products they need to go straight to salvage or export and avoid any attempt at repair outside of gathering information for engineering. So for your next RL opportunity, when performing the pricing analysis keep the repair half-life in mind and avoid radiation sickness of becoming a non-profit enterprise.
Bryant Underwood manages Public Safety Sourcing for Cassidian Communications, an EADS North America Company in Frisco Texas.