Shortest Path To Recovery

For every batch of service spares that go out the door, a portion of them is bound to return, usually under less than ideal conditions.

No matter how well managed the forward-facing segment of a service parts supply chain may be, it’s often hard to predict exactly what will come back from the field. Will it test as good? If yes, will the organization still have demand for that tested good component? If it does not test as good, will it be covered by warranty, or will it simply be labeled as scrap? If it’s covered in-warranty, how long will it take for the organization to recover credit back from the device manufacturer?

All good questions that seem to be frequenting the desk of any supply chain director in almost perpetual fashion. It’s relatively easy to outsource the forecasting, planning and fulfillment of a service spares inventory, but what to do about this unpredictable returns stream? It represents an element of risk that is quite difficult to quantify until tough questions concerning the end-of-fiscal-period inventory reports are pushed out to inventory control teams by CFOs.

The answer lies within a complete turnkey service parts management solution that includes a buy-back model. The buy-back model has the potential to reduce the time it takes to recover all credits tied to field return product streams from months down to mere weeks or days. It’s the recovery equivalent of just-in-time access to service spares.

In fact, in today’s complex supply chain, no spare parts management solution is complete without a buy-back component. The buy-back model is based on sophisticated analysis of mountains of data concerning the field returns. The data is used by the inventory manager to build a profile of what the returns stream looks like for the organization in question. What is the product mix? What is the error margin within the product mix assumptions? What have the historical yields been for each SKU? How much has the organization recovered from device manufacturers as part of RMA claims concerning in-warranty failures? Does the scrap product carry an intrinsic value of any kind?

Once these questions are answered, a mathematical model is built that predicts the value of field return streams with manageable error margins. Our organization currently builds models that are sustainable for up to five months ahead of analysis date – with some margin of error, of course. The model is utilized to buy back inventory from our partners as soon as that inventory hits their dock doors – condition unknown.

As the underlying data evolves, the model evolves with it. The upside is near-instant gratification for our partners when it comes to recovering value from their field returns instead of managing accounts receivable reports for extended periods of time. And often, the buy-back model prevents good inventory from going stale and bad inventory from ending up in a dumpster somewhere.

While evaluating a buy-back model for your organization, the most important point to consider is picking the right partner for the right commodity mix. Once successfully on-boarded, a properly executed buy-back model will reduce total spend on inventory and will contribute positively to your organization’s lean planning practices.

Site balancing for a supply-chain advantage

I was working with one of Converge’s customers a few weeks ago, analyzing service parts inventory levels across half a dozen of their global sites. The exercise was a valuable reminder of the importance of service parts inventory planning and brought to mind a broader supply-chain management problem concerning dynamic sharing of inventory across multiple sites.

Dynamic sharing is a relatively new concept that allows multiple sites to transfer inventory back and forth as needed. To put this into perspective, let’s take the computing industry as an example and focus on notebook computers. There are many common components across multiple brands of notebooks. These common components are typically categorized under CPU modules, memory modules, hard disk drives, optical drives and liquid crystal displays.

Now, let’s consider a service provider that refurbishes customer-returned notebook computers for more than one manufacturer within the same site or at multiple service locations.

The service provider will typically receive consumption or failure forecasts from each manufacturer, and in turn will procure service spares utilizing the notebook manufacturer’s internal part number for each service part.

While this system works well for meeting service-level requirements that the supplier must adhere to for each notebook manufacturer, it also introduces the risk of overprocurement of the same core part under various internal part numbers – either for the supplier or for the owner of the spare-parts inventory.

When this occurs, Converge is approached by our customers, at the end of each fiscal quarter or fiscal year, to evaluate cross-utilization opportunities of their “internal part number” inventory across multiple sites in an effort to drive down their inventory levels by reducing new procurement.

While periodic site balancing through many-to-many part number translation is a good step in the right direction, continuous linkage among internal part numbers that boil down to the same core part number across all service sites can improve supply-chain efficiencies by inherently altering procurement behavior.

Clearly, this is easier said than done. It requires clean data and a fairly sophisticated application logic that is deeply embedded in the supply-chain DNA of the service provider. However, it also represents a competitive advantage if executed properly. In today’s supply-chain services arena, where inventory ownership is the major source of financial liability, a quantifiable competitive edge such as real-time site balancing can be the winning ingredient.

Does your organization practice site balancing? Let me know what you think in comments or by sending me an email.

Inventory optimization strategies

The risks associated with carrying excess inventory have persuaded a number of major technology OEMs and contract manufacturers to implement asset reallocation programs. The financial risks can be quite significant and certainly warrant a closer look at the benefits of inventory optimization.

The underlying problem is simple: Companies tend to pile up excess material for too long. As I've mentioned before, technology companies just don't have the dedicated resources necessary for proper inventory assessment. Because of this, many aggregate all excess product together, regardless of its value or condition, in order to balance the books. This unfortunately causes companies to lose a significant amount of revenue if and when they sell excess product to the wholesale market.

This situation can be significantly improved. The burden of inventory liability should be removed from technology companies and transferred to reverse supply chain specialists that have built asset reallocation strategies specifically designed to address excess inventory, and have developed strong channel relationships. Supply chain specialists such as Converge work with their partners to incorporate different levels of the supply chain and a range of unique services into inventory optimization strategies.

To effectively manage excess inventory, supply chain specialists can employ the following strategies on behalf of EMS providers, OEMs and service depots:

• Asset reallocation
• Testing and screening
• Data destruction
• System teardown and parts harvesting
• Refurbishment
• Spare parts management (SPM)
• Product returns management (PRM)
• Vendor-managed inventory (VMI)
• Kitting programs
• Market intelligence

Within the range of reverse supply chain strategies, three services stand out for their potential impact on the bottom line:

Product ID, Classification, Testing and Refurbishing: These tasks help to identify the product, its quality and restrictions. This service implements the strict multipoint quality control tasks necessary to refinish and test a product to ODM or OEM specifications and maximize value.

Reconciliation and Reporting: Supply chain specialists will offer the ability to reconcile any given shipment at any stage of the process life cycle, and provide real-time reports for an end-to-end chain-of-custody view.

Reverse Fulfillment: This service steers excess inventory or customer/depot returns back to the supply chain to be used in the service spares environment. Centralized stock views are updated in real time, enabling a more efficient, cost-effective organization.

There are, of course, scores of reverse supply chain services that could add value to the bottom line. The takeaway I'd like to leave you with is that even a small shift in focus can turn an excess inventory issue with floating values and interpretations into a solid financial asset. By optimizing excess inventory through a supply chain partner’s asset reallocation program, organizations can reduce inventory liability and exposure, maximize revenue recovery, and reduce operational costs – all while maintaining total customer satisfaction.

Top three ways to increase IT asset residual value

Cost controls can be an important part of an IT asset disposal (ITAD) program, with cost-mitigation techniques often enabling the program to pay for itself. One of the most practical approaches taken is the remarketing of retired equipment, which is not only a green initiative, but also one that helps mitigate IT disposal costs.

Remarketing can return significant capital to your organization, especially if your equipment or components have residual value. Value is directly related to the assets’ age and condition, but there are other factors that you can influence to increase their net worth and the overall return rate. Here are the top three ways you can save money and help increase the value of your equipment even before it reaches your IT asset disposition partner:

1. Keep detailed records.
If you don’t know what equipment you have, you can’t anticipate the remarketing value or apply a strategy to your remarketing efforts. Plus, a thorough list of retired assets can decrease your ITAD vendor’s reconciliation costs and will provide extra security if there are ever discrepancies.

Make it a policy to catalog information such as manufacturer/model, hard-drive capacity, memory configuration, CPU type, optical drives and other relevant information.

2. Pack units yourself for safe shipping.
Logistics preparation, including packing and palletizing, is one of the biggest expenses incurred in the proper disposal of assets. Simply packing your equipment prior to pickup could reduce freight costs by 50 to 90 percent. And some ITAD companies, Converge included, will send preconfigured packing kits to clients to make the process extremely simple.

3. Keep machines clean and in working order.
Equipment that needs to be tested, screened and repaired will draw away value, and in the end it may even be cost-prohibitive to remarket. When machines are properly maintained and serviced throughout their life cycles, your ITAD partner will be able to remarket them easily, providing the best return opportunity. The end result is a greater return from your investment.

Start today by implementing even just one of these strategies. You’ll immediately start to save money and maximize the value of your end-of-life IT assets.

For more strategies aimed at increasing IT asset residual value, I invite you to get our white paper Checklist to Driving IT Asset Residual Value.

Recognizing inventory risk in technology manufacturing

Carrying too much inventory is a risky situation, yet it’s a common occurrence for many computer manufacturers, EMS providers and service depots. Excess product is easily accumulated during the ebb and flow of the forward and reverse supply chains, and problems arise when overvalued, obsolete or expired products are no longer needed and become a fiscal liability. In the typical overstock scenario, excess inventories are typically liquidated for pennies on the dollar.

Sources of Excess Inventory
Surplus inventory tends to pile up from several sources:

• Inaccurate forecasting
• Service spares excess
• Customer returns
• Order cancellations
• Out-of-warranty or scrap product
• Product recalls

How It Happens
There are many reasons why inventory becomes a liability, but some of the more prevalent ones are purely driven by demand for excellent customer satisfaction – the product must be manufactured on time, shipped on time and serviced on time. This means having the right parts on hand at all times. What is typically lost in translation here is the fact that although supply on hand ensures total customer satisfaction, it also has the tendency to result in excess inventory accumulation. This is due in part to canceled orders, poor planning and forecasting, a lack of dedicated internal resources to monitor pockets of supply and, ultimately, overbuying.

In addition, customer returns or materials returned from field service are not screened, tested and recertified to ODM specifications for reuse in the service supply chain. This leads to an increase in spend on new service spares that companies may already have in their possession but are not leveraging.

Valuing Excess Inventory
Once excess inventory is properly assessed, it can be grouped into three types of material: leading-edge technology, common technology and trailing-edge technology. Prices in all groups are directly affected by market conditions, and as they change, technology values change as well.

Forward-thinking organizations can minimize inventory risk by implementing asset reallocation processes that maintain, test and authenticate excess product in order to take full advantage of market spikes or to increase efficiencies in the service spares environment. A limited number of supply chain specialists such as Converge exist to manage the risk caused by excess inventory. These supply chain partners have experience in both the forward and reverse supply chains and offer validated excess inventory management programs that can reduce inventory risk and optimize the supply chain for computer manufacturers and OEMs.

For more information on this topic, I invite you to download our white paper, Excess Inventory Management.

Set-top box builders' substantial returns rate

Recently, I posted some solutions for managing the long life cycles in the set-top box industry. While this equipment sits in a home for years, many of its internal components become obsolete, thus having a direct effect on managing the service spares inventory for these products. I’d like to discuss another area where additional improvements can be gained, related to the substantial return rate of set-top boxes.

Even though set-top boxes have a long life cycle, they tend to be returned a lot. For instance, they can break, service requirements change or, quite often, the end user simply changes residence. These high field return rates are not just a characteristic of product failure but also of simple address change. Multiply this occurrence by tens of millions of users, and the quantities returned are dramatically high.

Now these boxes are widely deployed – logistically they can be located anywhere. As equipment is returned to local and regional distribution centers, the returns are often palletized and trucked cross-country to a single processing center. This process inflicts additional harm, as electrical components such as fans and hard drives are much more susceptible to damage when transported in a hot truck under less-than-ideal circumstances.

Rather than ship boxes across the country to one location, forward-thinking cable service providers and manufacturers can save money on freight by relying on partner-managed, centrally located processing centers, such as those handled by Converge. This type of outsourced solution can utilize packaging and product planning techniques to minimize transit time and ensure that equipment is not damaged further. Once the set-top box arrives at its destination, it is tested to strict standards and reconditioned for redeployment, and components are harvested for reuse/resale or responsibly recycled.

I’ve noticed two opportunities that manufacturers often fail to take advantage of:

1. Cross-utilization of parts in processing. Since a high number of set-top boxes are returned simply because of a move, they typically have a high yield or pass rate. In a heavy-return/high-yield environment, there is significant opportunity to repair failed units with NTF (no trouble found) parts harvested from other returned units. This practice decreases the need to purchase additional service parts inventory if implemented in the decision-making process properly.

2. Often the only reason set-top boxes cannot be immediately returned to service is CID (customer-induced damage), such as scratches or other blemishes on the surface of the unit. For example, maybe someone placed a plant on top of the unit, leaving dirt and a water mark. Damage such as this can be easily fixed with harvested shell components or minor cosmetic touch-ups such as paint or cleaner, enabling the manufacturer to return the box to service quickly and at low cost.

Because of the unique nature of these high returns and the potential to reuse parts, it is surprising to me that many vendors are still running old-school processing centers that do not take advantage of these opportunities to save time, money, logistics costs and repair costs.

Do you have additional ideas? Let me know if you have any other low-cost ideas that can have high financial impact.

ITAD Trends Report questions part 2

My last post discussed some interesting questions asked during a recent ITAD Trends Webinar, specifically related to ROI measurement and liability in IT asset disposition. To close the loop, I'm covering another set of questions asked during the webinar regarding IT asset disposition regulations and a specific question from the ITAD Trends Report about how organizations dispose of end-of-life equipment. For more background information, feel free to download the Converge ITAD Trends Report or watch the ITAD Trends webinar on-demand.

Q: What kinds of penalties can companies face for improper ewaste disposal?
A: The penalties for improper ewaste disposal can be severe, costing millions of dollars, negative publicity, even imprisonment. And they can be imposed by any number of local, state, national, and global authorities. Plus, there are two issues to be aware of when disposing of ewaste: the physical danger of ewaste to the environment and the risk of confidential data being exposed.

If your violation falls under HIPAA, you can face criminal penalties of up to $250,000 and/or 10 years imprisonment per violation. And the Gramm-Leach Bliley Act imposes penalties of up to $100,000 per violation. Other regulations include the Sarbanes-Oxley Act, the Massachusetts Identity Theft Law, WEEE, RoHS, CERCLA (Superfund), California's Electronic Waste Recycling Act and Cell Phone Recycling Act, and many more. E-waste legislation is very complex and it's changing rapidly. An effective ITAD service provider will understand the regulations affecting your organization and have controls in place to offer comprehensive liability protection.

Q: How do I find out about specific state laws regarding disposal?
A: For those wishing to handle their IT asset disposition internally, information on state laws can be found through simple web searches. However, organizations partnering with an ITAD provider do not need to be versed in U.S. or global regulations. A professional ITAD firm will have a thorough understanding of the local, state, federal and international laws that affect your IT disposal and will seamlessly handle all of the details with a proven ITAD process that ensures your compliance.

Q: It seems like most of the companies in the survey have a formal ITAD process, but still a large number store their equipment. Is this a disconnect?
According to the ITAD Trends Survey, 86.4% of respondents claimed to have a formal ITAD strategy in place. However, when asked, "How do you dispose of your end-of-life equipment?" our survey results showed that nearly a quarter of the survey set store equipment until a solution is found. This could indicate that there’s still some educational outreach necessary related to the implications of improper disposal and how to properly handle end-of-life equipment.

A different opinion is that it could also reflect the uncertainty of organizations in deciding whether and how to redeploy this equipment. This could be a viable explanation due to the contraction that many organizations have experienced in the last year or so.

Ultimately, the fact that organizations are putting material in storage because they lack a better option can be alarming, especially from a data security standpoint. And also, the cost to maintain the proper type of storage area for IT equipment can be extremely expensive to maintain and secure.

I hope you have a chance to read our 2010 IT Asset Disposition Trends Report. Overall, I see a strong year-over-year increase in organizations becoming more savvy as far as how they utilize their ITAD programs. When you read it, send me a comment with your analysis of the survey results.

The evolution of computing

Last week I attended an industry event attended by many of the computing industry's heavy hitters. Among the many notable speakers was one who made a significant impression on me because his topic undeniably spoke to the changes that have happened and continue still, shaping the industry and the way we do business.

The key takeaway from the presentation revolved around the evolution of computing from the 1990s into the new millennium and up through and after 2010. The role of hardware and software has continuously evolved over time, and it has forever changed the way we manage the supply chain for enterprise computing.

To review history: Through the 1990s and into the early 2000s, most enterprise computing was vertically scaled, with expensive individual computers containing heavily specialized hardware running very proprietary computing environments. A by-product of this situation was that manufacturers had to run almost completely different supply chains for the enterprise versus the non-enterprise products, simply because the two platforms didn't have much in common. They weren't ever meant to share hardware or applications.

During this time the hardware itself was a differentiator — it was so unique that it was what made the enterprise special. But the challenge came in that the enterprise environment was usually very expensive to implement and maintain compared to the desktop environment.

Due to the uniqueness of enterprise products, manufacturers typically built higher volumes of non-enterprise products, which were more cookie-cutter in design and therefore less expensive. However, the heavy cost burden was on the enterprise side.

This meant that computer manufacturers had virtually no leverage through volume in the enterprise computing environment, because the materials lists were so different and the volumes so small. On the other hand, the non-enterprise products shared many components, allowing the computer manufacturers to negotiate volume rates.

Over the course of the past two decades there's been an increase in server farms, with the term "cloud computing" evolving to represent this. While in the 1990s hardware was the differentiator and a single enterprise computer running a specialized operation was the norm, the enabler for cloud computing now heavily rests with software as a strategic differentiator.

Today, enterprise computing has evolved to a collection of low-cost computers running a range of highly available software that is sold or allocated in portions — the current state of cloud computing. This industry trend offers an opportunity for computer manufacturers and service providers to implement lean planning and to optimize overall supply chain practices.

When you think about it, software technology and edge-of-the-network routing intelligence have come a long way to enable concepts like the cloud computing model. With this new environment in place, manufacturers have the option of cross-using the same set of parts that can be borrowed from lower-end products. Maximizing part sharing is an opportunity to build traditionally non-enterprise components into enterprise footprints.

Since the application layer has become a greater differentiating factor between enterprise and non-enterprise hardware, the underlying hardware platform is simplified and its components can be interchanged across multiple platforms. In turn, this strategic shift implies the merging of enterprise and non-enterprise supply chain management processes.

In short, the evolution of computing has led us to the present day, when hardware is becoming shared more and more across platforms. This translates into cost savings in both forward and reverse supply chains. Speaking specifically to service spares for this new footprint, this model helps to increase efficiencies by lowering inventory and operating costs. It also allows supply-chain managers to leverage their non-enterprise volume muscle to support enterprise platforms.

Along with R&D efforts currently under way furthering software development progress, we predict this trend of sharing parts between desktop and server to continue all the way through edge-of-network and infrastructure devices.

Set-top box builders' long life cycle problem

In today's blog, we'll take a look at the reverse logistics of the set-top box market.

From my perspective, there is plenty of room for improvement in the return process for set-top box builders. Achieving improvements in the returns process is actually not difficult when you implement life cycle planning principles. In this blog, I'll touch upon the issues of managing the long life cycle of these materials.

Set-top boxes are widely used and recognized in the consumer market. These are the cable and satellite boxes used with televisions and found in most households in many shapes, sizes and configurations. They have a very long life cycle, staying in homes for years after initial installation. But the life cycle itself is not the core of the problem. The real issue is the core commodities (memory, storage drives, etc.) in each set-top box that reach end-of-life while the box is still in use. This creates a problem for set-top box manufacturers, who have to ensure that they have a supply of materials to properly service and repair equipment that has been in the field for a significant amount of time. This ultimately leads to manufacturers making substantial last time buys (LTB) to handle end-of-life component issues – thus inflating their overall service parts inventory – or finding engineering solutions for the products to utilize other replacement materials.

Compounding this situation is the fact that legacy storage devices have been rapidly moving to the newer models and configurations in the hard drive industry over the past few years. In response, set-top box manufacturers have moved to newer architectures and discontinued the use of older technology. But this response raises several issues: Vendors can't get an ample supply of materials or support older architectures, or if they can, it's at significant cost. The end result is that manufacturers are forced to choose between two options: either negotiate for LTB (significantly increasing service spare inventory levels) or find an in-house engineering solution. It's a risky business proposition in both cases.

The third option that I recommend is to more closely evaluate the manufacturers' return stream, meaning boxes or parts that come back from service calls in the field. Typically, when these parts are returned, they are an afterthought and end up ultimately being recycled or liquidated for pennies on the dollar. These materials are usually stored for long periods before disposition and are not factored into the forward supply chain. In this example, the manufacturer or the service provider might be receiving significant numbers of no-trouble-found components from the return stream, or reverse supply chain, that they just don't realize they have.

The valuable parts inside the returned set-top boxes could be harvested to be reused or remarketed back to the service supply chain, removing the need to purchase large quantities of LTB components. However, this option is usually not considered. And rightly so, because teardown is generally not a core competency for most manufacturers and is considered a cost center.

Utilizing the skills of a third-party service provider can remove this roadblock. Third-party reverse supply chain organizations, such as Converge, are highly skilled in tear-down, testing, kitting, packaging and shipping materials back to the manufacturer or service provider for reuse in their service spares inventory. A third party can also properly recycle materials or save any valuable components that meet testing requirements for future use.

This solution is environmentally friendly because it minimizes waste while maximizing reuse. It is also cost-effective because it produces a stream of service materials that are already owned by the manufacturer while removing the need for costly LTB. And it doesn't cost as much as you would think. In fact, a service like this is essentially a net gain for the customer.

What are your thoughts on reusing tested and screened materials in the service environment?

ITAD Trends Report questions part I

Last month, Converge and IAITAM co-hosted a webinar to analyze the results of the second annual Converge ITAD Trends Report. The ITAD Trends Report is based on a survey completed by more than 100 IT managers. It sets a benchmark for the coming year by giving insight into IT asset disposition topics like disposal methods and factors, budgeting aspects, and data security dynamics to name a few.

We discussed all these issues and more in the ITAD Trends webinar, which you can watch here. At the end of our presentation we opened up the floor to attendee questions and received a lot of insightful queries. In fact, there were so many questions that we ran out of time before we could answer them all. This post and the next one will be dedicated to covering the most compelling questions from the ITAD Trends webinar. Read on, and if you find even more questions cropping up, feel free to send them to me and I'll try to answer them as well.


Q: What are some ways I can measure the ROI of my ITAD process?
A: Dollar for dollar, remarketing is probably the best way to measure the return on investment of your ITAD process. Simply remarket the systems or components that have value and apply the revenue generated to your ITAD costs. Another ROI consideration is cost avoidance, where you implement a secure, thorough ITAD process to mitigate your liability for improper disposal arising from environmental or data security issues. The most recent Ponemon industry study places the average cost of a data breach at $6.75 million, which can be a good benchmark for measuring cost avoidance.

Q: Is a certificate of destruction enough to constitute a formal “transfer of liability” for disposed of assets?
A: I'm asked about liability often and the first thing I want to make clear is that an organization can never fully transfer liability. It will always be accountable for what happens downstream with that asset. A reputable ITAD services firm will never promise unlimited liability because they can only cover damages to the extent of their company's worth. And the original corporation will still be faced with the resulting liabilities of customer turnover, reputation damage and corrective actions.

That said, a Certificate of Destruction or Certificate of Recycling provides a high level of protection by showing that your organization took all appropriate steps to properly dispose of its IT assets. Even better, enlisting an ITAD provider who offers a completely transparent disposition process and complements your corporate objectives will offer the most liability and risk protection.