Theory of Constraints Handbook - James Cox Iii [586]
As with other parts of any business organization, CS is striving to contribute its share to the bottom-line results of the firm.
For many years in so many companies, the revenues of the CS organization were a major source of income. Moreover, as the annual CS contracts were almost automatically renewed year in year out, it was a source of very steady income, independent of the vagaries of the sales efforts. However, let us not make a mistake; the income derived was as a rule the result of hard work of top-notch professionals. At the base of it was an expert knowledge, a result of years of hands-on experience, which enabled it to happen.
As we have mentioned previously, the growing competition has brought about, with a plethora of other effects, a constant process of decline of the selling price of the equipment. That, in turn, has reduced the income derived from providing technical support for the installed equipment. Moreover, today the price, which is the basis for comparison between different suppliers of equipment, is the total cost of ownership (TCO), which takes into account not only the selling price, but also the expenses involved in keeping that equipment fully operational.
Fierce competition imposes pressure on equipment price and thus on the price of technical support, which leads to a steady erosion of service revenues. The net result is the fast transformation of what used to be a very profitable part of the business into a problematic one. Its impact on the overall profitability of the equipment business is turning from very positive to much less so.
The interplay of these phenomena can be described as the following cause-and-effect (Current Reality Tree [CRT] in TOC terminology) as diagrammed in Fig. 30-1.
One can easily envision what will happen over time, if the Operating Expenses involved in providing service is fixed (if not growing over time), while the revenue it generates only goes down, as in Fig. 30-2.
In the business world, if a product or service shifts from a profit-generating operation into a losing proposition, it must be corrected, abandoned, or replaced by a better one. However, what if such a loss-generating operation happens to be the key to customer satisfaction and loyalty? In many cases, CS is the main driver in future sales to existing customers. In addition, the satisfied existing customers provide references to potential customers.
However, this deterioration of profits, in turn, leads equipment manufacturers to realize that they already face (or, in no time they certainly will) the following dilemma, with no simple solution in sight, as we see in Fig. 30-3.
The Warranty Trap
The initial period of time during which CS is provided, generally free of charge, to the user of the equipment is usually called the warranty period. Warranty is the assurance of the seller to the purchaser that the goods will function properly and shall be as represented. If not, it will be replaced or repaired. It constitutes a part of the purchase contract and must be fulfilled to keep the contract in force.
FIGURE 30-1 CRT of customer support. (Source: Modified from Klapholz and Klarman, 2009, 13.)
FIGURE 30-2 The dwindling CS revenue. (Source: Klapholz and Klarman, 2009, 24.)
FIGURE 30-3 The dilemma of CS. (Source: Klapholz and Klarman, 2009, 19.)
From the viewpoint of the customers, it constitutes a critical component of the value they expect to derive from the purchased equipment or service. However, for the customer service organization, which provides this service (usually) without a charge to the customer for a period of time, it can be a tricky business. Although it is customary to present this in the firm’s accounting system as warranty revenues with its associated expenses, and to talk about warranty profitability