Theory of Constraints Handbook - James Cox Iii [587]
Warranty revenues are usually a time-proportionate, fixed percentage allocation of equipment sales revenues to CS. It does not reflect the value of the service agreements that will replace it once the warranty expires; it is just an arbitrary allocation—an allocation, not a market price, tested through the market’s competitive mechanism.
Warranty expenses are usually “buried” in the overall expenses of CS. It typically covers not just service, but also the installation and training of the user. In addition, the timing of the beginning of the warranty period is often vague, and frequently tends to start long after the shipment of the equipment; sometimes after its installation, often after formal client acceptance. One can only imagine, the faster the product is rushed to the market the bigger the burden of warranty expenses, without any comparable growth in the percentage of revenue allocated to CS.
In addition, one of the “goodies” sales people use to “sweeten” the sales deal is the extension of the warranty period, either free of charge or at minimal cost to the client. This additional burden on CS is rarely (if ever) factored into the business picture.
No wonder that warranty expenses, which in the past were a minor irritation in an overall positive picture, are seen today as a major problem; a problem that casts a dark shadow on the overall CS business situation, which is fast moving from rosy to a very worrisome one.
As we can see in Fig. 30-4, warranty revenues distort (see the core problem in 500) rather than assist the ability to analyze, forecast, or plan warranty’s impact on the overall business of CS.
When we add what happens with the warranty to the problems CS already faces (lower prices, greater strain on the resources, shorter product life cycle), the overall business picture of CS becomes even more grim (see Fig. 30-5).
FIGURE 30-4 Warranty CRT. (Source: Klapholz and Klarman, 2009, 47.)
So, why not dump CS altogether? Why should the producer take this burden in the first place? True, you hardly can sell anything today without providing proper warranty and service (is watermelon the only thing sold without one?), but why not let the market mechanisms take care of that? The problems lie in the equipment producers’ realization that CS is necessary due to its strategic impact on the revenue of the firm, both in the present as well as in the future, as seen in Fig. 30-6.
FIGURE 30-5 The bleak outlook of CS. (Source: Klapholz and Klarman, 2009, 14.)
FIGURE 30-6 The business impact of CS. (Source: Klapholz and Klarman, 2009, 14.)
FIGURE 30-7 CS as a hostage. (Source: Klapholz and Klarman, 2009, 15.)
The bottom line of this situation is an unattainable one; companies in the equipment business are held hostages of their installed base of equipment as in Fig. 30-7.
It is far away from the common wisdom of equipment producers, which for years have seen CS as a reliable “cash cow” of their organizations, immune to the inherent capriciousness of the markets.
What to Change
The basic approach of TOC to problem resolution requires us to start with identification of the core problems—the core drivers behind the rise of the multitude of undesirable effects we endure in the organization.
In order to make sure that the reality picture we portray here, dark as it may be, is an exhaustive one, we must go one step further; let us have a look at the day-to-day relationships between CS and its customers. We should relate to what CS personnel often call the “abuse” of its services by the customers.
In spite of the mantra of any business organization, “The client is always right,” nobody knows better than CS that it is not always the case. The CS operational motto is rather, “The client is not always right, but he always is a client.” The CS contracts are similar to insurance contracts, promising the insured that when in need, the insurer will provide the technical expertise needed to bring the situation back