Executive Briefings

Looking Backward: Sony Ericsson Takes on Challenge Of Reverse Logistics

The joint venture between Sony Corp. and Ericsson AB seeks a competitive edge in the mobile-phone market. The solution: revamp the handling of returns and repairs.

It takes huge amounts of creativity and flexibility to succeed in the mobile-phone business-and maybe a touch of masochism as well. No industry changes faster, or experiences more abrupt changes of fortune. And Sony Ericsson Mobile Communications AB is no exception to the rule.

The joint venture between Japan's Sony Corp. and Sweden's Ericsson AB has had its share of ups and downs in the four and a half years since its birth. It has squared off against rivals such as Nokia and Motorola in the fight to keep pace with consumer demand. At the same time, it has had to cope with ever-shrinking product lifecycles, as cell phones morph into cameras, messaging devices, personal data assistants and video and music players. The hottest models become old news in a matter of months.

All of this can have a disruptive effect on the reverse supply chain-the return, disposal, repair and replacement of defective phones. In fact, a combination of rapid growth and dissatisfaction with the status quo caused the company's North American unit, Sony Ericsson Mobile Communications (USA), to take another look at the way it was handling the service part of the equation.

Sony Ericsson's setup for reverse logistics in the U.S. and Canada wasn't keeping pace with the demands of its customers, says Ian Scott, director of customer services for North America. The industry is dominated by big carriers such as Verizon, Sprint and T-Mobile, who can essentially dictate service terms to their providers. Sony Ericsson needed a system that was fast, reliable and flexible, able to manage parts for phones with a lifecycle of around nine months.

It also needed to lower its cost structure. The cost of many cell phones is either partially or entirely subsidized by carriers in order to entice consumers into lucrative service plans. So margins are sliced thin from the beginning. What's more, the pressure to lower overhead increases as the price of phones drops below the $100 mark. As for the sleek high-end models, able to play music or shoot video, they're too expensive to leave sitting around in some warehouse. Velocity, therefore, becomes another obsession of cell-phone providers.

Sony Ericsson had been relying on a single electronics manufacturing service (EMS) provider to handle, not just the making of its phones, but repair and logistics, both forward and reverse, as well. In recent years, EMS companies have made a strong bid to expand their service portfolios, as they scramble for ways to improve margins. Some have recast themselves as logistics service providers, competing with traditional LSPs. They tout the convenience of dealing with one partner for the full range of services needed to make product and get it to the customer.

Fine in concept, but it wasn't working for Sony Ericsson. Not an expert at logistics, the company's EMS provider was subcontracting out the freight and brokerage portion of its contract. That put one more layer between Sony Ericsson and the critical logistics component. And it prompted Scott to seek out a more direct relationship. "I wanted a face to kiss, or a face to slap," he says.

The repair situation was equally problematic. The growing complexity of cell phones was another reason why Sony Ericsson wanted a specialist to do the job, says Scott.

Complicating matters was the company's insistence on doing repairs in Mexico. That was the cost-saving piece of the puzzle, but it raised additional complications. How could Sony Ericsson accept returns from its customers, ship them south of the border for repair, and get them back into the U.S. in a matter of days, if not hours?

A Two-Pronged Strategy
The decision was made to split the contract into two pieces-one for repair, the other for logistics. Sony Ericsson would hire an expert for each, giving the company tighter control over the entire process as well as greater peace of mind.

The choice of a repair vendor was fairly straightforward: Bloomington, Ind.-based PTS Electronics Corp., an independent service company with more than 30 years' experience in repairing everything from high-definition televisions to cable converters to cell phones. The logistics end was a bit trickier. Sony Ericsson needed a provider that could surmount the daily issues related to cross-border traffic, and deal effectively with two customs bureaucracies.

As it turned out, the choice was close at hand. A few months earlier, Sony Ericsson had begun using Atlanta-based UPS Supply Chain Solutions for logistics services in Brazil. That contract had also been driven by the need to boost service and cut costs in the aftermarket sector. There, Sony Ericsson had chosen to outsource its entire post-sales operation, including customs brokerage, testing and repair, warranty, and inbound and outbound transportation, to UPS SCS. The vendor was supporting service-parts logistics at more than 140 retail centers in Brazil. Having achieved greater visibility of its parts inventory, more accurate testing and repair, and guaranteed delivery of repaired units, Sony Ericsson was able to increase its market share in Brazil.

With PTS Electronics signed up for the repair piece, the situation in Mexico was somewhat different from that in Brazil. Still, Sony Ericsson needed to draw on the same set of logistics skills that UPS SCS had demonstrated there. UPS SCS wasn't actually providing integrated reverse logistics services for another cell-phone maker, says Joe Beck, director of business development for high-tech and telecommunications. But it was well-acquainted with the challenge of moving large numbers of pallets back and forth across the U.S.-Mexico border. Beck claims that UPS SCS is one of the few LSPs that can furnish the wireless industry with reverse logistics services on a global basis. Adds Scott: "UPS had the corporate muscle and mass to put a program together quickly."

UPS SCS would manage the job out of a distribution facility in El Paso, Texas, just over the border from Sony Ericsson's chosen repair location of Ciudad Juarez, Mexico. At El Paso, the company would accept finished goods, defective units, replacement parts and accessories from Sony Ericsson's distribution center in Dallas. It would then perform cross-docking and customs brokerage services before shipping the items to Juarez for processing and repair. Modes of transport would include parcel delivery and less-than-truckload services.

The process begins when Sony Ericsson's customers send bulk shipments of returned product from consumers. The units are collected and consolidated on a daily basis at El Paso. UPS SCS receives electronic notification prior to the arrival of all shipments, Scott says. It stays in constant communication with the repair vendor, which holds no inventory on site.

Receiving inbound shipments in bulk, UPS SCS verifies both quantity and country of origin before moving units through its cross-dock facility, from which they travel straight to Mexico. They reach the repair center within 24 hours.

The Not-So-Easy-Part
So much for what Scott calls "the easy bit." At Juarez, incoming phones are repaired, scrapped or returned as unrepairable (in cases where the damage was caused by the user). At this point, UPS SCS enters the picture again. It picks up product from the repair center and moves it back across the border with all necessary customs paperwork. Next, it validates the serial numbers, model numbers and disposition of all units. Based on orders received, it picks, packs and ships to the appropriate end destination.

In most cases, the consumer gets a new phone immediately, and the defective unit, once repaired, is sold again. Nevertheless, the replacement cycle for repaired equipment is a fast 48 to 72 hours.

Scott was ready for trouble when the program began, having been swayed by stories of border-crossing snags between the U.S. and Mexico. Now he wonders whether those stories weren't urban legends. "It hasn't turned out to be a problem at all," he says. "[Delays] are practically zero."

The deal has done more than validate the wisdom of outsourcing repair services to Mexico. According to Scott, it has led to better service by Sony Ericsson, along with less inventory at all points in the supply chain. And, with PTS in the loop, the company ensures that repairs are done quickly and thoroughly.

The arrangement kicked off in February 2005, embracing the full range of services by May, and reaching peak volumes by September. Scott says activity has remained at a fairly steady state since then, with slight variances from month to month.

There were few if any glitches in the launch, says Beck. One challenge was to transfer UPS SCS's knowledge of the mobile communications industry to the southern border. Another was to build an internal system that could handle the sheer volume of product flowing through the pipeline.

Security has always been a concern where cross-border shipments come into play. UPS Capital, the unit of the parent company that addresses the financing needs of its shippers, was called on to put together an insurance policy to mitigate risk. The policy protects shippers against the possibility of pilferage or loss.

Such occurrences seem rare, however. Nor is there a need to hire additional armed guards to protect the expensive equipment, says Beck. Shipments flow through the established UPS cross-border network which has been running smoothly and well-protected for years. The carrier takes the usual precautions, such as enforcing loading patterns that make it difficult to remove the most valuable items from a trailer. Finally, there's the brief nature of the trips between El Paso and Juarez, a distance of less than 20 miles. The two sister cities are linked by a well-traveled route that has securely supported Mexican maquiladora operations for decades.
"We took a long time choosing the location for this," says Scott. "There were multiple possibilities. Juarez looked the safest."

UPS keeps Sony Ericsson continuously apprised of the status of the system. The customer can pull daily reports which give it visibility of every transaction. The information is fully integrated into Sony Ericsson's internal enterprise resource planning (ERP) system from SAP AG. In the process, Scott says, UPS SCS becomes "a virtual warehouse" for the company's service network.

Though Sony Ericsson is reluctant to discuss hard numbers, Scott says the company has doubled its customer-satisfaction levels since taking on UPS SCS and the Mexican repair program. Today, "we are pretty much the benchmark for our competition." Other benefits from the program, the partners say, include improved inventory control, visibility and overall process management.

Road Map for the Future
Both sides hope to expand the partnership into other areas and types of service. Utilizing its fixed-cost structure, UPS SCS expects soon to provide Sony Ericsson with technical screening and phone repair in a climate-controlled environment, repackaging and rekitting of repaired units, and the handling of credit returns.

"One thing I try to do within Sony Ericsson is try and get as much buying power out of our business as I can," says Scott. "If they perform well, I become an internal salesperson for them."

He intends to shift additional projects to UPS SCS. "Every relevant opportunity I get," he says, "we give Joe [Beck] the first option."

Beck says UPS SCS is now looking to draw on its experience with Sony Ericsson in Brazil and Mexico to set up a centralized hub serving major points throughout the Asia-Pacific region, China excepted. Down the road, there are additional opportunities for launching similar services in Europe-the region Beck calls "the big fish."

Other possibilities include the Caribbean and the rest of Latin America. Scott says Sony Ericsson might be able to use Mexico as a repair center for other nearby countries in the region. The hope is to make maximum use of a facility that's already up and running. "System integration is no mean feat," he says. "It's a difficult thing to do well, and we don't want to do it too often."

Scott is part of Sony Ericsson's global management team, which is constantly looking for ways to improve service worldwide. The U.S.-Mexico project, with its double emphasis on service quality and low cost, was the first of its kind in the company. Scott believes it can be duplicated elsewhere, breaking the pattern of conducting all repairs in local markets close to customers.

By hiring a reliable service provider, Sony Ericsson was able to delink geographical proximity and service quality, while throwing cost considerations into the mix. Scott says future projects should be easier and less uncertain to implement. "We did take a huge risk," he admits, "and gave it a very compressed time line."

In the cellular telephone industry, reverse logistics "is very much relationship-based," Scott says. "Working with UPS turns it into more of a professional, business-to-business environment."

The program represents another win for a company coming off an industry-wide slump. Recent financial results suggest that Sony Ericsson's fortunes are on the upswing. In 2005, it shipped a total of 51.2 million units, up sharply from 42.3 million in 2004. Sales rose to $8.7bn from $7.8bn, while net income rose to $427.4m from $379.3m. The fourth quarter was a record in terms of volumes, sales and net income, the company says.

Sony Ericsson got a big boost in the second half of 2005 from the introduction of music-playing phones that carry the famed Walkman brand. Between August 2005 and January 2006, it shipped 3 million Walkman units.

Sony Ericsson has also moved to assert greater control over the manufacturing stage of its supply chain. Late last year, it announced a $14m investment to acquire a 64.5-percent share in Beijing Suohong Electronics Co. Ltd. from Sony China. In a bid to strengthen in-house manufacturing, the company was planning to consolidate its majority share in BSE into Sony Ericsson in the first quarter of 2006.

Still, the effectiveness of those moves could be sabotaged by an under-performing aftermarket program. So Sony Ericsson will continue to look for ways to keep both its powerful customers and end-consumers happy-even as it keeps a sharp eye on overhead. "My role," says Scott, "is to control costs and create service solutions that help our salespeople to differentiate Sony Ericsson to our customers."

Sony Ericsson at a Glance
The company: Sony Ericsson Mobile Communications (USA) Inc., the North American subsidiary of Sony Ericsson Mobile Communications AB, a 50-50 joint venture of Sony Corp. and Ericsson AB.

The business: Mobile phones, accessories, PC cards

Headquarters: Parent company based in London, England

Senior executive: Miles Flint, president

Number of employees: 5,000 worldwide

Financial results: $8.7bn in sales for 2005, and $427.4m in net income

The supply chain challenge: Improving customer service while cutting the cost of managing repairs and service parts in North America. Repair center established in Ciudad Juarez, Mexico.

It takes huge amounts of creativity and flexibility to succeed in the mobile-phone business-and maybe a touch of masochism as well. No industry changes faster, or experiences more abrupt changes of fortune. And Sony Ericsson Mobile Communications AB is no exception to the rule.

The joint venture between Japan's Sony Corp. and Sweden's Ericsson AB has had its share of ups and downs in the four and a half years since its birth. It has squared off against rivals such as Nokia and Motorola in the fight to keep pace with consumer demand. At the same time, it has had to cope with ever-shrinking product lifecycles, as cell phones morph into cameras, messaging devices, personal data assistants and video and music players. The hottest models become old news in a matter of months.

All of this can have a disruptive effect on the reverse supply chain-the return, disposal, repair and replacement of defective phones. In fact, a combination of rapid growth and dissatisfaction with the status quo caused the company's North American unit, Sony Ericsson Mobile Communications (USA), to take another look at the way it was handling the service part of the equation.

Sony Ericsson's setup for reverse logistics in the U.S. and Canada wasn't keeping pace with the demands of its customers, says Ian Scott, director of customer services for North America. The industry is dominated by big carriers such as Verizon, Sprint and T-Mobile, who can essentially dictate service terms to their providers. Sony Ericsson needed a system that was fast, reliable and flexible, able to manage parts for phones with a lifecycle of around nine months.

It also needed to lower its cost structure. The cost of many cell phones is either partially or entirely subsidized by carriers in order to entice consumers into lucrative service plans. So margins are sliced thin from the beginning. What's more, the pressure to lower overhead increases as the price of phones drops below the $100 mark. As for the sleek high-end models, able to play music or shoot video, they're too expensive to leave sitting around in some warehouse. Velocity, therefore, becomes another obsession of cell-phone providers.

Sony Ericsson had been relying on a single electronics manufacturing service (EMS) provider to handle, not just the making of its phones, but repair and logistics, both forward and reverse, as well. In recent years, EMS companies have made a strong bid to expand their service portfolios, as they scramble for ways to improve margins. Some have recast themselves as logistics service providers, competing with traditional LSPs. They tout the convenience of dealing with one partner for the full range of services needed to make product and get it to the customer.

Fine in concept, but it wasn't working for Sony Ericsson. Not an expert at logistics, the company's EMS provider was subcontracting out the freight and brokerage portion of its contract. That put one more layer between Sony Ericsson and the critical logistics component. And it prompted Scott to seek out a more direct relationship. "I wanted a face to kiss, or a face to slap," he says.

The repair situation was equally problematic. The growing complexity of cell phones was another reason why Sony Ericsson wanted a specialist to do the job, says Scott.

Complicating matters was the company's insistence on doing repairs in Mexico. That was the cost-saving piece of the puzzle, but it raised additional complications. How could Sony Ericsson accept returns from its customers, ship them south of the border for repair, and get them back into the U.S. in a matter of days, if not hours?

A Two-Pronged Strategy
The decision was made to split the contract into two pieces-one for repair, the other for logistics. Sony Ericsson would hire an expert for each, giving the company tighter control over the entire process as well as greater peace of mind.

The choice of a repair vendor was fairly straightforward: Bloomington, Ind.-based PTS Electronics Corp., an independent service company with more than 30 years' experience in repairing everything from high-definition televisions to cable converters to cell phones. The logistics end was a bit trickier. Sony Ericsson needed a provider that could surmount the daily issues related to cross-border traffic, and deal effectively with two customs bureaucracies.

As it turned out, the choice was close at hand. A few months earlier, Sony Ericsson had begun using Atlanta-based UPS Supply Chain Solutions for logistics services in Brazil. That contract had also been driven by the need to boost service and cut costs in the aftermarket sector. There, Sony Ericsson had chosen to outsource its entire post-sales operation, including customs brokerage, testing and repair, warranty, and inbound and outbound transportation, to UPS SCS. The vendor was supporting service-parts logistics at more than 140 retail centers in Brazil. Having achieved greater visibility of its parts inventory, more accurate testing and repair, and guaranteed delivery of repaired units, Sony Ericsson was able to increase its market share in Brazil.

With PTS Electronics signed up for the repair piece, the situation in Mexico was somewhat different from that in Brazil. Still, Sony Ericsson needed to draw on the same set of logistics skills that UPS SCS had demonstrated there. UPS SCS wasn't actually providing integrated reverse logistics services for another cell-phone maker, says Joe Beck, director of business development for high-tech and telecommunications. But it was well-acquainted with the challenge of moving large numbers of pallets back and forth across the U.S.-Mexico border. Beck claims that UPS SCS is one of the few LSPs that can furnish the wireless industry with reverse logistics services on a global basis. Adds Scott: "UPS had the corporate muscle and mass to put a program together quickly."

UPS SCS would manage the job out of a distribution facility in El Paso, Texas, just over the border from Sony Ericsson's chosen repair location of Ciudad Juarez, Mexico. At El Paso, the company would accept finished goods, defective units, replacement parts and accessories from Sony Ericsson's distribution center in Dallas. It would then perform cross-docking and customs brokerage services before shipping the items to Juarez for processing and repair. Modes of transport would include parcel delivery and less-than-truckload services.

The process begins when Sony Ericsson's customers send bulk shipments of returned product from consumers. The units are collected and consolidated on a daily basis at El Paso. UPS SCS receives electronic notification prior to the arrival of all shipments, Scott says. It stays in constant communication with the repair vendor, which holds no inventory on site.

Receiving inbound shipments in bulk, UPS SCS verifies both quantity and country of origin before moving units through its cross-dock facility, from which they travel straight to Mexico. They reach the repair center within 24 hours.

The Not-So-Easy-Part
So much for what Scott calls "the easy bit." At Juarez, incoming phones are repaired, scrapped or returned as unrepairable (in cases where the damage was caused by the user). At this point, UPS SCS enters the picture again. It picks up product from the repair center and moves it back across the border with all necessary customs paperwork. Next, it validates the serial numbers, model numbers and disposition of all units. Based on orders received, it picks, packs and ships to the appropriate end destination.

In most cases, the consumer gets a new phone immediately, and the defective unit, once repaired, is sold again. Nevertheless, the replacement cycle for repaired equipment is a fast 48 to 72 hours.

Scott was ready for trouble when the program began, having been swayed by stories of border-crossing snags between the U.S. and Mexico. Now he wonders whether those stories weren't urban legends. "It hasn't turned out to be a problem at all," he says. "[Delays] are practically zero."

The deal has done more than validate the wisdom of outsourcing repair services to Mexico. According to Scott, it has led to better service by Sony Ericsson, along with less inventory at all points in the supply chain. And, with PTS in the loop, the company ensures that repairs are done quickly and thoroughly.

The arrangement kicked off in February 2005, embracing the full range of services by May, and reaching peak volumes by September. Scott says activity has remained at a fairly steady state since then, with slight variances from month to month.

There were few if any glitches in the launch, says Beck. One challenge was to transfer UPS SCS's knowledge of the mobile communications industry to the southern border. Another was to build an internal system that could handle the sheer volume of product flowing through the pipeline.

Security has always been a concern where cross-border shipments come into play. UPS Capital, the unit of the parent company that addresses the financing needs of its shippers, was called on to put together an insurance policy to mitigate risk. The policy protects shippers against the possibility of pilferage or loss.

Such occurrences seem rare, however. Nor is there a need to hire additional armed guards to protect the expensive equipment, says Beck. Shipments flow through the established UPS cross-border network which has been running smoothly and well-protected for years. The carrier takes the usual precautions, such as enforcing loading patterns that make it difficult to remove the most valuable items from a trailer. Finally, there's the brief nature of the trips between El Paso and Juarez, a distance of less than 20 miles. The two sister cities are linked by a well-traveled route that has securely supported Mexican maquiladora operations for decades.
"We took a long time choosing the location for this," says Scott. "There were multiple possibilities. Juarez looked the safest."

UPS keeps Sony Ericsson continuously apprised of the status of the system. The customer can pull daily reports which give it visibility of every transaction. The information is fully integrated into Sony Ericsson's internal enterprise resource planning (ERP) system from SAP AG. In the process, Scott says, UPS SCS becomes "a virtual warehouse" for the company's service network.

Though Sony Ericsson is reluctant to discuss hard numbers, Scott says the company has doubled its customer-satisfaction levels since taking on UPS SCS and the Mexican repair program. Today, "we are pretty much the benchmark for our competition." Other benefits from the program, the partners say, include improved inventory control, visibility and overall process management.

Road Map for the Future
Both sides hope to expand the partnership into other areas and types of service. Utilizing its fixed-cost structure, UPS SCS expects soon to provide Sony Ericsson with technical screening and phone repair in a climate-controlled environment, repackaging and rekitting of repaired units, and the handling of credit returns.

"One thing I try to do within Sony Ericsson is try and get as much buying power out of our business as I can," says Scott. "If they perform well, I become an internal salesperson for them."

He intends to shift additional projects to UPS SCS. "Every relevant opportunity I get," he says, "we give Joe [Beck] the first option."

Beck says UPS SCS is now looking to draw on its experience with Sony Ericsson in Brazil and Mexico to set up a centralized hub serving major points throughout the Asia-Pacific region, China excepted. Down the road, there are additional opportunities for launching similar services in Europe-the region Beck calls "the big fish."

Other possibilities include the Caribbean and the rest of Latin America. Scott says Sony Ericsson might be able to use Mexico as a repair center for other nearby countries in the region. The hope is to make maximum use of a facility that's already up and running. "System integration is no mean feat," he says. "It's a difficult thing to do well, and we don't want to do it too often."

Scott is part of Sony Ericsson's global management team, which is constantly looking for ways to improve service worldwide. The U.S.-Mexico project, with its double emphasis on service quality and low cost, was the first of its kind in the company. Scott believes it can be duplicated elsewhere, breaking the pattern of conducting all repairs in local markets close to customers.

By hiring a reliable service provider, Sony Ericsson was able to delink geographical proximity and service quality, while throwing cost considerations into the mix. Scott says future projects should be easier and less uncertain to implement. "We did take a huge risk," he admits, "and gave it a very compressed time line."

In the cellular telephone industry, reverse logistics "is very much relationship-based," Scott says. "Working with UPS turns it into more of a professional, business-to-business environment."

The program represents another win for a company coming off an industry-wide slump. Recent financial results suggest that Sony Ericsson's fortunes are on the upswing. In 2005, it shipped a total of 51.2 million units, up sharply from 42.3 million in 2004. Sales rose to $8.7bn from $7.8bn, while net income rose to $427.4m from $379.3m. The fourth quarter was a record in terms of volumes, sales and net income, the company says.

Sony Ericsson got a big boost in the second half of 2005 from the introduction of music-playing phones that carry the famed Walkman brand. Between August 2005 and January 2006, it shipped 3 million Walkman units.

Sony Ericsson has also moved to assert greater control over the manufacturing stage of its supply chain. Late last year, it announced a $14m investment to acquire a 64.5-percent share in Beijing Suohong Electronics Co. Ltd. from Sony China. In a bid to strengthen in-house manufacturing, the company was planning to consolidate its majority share in BSE into Sony Ericsson in the first quarter of 2006.

Still, the effectiveness of those moves could be sabotaged by an under-performing aftermarket program. So Sony Ericsson will continue to look for ways to keep both its powerful customers and end-consumers happy-even as it keeps a sharp eye on overhead. "My role," says Scott, "is to control costs and create service solutions that help our salespeople to differentiate Sony Ericsson to our customers."

Sony Ericsson at a Glance
The company: Sony Ericsson Mobile Communications (USA) Inc., the North American subsidiary of Sony Ericsson Mobile Communications AB, a 50-50 joint venture of Sony Corp. and Ericsson AB.

The business: Mobile phones, accessories, PC cards

Headquarters: Parent company based in London, England

Senior executive: Miles Flint, president

Number of employees: 5,000 worldwide

Financial results: $8.7bn in sales for 2005, and $427.4m in net income

The supply chain challenge: Improving customer service while cutting the cost of managing repairs and service parts in North America. Repair center established in Ciudad Juarez, Mexico.