Product Support Financial Value Drivers. 2/10 – End User Product Utilization Rate.

Sep 24
2012

This post is the second of ten entries that will discuss product support financial drivers for solutions supplied by a commercial or military focused capital good Product Support Enterprise [PSE]. The 10 topics that will be discussed are the following:

  1. # of products employed by end-users
  2. End-user product utilization rate
  3. Product failure
  4. Environment in which end users engage the product
  5. Preventive maintenance processes employed
  6. Volatility of product technology
  7. Regulatory requirements
  8. Chronological age of the product installed base
  9. Life cycle stage of the product
  10. Manufacturer’s warranty coverage

The utilization rate of a product materially drives the financial impact of Product Support upon Total Ownership Cost [TOC]; an aircraft end-user that flies 500 hours/year will spend less on Product Support solutions than that of an aircraft end-user that flies 3,000 hours/year. The Product Support processes most impacted are correct/prevent unplanned failures and conformance to safety/regulatory requirements.

There are three primary ways in which a product’s utilization can be measured:

Period of use (i.e. 3 hours), frequency of use (i.e. 8 trips, 20 cycles), and output from use (i.e. 500 miles travelled, 1,000 pieces produced).

End user utilization rate for aircraft. Product support financial value drivers.

Choosing the appropriate utilization measurement can significantly impact the understanding of this key Product Support financial value driver. For example, if mileage is the only utilization measurement for a truck, and if the truck spends many hours idling, Product Support estimated costs based upon only mileage utilization may result in inaccurate forecasts; utilization measurement may sometimes require a blend of several factors.

The following four deployability types that can be employed to segment the planned utilization of a product, as well as be compared to a baseline utilization level:

  1. Preparing for deployment (i.e. garrison training); 1.00=baseline
  2. Non-deployable (i.e. schoolhouse training); ~1.25 of baseline
  3. Deployed (i.e. combat, humanitarian); ~2.00 of baseline
  4. Stored for future deployment (i.e. advanced deployed); ~.05 of baseline

Recently I delivered a weapons system Product Support Business Case Analysis [BCA] to a TACOM lifecycle management command program office in which the products were to be employed in all of the four above deployability types. The product studied was to be fielded over a 6 year period, but the distribution of the product’s deployability types had yet to be decided, but regardless, I had to estimate the impact of Product Support upon TOC in order to deliver my Business Case Analysis.

EOD team and product support

Given several known and unknown factors, I applied the following distribution of the products to be fielded for each period that a product was in-service: 70% preparing for deployment, 10% non-deployable, 15% deployed and 5% stored for future deployment. Using the variance factors from the baseline, the utilization of all the fielded products from the baseline was calculated as 1.15= [(70%*1.00) + (10%*1.25) + (15%*2.00) + (5%*.05)]. This weighted cost factor was applied to all processes that were driven by product utilization. For example, if the utilization baseline was 1,000 hours year, then a 1.15 weight factor would drive the annual utilization rate for each fielded product to be 1,150 hours.

Knowing that the Mean Time Between Failure [MTBF] was 2,000 hours and the weighted utilization was 1,150 hours/year and that the average cost of a repair was $2,000, I could estimate that the annual Product Support cost for the correct-failure Product Support process per fielded product was $2,875= [(1,150hrs/2,000hrs)*$5,000]. This was a simplified calculation, but it provides an overview of how utilization impacts Product Support costs.

Hypatia©, a Giuntini & Company financial software tool, provides a highly automated means of calculating the above and other product support financial value drivers, as well as an effortless way of being able to change any utilization assumption and immediately understand its impact upon total ownership costs.

 

Don’t Always Trust Product Support Enterprise Financial Data

Jul 23
2010

Recently General Motors (GM) reported their 2009 new-condition light vehicle sales warranty expenditures. In calculating the warranty expense per vehicle sold, the results were $357. Utilizing this per vehicle cost in calculating the average price per vehicle sold to the dealer network, this would indicate that GM sold each of their vehicles at an average price of $14,300…appears to be a very low number relative to all its major competitors…and common sense.

With US sales about 35% of GM’s overall unit sales and the average US vehicle sold to dealers at around $23,000, GM is implicitly indicating that the average price of the remaining light vehicles sold in the EU and Asia would be about $9,000 each…not likely. The warranty expenditures have a material impact on overall earnings for GM, thus this “cost conflict” is important.

It may be that GM, currently controlled by the Federal Government is applying “creative” financial accounting, similar to that of the Federal Government has been employing for decades…but that is another story.

Lesson Learned: When performing financial analysis of a Product Support Enterprise (PSE), warranty is an OEM’s cost incurred by the PSE, always validate the results by employing a secondary calculation for at least a selected group of costs that are material….a bit more work, but important in delivering accurate results.

Bob Hallinan of Giuntini & Co. Appears on ‘Tip of the Spear’

Jul 21
2010

Giuntini & Co. Aviation Lifecycle Segment Leader Bob Hallinan, speaks with IDGA’s Nick Younker on UAV/UAS lifecycle sustainment. Visit IDGA.com to listen to the radio show.

IDGA and Giuntini & Co. to host 2 day seminar

May 28
2010

IDGA and Giuntini & Co. to host 2 day seminar on “Managing the Parts Employed in the Product Support Process of of COTS Items”.

Coming this October to the Washington DC metro area. Contact info@giuntinicompany.com for current details. More information coming soon…

IDGA and Giuntini & Co. to host online seminar

May 28
2010

IDGA and Giuntini & Co. to host online seminar on “Managing COTS items in the Trailing Edge Technology Business Model”.

Coming this July to a computer near you! This interactive experience will allow you to communicate directly with Ron and other SMEs about the future of COTS and how COTS will be utilized in the Trailing Edge Technology Business Model. Contact info@giuntinicompany.com for current details. Official registration coming soon…

Ron Giuntini tapped to host first ever “Ask the Expert”

May 28
2010

Ron Giuntini tapped to host first ever “Ask the Expert” networking break at the IDGA Military Logistics Summit, September 13-16 in Vienna, VA.

The Giuntini & Co. Principal was asked by event chairman, Tom Engelman, to host a first-ever consultation break during the second day of the main conference. The session will allow delegates to ask questions about the transition from performance based logistics to the outcome-based product support business model.

Ron Giuntini appointed to the IDGA Military Logistics Summit 2010 Advisory Board

May 28
2010

Ron Giuntini appointed to the IDGA Military Logistics Summit 2010 Advisory Board

The Giuntini & Co. Principal is one of 5 industry and military leaders selected to advise on the proceedings and structure of the 2010 Military Logistics Summit in September.

John Kotlanger and Ron Giuntini selected to host “PBL/Outcome-Based Product Support Master Classes

May 28
2010

John Kotlanger and Ron Giuntini selected to host “PBL/Outcome-Based Product Support Master Classes” at the IDGA Military Logistics Summit in Vienna, VA September 13-16, 2010.

Ron Giuntini to present at IDGA May 24th

May 21
2010

Ron Giuntini to present a workshop on technology-focused product based lifecycle business models to the US Military at the IDGA Irregular Warfare international summit in Arlington on May 24th.

Nick Younker Interviews Ron on his weekly Radio Show

May 15
2010

Ron Giuntini discuss the impact of component technology used during international warfare. Nick Younker of the Institute for Defense and Government Advancement interviews Ron on his weekly radio show…

info@giuntinicompany.com

Tel: 570-713-4795