‘Remanufacture Your Business Environment’ – Material Handling & Logistics

Apr 08
2013

Be sure to check out my new article entitled ‘Remanufacture Your Business Environment‘ in this month’s Material Handling & Logistics. I look forward to your comments…

You can read the article on page 21 here.

Product Support Financial Value Drivers. 9/10 – Life Cycle Stage of a Product

Mar 19
2013

This blog is the ninth of ten discussing the product support financial value drivers of the solutions supplied by a commercial or military focused capital good Product Support Enterprise [PSE]. The blog will provide an overview on how the analysis of the life cycle stages of a product and its components can deliver a better understanding of the life cycle cost of a PSE.

The life cycle stage of a product inducted into a variety of Product Support processes can be broken-down into two primary stages: in-production and out-of-production, and then segmented into early, mid and late life stages. A further break-down can also be employed in which the product’s parts are either in-production or out-of-production. And finally the segmentation of a Product’s parts can be identified as being Made-To-Order [MTO], also referred to as developmental or proprietary, and Commercial Off The Shelf [COTS]. For each stage analyzed, the following 5 financial elements must also be reviewed:

  1. Direct resources: Tech labor (i.e. maintainers, tech reps)
  2. Direct resources: Parts (i.e. reparable, non-reparable)
  3. Indirect resources: Process flow (i.e. shop building, test equipment, schedulers)
  4. Indirect resources: Direct resource management (i.e. warehouse, transport, packaging, training)
  5. Indirect resources: PSE oversight management (i.e. offices, data infrastructure, leadership)

The blog will be a series of the following 3 charts providing a template for a variety of discussions in establishing PSE solutions throughout the life cycle of a product:

  1. Product life cycle graph and corresponding PSE activity
  2. Table of life cycle stages and potential scenarios; there can be many more scenarios that can be reviewed
  3. Example of inputs for each life cycle scenario selected

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The purpose of this BLOG was only to skim the surface as to the multiple questions that must be addressed when reviewing a Product’s life cycle and its financial impact upon the PSE.

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. Hypatia is also a proven, trusted and highly effective tool for assisting in the development of product support business case analysis.

Product Support Financial Value Drivers. 8/10 – Chronological Age of the Product Installed Base

Jan 08
2013

This post is the eighth of ten entries that will discuss product support financial value 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 requirement
  8. Chronological age of the product installed base
  9. Life cycle stage of the product
  10. Manufacturer’s warranty coverage

The basic premise underlying this Product Support financial value driver is that as an item that is continuously employed in a process gets older, “stuff” may or may not happen to it. The analysis of this area is primarily dominated by the product design/reliability engineering community; this may be good or bad as we delve further in our discussion.

 

 

 

 

 

 

 

For my calculations, all the primary subassemblies of an end-item need to be identified and codified as to falling into one of the six age-related reliability curves. These subassembly categories can be the following, though they are not exhaustive:

  • Sensors (i.e. lasers)
  • Electronics (i.e. computer processor)
  • Electrical (i.e. generator)
  • Mechanical (i.e. gearbox)
  • Hydraulic (i.e. actuator)
  • Hard/soft goods (i.e. filters)
  • Software (i.e. application)
  • Structure (i.e. housing)
  • Others (i.e. outfits, tools)

Once the reliability life cycle curves are identifies as well as the subassembly categories that are part of the end-item configuration, I can then identify how each reliability curve matches-up with the subassembly category.

 

 

 

 

 

 

 

 

Then, the costs of correcting or preventing failure can be estimated using the following methodology:

  • Identify a variable that is closely aligned with the cost of correcting or preventing unplanned failures. The correlation selected for our discussion is that between the value of a subassembly and the cost of its repair; the higher the value of the subassembly, the higher the cost of a repair event
  • Obtain a Cost Estimating Relation [CER] with that of the repair cost of a subassembly type and the value of the item. The use of warranty financial data, filed with the Securities and Exchange Commission [SEC] by every publically-held OEM (i.e. Caterpillar, United Technologies) and their key suppliers, provides a means to establish a CER

    For example, direct and indirect repair costs for electronic components, as a percent of their value, is 2% per year. If the cost of repair is 10% of the component value, then the annual failure rate is 20% of fielded items (2%/10%) based upon a “normal” utilization

Areas such as modifications and remanufacturing/overhaul can reset some of these aging factors. Also the source of design, design-to-order versus off-the-shelf, can impact reliability factors.

Now, for most reliability engineers, my calculations are most likely “foreign”, but I can tell you that leadership can understand my “simple” method of establishing the cost of correcting or preventing failure. Most reliability engineers have “Physics Envy”; they develop formulas that demonstrate that the reliability world is an “orderly place”, just as that is found in the realm of the sciences. But for anyone who has been in the field of reliability, it is at best an inexact science in which one is happy to be accurate in one’s prediction by +/-50% in anyone year, and over the life of an item +/-20% accurate.

Note that reliability engineers struggle to obtain credibility with leadership because they “get into the weeds” almost immediately when discussing reliability; one recommendation to engineers is to translate all that is calculated into financial terms; not always easy to do. Annual costs to prevent or correct failure should always be within the range of 3-6% of the value of an item that is being analyzed; anything above these percentages should be suspect.

From my experience I have seen highly rigorous quantitative analysis performed by an engineer, when converted into financial terms, to be in the 20-25% of the value of the item. Almost always after further analysis, the underlying assumptions of the engineer’s calculation were incorrect and indeed the ultimate outputs resulted in a 3-6% range of the value of the item.

Product Support life cycle financial planning should include scenario-based tools that can analyze the impact of different factors upon reliability in any one period, as well as upon the entire life cycle.

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. Hypatia is also a proven, trusted and highly effective tool for assisting in the development of product support business case analysis.

Product Support Financial Value Drivers. 7/10 – Regulatory Requirements

Nov 27
2012

This post is the seventh of ten entries that will discuss product support financial value 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

As nations become wealthier, there is a drive to mitigate the risks of occurrence of the events that unfavorably impact society – think auto safety, hazardous materials disposition, and many others. As a result, many regulatory actions have been employed by nations and local legislatures. These regulations have had a significant impact upon Product Support financial value driver results.

Product support financial value drivers – regulatory requirements

Let’s start with safety concerns. All industries have regulations that require certain Product Support processes to be employed that either protects the users of equipment, or the outputs of the equipment. Transportation equipment has as extensive amount of time/use/condition based preventive maintenance tasks to avoid any unplanned failure. From brake overhauls for trains, to flight control actuator overhauls for aircraft, very specific maintenance tasks must be performed throughout the life of the equipment; in most cases the ability to operate a piece of equipment requires that the OEM has obtained approval by a regulatory body for a detailed preventive maintenance schedule. These requirements can often drive 20-40% of the Product Support life cycle costs.

Another area of regulation driving costs is one that continues to expand every year; maintenance activities that avoid unfavorable environmental events. For example, the preventive overhaul of a valve in order to avoid failure resulting in a hazardous material spill, or the inspection of a structure for corrosion that could result in equipment releasing toxic fumes into the atmosphere. This area is specifically costly in the process industries of chemicals, oil and power generation.

In certain cases, regulatory requirements have a strange impact on Product Support costs. A case in point is in Japan and the insurance of automobiles where in order to generate demand for new cars, the Japanese government has mandated that insurance rates increase based upon the age of a vehicle. Upon a car approaching 10 years old, the insurance rates are so high that it “pays”  to get rid of the car (they leave Japan for  less developed countries) and purchase a new car. This regulation has a major impact upon the Product Support financial value driver solutions for older vehicles; there is none!

Recent changes to the fuels employed to operate equipment has created unintended impacts upon Product Support maintenance; some have decreased the frequency of unplanned failures, but others have significantly changed the frequency of preventive maintenance tasks; think bio-fuels for commercial truck engines.

The disposition of Product Support parts that are deemed hazardous materials can also increase costs; sometimes the cost of disposition is more expensive than the acquisition of the part. This is often true of certain consumables such of filters, lubricants, and others.

Product support financial value drivers – regulatory requirements

One of the Product Support financial value cost challenges is that there are many different regulations throughout the globe requiring different Product Support processes to be employed. For many global organizations, where equipment is transported to many sites, think oil drilling equipment, Product Support processes are often employed that meet the most demanding regulations of any nation that the equipment can be employed. This is done in order to be flexible in aligning demand and supply of equipment on a global basis. For example if ExxonMobil has to move equipment from Nigeria to the USA, even though Nigeria may have less demanding Product Support regulations, the Nigerian equipment is maintained to USA standards so that if demand shifts to the USA, the equipment doesn’t have to be reset to use in the USA.

All the above cases of regulatory requirements are always driven by optimizing equipment cost and minimizing its unfavorable impacts on society. Product Support costs, which constitute the plurality of Total Ownership Costs for most equipment types, will remain a primary “victim” of many of these regulations.

Product Support life cycle financial planning must include scenario-based tools that can analyze the impact of different regulatory changes upon the short-term and long-term TOC.

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. Hypatia is also a proven, trusted and highly effective tool for assisting in the development of product support business case analysis.

Product Support Financial Value Drivers. 6/10 – Volatility of Product Technology

Nov 04
2012

This post is the sixth of ten entries that will discuss product support financial value 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

Product Support Financial Value Drivers

The current business model for OEMs is to seek a problem being encountered by an organization and to configure a hardware/software solution that affordably and effectively addresses a resolution to the problem. For example, a warfighter requires, within a 6-month period, a communication system that can access satellite transmissions on-the-move for a period of 20 years. The OEM awarded the contract chooses to employ a suite of bleeding-edge Commercial Off The Shelf [COTS] items and integrates all the pieces into a Design-To-Order solution. Great; the warfighter gets their solution quickly and the OEM can “call it a day.” But now comes the fun part. The Product Support Strategy [PSS] for this COTS-based solution must employ a process that modifies the configuration of the solution based upon future Diminishing Manufacturing Sources Material Shortages [DMSMS] challenges; what is currently bleeding-edge, will most probably have a cold commercial supply chain within 3-4 years.

Understanding how the source-of-design impacts Total Ownership Cost [TOC] is often not fully understood. An OEM’s employment of COTS items enables access to a hot supply chain in which development costs have been amortized by the manufacturer; item acquisition costs can often be 30-50% less than that of a developmental item with the same capabilities. Also note that the reliability of a COTS item can be 3-4 fold higher than that of a developmental item. All-in-all the production costs of a COTS-centric solution is financially attractive, but Product Support life cycle costs can be significant enough to offset the production savings.

For example, if a COTS item is to be modified, due to DMSMS issues every 4 years and there is a planned 20 year product life, that indicates that 4 to 5 modifications will have be performed during the period that the solution is in inventory. Note that upon the insertion of these modifications, capabilities enhancements may occur, but that is strictly a by-product of the activity.

From personal financial analytics experience working on many systems, I have in almost all situations observed that DMSMS-driven modification costs can constitute the number one or two ranked Product Support cost driver. Remember that Product Support constitutes a plurality of TOC, thus modifications to COTS-centric solutions are often within the top ten cost drivers of TOC.

Product Support Financial Value Drivers

Other issues to be considered that will impact financial performance due to technology volatility, is how the modification process will be performed. There are several alternatives (this is not an all inclusive listing), each with their own cost drivers:

  • Block-mod in which all end-items are inducted into the modification process at a depot within a short period of time
  • Block-mod in which all end-items are inducted into the modification process in the field via an exchange program, within a short period of time
  • Modify-as-failed in which reparable items, when inducted in a repair process, will also be modified
  • Modify-bundled-with-other in which an end-item when inducted into a process such as reset, overhaul or other end-item process, the modification will be employed when the end-item has been disassembled; logic is that as long as the end-item is apart, there is no additional labor required for installing the modification.

Each of the above impacts technician labor costs to remove and replace, transportation costs, facility costs, indirect personnel costs and many other costs. Also note that each alternative will impact Materiel Availability [Am].

Any financial analytics of the Product Support life cycle must include a rigorous review of modification expenditures regardless of the “color of money.” Technology volatility provides many challenges, but with insightful life cycle planning unfavorable performance risks can be mitigated.

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. Hypatia is also a proven, trusted and highly effective tool for assisting in the development of product support business case analysis.

Product Support Financial Value Drivers. 5/10 – Preventive Maintenance Processes Employed

Oct 25
2012

This post is the fifth of ten entries that will discuss product support financial value 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

Product Support Business Case Analysis – Product Support Financial Value Drivers

Preventive Maintenance [PM] is a Product Support process that attempts to avoid an unplanned failure event; it is typically described and recommended to be employed by an end-item maintainer in the maintenance manual generated by an OEM.

There are three key flavors of PM:

  1. Use-based (i.e. after every 1,000 cycle remove reparable item to be overhauled and re-installed)
  2. Period-based (i.e. every 6 months remove/dispose non-reparable part and replace with a new condition part)
  3. Condition-based (i.e. when consumable brake pad wears down to 1 inch thickness, remove/dispose and replace)

All the above actions lend themselves to dependent demand financial planning; all you need to know is the forecast of each of the PM drivers and you develop a lock on the financial impact of a PM schedule.

For example;

  1. A reparable item has a PM schedule of a removal every 1,000 hours of end-item use; the item is to be overhauled and re-installed
  2. The end-item’s utilization is forecasted to be 4,000 hours per year or a planned removal event every 3 months/4 times per year
  3. The estimated cost of an overhaul is $2,000; the annual cost of the PM schedule is $8,000 (4 removals*$2,000).

The great tragedy of PM is that once established, there is often little adjustment to its frequency; comparing real-world failure experience and that of the PM schedule. The exception is when there is a major reliability issue which requires an immediate PM schedule adjustment. This lack of proactive adjustment, either up or down, can have a major impact upon Product Support financial value drivers.

Note that there are some PM schedules that are safety related and are required by Governmental regulations to be performed, but in almost all cases the PM schedule can be changed upon Governmental approval.

The following is an example of a project I designed and managed which was able to ultimately reduce the frequency of PM events by 50% over a 5-year period. There were about 100 non-reparable items that were selected that had PM scheduled removals every year. A slow frequency adjustment was employed in order to mitigate any unfavorable Materiel Availability performance risks; if actual unplanned failures increased, then we could quickly recover by going back to the original PM schedule frequency.

Product Support Business Case Analysis – Product Support Financial Value Drivers

In the project’s first year, the PM schedule of all 100 items was changed from 12 months to 13 months; an 8% reduction in removal frequency. The project team then waited 1 year to review failure analysis and end-user issues regarding these parts; there was no impact on the end-user community. In year two, the team stretched the PM schedule to 15 months; a 15% frequency reduction. Year three the PM schedule was moved to 18 months, with year four to 21 months and finally year five to 24 months; with a total decrease in PM schedule frequency of 50% ((24-12)/24). These 100 items drove 10% of the Total Ownership Cost [TOC]; the reduction in PM frequency resulted in a weighted 5% (50% reduction * 10% of cost) reduction in TOC.

The use of scenario based Product Support financial planning tools enables “what if” calculations on the changing of the frequency of PM schedules. There are big reductions in TOC to be harvested, but it has to be slow and methodical in its execution.

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. Hypatia is also a proven, trusted and highly effective tool for assisting in the development of product support business case analysis.

Product Support Financial Value Drivers. 4/10 – Operating Environment in Which End-Users Engage the End-Item

Oct 19
2012

This post is the fourth of ten entries that will discuss product support financial value 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

Product Support Financial Value Drivers

There are many attributes of an operating environment that can have an impact upon Product Support financial drivers and performance. For some end-items, the impact is quite material, and for others not as much. OEMs, when designing their products, are quite aware of the operating environment of their end-items, and in turn adapt their design to minimize the operating environment’s impact Total Ownership Cost [TOC]. The OEM still will acknowledge that there will be financial implications, that can be material, especially if the instructions in their maintenance manuals are not followed.

There are 6 factors impacting Product Support financial driver performance:

1. Temperature
The majority of products are designed to meet their performance attributes within a range of temperatures. For example, aircraft, during the certification process, are tested in extreme cold temperatures, as well as in extreme hot temperatures. This assures end-users that all subsystems can function within a wide range of operating environments.

Where Product Support financials are impacted is when the end-user employs the end-item outside the temperature design range for any extended period of time. One example is a Class 8 truck designed for the North American market is exported to sub-Sahara Africa where temperatures can exceed that of the design threshold. Reliability issues can surface quickly resulting in much downtime.

Another example is an electronic device requiring cool external temperatures in order to offset the high temperatures generated by the device. Without the proper conditioning of air, reliability can materially decline.

2. Humidity
This is a major product support financial driver for the Product Support processes engaged in the repair of structural items. Again OEMs design attributes that attempt to minimize the impact of humidity. For example, Boeing in their new 787, reduced the impact of humidity on the corrosion of aluminum, by replacing large sections of the aluminum airframe with non-corroding fiber composites. Vehicle OEMs have dramatically reduced the impact of humidity through higher tech paints and their application.

The employment of preventive measures to assure that humidity does not corrode an end-item is the preferred solution for this area.

3. Particles
Sand, dust, dirt and other particles can cause the employment of multiple Product Support processes; from reliability issues related to mechanical parts becoming impeded, to cosmetic issues of a “dirty” end-item, and to items wear and tear being accelerated as a result of grinding caused by sand. Again OEMs are quite aware of these issues and indicate courses of action in their maintenance manuals, but it doesn’t preclude the end-user from being financially impacted by the presence of these particles due to the preventive maintenance activities that are performed on a periodic basis.

4. Fluids
The effective management of the impact of salt water, chemicals, oils and other fluids can improve Product Support financial performance. For example end-items employed in the transportation field, trucks, aircraft, ships and trains all have extensive Product Support programs to minimize the financial impact of salt water; from fresh water washing to periodic disassembly/clean/reassembly. Manufacturing equipment is often subjected to chemical and oil exposure requiring the employment of preventive Product Support processes.

5. Hours of Operation
For certain end-users they can only operate their end-items during specific times of the day; could be safety related, pollution related or noise related. For example trucks cannot idle in an urban area after 2200, or aircraft cannot depart after 2100, or building construction activities cannot occur during the week-end. Whatever the situation, a Product Support Enterprise must deliver solutions that adapt to these constraints. Often Product Support processes will be performed during the hours that the end-user cannot employ its end-items; for labor this can result in higher costs related to shift differentials, or requiring more Product Support parts safety stock, due to parts suppliers not being available to delivery items during off-hours.

6. End-Item Operator
Challenges in adopting to a new technology, loss of experience due to high operator turnover, employee malfeasants (i.e. union “thuggery”) and other elements related to an end-item operator’s unfavorable impact Product Support financial performance is a continuing occurrence to be dealt with in developing solutions for a Product Support Enterprise. Improved operator training programs, user-friendly operator manuals, electronic monitors identifying end-user abuse and other resources can be employed to mitigate the additional financial impact of these challenges.

Product support financial value drivers

Understanding how an end-item is operated in developing a scenario-based Product Support life cycle financial plan or product support business case analysis is just one more element to consider. My recommendation is to have an “operating environment” weight in your Cost Estimating Relationship [CER] input; you might not know exactly how changing operating environments may impact you, but you can take a guess and once real data sets can be captured, you will have a place holder to make those changes.

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. Hypatia is also a proven, trusted and highly effective tool for assisting in the development of product support business case analysis.

Product Support Financial Value Drivers. 3/10 – Product Failure

Oct 11
2012

This post is the third of ten entries that will discuss product support financial value 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

Product Support Value Drivers – Product Failure Physics Envy

This area is one of the most “abused” areas in Product Support life cycle financial planning. Operation Research [OR] analysts, design engineers and logistics professionals have what is affectionately called “physics envy” when it comes to estimating the product failure rates of end-items and their components. The elite group of professionals in the business of predicting product failures tend to have a universally low success rate…

The marketplace has defined the acceptable average level of unplanned failures for a capital good/end-item at about once every 5-7 years. This product failure rate is applicable primarily for Commercial Off The Shelf [COTS] items, with Developmental/Design-To-Order items incurring product failure rates anywhere from 50-100% higher than that of COTS items.

The source of the aforementioned failure data is the Security Exchange Commission [SEC] mandatory filings by OEMs detailing their actual expenses incurred to support their warranty programs. There is over 10 years of reliability/failure rate data sets. Note that product failure rates have dropped by almost 50% over this 10+ year period. Why the “failure analysis” community does not employ this treasure trove of data in all their cost calculations is always amazing to me.

Product Support Value Drivers – Product Failure

Recently Giuntini & Co. developed a scenario-based Product Support life cycle financial plan that included the target cost for the correct-failure process throughout the twenty life of a product. We employed a series of SEC filing data sets and estimated $10 million per year in costs associated with the correct-failure process for an installed base of $200 million end-items. We also employed another method to calculate the cost and it still resulted in approximately the same number.

Product Support Value Drivers – Product Failure

While we had been calculating the correct-failure process costs, a team of OR brains were also calculating the same cost; we were both aware that we were working to the same goal. We both agreed to compare our estimated costs and there was a 4-fold difference in our costs; the OR guys were the higher number. After I examined their methodology, which was quite eloquent, I must say (disclosure; I once was an OR geek myself), I found their results to be totally bogus.

If the higher product failure rates were to have occurred, the product would never have been acquired by any end-user. Our common client accepted the Giuntini & Co. cost estimate as the one to be included in his Total Ownership Cost [TOC] calculation. To this day the OR brains have remained convinced that their methodology was the right way to go, even after being proven decidedly inaccurate.

Lesson learned – be extremely careful of ”physics envy” professionals providing you with product failure rate estimates. There is a high probably that they are materially off from the real world and if you accept their costs without an alternative opinion, you have only yourself to blame when an estimated TOC is way, way off.

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.

Product Support Business Case Analysis [BCA]: Fast, Accurate, Proven Results Employing The Hypatia© Scenario-Based Product Support Life Cycle Financial Planning Software Tool

Oct 01
2012

Product Support Business Case Analysis for MRAP

A Product Support Business Case Analysis [BCA] study is employed by the Program Manager [PM] Office of a Program Executive Office [PEO] of a Life Cycle Management Command [LCMC] in their Milestone Weapon System Acquisition review. The Product Support BCA study applies a disciplined methodology for recommending the best solutions for efficiently and effectively managing the processes employed by a Product Support Enterprise [PSE] during the in-service life and End-Of-Life [EOL] of a weapon system. The Product Support BCA output is a major input to the Life Cycle Sustainment Plan [LCSP] that is delivered by the Product Support Manager/Integrated Logistics Support Manager of the Program Office. Giuntini & Company, Inc. [GCI] has successfully performed five Product Support BCAs for the CECOM LCMC and the TACOM LCMC.

As a result of the experience above, GCI has developed a listing below of the varied elements required as inputs to the BCA.

Item #

BCA elements

1

# of end-items to be fielded

2

# of end-users

3

Deployability status of end-users

4

Global location of end-users

5

Product Support processes employed during life cycle

6

Product Support process frequency

7

Product Support process duration

8

Business model of each Product Support solution delivered by the PSE

9

Volatility of product technology/DMSMS issues

10

Regulatory requirements

11

Aging of the fielded end-items

12

Life of the product in DoD inventory

13

Manufacturer’s warranty coverage

14

Item design source/IP ownership/TDP

15

Materiel Availability [Am] requirements of end-user

16

“Jointness” of solution with multiple end-users

17

Business model elements for each Product Support solution

18

BOM levels employed

19

BOM variations

20

BOM level capabilities

21

End-item on-site maintenance strategy

22

End-item off-site maintenance strategy

23

BOM item costs

24

LRU renewal cost

25

Current/constant $$

26

Continuous Process Improvement [CPI] initiatives

27

Level of BOM in which Government owns IP

28

Employment of PSM/PSI PSE construct

29

Employment of ARFORGEN reset/reconstitute Product Support process

30

Funding sources included in analysis

31

Reparable parts Beyond Economic Repair [BER]/washout rate

32

Others

Product Support Business Case Analysis using Hypatia Tool

With over 35 years of data collection and development, GCI has created a software tool that encompasses all the above elements to create the outputs of a BCA study; it is called “Hypatia: A Scenario-Based, Product Support Life Cycle Financial Planning Software Tool.” Hypatia has enabled GCI to reduce the time to complete a Product Support BCA by 30%, and in turn has been able to reduce the cost of the study by the same amount. Another benefit of Hypatia has been its ability to deliver target life cycle Product Support costs that have been considered reasonably accurate by the recipients of the study. Traditional Product Support cost estimating tools such as COMPASS  are often inadequate to be employed in a BCA.

If you are interested in discussing how our proven Hypatia tool can be employed in your Product Support BCA study initiative, both for new programs and legacy programs, call a Giuntini & Co. SME at 570-713-4795 or visit us at www.giuntinicompany.com.

Product Support Financial Value Drivers. 1/10 – Number of Products Employed by End-Users.

Sep 23
2012

This post is the first 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 first financial value driver – the number of products that are in the hands of the end-user – is THE biggest driver of all. Put simply, the more products delivered to end-users, the more Product Support required. It is always surprising to me that OEMs often do not know the quantity of their products that are in the hands of end-users. Almost all OEMs are focused upon production, but few are focused upon Product Support solutions.

number of products employed is the most important part of a product support enterprise

Working recently with one construction equipment OEM, I sat down with their leadership to discuss areas of revenue/profit opportunities in Product Support. Leadership was gloating that Product Support revenue had been increasing at 15%/year for the last 4 years. I asked them how much was their installed base changing for their products, but they couldn’t answer my question. So, I asked them to give me their warranty files and I did a quick and dirty analysis and I found that their installed base was growing at a 25%/year rate. When I plotted the results and told them that they had foregone 40% of the potential Product Support revenue, they were crushed…but I got them to be angry at themselves for not seeing all the money that were leaving on the table, and the OEM became much more proactive in assuring that they got “their fair share” of revenues generated from solutions delivered by a PSE.

To give some OEMs slack, they often employ authorized distributors to sell their products directly or indirectly to end-user; the OEMs don’t know when their products are actually sold and to whom.

Lesson learned: OEMs must know the current and future size of their installed base in order to develop a Product Support life cycle financial plan…and as a result of not knowing the size of their installed product based, especially for out-of-production product lines, the typical OEM captures only an estimated 15% of the value of all the solutions supplied by a PSE.

The next product support financial value driver entry coming in a few days.

Learn how to maximize your profits using Hypatia financial cost analysis forecasting software from Giuntini & Co. 

info@giuntinicompany.com

Tel: 570-713-4795