‘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.

Remanufacturing – A New Business Model for Light-Vehicle OEMs

Mar 04
2013

I wanted to share a recent white paper I prepared for SAE International focusing on the hot topic of remanufacturing in the light vehicle OEM world.

“The combined market value of GM, Ford and Chrysler (the estimated value that is part of Fiat) is less than that of combined value of Deere, PACCAR and Caterpillar, which have only 25% of the annual sales volume of the “Big-3.” GM, nor Ford, which for decades were ranked within the top 25 largest US- based corporations, measured by market capitalization, do not currently even rank within the top 100 corporations.”

Read the article in its entirety here and learn about my proposal to the Big-3 auto OEMs: Remanufactured Products: A New Business Model For Light-Vehicle OEMs

Giuntini & Co. Referenced in Latest US International Trade Commission Study on Remanufactured Goods

Nov 28
2012

Quite proud of this – I was recently referenced in the latest U.S. International Trade Commission study on Remanufactured Goods. Click here to view the release and then follow the link to a PDF of the report. Referenced on page 39.

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. 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.

Saving on COTS Parts – The Airline Industry’s Secret

Jul 14
2010

There are many ways to reduce the unit cost of parts employed in the Product Support Enterprise (PSE). Each industry sector end-users take a different approach at parts cost control, based upon the materiality of parts relative to overall costs. The airline industry is one sector that has identified parts as a major cost, specifically for jet engine Product Support; from parts employed in the organizational/line maintenance level process, to the overhaul process to the modification process.

An airline’s jet engine PSE can take the following steps at controlling the cost of parts:

  1. Acquire surplus new-condition parts directly from other airlines; bundled package of parts at large discount from list price
  2. Acquire not-new-condition parts from distributors: overhauled/ remanufactured, repaired and certified/as-is
  3. Acquire reversed engineered manufactured parts that are like-kind to that of original manufacturers; the FAA provides the manufacturers of these parts a Parts Manufacturer Authorization (PMA) in order to sell these parts
  4. Acquire and disassemble not-new-condition products for parts, also known as cannibalization
  5. Acquire new and not-new condition piece parts that are employed in a LRU and assemble LRU
  6. Develop multi-user LRU exchange pool with several user of same product; decrease depreciation of reparable LRUs

Aggressively finding ways to reduce parts cost can pay large dividends in reducing the Total Ownership Cost (TOC) of a product. Check out this Aviation Week story that touches on many of the points above.

OEM PSE Profits -The Secret The Industry Doesn’t Know About

Jul 06
2010

Commercial OEMs create from 15% to 40% of their profits as a result of the revenues generated from each Product Support Enterprise (PSE) that employs their product. A PSE engages all the processes employed by a product end-user to: meet materiel availability levels, increase maintainability, assure capability, grow reliability, improve deployability and decrease costs. The remainder of an OEM’s profits is primarily derived from the sale of new-condition products, with the exception being those OEMs that have a financial arm.

When I have had nothing to do at 0400 on a Sunday morning, I have used that time “wisely” to dig into the Quarterly (10Q) or Annual (10K) Security and Exchange Commission (SEC) financial reports of capital goods OEMs in order to better understand the financial impact of PSEs upon their balance sheet….but I have been highly “disappointed” when virtually no information could be found to satisfy this longing of mine! I have reviewed close to 200 OEMs and I have developed a list below of only 13 OEMs who are willing to acknowledge, in even a minor detail, the existence of investments employed in PSEs.

When an OEM truly believes that being proactively engaged in PSEs is material to their financial health they often segment their balance sheet investments employed for PSEs. Note that for some OEMs, creating opaqueness in being engaged with PSEs is by design; they often do not want to indicate to their competitors that their business model is more like the razor-and-razorblade then one that focuses on the sale of the razor…but that is another story.

# OEM or Key Supplier Sector Financial Statement Description
1 AGCO Farm Balance Sheet: Current Assets Repair and Replacement Parts
2 NCR Office Balance Sheet: Current Assets Service Parts
3 Pitney Bowes Office Balance Sheet: Current Assets Supplies and Service Parts
4 Cognex Mfg. Automation Balance sheet: Long-term Assets Service Inventory
5 Ciena Data/Voice/Network Balance sheet: Long-term Assets Maintenance Spares Inventories
6 Diebold Specialty Balance Sheet: Current Assets Service Parts
Balance sheet: Long-term Assets Rotable Parts
7 KLA-Telcor Mfg. Semiconductor Balance Sheet: Current Assets Customer Service Parts
8 Rofin-Sinar Technologies Mfg. Automation Balance Sheet: Current Assets Service Parts
9 Faro Technologies Mfg. Automation Balance sheet: Long-term Assets Service Inventory
10 PAR Technologies Transactions Balance Sheet: Current Assets Service Parts
11 Terex Construction Balance Sheet: Current Assets Replacement Parts
12 Applied Materials Mfg. Semiconductor Balance Sheet: Current Assets Customer Service Spares
13 Wabash National Transportation: Trucks/Engines Balance Sheet: Current Assets Aftermarket Parts

Will the DoD Ever Manage Parts More Efficiently?

Jun 27
2010

The estimated current inventory investment by DoD for the organizational level parts employed during the Product Support processes of correct/prevent unplanned weapon system failure is $40 billion. An estimated 35%-50% of this investment is materially excess or obsolete (will never be used). Another issue is that the financial accounting accuracy of these parts would never meet the “smell test” by any private sector auditing firm; people would go to jail for this type of accounting…but that is another story.

GAO has had many studies dealing with the efficiency and effectiveness of the management of parts by the Services; none have been very flattering: Study 1, Study 2, Study 3

DoD accountants are not “bad people;” they do the best with the procedures provided to them. The real issue is that DoD, nor the Federal Government, develops a balance sheet that has any merit; politicians like it that way because accountability for “mistakes” can often be hidden from view…nothing better for a politician than to be opaque!

As more and more parts are COTS, and CLS, coupled with PBL/Outcome-Based Product Support constructs become more common, some of these inventory investment issues will become less glaring.

The Dark Side of Remanufacturing

Jun 23
2010

The Product Support process of remanufacturing can be employed for good…or for evil. Remanufacturing is a process that extends the economic life of a used-condition system by: growing its reliability, evolving its technology, assuring its design capability and improving the efficiency of Product Support processes employed.

Many firms acquire used systems and induct them into a remanufacturing process that delivers a product that has many of the attributes of a new system, but at 50% to 70% of the price; the customer wins and the entrepreneur wins by taking an “ugly duckling” and making an attractive profit from the make-over.

But there is one organization that can view remanufacturing unfavorably; OEMs who believe that the remanufactured product has “stolen” sales from their new-condition products. One approach an OEM could take is to begin a remanufacturing business and at least grab some of the used product market…but an “evil” approach would be to purchase as much used products as possible and then destroy the products so they could never be remanufactured…forcing customers to buy the OEM’s new-condition products.

One of America’s business leader icons, Thomas Watson, Sr., founder of IBM, used exactly this “evil” practice and was found guilty of anticompetitive practices. In 1903 Watson, working for National Cash Register (NCR) created a bogus firm to monopolize the used cash register business and systemically destroyed the machines, thus driving increased demand for new-condition cash registers.   

The above event and much more about Thomas Watson can be found in the book, “The Maverick and His Machine: Thomas Watson Sr., and the Making of IBM”.

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