Pricing Product Support Parts for Clueless OEMs

Sep 14
2012

Pricing Product Support parts continues to be an area in which many OEMs struggle.

A 2011 Defense Department’s Inspector General  report accused Sikorsky Aircraft Corp. a unit of Hartford, Connecticut-based United Technologies Corp. (UTX) of overcharging the U.S. Army Aviation and Missile Life Cycle Management Command’s Corpus Christi, Texas Depot  for 28 UH-60 Black Hawk helicopter Product Support parts, including $2,393.41 for a plastic wiring box cover worth $181.70.

Most OEMs continue to employ the following, dated method to pricing Product Support parts:

1. This is my cost.

2. This is the profit I have to make.

3. Therefore, this is the price I charge the customer.

Overly simplistic, and frankly, quite archaic.

Archaic Pricing Product Support models…

Earlier in my career, I ran an OEM’s (Falcon Jet) Product Support parts business unit for 10 years and my predecessor employed the cost-plus approach above. Customers were always screaming about $10 bolts, which met demanding aerospace specifications and were produced in small lots, but which a mechanic would perceive should only cost $1…because that is what you would pay at Sears.

Here is the funny part - a proprietary flight control actuator priced at $13,451 would have no pushback on price; the mechanic had no reference point to compare prices.

One day I decided to be very “clever” about pricing. I identified about 2,000 parts that “appeared” overpriced by our customers. Regardless of their cost, I brought them all down to $1. I then calculated my “loss” and increased the price of my proprietary items by the “loss” incurred, keeping my bottom line the same. Our customers were very happy that their concerns were acted upon…and there was no reaction to the higher prices on the proprietary parts.

Lesson learned: When an OEM stays with an illogical and rote Product Support parts pricing policy of cost-plus, their customers will be vocal about their disatisfaction. However, if you are clever, you can make your customers happy and still make the same profit. Voila!

Learn more about dynamic Product Support parts pricing models at www.giuntinicompany.com.

 

 

 

 

 

 

 

 

 

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.

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