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. 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.

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