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.

Fake COTS Products

Aug 16
2010

An area that has experienced greater scrutiny since the advent of global terrorism has been the infiltration of fake and stolen COTS products into the supply chain. This initiative by terrorists has had three primary drivers:

  1. An “easy” way to generate large profits from an illicit enterprise in order to fund terrorist activities against US Warfighters and others
  2. The deployment of sub-quality products into the supply plain in order to cause business disruptions and economic harm to US firms
  3. The erosion of the value of brands and in turn the value of Intellectual Property (IP) rights; this can undermine the foundation of Western capitalism…but that is for another blog

The Organization for Economic Cooperation and Development estimates that 5-10% of world trade employs fake or stolen products. This is a serious problem that provides almost a limitless source of funds to terrorists, besides that of illegal drugs.

The Government and/or its contractors pay the following price for the need to secure the COTS product supply chain:

  • Higher insurance costs to mitigate the risks of “being stuck” with fake products or experience the thief of their product
  • Higher costs for the security of goods while in storage
  • Liabilities for branded products that fail and cause harm
  • Higher warranty expenditures for fakes
  • Overhead costs for providing surveillance of employee: espionage, bribery and theft
  • Authentication efforts to be able to validate the source of goods
  • Legal expenses to pursue wrongdoers

As COTS products continue to increase their presence in weapon systems, the above issues will have to be addressed by the Government and its contractors.

Changes Are A Comin’ to DoD Contractor Product Support

Aug 10
2010

The U.S. Department of Defense is the biggest purchaser of Product Support expenditures in the world; it annually buys an estimated $50 billion dollars worth of such goods and services.

The last ten years has proven to be an especially favorable period for military contractors; overall DoD spending has increased from $300 billion per year to $700 billion, or 130%, and America now employs nearly half of all global military resources.  It is estimated that Contractor Product Support expenditures rose at a 150% to 200% rate during the ten year period.

As a result of the large build-up in DoD expenditures, the US currently generates 50% of the global military expenditures, but the US economy only generates 25% of the global economic output…this imbalance will most likely be realigned back to a historical ratio of 1:1 between the US economic output and defense spending.  

When many contractors have only one customer that matters financially, options are limited as to generating additional sources of revenues to compensate for lost Product Support revenues.

Even the biggest military contractors claim less than five percent of the Pentagon’s budget, so a contractor’s fortunes is influenced more by how defense dollars are spent than by the size of the budget. For example, contractor revenues can decrease, even when military spending remains high, if money migrates out of weapon system acquisition and into uniformed and civilian manpower.

Below are some of the primary trends driving down Contractor Product Support expenditures:

  1. Reduction in overall weapon system OPTEMPO due to the scaling back the size of the US military deployment in SW Asia. With an estimated 25% of all weapon systems in theatre and their OPTEMPO an estimated 100% higher than those systems not in theatre, it is estimated that overall Product Support expenditures will decrease by 15%-20%, with contractors experiencing an estimated 20%-30% drop in Product Support revenues
  2. The current fiscal challenges of the Federal Government to finance all their budgeted programs will most likely result in the military being a “victim” of fiscal austerity. It is quite feasible that 15-20% of DoD weapon system inventories will be stored long-term in order to reduce Product Support expenditures. Given the US Congress and the power of the depot-lobby, many of the systems stored will be those currently primarily supported by contractors
  3. The emphasis that Secretary Gates has put on “rebalancing” the defense strategy. Rebalancing means putting less emphasis on conventional, industrial-age warfare, and more emphasis on non-traditional skills like counter-insurgency warfare; this strategy will reduce complex weapon systems that require a complex Product Support Enterprise. There will be more an emphasis upon COTS items being integrated into a solution for the warfighter. COTS Product Support expenditures are often materially less than that of Developmental Items, thus resulting in overall lower Product Support expenditures
  4. The move to “in-source” Product Support management jobs previously contracted out to industry by the Program Offices and Life Cycle Management Commands. The Government is actively recruiting “seasoned” professional from contractors; either the professionals join the Government or they lose their job.

Each of the major weapon system contractors will be encountering different Product Support issues:

  • Northrop Grumman (NG) has decided to remain primarily focused upon new weapon system deliveries. It recently sold its services unit, TASC, due to conflicts between its OEM business and its Product Support business. This was a major policy change for NG
  • General Dynamics (GD) has generated material Product Support revenues from Interim Contractor Support (ICS) programs for the communication communities, especially for weapon systems in theatre; a GD Contractor Field Service Representative (CFSR) in theatre generates almost $500,000 per year of revenue. Supplemental funds have been an engine of growth for GD Product Support programs; this will be going away sooner, rather than later
  • Raytheon is less exposed than other primary OEMs due to the nature of their products being electronics; Product Support expenditures, at least at the organizational maintenance level, is much smaller than that of weapon systems that have more mechanical parts
  • Lockheed Martin (LM) will encounter many challenges in the Product Support area. The company needs to generate $130 million in new sales every day just to stay where it is, and that won’t be easy in a down market for Product Support.

There will be many challenges in the area of DoD Product Support over the next few years. Adding value to DoD, rather than filling positions to perform routine Product Support tasks, will differentiate winners from losers. And let us not forget that Outcome Based Product Support programs will be the rule rather than the exception for all future Product Support contractor offerings; that will be the only way that DoD will be able to manage Product Support processes more effectively for less costs.

For a more detailed discussion on the above topic, review the recent conference discussions at the Lexington Institute.

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.

The “Miracle” of COTS Products

Jul 09
2010

The Department Of Defense and its research organizations have always been touted as working on the “bleeding edge” of a multiple array of technologies. This is often true, leading to more effective (i.e. lethal) mission capabilities, but rarely are these initiatives more efficient (i.e. cost per outcome) in completing a mission.  See Undersecretary Carter’s comments regarding this issue here.

When we move to the COTS product world, the employment of COTS products in the processes of everyday life has resulted in both improvements in effectiveness and efficiency. In a recent article in the Journal of the American Enterprise Institute,  a striking comparison of what could be purchased in 1964 and today with the same purchasing power (price as a % of average salary) was illustrated below based upon an average one month salary.

1964:
 A moderately priced Radio Shack stereo system.

2010:
Panasonic Home Theater System, Insignia 50″ Plasma HDTV, Apple 8GB iPod Touch, Sony 3D Blu-ray Disc Player, Sony 300-CD Changer, Garmin Portable GPS, Sony 14.1-Megapixel Digital Camera, Dell Inspiron Laptop Computer, TiVo High-Definition Digital Video Recorder.

Also note that a personal computer in 1978, the Radio Shack Model 1, with 4K of RAM, a tape recorder as a data storage device, a green screen and little application software cost $600, or equivalent to about $3,000 today.

The above are stunning testimonials as to the value of COTS products and the inevitable greater and greater employment by DoD. Though our enemies have the same access to COTS products, it is the Acquisition corps that has to use their prowess at COTS product integration in developing solutions for the Warfighter. The US is second to none when it comes to integration and our enemies will never be able to duplicate our COTS products integration efforts resulting in our remaining the most efficient and effective military force of all time .

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

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