Capital Goods OEM Warranty Costs Have Fallen By 20% Over The Last 8 Years

Sep 11
2012

 

Capital Goods OEM Warranty Costs Have Fallen By 20% Over The Last 8 Years

 

Overall annual warranty costs, as a % of sales revenue has been steadily declining. In 2003 warranty costs comprised about 1.8% of revenues for OEMs and last year it dropped to 1.4% or a 20% decline. This trend is positively impacting the end-users Total Ownership Cost [TOC] as products become more reliable and require less failure-driven maintenance.

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Product Support Gone Bad

Sep 06
2012

Giuntini & Co. will be starting an ongoing series of posts about some of the big ‘uh ohs’ in the product support world. Take these as lessons folks – proper product support can be the difference between disaster and success…

Can you imagine if 15% of your fleet has been down for over 2 years because of the lack of Product Support parts. Take a look at what has happened with a bus fleet in India.

Spare Parts Product Support Gone Bad - Broken Down Bus

Spares rage can make the acquisition process for Product Support parts a stressful event. Take a look when someone gets really, really upset when they believe that someone has ripped them off.

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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.

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.

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

The COTS Wagon Keeps On Rolling…But Is Anyone Watching?

Jul 02
2010

It is inevitable that the Services Acquisition Commands continue to focus on employing COTS products in the design of their new weapons systems and key infrastructure; this is aligned with the focus of Secretary Gates and Undersecretary Carter to reduce costs, but retain the military’s effectiveness.

Below are two recent acquisition initiatives at employing COTS products. I know of no DoD study that annually measuring the COTS content of new weapon systems…if there is none, one should be started.

1. The U.S. Navy’s Space and Naval Warfare Systems Command (SPAWAR) is placing orders under the Common Afloat Local Area Network Infrastructure (CALI). Under the CALI contracts, contractors will provide ships and submarines with Common Computing Environment (CCE) Components, Integrated Logistics Support (ILS), Configuration Management (CM), Test and Evaluation (T&E), Quality Assurance (QA), and Installation Support. Each contractor will deliver a secure, commercial-off-the-shelf (COTS) hardware, software and networking equipment. Each CALI contract has a total potential value of $502 million if all options are exercised. 

2. The Air Force is working on the Common Large Area Display Set (CLADS) acquisition program to replace aging CRTs in the Airborne Warning   And Control System (AWACS) aircraft with one of three flat-screen technologies: active matrix LCD (AMLCD), gas plasma, or a digital micro-mirror device. “The heart and soul of this is COTS, with some heavy ruggedization to operate under depressurization. The prices we`re seeing coming in the door are a third of what the old technology stuff now costs,” Bill Sirmon, a civilian contract negotiator at the Warner Robins Air Logistics Center at Robins Air Force Base, Ga. Aboard the AWACS now are CRTs that operate for about 300 hours between failures; the new products are planned to increase that operating time to 3,000 to 5,000 hours between failures.

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”.

Product Support Productivity: What Matters Most

Jun 21
2010

Many organizations believe that they can improve the productivity of the various processes employed during the Product Support stage of the lifecycle of a product by just working harder and smarter; this can often be seen in Product Support organizations in which “heroic” efforts are made to satisfy a customer’s requirements. A recent MIT study concluded that this heroic effort does not provide an organization with the long-lasting results it needs to be both efficient and effective in managing processes; true productivity improvements are the result of strategic thinking about how an organization is to be managed, as well as the operational steps that are designed to get work done.  It is this investment, which can be a 5-10 year intensive journey, which truly favorably impacts the performance of an organization.

The Frugal Engineering Paradigm Shift For Product Support

Jun 18
2010

Strategy + Business recently published an article on frugal engineering, discussing how providing new goods and services to “bottom of the pyramid” customers requires a radical rethinking of product development.

As the domestic economic growth of industrial nations remains at 0% to 3% over the long term due to demographic issues, OEMs will be more aggressive in seeking revenue growth opportunities in Developing Nations. The Developing Nations buyers of products cannot afford the sophisticated products that the Industrial Nations currently acquire, but they are beginning to be able to purchase “stripped down” products that cost 10-25% and perform 85% of the capabilities of that of a product sold by OEMs based in Industrial Nations. In order to develop products to meet this new demand, OEMs will have to focus upon “frugal engineering,” a design concept that develops a product that is simple, low-cost and delivers a highly focused solution that appeals to Developing Nation buyers.

A product that is frugally engineered will have a huge impact upon an OEM’s Product Support business strategy. Many of these products will be platforms in which as the end-users increase their economic prosperity, they will demand additional capabilities delivered as upgrades throughout the life of the product. Understanding Product Support lifecycle management will be critical for successfully deriving the profit margins required for the risk exposure in entering these markets.

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