The Upside of Uptime Software

The Upside of Uptime Software

Planning for Unplanned Events Can Deliver Big Results

$50 billion. That’s a big number plaguing the industrial sector, and one that doesn’t have to be so, well, big.

According to estimates compiled by Deloitte, unplanned downtime costs industrial manufacturers upwards of $50 billion each year. And that may only scratch the surface. Downtime not only impacts a site’s production capacity – with estimates varying between 5 and even 25 percent, or the equivalent of one full fiscal quarter a machine is expected to be operating. But big numbers are just that – numbers – until you start to assess the real down-the-line implications of this endemic problem.

From the direct costs of down plants, break-fix service and repeat field service visits to employee safety, morale and customer service agreement failures, these implications combined contribute significantly to bottom-line industrial performance. And many of these failures can be eliminated.

Today’s industrial plants have millions of data points at their disposal. But this information is often disparate, disorganized, and underutilized – informing some parts of the business but not others. In turn, teams are left to utilize other approaches – balancing the cost of preventative maintenance with the potential cost of machine or even plant downtime, proactively replacing ‘good’ parts to avoid full breakdowns.

The Value of Predictive and Pre-Emptive Maintenance

Uptime software powers a different paradigm – taking that information and insight to redirect loss-leading time and investment in the traditional ‘break-fix’ model toward pinpointing anticipated failures before they happen, targeting the right part at the right time so manufacturers – from the plant floor to the field – can get ahead of problems before they occur.

As an example, look at a manufacturer with 10 percent downtime each year. That means that it is losing more than three-quarters of an hour for every shift. If a company is running two, eight-hour shifts, five days a week, that amounts to nearly 25,000 lost hours each year. Consider that unpredictable costs mean unpredictable margins and profit.

Now let’s take the flip of this equation. An IOT sensor-enabled system in which the information from each of these machines is captured and analyzed using Machine Learning (ML) and Artificial Intelligence (AI) informed by vast historical data to not only monitor performance and detect anomalies but also predict product and part failures to eliminate unplanned downtime and improve parts utilization. In this same scenario, an organization is able to not only improve machine uptime and recoup that lost time but also potentially create new value across its organization or for its customers.

Consider the incredibly positive implications of software that contains automated recommendation capability. This is a function in which any service job recommendations for root causes and corrected actions are communicated via Work Order Request (WOR), generated by the software and sent directly to the execution system such as FSM, CMMS, or EAM system.

This is the real value of pre-emptive maintenance. And it goes up exponentially when you factor in the benefits to productivity and improved customer outcomes, particularly in cases of risk-based service contracts that require performance commitments.

Realizing the Potential of Industry 4.0

Effective software allows users to proactively target products with high failures, more accurately forecast parts demand and improve the efficiency of the current reactive break-fix service model that most companies deploy. Combined with the other forces shaping Industry 4.0 – 5G, the Industrial Internet of Things, AI and Machine Learning – uptime software not only transitions manufacturers from reactive to proactive problem solving, it also opens up entirely new ways of working and new service models – from product-centric to service-centric.

This allows companies to create new customer value while reducing cost, including the opportunity to create entirely new revenue streams and ‘future-proof’ their businesses with the rise of ‘as-a-service’ consumption models driving many of today’s customers. This increasingly popular consumption preference is driving original equipment manufacturers (OEMs) to shift from product-centric to service-centric, or subscription-based, business models. And as more and more industrial devices go further into the field – with sensors in increasingly hard to access, and in turn service, areas – this becomes even more appealing for customers seeking to limit exposure, improve safety and ensure the right fix at the right time the first time.

Understanding the trends in a business are important. Being able to analyze those trends in real time and get that information across multiple different channels – from maintenance to planning to revenue – to take action is increasingly the difference between high-performing and under-performing organizations. By turning on all of a business’s potential assets – and truly capturing and leveraging the rich information that is already embedded within an organization – companies can not only save money and time but also increase their competitiveness in the long run.

The shift to uptime software is a win-win for many organizations – and as Industry 4.0 continues to take hold, increasingly a must-deploy strategy to compete for future customers. And that may be well worth more than the $50 billion being lost today.

To speak with a Syncron expert about how to improve uptime in your machinery, click here.

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5 Ways Optimized Service Parts Management Improves Financial Performance

5 Ways Optimized Service Parts Management Improves Financial Performance

Companies around the world are increasingly dealing with the vagaries in the economy as they relate to the ups and downs of their industries. This creates feelings of uncertainty and stress for both employees and customers. Manufacturers must ensure they have near- and long-term strategies in place that support increased financial and operational performance, exceptional customer experiences, and competitive differentiation.

Aftermarket service is already a margin-rich side of the business, however service parts management is often sub-optimized. In today’s landscape, efficient service parts management can provide a competitive edge and drive increased revenue. Optimized service parts management will increasingly be a margin-contributing differentiator that might make the difference between program success or failure.

To truly unlock value from service parts planning, investment in a sophisticated, cloud-based solution that easily and reliably integrates into existing systems is vital to success. In a world that is always changing, a modern service parts management solution provides the foundation that will accelerate and fuel success for years to come.

Throughout the service parts planning process, look for opportunities to improve data quality, raise forecasting accuracy, reduce internal lead times, and automate routine processes to reduce safety stock, improve productivity, and raise fill rates. These improvements, both incremental and significant, will ultimately lead to improved financial performance.

Here’s how to get started:

1. Generate and Analyze Demand-Related Data

Data from previous events and situations can enable manufacturers to make future, smart decisions. Examples of demand-related data include shipment history, install base data, machine and sensor data, and part supersession chains, among others. Analyzing this level of information is entirely too complex to do manually, but with a cloud-based service parts management system, planners can understand variations in different demand streams to make more strategic decisions – ultimately resulting in improved forecasting.

2. Automate Forecasting

Leverage demand-related data to make predictions and recommendations, using advanced statistical algorithms. Examples include causal forecasting, lifecycle planning, sporadic and low volume demand, and more. In a sub-optimized organization, errors in forecasting can result in unnecessarily inflated safety stock levels, but a modern solution automates and improves forecasting which results in decreased carrying costs and reduced excess and/or obsolete stock.

3. Determine the Optimal Quantity and Stocking Locations

Traditionally, dealers and planners overstock parts to avoid low first-time fill rates. However, optimizing the inventory planning process not only provides a clearer view into the entire process, but also reduces safety stock and internal transportation costs – ultimately resulting in margin improvements.

4. Identify the Most Cost-Effective Solution

Efficient procurement planning helps to find the least expensive options for executing an inventory plan. With a sophisticated solution, rebalancing, repairs, and other factors are considered, and the system avoids unnecessary transportation costs, procurement costs, and more. The system provides optimal inventory for each stocking location, ensuring customer expectations are met while improving the bottom line.

5. Update Your Execution Planning Process

When deciding which orders for the ERP system to execute, they can be set up to run manually or automatically according to a business’ specific rules. Optimized execution planning increases planner efficiency, decreases human error (which almost always results in excess inventory), and ultimately improves financial performance.

To truly unlock value from service parts planning, investment in a modern, cloud-based solution that easily and reliably integrates into existing systems is vital to success. In a world that is always changing, a sophisticated service parts management solution provides the foundation that will accelerate and fuel success for years to come.

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10 Reasons Why You Need to Reevaluate Your Service Parts Pricing Strategy

10 Reasons Why You Need to Reevaluate Your Service Parts Pricing Strategy

With aftermarket service becoming an increasingly important and strategic focus area for manufacturers around the world, why is it that so many organizations are resisting investment in solutions dedicated solely to its optimization?

Original equipment manufacturers (OEMs) that continue to rely on antiquated service parts pricing face hidden costs from capital, service, time, and resources. And what they don’t see is that these costs are adding up to more than what they’d be investing in a sophisticated pricing solution.

So, what’s the hold up? For many, it’s the reality that aftermarket service is already profitable as is – which can be a barrier to change. Therefore, many OEMs are not demanding any major changes right now. In fact, many see change as a potential detriment to the profit extraction of the aftermarket service-side business.

But the reality is, the sooner they make a change – one that they know they’re likely to make in the future – the lesser the disruption to operations will be today. If you wait until change is needed, you are setting yourself up for massive disruption later.

Why It’s Time to Change Your Service Parts Pricing Strategy:

  1. There will always be segmentations of price that lend themselves to either end of the service pricing maturity curve, requiring a flexible pricing
  2. True pricing maturity is all about balancing multiple different pricing approaches at once – but there’s no quick way to achieve intelligent pricing at scale
  3. The science of pricing will always exist, but the art of pricing lies in the pricers’ ability to leverage technology to streamline the process efficiently and effectively.
  4. Nearly 80% of manual pricing organizations’ time is spent on administrative activities, leaving only 20% of their time to actually work on creative pricing strategies.
  5. By blending automation with customization and rule setting, pricing technology can empower pricers to use the art of pricing to the organization’s advantage.
  6. The right pricing technology enables businesses to serve more customers, at greater speed, and at less cost, while turning today’s influx of data into valuable business intelligence.
  7. Getting early pricing technology buy-in from IT is crucial to implementation success, adoption, and change management within the
  8. The better implemented an intelligent pricing solution is within the entire organization, the more successful OEMs will be on their pricing
  9. OEMs that continue to rely on homegrown pricing solutions, or solutions that are too broadly focused on pricing as a whole, face hidden costs from capital, service, time, and
  10. A traditional pricing vendor may be keenly aware of pricing problems in an organization, but an aftermarket service-focused provider understands the bigger picture, like overstock challenges, delivery problems, and part availability

Achieving best-in-class pricing is about a fundamental understanding of either price increases or price decreases necessary for an organization to grow profit and market share. Ultimately, for organizations that desire the benefits of more advanced pricing methodologies, an intelligent pricing solution that automatically manages data administration is the only way to go.

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Implementing a Retail Inventory Management (RIM) Program: Getting Started

In part one of this series on Retail Inventory Management (RIM) planning, we covered the importance of having an effective strategy and considerations for implementing a robust technology solution. Now let’s dig a little deeper and look at what steps you can take to successfully plan, implement, and roll out a strategic RIM program. While this may seem like a daunting task, breaking it down into bite-size pieces will help you tackle common obstacles.

These steps are based on years of proven practice, so you can move forward confidently.

RIM Customer Results

Typical outcomes of a successful Retail Inventory Management implementation:

  • 20-30% dealer network inventory reduction
  • 20% increase in parts availability (from 70% to 90%)
  • 15-40% emergency order reduction
  • 10-30% write-off reduction
  • Variation order request (VOR) reduced to 10-15%

  1. Getting dealers on board

    The biggest challenge to successfully rolling out a good RIM program often is dealer adoption. While this may seem obvious, it can become a serious roadblock—no matter what system you’re using, it’s important to get them onboarded and using the system quickly and consistently.
    Dealers are independent companies with their own parts and, in many cases, their own inventory systems. You can’t force them to do anything, so you need to show them how your system can benefit them. It comes down to change management. Offering favorable terms and conditions can help incentivize dealers and build trust. Just be sure to carefully review and modify any existing incentive programs at the same time to make sure they’re not working against what RIM is trying to achieve—for example, sales team incentives.

    Integration with data management systems (DMS) is also crucial. On the OEM side, there’s probably just one system to integrate with, usually an Enterprise Resource Planning (ERP) system. But in a dealer network, the landscape can be scattered because each dealer might be using their own software. Ensuring the integration maintains data quality and accuracy is critical. If the data is wrong, the dealers won’t trust the system—and they won’t use it.

  2. Start with a pilot program

    Dealer networks often span a large geographical area, whether in a specific region or around the globe, which means the RIM system also has to be quite large. To test the scope and get a feel for how receptive your dealers are, start with a carefully thought-out and well-executed pilot program.

    Be sure to include dealers on your main DMS systems so you can test that integration, as well as dealers that represent the functionality you want to evaluate. Make sure you have good testers, too, who will really get involved—because only the dealers can see what actually ends up in their DMS. Choosing dealers that will be good ambassadors, helping to spread the word and spark interest in the wider network, will also help with the main roll out and that all-important adoption. Don’t underestimate the power of a good review.

  3. Roll out in waves

    Once you’ve thoroughly and thoughtfully tested the system and made sure everything works, you have to figure out the most efficient way to roll out to the rest of your network. Build what’s called a rollout factory, which means you design your approach, build your templates, and decide how the system should be configured. Then build a factory to roll it out quickly, in waves—onboarding dealers together that use the same DMS system or are in the same region and speak the same language, for example. Start with the big dealers and management systems, and then work your way through until you’ve reached your total business volume target. To get it done as quickly as possible, you can roll out many waves in parallel.

  4. Think strategically

    Just as important as getting dealers on board is planning for change management on the OEM side. If you’re launching a RIM program, you need a dedicated RIM department or group that can actively make sure that it’s working, that your dealers are compliant, and so on, providing help wherever it’s needed. Approach this as a strategic initiative. Trying to implement a program without taking this view, without making a lot of changes, usually results in failure.
    It’s also important to think about the short-term financial impact. In the long-term, RIM will increase efficiency, satisfaction, and sales. But in the immediate future you may need to change some of your dealer terms and conditions, which could have financial implications.

  5. Think you already have a RIM program?

    It’s worth noting that some companies have created their own in-house or homegrown RIM system and may be looking to improve or add to it. But these systems typically have no collaboration with the dealer. In fact, they’re more like a back-end engine or calculator—the dealer sends a file and receives a recommended order in return. These systems are usually quite basic and lack key features such as redistribution, future planning, buybacks, and so on. In reality, it’s very far from actual RIM.

  6. Can a RIM solution be implemented remotely?

    Absolutely. While there are some advantages to gathering everyone together during the design phase, most RIM solutions are cloud based so there’s nothing to physically hand off. With many companies already working remotely over the last year or so, providers are well-versed in remote implementation and may have even improved their tools and technologies in the process. If possible, do the pilot dealer training sessions in person so you can iron out any wrinkles together. But when you’re ready to roll out to your wider dealer network, you’ll want to train dealers virtually anyway because doing it in person is cumbersome and expensive.

  7. Has the pandemic impacted RIM program operations in any other way?

    Most OEMs did not escape the economic impact COVID-19, with many seeing a sudden 80-90% drop in dealer orders for new equipment. OEMs that already had a RIM program in place were able to see this change as well as what was happening at the dealer level. This put them in a position to collaborate closely with their dealers and figure out ways to cope, such as promoting specific parts. On the other hand, OEMs without a RIM system had no visibility into what was happening or why.

    The aftermarket tends to gain importance following any kind of economic uncertainty, as it’s one area where OEMs can continue to generate revenue. Many end customers stop buying new equipment, so they need to keep their old equipment up and running. This means parts availability is critical—maybe even more so than during a growth economy. Just one more reason to get your RIM program up and running sooner than later.

Find out how Syncron can help your organization successfully design, test, and implement a RIM program across your dealer network. Visit the Syncron Inventory – Retail product page or contact us to speak with a representative.

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Modern Retail Inventory Management Strategy: Why You Need it

Whether your organization is just starting its Retail Inventory Management (RIM) program, or you’ve outgrown your in-house solution, it is imperative to have a comprehensive strategy in place. It is about understanding what an effective RIM program entails, why it’s essential for OEMs today, and what benefits you can expect to see—at the OEM, dealer, and customer levels.

What is Retail Inventory Management?

On the highest level, it’s simple: RIM is a technology-enabled program where the OEM collaborates with dealers to ensure the right parts are stocked in the right locations. From the OEM’s perspective, RIM also creates visibility so they can see what’s happening at the dealer end. (You can learn more about how it works in our Back to Basics series—check out RIM fundamentals part one and part two.)

Why is RIM important?

Both the OEM and the dealer are responsible for—and rely on—keeping end customers happy, and parts availability at the dealer plays a big role in customer satisfaction. Both the OEM and dealer want to sell more parts. They want to create brand loyalty so they can increase new product sales. And they want to minimize the inventory investment. A good RIM strategy considers all of these goals and implements a robust technology solution to meet them. Every OEM that delivers products and services via a dealer network needs a RIM solution. This includes not only the automotive industry, but also makers of construction equipment, agriculture equipment, and so on.

What challenges does RIM help overcome?

Most OEMs have a customer satisfaction problem. In the OEM supply chain, they probably have very high availability at the central warehouse—around 99.5%. It drops to around 98% at regional warehouses. But when you get to the dealer network level, they rarely are able to measure availability with accuracy —and you can’t solve what you can’t see.

The first thing RIM provides is insight into the dealer availability rate. When you start measuring that, it’s often around 30-40%. That’s a real problem. The closer you get to the consumer, the higher you want availability to be. Once you start to measure service, inventory, and so on, you can figure out what needs to be fixed, manage the exceptions, and start to set consistent KPIs across the network.

Making the pitch: What’s in it for dealers?

Most dealers often spend quite a lot of time in the Data Management System (DMS)—and often end up with excess inventory and low availability. RIM helps dealers reduce excess stock while improving availability and customer satisfaction. By ensuring they have the right parts in the right place, it can also help increase sales volume. And with an exception-based, best-in-class RIM system, they can manage their inventory in approximately 15 minutes a day. That means they have a lot more time to spend with customers. Plus, terms and conditions designed to get dealers on board can provide even more benefits—for example, waiving critical order fees.

Why OEMs win, too

The biggest benefit for manufacturers is supply chain visibility. Without a RIM program, OEMs rarely know what happens to their parts after they sell them to the dealers. Implementing RIM helps them better understand inventory volumes and what’s selling at the retail level. The other key benefit is that improving availability so close to the consumer can also help to improve sales volume—just a 1% improvement in availability can boost sales by 0.5%, which makes a significant bottom line impact.

Better availability builds brand loyalty, which matters for both customer acquisition and retention. So, ultimately, a good RIM program can even help OEMs boost new product sales. Other benefits include significantly lower return volumes, reduced expediting costs, and a better managed load on parts distribution centers, enabling more efficient delivery to the dealer network. For example, many dealers place big orders on Monday which can create backlog at the primary distribution center. With a RIM solution, OEMs can calculate out all those order lines across all dealers and figure out which ones are critical and which ones can wait a day or two. That makes managing day-to-day work in the parts warehouses easier, too.

 

Look for part two in this series coming soon. To see how Syncron can help you achieve your inventory optimization goals across your dealer network, check out Syncron Inventory™.

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OEM Pricing Trends of 2021 | Price Management

It’s safe to say that this is an interesting if not exciting time to be a pricing manager—and one of the most challenging. Prices are soaring across nearly every major index as demand surges, and supply runs short. As many countries headlong toward economic recovery, companies need to adapt pricing processes so they can react quickly to capitalize on rapidly shifting market conditions.

Two competing trends will shape OEM pricing strategies in the post-COVID world:

  1. Greater price sensitivity by consumers
  2. Lower price sensitivity for mission-critical parts needed for revenue-generating assets.

Let’s take a closer look at both sides of the coin.

Consumer concerns

Raw Materials

Most consumers don’t think about the cost of raw materials. That is, until it forces manufacturers, and subsequently retailers, to raise the price of everyday goods and services. Corn, lumber, copper, crude oil and soybeans are all hitting record highs, which makes the goods they’re used to produce more expensive, too. And when all these costs make it to the gas pump, consumers really start to take notice.

Falling Economy

Mostly by necessity, many people cut back on spending during the pandemic. And even with economic stimulus, the households most impacted financially won’t be eager to open up their wallets as wide as they did before. So not only are consumers willing to spend less, due to the surge in commodity costs they’ll also be confronted by a jump in prices at the store. This double whammy will inevitably make people more price-sensitive.

Pricing Agility

Manufacturers should be responsive to this even in the midst of greater optimism based on widespread vaccine availability. As with inventory management, the key to success here is increasing pricing agility. This enables optimized pricing that syncs closely with market conditions, leading to greater value capture.

Manufacturers with dealer networks also need to invest in the customer experience to keep margins high and reduce churn. By collaborating closely with their dealers, OEMs can help ensure that inventory availability is high, and pricing is responsive. If customers are happy, they won’t shop around for the lowest price—they’ll come back to your dealers again and again.

Back to business

On the B2B side, businesses that rely on revenue-generating assets that have been sitting idle for a year will be eager to keep them running with as high an uptime as possible. They know that the cost of downtime is much higher than any markup on parts they might face. Of course, this doesn’t open the door for price gouging, but it does mean that businesses are much less price sensitive than before the pandemic. After missing out on revenue due to lower demand over the past year, they won’t let anything slow them down now.

So how should pricing managers for B2B-focused OEMs and suppliers respond to make the most of this opportunity? The starting point is data. By leveraging a spare parts-focused pricing solution, manufacturers can gain insights into which value drivers are important to customers in specific regions. And by understanding the complete price waterfall, companies can see exactly where to adjust to achieve a desired sales volume while maintaining high profitability.

With these seemingly contradictory market forces, it’s harder than ever to get pricing right. That’s why leading OEMs invest in sophisticated solutions that take all the important variables into account to provide pricing managers with straightforward recommendations. There’s more money on the table than ever before. Make sure you don’t leave any of it behind.

 

Ready to get started? Take the first step toward higher spare parts profits by scheduling a complimentary profit discovery session with our team of pricing experts.

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Post Pandemic Inventory Management, 3 Tips to Survive

The Impact of Covid on the Supply Chain

Although the restaurants and stadiums are starting to fill back up around the globe, many manufacturers are still experiencing the impact of significant supply chain disruption. In 2020, some companies saw huge increases in demand for products as others experienced a sharp drop in sales. While many indicators suggest that consumer buying patterns are returning to pre-COVID conditions, driven by pent-up demand, many unknowns remain. Experience is a great teacher and savvy manufacturers are already building agility, flexibility, and speed into their inventory management strategies.

Make no mistake: the surge is coming. A recent survey released by the National Association of Manufacturers reveals that 88% of manufacturers are optimistic about 2021. The surge is likely to be small at first, but once it reaches the tipping point, it will be like water bursting through a dam. That is what manufacturers need to prepare for. Keeping up with demand will not simply be a matter of stocking more parts. It will be about stocking the right parts, in the right places. Being proactive in your approach means addressing the issues now.

Here are three tactics that are helping manufacturers get ahead of what’s coming:

#1: Prepare for the surge in demand

As more people resume past practices, like taking vacations and traveling to see family, more vehicles will be on the road and more equipment will be used in the field. While it may make sense to stock greater quantities of some fast-moving parts, loading up on too many of the wrong ones will lead to higher excess and unnecessary carrying costs. Using an intelligent spare part inventory management solution to tell you exactly which parts you need, when and where, and will help you meet higher demand without higher costs.

#2: Increase visibility into and collaboration with your dealer network

Your dealers are on the front lines, interacting with customers and ultimately providing make or break experiences for your brand. As customers increase equipment use for both business and pleasure, it’s more critical than ever to have insight and influence over parts purchasing and stocking strategy. Leading global OEMs ensure the highest level of collaboration with their dealers regarding parts availability.

#3: Rely on simulation-based forecasting for greater accuracy

While everyone’s crystal ball is a bit cloudier than usual based on the unique disruptions of the past year, smart OEMs will greatly increase their odds of success by running inventory planning simulations. Your ability to forecast based on the data you can extract from these simulations increases agility, because you’ve already seen potential outcomes and can pivot more quickly based on what actually plays out.

Agile Inventory Management

McKinsey & Company lists the five trademarks of agile organizations as: strategy, structure, process, people and technology. Rather than an organization operating as a machine, the agile organization operates as a living organism. This means flexible resources, end-to-end accountability, and leadership enabling action. Agile companies have proven to achieve greater customer satisfaction, faster time to market, higher revenue growth, and more engaged employees. Now is the time for you to get agile.

 

Stay tuned for the second post in this series on post-COVID resiliency, where we’ll focus on pricing. In the meantime, take a look at the key features of Syncron Inventory.

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OEM After-Market vs. General Retail: Yes, You Need a Different Pricing Approach

OEM After-Market vs. General Retail: Yes, You Need a Different Pricing Approach

Commonly, I am asked if there is a difference between the best approach to the pricing of general retail items and the best approach used for OEM after-market items such as spare parts and services. Ultimately, no matter where in the lifecycle of a sale, pricing of both is designed to maximize profits and shareholder value while considering consumer and market demand optimized across multiple markets and product segments. In some sense, that is where the similarities end.

General retail pricing and after-market pricing are inherently different and leveraging that knowledge for greater profits is a valuable differentiator to your business. Indeed, it is critical to understand the different pricing strategies, the pros and cons of each, and buyer intent—what drives someone to purchase and how that impacts pricing methodology.

Different Business Objectives Drive Different Pricing Strategies

When pricing strategically for a general transactional retail situation, the goal is usually to encourage a high sales volume at the best margin the market will bear. Pricing for transactional retail typically involves a simplistic cost-plus pricing model strategy. With a one-time, sales-driven approach, the pricing strategy is less about “how do I achieve the right price regardless of sales volume” to “how do I actively encourage higher sales volume with the price I set?” Retail pricing is primarily about encouraging consumers to buy an item from you, not your competitor.

For OEMs, after-market pricing of spare parts takes an entirely different and necessarily more nuanced approach. Not realizing the difference between the approaches needed for after-market is to leave revenue and more on the table. And it’s not that OEMs or their dealers care any less about driving higher sales volume – that’s an integral part of any successful service business. Instead, the critical consideration for pricing in the after-market segment is that spare parts sales volumes align with product lifecycle opportunities and meet necessary parts needs. This puts advanced pricing strategies such as value-based pricing at the center of your optimal approach, whenever possible.

Product Lifecycle Alignment Creates Unique Opportunities

As I shared in a recent post on where to look for hidden profits in your spare parts, OEMs have a significant pricing advantage in two stages of the after-market product lifecycle, in particular: brand new and somewhat old parts. When products are brand new, OEMs can lean into captive parts pricing because no third-party parts providers exist to challenge that higher price. OEMs can take advantage of this by ensuring prices capture higher margins while competition is non-existent.

Similarly, older parts can be a source of hidden profits. When for example, older equipment needs parts, those parts may be challenging to find because the third-party parts manufacturers have stopped making them, or those older parts are not readily kept in standard inventory. Why are third-party parts manufacturers not interested in carrying the parts? Because of a “sales volume first” mindset; it is simply not profitable for third parties to continue manufacturing or storing these parts because chances are the total sales revenue doesn’t warrant the part’s coverage. However, just looking at dollars coming in from sales revenue may not tell you the whole story about how your products are genuinely performing in the market. For the OEM, it’s likely in your best interest to continue providing parts for older equipment, as your margins on the older part can be at a premium as competition is low.

A Different Approach to Promotions

Another big difference in pricing between general retail and after-market spare parts is around promotion strategy. For third-party parts manufacturers and point-of-sale retailers, running as an example, a “buy three, get one free!” type promotion might make perfect sense. Even if the promotion is a loss leader, it will encourage buyer traffic to come through the door and increase total sales volume on the books.

However, this strategy doesn’t optimally apply to OEM spare parts business. Loss leader promotions such as the above example in an OEM’s case will unnecessarily erode margins on the parts customers must buy. For these customers, having an operational piece of equipment is a need-to-have, not a nice-to-have. We are talking about situations when the equipment is down; the bottom-line impact rises exponentially. A customer is paying for a machine that isn’t running is missing out on revenue. As a result, the cost of not having a part readily available needs to be reflected in the price of parts – something on which retail pricing tools and strategies do not focus. OEMs can take advantage of much lower price sensitivity in this situation. Promotion is unnecessary in this scenario; doing one can miss a vast source of good margin revenue.  Having a tool to model these scenarios is essential to running a successful after-market business.

So, how do you use your newly found knowledge to improve after-market business results at your organization?

  1. Get straight on your spare parts pricing strategy. As we’ve explored in posts on better segmentation and advanced spare parts pricing tactics, there’s a tremendous opportunity for OEMs to increase revenue and margins on spare parts. But you have to do your homework to ensure you understand the differences and intricacies of after-market spare part pricing.
  2. Leverage all the data at your disposal to capture more value. From competitive data to spare part inventory management data, you need to put all your information to work for you. The goal of your analysis is to find that sweet spot of maximum margin and sales volume. Not using this data to optimize your pricing is simply leaving money on the table.
  3. Invest in a modern, scalable, cloud-based pricing solution built for the after-market. As we shared in “why you should use spare parts price optimization software,” the best way to make your data actionable and profitable is to use a sophisticated pricing solution specifically built to address after-market pricing concerns. Solutions for after-market sales do many things, like make sense of the insane amount of pricing data in ways retail pricing systems cannot. Leading-edge solutions also use advanced technologies like artificial intelligence (AI) and machine learning (ML) based on after-market models to suggest the best price based on intelligent segmentation and several other data sources relevant to the after-market business.

Want to explore the difference optimal spare parts pricing can make for your after-market spare parts business? Head to our Profit Discovery Program page to find out how to get your no-cost, no-obligation assessment.

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Where to Look for Hidden Profit in your Spare Parts

There’s no shortage of things to think about when it comes to spare parts pricing. But despite the increasing complexity of catalogs, distribution networks, and markets, the majority of aftersales service organizations focus on the roughly 10% of products that make up the biggest portion of revenue.

This may be because they’re using legacy systems or processes, don’t think they have the resources to implement a more nuanced approach, or simply because that’s how they’ve always done it. Whatever the reason, using a blanket method such as cost-plus for the other 90% of your catalog means you’re not optimizing your margins—and that unrealized value represents significant profit opportunity.

Here are two places you can look for hidden profit in your spare parts inventory.

Pricing and the product lifecycle

Product lifecycle refers to the period of time from when a product is introduced onto the market to when it’s removed from the shelves. Where various parts in your catalog are in their respective lifecycles can have a significant impact on the level of competitive pressure as well as perceived value in the market, both of which offer an opportunity to increase margins. You can use various analytical strategies to measure a product’s lifecycle stage, depending on your available data.

For new items, look at the born-on date or when the item was first used in production. In some cases, it can be more helpful to look at first use—particularly for parts that don’t have any competition until six months or a year after production. This is often the case with new parts, which are under warranty in the introductory phase before the aftermarket has caught up. You can determine first use by looking at the duration since birth and assuming there was minimal competition in that initial period. In the early stages of a product’s lifecycle, you may be the only OEM offering it—which gives you considerable leverage that can translate into additional margins.

At the opposite end of the spectrum, a part that’s at or nearing obsolescence could be equally difficult to find, which means you can also price it higher. To determine end of life, start by calculating how much time has passed since a part was last used in production. Next, take the expected lifespan of the vehicle or machinery it’s used in to estimate how long the part will be in demand. If a part is used in multiple models, as is often the case with automotive manufacturers, look at the last used in production point on the latest model. Understanding how market pressures change when a part reaches the end of its warranty and when competing parts enter and exit the market can also help you optimize your margins and avoid over- or under-valuing products.

The three C’s: captive, commercial, commodity

Price segmentation can seem daunting due to the myriad of ways you can differentiate parts—but you don’t have to jump in all at once. Start by separating your products into three high-level buckets that will help you determine how aggressive you can be with your pricing. This approach also makes pricing a large volume of items more manageable.

A captive item is proprietary, meaning it’s designed by an OEM and available exclusively within your network. Captive items generally provide a greater opportunity to increase margins because you’re the only supplier offering these parts. Captive items can be further divided into “consumable” and “simple” categories. Captive consumable parts may be designed to fit a specific component and are unlikely to be re-engineered in the aftersales market unless they’re moving at a high volume. Captive simple items are easier to re-engineer, which makes them slightly less captive—and more subject to market pressures.

Commercial items are more widely available through other distributors and suppliers, which can include eCommerce stores and off-the-shelf retailers. Commercial items can be further divided into commodity and unique parts, which again informs your ability to increase margins. Commercial commodity parts are standard items you can buy off the shelf—for example, hydraulic cylinders. Commodity parts don’t hold a lot of value, so you’ll need to price them according to market competition or customers will simply go elsewhere. An example of a commercial unique part would be a hydraulic cylinder that’s customized for a specific attribute, such as stroke length. It holds more value because it’s not a standard part, so you can price it higher.

Uncover hidden profit in your spare parts

Making the move from a legacy pricing approach to a modern solution can seem overwhelming, but it doesn’t have to be—and the investment pays off in dividends. Our team of pricing experts are ready to help you discover where you have unrealized margin potential in your spare parts pricing model and how you can increase revenue by optimizing the data that’s available to you.

Head to our Profit Discovery Program page to find out how to get your no-cost, no-obligation assessment.

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Why Use Spare Parts Price Optimization Software?

Along the lines of my recent post on why you should use spare parts inventory management software, today we’re talking about another key topic for OEMs. We’ve been diving pretty deep into the benefits of price optimization and segmentation here on the blog this year, but maybe you’re still wondering about the basics: Why should you use spare parts price optimization software?

Pricing is one of the most crucial top-line revenue levers available—because it can directly and significantly increase financial performance.

One key reason is the growing strategic importance of after-sales service for OEMs as a way to create resilience and offset potential revenue losses on new product sales. Increasing market uncertainties before the pandemic coupled with the subsequent economic downturn have led consumers and businesses alike to try and extend the life of their existing machinery, industrial equipment, and vehicles. That means manufacturers must be able to deliver the right part at the right price, right when they need it.

Price optimization is a powerful strategy for OEMs looking to make up for lost revenue and identify new margin opportunities—just a 1% price increase makes a much bigger difference to your bottom line. That’s why pricing is one of the most crucial top-line revenue levers available—because it can directly and significantly increase financial performance. And yet, many manufacturers are still relying on outdated pricing methods such as basic cost-plus strategies and spreadsheets to manage pricing across increasingly complex networks and catalogs.

In the after-sales service world, these methods are too simplistic and can result in money left on the table. Let’s look at the advantages a modern, cloud-based price optimization software solution can deliver and why it’s well worth the investment.

Sheer volume and scale

Finding the right price for every part in your catalog can be daunting. While traditional pricing solutions may be able to handle up to 10,000 products, OEMs selling parts for after-sales service can have hundreds of thousands or even millions of parts spanning different stages of a product’s lifecycle. And if you’re selling in multiple markets or countries, your pricing matrix multiplies exponentially.

A legacy system simply isn’t capable of managing this volume—at least not with any level of sophistication or accuracy. Plus, you would need thousands of pricing analysts working around the clock to manually assign the best price for every part and customer. Investing in a powerful price optimization solution will give you visibility across your entire supply chain and the ability to automate much of the work. Once you understand baseline performance, you can set goals and start to optimize.

Move beyond basic

Cost-plus parts pricing has been the gold standard for years. But with the growing volume and complexity of spare parts catalogs, strategies based on broad categories and arbitrary markups fail to account for competitive value—leading to missed margin opportunities. You need to take a wide range of commercial considerations into account to determine the optimal price for each part. With a sophisticated, cloud-based system, you can evaluate new pricing techniques and run “what-if” scenarios to see how changing your pricing method or policy will affect financial performance. From there, you can decide on the best pricing method for various parts categories.

Spare parts pricing techniques

There’s no one-size-fits-all approach to pricing. Here are just a few of the pricing methods OEMs can use for after-sales service parts:

  • Competitive-based—mark up varies based on what competitors are currently doing
  • Cost-plus—takes the cost to produce a part and adds a pre-defined margin, typically around 30%
  • Kit-based—uses a bill of materials for multiple items needed together in a repair operation
  • Statistical-based—uses historical commercial information to negotiate prices
  • Supply-driven—based on what inventory you have on hand and your ability to deliver
  • Value-based—drives higher margins by accounting for the customer’s perceived value of the product
  • Yield-based—used to maximize profits and on-hand inventory for end-of-life parts

Get smart about segmentation

With a modern pricing solution, you’ll be able to use parts segmentation to make pricing a large volume of items more manageable—and more profitable. Price segmentation groups products together by common factors, from technical attributes to product lifespan. At the highest level, you can divide parts into commercial (widely available) or captive (proprietary). From there, you can continue to differentiate based on attributes at many levels.

Rule-based segmentation lets you easily segment products multiple ways to support differentiated pricing rules. Adding depth to your segmentation strategy helps you identify where you’ve over- or underpriced parts and adjust accordingly. But sophisticated segmentation can only be done with a sophisticated system.

Do go chasing waterfalls

The price waterfall is a method many organizations use to identify hidden costs and margin leakages at every price level. If you’re using the price waterfall and need to address more than one level, you need to be able to connect global and regional price lists to various discounts, rebates, and other special prices to figure out the optimal pocket price for different customers. An advanced pricing solution will help you understand the impact of various pricing strategies on customer net prices—another function that’s beyond the capabilities offered by legacy systems.

Data, analytics, and reporting

For organizations that haven’t invested in a modern pricing solution, lack of data can seem like a barrier to moving beyond basic pricing techniques. But without a sophisticated system, gathering data can be a challenge—you may have no choice but to scrape prices from the internet, which may be incomplete or inaccurate. To really understand how competitive your commercial parts are, compile all your field data into a single system of record. This will give you access to the competitive insights, customer insights, and sales insights you need to optimize your pricing.

Analytics also help you understand how categories develop across segments and let you drill down into the root cause of any pricing issues. With a better understanding of demand across your entire supply chain, you’re better positioned to land on that goal of “right part, right price, right time.” This will let you keep your customers happy while making the most of value drivers and margin opportunities.

Pricing at the speed of business

In today’s world, market fluctuations happen fast. If you’re not using a system that gives you real-time feedback and lets you react instantly by updating prices to reflect current conditions—you’re shooting yourself in the proverbial foot. To stay competitive and keep up with the constantly evolving business environment, choose a system that’s cloud-based, centralized, and AI-powered, enabling insight and agility at scale. It’s the only way to maintain long-term profitability and growth.

 

If you’re ready to take a more sophisticated approach to spare parts pricing and tap into missed margin opportunities, our Profit Discovery Program is a great place to start, as it offers a no obligation, complimentary assessment of your profit potential, based on a sample of your actual pricing data.

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