OEMs and their authorized dealer networks use different business models in their relationships when it comes to spare parts. OEMs focus on designing and/or specifying the capability of a new condition part based on:
➤ Product development time-to-market; readily available parts are preferred to custom-designed parts that require longer lead times to develop/acquire/manufacture;
➤ Quality/brand reputation; the high reliability of parts reduces operator downtime, but also reduces warranty costs, which can dock an OEM’s annual profitability by 15-20%;
➤ The equipment operator Total Ownership Cost (TOC); ensures the affordability of the acquisition price by reducing the cost of parts employed in the production process.
OEMs often acquire parts from enterprises that are non-U.S. based. Many of these parts are designed to be low-cost to the OEM, but not necessarily low-cost to the operator during the life of the equipment. The inability to renew or extend the life of a part enables a part supplier to reduce its:
➤ Design engineering effort; little effort in optimizing designs for the manufacturing and renewal processes;
➤ Materials content employed; parts often need more “heft” to be worked on;
➤ Manufacturing process time; fewer piece parts are required for fabrication.
Why Material Handling Distributors Care
Authorized material handling dealers associated with an OEM offer product support to help customers afford total operating cost and maintain uptime. They also help:
➤ Maintain equipment reliability through corrective, preventive and condition-based service;
➤ Modify equipment for ergonomics, efficiency and added capabilities;
➤ Provide repair parts, including piece parts that are inducted into a parent part;
➤ Repair accident-damaged equipment, including minor and major mishaps;
➤ Comply with safety requirement, including Federal and insurance mandated replacements;
➤ Rebuild/remanufacture equipment to like-new via life extension programs.
When an OEM impedes the renewal of parts through their product design strategy, dealers can lose opportunities to employ the same parts more than once for the various product support processes identified above. Though dealers sell new condition, non-renewable parts, the profit margins can be materially less than that of a renewed part.
For example a dealer-rebuilt part is often sold for 70% of the price of a new part, but its profit margin can be three times higher than that of a new part. The sale of a $100 new part may have a 5% margin or a profit of $5.00, while a rebuilt part selling at $70 may have a 15% margin or a profit of $10.50.
To make matters even worse for the authorized dealers, the OEM non-renewable part design strategy opens the door for non-OEM aftermarket parts to enter the supply chain. These parts, often sourced from abroad, are always priced below that of the authorized dealer’s price, meaning many third-party non-OEM affiliated organizations can capture product support parts market share from the dealers. Also, many of these foreign-sourced parts have intellectual property (IP) issues and quality issues.
Fight for Renewability
If design-for-renewal (DFR) were applied by the OEM, many of these non-OEM aftermarket non-renewable parts wouldn’t be competitive in the marketplace with solutions employing renewed parts.
It’s time for the authorized OEM material handling equipment distributors to fight back. The following proposal is an innovative approach to aligning the business self interests of the OEM with its dealers regarding renewable parts:
➤ The members of the dealer network should create a committee responsible for overseeing a DFR initiative.
➤ A DFR fund should be established to compensate the OEM for spending the extra amount required to ensure that DFR is employed in their products (the OEM may lose equipment revenues if DFR is aggressively applied to extending the life of equipment, but that can be counterbalanced by increased demand for the OEM’s product due to a lower TOC);
➤ Each dealer would contribute an amount that is proportional to their annual new equipment sales;
➤ The OEM (and its dealer network) would identify the parts employed in its manufacturing process that impact the dealer’s product support parts renewal revenue streams;
➤ The incremental cost of those parts to employ DFR would be established and the amount would be contributed to the DFR fund. (For example, $50,000: price of total parts installed on equipment by OEM; 10% of the value of all parts have been identified as requiring DFR by the dealers, or $5,000 worth of parts per equipment delivered. The incremental cost to the OEM is 3% or $150/unit sold. This is the amount that the dealer DFR fund would pay the OEM.)
How Distributors Benefit
The following example illustrates how the dealers would benefit from this initiative:
The 10% of parts now employing DFR would incur an annual renewal event (i.e., repair, modification, rebuild).
Instead of selling $500 (10% of $5,000) of non-renewable parts with a 5% margin or $25, the dealer would experience 70% of the revenue but with a 15% margin or $75 when employing a renewed part—a $50 incremental profit.
Given the above scenario, the ROI for the dealers would be 3 years ($150/$50); if the equipment has a life of 10 years, the incremental profits could be significant.
A robust business case analysis would have to be performed for the parts singled out as being converted to DFR. In some cases it may not make economic sense for a part to migrate to a DFR strategy.
Why End Users Should Care
These strategies also help ensure that money stays in the U.S. rather than supporting organizations abroad. One OEM 800-pound gorilla, Caterpillar, has a corporate focus on DFR, not only for its construction equipment, but also locomotives and mining equipment. Cat’s financial reports don’t tout the effects of its DFR focus on its profit margins, but I can assure you that it has been very lucrative for Caterpillar and its authorized dealers.
In short, DFR will do the following:
➤ Increase the financial health of the dealer network;
➤ Keep jobs in the U.S.;
➤ Make the equipment supply chain more environmentally friendly (DFR is a driver for recycling/reuse);
➤ Improve the relationship between the OEM and its dealers;
➤ Tighten the product support/parts supply chain for the end users by excluding the use of non-OEM sourced parts and keeping fakes out of the supply chain.
This initiative can become a win-win-win for OEMs, dealers and material handling equipment users across the U.S.
Ron Giuntini is principal of Giuntini & Company, Inc. (www.giuntinicompany.com). He has 36 years of experience in business-to-business supply chain management for both supplier-forward and customer-return operations. He can be reached at [email protected].
