Network Member Question:
“What is the best equation to prepare a costing for spare parts in an electronic repair center?”
Baxter Answer (Mark Anderson, Vice President, Supply Chain Solutions):
“I think we would need more precise information about your environment to offer specific pricing equations, so I’ll use this opportunity to talk in general about service parts.
There are unique characteristics to service parts to be considered. First, there are the large number of parts (generally) that you will need to perform repair. There is also a unique pattern to demand of these items. In Pricing, consideration should be given to the criticaity of each part and the part’s lifecycle (new, growing, mature, phasing out, discontinued). Of course, pricing of your competitors is also a consideration.
It’s common for service pricing to use cost-plus models. These are simple and straight-forward, using the cost to manufacture or purchase the part and applying a standard mark-up. More organizations are recognizing that adding demand information for service parts is a valuable strategy. Also, more are segmenting parts, not based on ABC, but on groups tied to life cycle and competitive pricing. Demand information is used to analyze the affect of sales volume due to potential pricing changes. They determine the best pricing to apply to each part grouping.
In the end, you must be competitive and profitable and correct pricing can be a big part of that. Also, planning for the right number of spare parts has a direct impact on your profitability as you invest spares. Planning tools to aid in the optimization of inventory and service level are paramount to a successful service strategy.”
From a Q&A exchange on LinkedIn – August 2008 (Note: the link to the Baxter answer in its entirety has been provided in the Web Resources Section at the conclusion of this post)
Something that I have learnt over the many years I have been a writer is that the interaction between a vendor and a prospect or client is far more revealing than an interview. Unencumbered by concerns as to how the interview will translate into print, the vendor – prospect interaction is unguarded and expansive in terms of disseminating critical information about the product or service being offered. For this reason, Mark Anderson’s response to the question, “What is the best equation to prepare a costing for spare parts in an electronic repair center,” was both informative as well as telling.
Over the years I have dedicated a good portion of my research energies on the vagaries of Maintenance, Repair, Operations (MRO) commodities, including their procurement and management. In fact one of the first papers I wrote that achieved critical acclaim centered on the fact that MRO products consistently demonstrated a Dynamic Flux Commodity Characteristic versus the more pedestrian characteristics of Direct Material commodities. The identification of Commodity Characteristics was an important breakthrough in that it directly impacts the way in which organizations such as service companies structure their client programs. (Note: to obtain a copy of the White Paper “Acres of Diamonds: The Value of Effectively Managing Low-Dollar, High Transactional Volume Spend” send me an e-mail at jwhansen@sympatico.ca, with “ACRES” in the subject line.)
As a result of my research, Anderson’s response resonated with me perhaps more so than Q&A’s involving other areas of supply chain practice because it did not seek to “champion” a technological approach to what can be a complex environment. In fact, and unless you had noted his title and company’s name in the profile box, one would be hard pressed to even identify Anderson as being in the “software business.” And it is this seemingly innocuous observation that is at the heart of the Baxter solution.
Proactive Understanding
In the previous post, I posed the question “Are you in the software business?” As indicated, the basis for the question was the result of a conversation I had with a senior level executive who lamented the fact that she had to dedicate two full-time staff to the “ongoing” implementation of a PeopleSoft procurement module.
Of the myriad of problems encountered by organizations who pursue a technological solution as a means of filling their operational gaps, the risk of being defined by the chosen application is most prevelant. Specifically, being pigeonholed into a pre-determined course that is governed by a cost justification imperative versus a process improvement resolution.
While Baxter Planning System’s financial success is driven by “selling” their applications, the solutions they provide are an extension of an in depth industry knowledge and understanding. In short, they lead with insight and deliver tangible value versus leading with technology and justifying fees through analytical mumbo-jumbo (I think mumbo-jumbo is a word?).
This is an important distinction, especially when one recognizes the inherent flaws with the traditional “belt with suspenders” mindset that has historically governed warehousing strategies.
More Than 90%
I cannot help but recall a meeting I had with a large electronic retailer based in Minneapolis who proudly proclaimed that they had rationalized the supply base down to 100 vendors, and satisfied 90% of their service calls through their warehouse.
Without going into too much detail, a simple analysis of a single MRO commodity (supported of course by extensive case reference history) showed that they were paying a premium of 23% over the going market price for the service part in question. In effect, their perception of reality was dangerously skewed by the self-imposed confines of a strategy that took them further away from being able to make an accurate assessment of real-world performance. Or as I tell my audiences in the many seminars I give, they unintentionally narrowed the scope of their experience (re data capture) as part of their rationalization strategy to the point that they based their performance measurements on an internal, increasingly narrow point of reference.
In this scenario, does it make sense to lead with a warehouse management technology, or would it make more sense to proactively attempt to discern their current strategy’s impact on critical areas of the business including both financial as well as Service Level Agreement (SLA) performance?
A software company would lead with technology. An intelligence resource and business partner would not. Baxter is not a software company!
Why Baxter?
For those of you who are part of my reagular readership, you already know that an important tenet of the Procurement Insights Sponsorship Program (which includes these profiles) is my total commitment to neutrality. In assessing the viability of the Baxter value proposition, it will be up to you to determine how they may be of service to your organization. And as is the case with all sponsors, I will direct you to the Link To Our Sponsors section of the PI Blog to investigate their value proposition in greater detail, and at your own convenience. (Note: as I have run out of ways to state my commitment to neutrality, I have decided to use the above standard “template” in this as well as all future posts. My apologies for foregoing originality in place of convenience.)
In the end, Baxter Planning Systems places a greater emphasis on the “Planning” versus “Systems” aspect of their name. This is not to imply that their technological offering is in some way a secondary consideration. In fact, the opposite is true in that the veracity of the Baxter solution is inextricably linked to their “intelligence” first approach.
And it is through this clarifying lens that the unique operating attributes of your organization will be thoughtfully viewed and successfully addressed.
Web Resources:
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Posted on September 18, 2008
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