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Using an Industrialized Approach to Pricing Parts

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Spare parts can be a steady source of revenue, making them a prime target for maximizing their value.
For industrial equipment (IE) manufacturers, adopting a process that can best price spare parts in line with customers’ perceived value of them has become as critical to driving profitability as ensuring they meet the reliability and high-quality standards the market demands.

To survive the economic slowdown, many IE manufacturers not only cut operating costs and instituted aggressive savings programs, but adjusted customer pricing to accommodate increased pricing sensitivity. As the economy recovers, much of this sensitivity remains, adding a new level of complexity to the spare parts and IE products market overall that could impact performance. To overcome this challenge, companies will need to treat pricing more as a science, complete with driving principles; a sustainable process; and standard, provable metrics.

>> Growing pains via acquisitions, inventory and buying strategies are just some of the issues found in Enterprise View columns. Visit http://bit.ly/aw_enterprise

Accenture’s Parts Optimization (APO) center reinforces an industrialized approach. Results show that an industrialized process can be used to analyze, align, and provide transparency into the perceived value of IE and automotive parts. Incremental revenues, the revenue increase between new and previous parts revenue, can aid profitability by 10 to 15 percent for captive parts, while competitive parts can yield a five to 10 percent improvement. One manufacturer, which specializes in cryogenic equipment and energy processing, increased spare parts revenues by 16.7 percent in 2011, and a leading automaker boosted performance by 12 percent in 2010 using the process.

An ongoing process
Spare parts can be a steady source of revenue, making them a prime target for maximizing their value. But, as the market evolves, companies will need to institute a sustained process to effectively respond to potential shifts in pricing perceptions.

There are a number of key steps manufacturers can take to better align parts pricing on a continuous basis, while containing manufacturing costs and adding to profitability.

· Define where parts lie on the pricing spectrum relative to market demand to develop an appropriate pricing strategy. Most spare parts are either part of the captive market, where customers consider them a necessity and have one or a very limited source for the parts, or the competitive market, involving parts that can be easily exchanged for similar, less expensive competing products.

· Access product characteristics, including dimension, material weight, technology used, manufacturing complexity, specific functions, customer-specific requirements, added value, and residual value. In addition, identify potential parts duplications, as well as standardization and customization opportunities.

· Take a “should-cost” approach, correlating a part’s technical, manufacturing, and sourcing attributes with current sourcing costs to identify deviations and potential savings to optimize operating costs.

· Correlate the parts pricing with actual functionalities or features, especially for captive parts, to achieve consistency in pricing and provide transparency into the customer’s perceived value of such parts.

· Leverage market intelligence in a systematic and structured way, converting a market positioning strategy into a parts pricing strategy that includes using analytics to continuously align pricing with the market and increase market share.

· Monitor the impact of pricing strategies on revenues, volume and product mix, and adjust the pricing model over the lifecycle of parts–from their price leadership position and competitive pricing stage to the end of the products’ life.

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The recalibration of spare parts pricing will continue no matter the state of the economy, making how they are priced as increasingly important to success as factory-floor performance and innovative manufacturing strategies. In an ever-changing marketplace, industrial equipment manufacturers will do well to more closely integrate these three elements to compete effectively, gain market share and achieve future high performance.

>> James Robbins, [email protected], is automotive industry & industrial equipment industry North American Managing Director with Accenture (www.accenture.com), a global management consulting, technology services and outsourcing company.

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