Focusing on Spare Parts to Aid Profitability

Nov. 30, 2011
As industrial manufacturers seek new ways to mitigate the effects of the prolonged economic recession, focusing more on strategically pricing spare parts may be an option. But, how they approach pricing such parts will either help or hinder their pricing efforts.

Although spare parts typically only represent 10 percent of global sales, they can contribute up to 50 percent of net income for an average industrial company. However, such parts are often priced sight unseen. In other words, price levels are decided on cost alone, or based on a mark-up percentage applied universally to all the parts in a given technical family. As a result, captive parts are often not valued in line with market opportunity. Some are under-priced and erode margins, while others are over-priced and damage the credibility of a given brand.

To leverage a spare parts strategy to aid profitability, industrial manufacturers need to develop a new approach that is in tune with the perceived value customers place on spare parts. Companies that thoroughly evaluate parts at their inception will be able to gain the insights needed to more effectively price them to satisfy customer expectations. Achieving this goal will require assessing product characteristics, including dimension, material, weight, the technology used, added value, specific functions, manufacturing complexity, residual value, and customer-specific requirements.
Taking this approach will not only help provide more on-target pricing, but will enable companies to manufacturer parts in a more cost-effective way—aiding both operating profit and overall profitability. Employing this kind of robust analysis in the initial stages of parts production also will greatly help companies that are pursuing high volume parts manufacturing. Manufacturers will be able to establish a more systematic approach to optimizing parts pricing on a large scale. 
Completing the process
It will be important to have an in-depth understanding of the marketplace, as well as the product characteristics of spare parts. This will include continuously assessing market conditions and competitors, while evaluating customers relative to defining customer targets, and the type of equipment they own. Identifying profitability opportunities based on part categories, geographies and channels, and price elasticity as part of the process will be essential too.
The results from such analyses will help manufacturers tailor their pricing structures and processes to their specific business situation. For instance, a company that has a competitive advantage or proprietary technology can command a premium, while other parts that decrease in price, can increase customer loyalty and market share. Applying “what if” scenarios before implementing a new pricing strategy remains a key component of the pricing process, as well. This includes assessing prices against the competition, determining expected sales volume, and ascertaining the bottom-line financial impact to ensure that the proposed pricing strategy is on target. Finally, measuring results is key. It is essential that manufacturers know bottom-line results in order to make needed adjustments to pricing strategies as they are rolled out.
Placing a greater emphasis on spare parts pricing as a hedge against the downturn makes sense. Using this strategy, some companies have been able to generate between $25 to 45 million in annual profit increases. Analysis shows that better pricing strategies can help companies improve profitability and recover costs.  But, to succeed industrial manufacturers will need to first consider all of the elements involved in producing a part to know how best to manufacture it, and to have a better understanding of its true value. Such insight will help companies increase customer satisfaction, stave off the effects of the economy, and move closer to achieving high performance.
James Robbins, [email protected], is automotive industry & industrial equipment industry North American managing director with Accenture, a global management consulting, technology services and outsourcing company.