Professional Documents
Culture Documents
80% 80%
More Than 40%
60% 60%
40% 40%
Spare Parts
0% 0%
REVENUE PROFIT
Figure 2
$800
Cost
$700
Willingess to pay
$600
$400
$300
$200
$100
$0
NAVIGATION SYSTEM METALLIC PAINT
Figure 3
Highly Complex
— — Very High Markup Very High Markup
Parts
Figure 4
Competition
Criticality
(Low Cost Substitutes, Manufacturing Complexity
(Impact Due to Downtime)
Mainstream Manufacturers)
Other Factors
(Product Features,
Customer Value Technology, Etc.)
Cost
Figure 5
4. Neutral 1% 2% 4%
6. Unlikely to Buy 2% 2% 1%
Figure 6
Figure 7
Figure 8
•• Category A consists of 20% of the spare company’s annual revenue. These parts are
parts that will deliver approximately 80% least critical and are stored to fulfill some
of annual revenue to the company. These irregular customer demand.
parts are considered critical and must have
a tight inventory control. This categorization scheme will also help in
determining the velocity of fulfillment within
•• Category B consists of those 50% of spare the supply chain and help dedicate separate
parts that provide about 15% of the company’s processes and workflows based on contribution
annual revenue. These parts are less critical to revenue.
and a reasonably accurate inventory control
is required. Though these parts are of The second step is to refine the classification
less annual dollar value, they add volume based on the lifecycle of the product where the
to orders. spare parts will be used. Industrial companies
can use data points such as sales volume,
•• CategoryC consists of 30% of the spare profit and competition to decide in which part
parts that generate roughly 5% of the of the lifecycle the product fits.
* T he percentages indicated in the columns “Number of Items”and “Annual Dollar Value” differs from
industry to industry and can be adjusted in accordance with the opinion of the experts.
Figure 9
Figure 10
SALES VOLUME,
MARGINS
DISCOUNTS BASED ON
CHANNELS, PRODUCT ALLOWABLE PRICE
SEGMENT, CUSTOMERS, VARIATION FOR A
GEOGRAPHY PRESPECIFIED PERIOD
BUSINESS
RULES
Figure 11
Figure 12
Use Analytics to Support can lead to better returns for the company,
Pricing Decisions pricing analytics can be applied for critical
spare parts belonging to “A” category. Figure
Price analytics can be used as an iterative
13 highlights analytical approaches which can
exploration of historic pricing information to
be used, depending on the circumstance.
gain insights that enhance planning for the
next pricing cycle. These analytics make use Such analytics will provide insights that help
of statistical, quantitative and fact-based to identify opportunities for improving the
analyses to drive decision-making. Since any spare parts pricing process.
pricing improvement for critical spare parts
• Identify critical • Benchmark the • Choose the correct • Find out how much
price points for the price vis-à-vis pricing strategy during revenue companies
spare parts — i.e., the competition the various stages of really keep from each
the correlation and identify the the product lifecycle. of their transactions.
between purchasing price premium/
decisions and various differential that the • Change the price • Identify the
pricing drivers. consumer would be range of a product/ components of
willing to pay for family post- transition discounts, allowances,
• Understand the competitors’ product. to a new stage in rebates and incentives,
price sensitivities product’s lifecycle – and constantly try
of each individual • Determine the namely, launch to to improve so they
customer/segment; premium that the growth, growth to can add an additional
manufacturers to consumer would steady, steady to 1% or more of the
keep the price within be willing to pay saturation phase. price to their pockets.
control limits. for buying from
the firm.
• Gain insights such as
how sales volumes
are impacted by
price changes and
if cannibalization of
other product sales
will take place due to
price change.
Figure 13
PROS
Zilliant
Figure 14
Enterprise applications are simpler to implement We advise industrial companies to identify the
but may not have built-in capability for price nature of their spare parts before segmenting
enforcement. Best-of-breed solutions provide them and applying an ABC analysis. They should
the maximum capability and may need to also select a price range for products by using
be configured to make them suitable for customer perception feedback and then fine-tune
companies’ requirements. These solutions pricing based on expert opinion and industry
not only provide advanced analytics, but also surveys. From there, they need to enforce
allow spare price optimization and enforcement. business rules to account for key business terms
and conditions and apply analytics to assist
decision-making. Only then can they effectively
decide upon the best IT application to inform
the spare parts pricing process.
2
GE Annual Reports, 2010 and 2011.
3
“Full-Year Results,” Rolls-Royce Group plc, 2010.
4
Compustat, McKinsey Analysis.
Nazia Tarannum is a Consultant within Cognizant Business Consulting, focused on the manufacturing and
logistics domain. With almost five years of industry experience, she has helped manufacturing and logistics
companies to define and identify improvements in pricing processes and systems. Nazia holds a bachelor’s
degree in electronic engineering and a post-graduate degree in business management (logistics and supply
chain) from S.P Jain Center of Management, Singapore and Dubai. She can be reached at
Nazia.Tarannum@cognizant.com.
About Cognizant
Cognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process
outsourcing services, dedicated to helping the world’s leading companies build stronger businesses. Headquartered
in Teaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deep
industry and business process expertise, and a global, collaborative workforce that embodies the future of work.
With over 50 delivery centers worldwide and approximately 140,500 employees as of March 31, 2012, Cognizant is a
member of the NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among the
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