If You’re Not Recovering Defective Parts as an OEM, You’re Missing Opportunities

Welcome to Thomas Insights — every day, we publish the latest news and analysis to keep our readers up to date on what’s happening in industry. Sign up here to get the day’s top stories delivered straight to your inbox. Back in March, I shared a high-level article about the […]

Welcome to Thomas Insights — every day, we publish the latest news and analysis to keep our readers up to date on what’s happening in industry. Sign up here to get the day’s top stories delivered straight to your inbox.

Back in March, I shared a high-level article about the spare parts business for an industrial OEM — Managing a Spare Parts Business Is a Big Deal for an Industrial OEM. Now, this post delves into the analysis that goes into deciding if any specific part is worth recovering and reclaiming.

Your company’s end-to-end spare parts process probably grew without much planning and oversight. Over time the original process was slowly improved, but top-down upgrades were never implemented.

When was the last time you took a fresh look and updated your spare parts recovery process? 

Selling Spare Parts

An OEM can sell a spare part under two conditions:

  1. Either a distributor or end-user includes spare parts stock with the original equipment P.O. The parts will then remain in a stockroom until the equipment fails. At the end of the equipment’s useful life, the original purchaser may still have new parts in their stockroom with no future demand.
  2. The equipment you sell fails and either the plant maintenance personnel or your field service technician diagnoses the cause of failure as a field replaceable unit (FRU). When the parts department ship the replacement part and the on-site technician receive and install it, the equipment is fixed. And they have a defective part with some value remaining in it.

The unasked and unanswered question is: What happens to either the new or the defective part when it has finished serving its intended purpose?

Recovering the Value Associated with Each Spare Part

A recovered part, whether defective or never used, still has value. Depending on your cost to recover and process an unwanted part, if you are not recapturing the remaining value, you are probably leaving money on the table. The challenge is to calculate the costs and remaining value for each part before deciding how you will handle the potential return and disposition.

The Value Elements of a Spare Part

I recently watched a webinar presented by Cooperberg featuring Andy Bailey, CMO of OnProcess Technology. In the webinar, Bailey identified four major value creating areas, with some having a number of sub-headings. I then added a fifth value element.

Here they are:

  1. Costs
    1. Asset valuation
    2. Reuse to prevent new buys
    3. Use some of the piece-parts to reduce supply chain outages
  2. Revenue
    1. Remarket either with or without remanufacturing
    2. Warranty claims reduction
  3. Theft and Fraud
    1. Replace lost or stolen items
    2. Brand protection – prevent unauthorized reverse engineering
  4. Sustainability and Circularity
    1. Recover materials
    2. Reduce emissions
    3. Reduce landfill
  5. Customer Loyalty
    1. Repurchase unused parts (at a discount)
    2. Support customer’s sustainability initiatives

The Potential Cost Elements Required to Make a Part Resalable

Before you even start to consider the cost to make a part salable, you should make sure there will be a future demand for it.

Usually, calculating part and assembly costs are easier than projecting their value. However, because of the number of uncertainties, when talking about returned parts the opposite is true. This is a listing of the major cost areas:

  1. Return shipping
  2. Incoming visual inspection and initial use/scrap disposition
  3. Cleaning: Will there be any safety or hazmat issues?
  4. Inspection and test: What is the current revision level? Can it go right back into stock?
  5. Rework or disassemble?
  6. Resell as equivalent to new (ETN) or as refurbished?
  7. Costs associated with reselling the part include:
    1. Commissions
    2. Seller fees (eBay, parts auctions)
    3. Inventory carrying costs if selling from your own inventory
    4. Order processing and credit checks
    5. Lost revenue if an existing customer buys a refurbished part at a discount instead of a new part at list price

Each of these costs will vary depending on the characteristics of the part, your industry, and how you do things in your plant.

For many B2B industrial OEM manufacturing businesses, the spare parts business is central to their value proposition and should be actively managed just like any other important product line.

Sam Klaidman is the founder and principal adviser at Middlesex Consulting. He helps his B2B product manufacturing clients grow their services revenue and profitability by applying the methodologies and techniques associated with the Customer Value Creation and Customer Experience professions to assist his clients as they design and commercialize new services and the associated business transformations. Contact Sam here.

Image Credit: ESB Professional / Shutterstock.com

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