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Understanding the Value of High Quality Components and Services

Putting a Price on High Quality Components

Just because some pneumatic components cost more doesn’t mean they are high in quality. Reliable, predictable, and readily available components, however, provide value that merits their higher expense.

All pneumatic components used in food and beverage packaging builds are not created equally. This is one of the reasons prices for pneumatic components differ from supplier to supplier.

OEM supply chain managers tasked with purchasing components for their companies’ builds tend to seek the lowest prices they can for pneumatic staples like hoses, tubing, and fittings. Prices for pneumatic valves and cylinders also are scrutinized by purchasing executives in search of the lowest price tags. The attention on price certainly makes sense: paying more for pneumatic components does not always guarantee quality or value.

In fact, OEMs should expect to find very specific value propositions behind many of the “more expensive” parts they’re considering. By understanding and factoring these values into their purchase equations, OEMs will be able to determine the true value in what they are buying, and the return on investment they should expect.

Factors that Create Value
OEMs should generally expect that if they are paying more for a component they could buy elsewhere at a lower price, they should see solid benefits in doing that. These relate to the supplier’s proven track record of performance in a number of areas. Key among them are product quality, availability, and performance, sometimes referred to as the quality, service, and affordability trifecta. An additional area would be the supplier’s ability to provide customized solutions and specialized services specific to an OEM’s needs.

This combination of qualities can be difficult for suppliers to master. For example, an OEM may purchase a product or fitting that works within their system, but then find that it’s not readily available when required. Or maybe the product is readily available, but doesn’t fit the customer’s equipment well and forces the OEM to incur added costs such as modifications, increased maintenance, or repairs. Perhaps the OEM needs more parts, within a short time frame to meet increased production targets, but the supplier can’t deliver the requested quantities of components in time. All are factors that relate to the supplier’s track record, and all of them can end up increasing costs over both the short and long terms.

On the other hand, OEMs that are assured of receiving the right parts, in the right quantities, at the right times, and in the right locations, can avoid added operational costs and find greater returns.

In addition, products that perform more effectively, more durably and create a better end user experience also give OEMs the opportunity to be more profitable, if they understand these values and can put a number to them.

Earning Returns on Components
For a clear understanding of the true value of pneumatic components and assemblies, OEMs should also factor in the process efficiency improvements those components will deliver. For example, OEMs will realize improved efficiencies or operations cost reductions by selecting products that reduce the need for secondary operations, such as subassembly and testing tasks they would otherwise have to do in-house. Secondary operations typically require added direct labor costs as well as equipment and process investments.

Using finished goods assemblies that are pre-assembled and pretested, despite having a slightly higher price tag, can also enable an organization to reduce its overall processing costs for many functions. These strategies are proven to reduce production times and materials expenses associated with acquisition/materials management and quality costs. The number of times the OEM has to move, process, and store certain components will all be reduced dramatically with this strategy.

Furthermore, by realizing this process improvement, the OEM may be able to eliminate overtime or free up capacity for additional production. Ultimately, this provides an increase in capacity without requiring additional investments in labor or processes, which in turn increases the OEM’s profitability on the products produced.

Examples of specific cost improvements OEMs can realize by aligning with a supplier that delivers operational or process efficiencies include:

• Reduced specialized inventory
• Fewer weekly deliveries
• Leveraging best practices for Lean manufacturing concepts
• Consolidating suppliers
• Reducing material management "touch points"
• Built-in engineering and application support
• Reduced downtime

By quantifying and adding up these process improvements and resulting cost benefits and then dividing them by the total material expenditures, OEMs can also figure out how much of every dollar is returned because of the new operational efficiencies.

For example, an OEM may realize that by spending $8,300 more on certain pre-assembled components versus individual discrete components, the company will be able to decrease its total production costs by $21,600 through eliminating various primary and secondary processes as well as the additional labor and stocking burdens associated with those processes. For each additional $1.00 spent, the OEM is receiving $2.35 back in cost reduction, process efficiency, and operational excellence.

Bottom Line Benefits
Implementing comprehensive strategies like these delivers value through decreased operational costs and increased efficiency. As such, OEMs are likely to gain real bottom-line impacts, not by acquiring the lowest price products, but by acquiring products that benefit the organization across operations. These OEMs will be able to lower their overall production costs by delivering greater throughputs or more efficient operations. This, in turn has the potential to increase OEM revenues, by resulting in more marketable equipment to sell.


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