Managing Product Obsolescence in Capital Intensive Assets

Transcription

1 Orilla Consulting Managing Product Obsolescence in Capital Intensive Assets Executive summary When a customer needs to maintain a valuable asset over several decades, their priorities change. The need for frequent product updates to bring in new features, gives way to making sure that the identical product stays available for many years. Products obsolescence planning is something that customers accept, leaving mitigation planning to chance is not. Suppliers seeking to be included in large scale integration projects, are expected to demonstrate that they have obsolescence of their product lines well under control, throughout their organisations. In this white paper, Orilla Consulting discuss product obsolescence in the context of capitalintensive assets, and propose what steps a supplier can take to ensure that customers view them, and their products, as future-fit.

2 Contents Executive summary... 1 Background - Product Obsolescence and Capital-Intensive Assets... 3 Terms of Reference... 3 What is product obsolescence?... 3 Why do products become obsolete?... 3 When does product obsolescence matter?... 4 How are Capital Intensive Assets affected by product obsolescence?... 4 Pre-empting product obsolescence... 5 Capital Intensive Assets - Other factors to keep in mind... 5 Collaborative Strategies to Manage Obsolescence... 7 Implement a Product Life Cycle Policy... 7 Automation... 8 Adopt common obsolescence management strategies... 8 Transfer responsibility for managing obsolescence through the supply chain... 9 Consider obsolescence early during the Product Development Process... 9 Managing Obsolescence in Practice Making a Product Obsolescence Management Plan Implement an Obsolescence Programme Function Holding Spare Parts Inventory Deciding when to use the reactive or the pro-active strategy Benefits of proactive obsolescence management How can Orilla Consulting help? P a g e 2 14

3 Background - Product Obsolescence and Capital-Intensive Assets Terms of Reference A Capital-Intensive Asset is an item which requires a significant financial outlay to design, build and bring into service, examples include: Infrastructure such as power and railway networks Vehicles, vessels and aircraft Monitoring, control and communication networks The Design Life of a Capital-Intensive Asset is the period over which it is expected to operate. An asset may have a design life of twenty years or more. A Product is a hardware item such as a system, part, assembly, component or a piece of software. The product life cycle is the time between initial development of the product and its eventual withdrawal. To mitigate is to reduce or make less severe. What is product obsolescence? A product is considered to be obsolete when it: 1. cannot be purchased from a supplier 1 2. is no longer fit for purpose. Why do products become obsolete? Products become obsolete for many reasons. A few examples include that requirements may change, new technology may become available, skills to maintain the product may be lost or it may not be viable to continue to buy or sell the product for financial reasons. 1 E.g. for availability, supply or budget reasons P a g e 3 14

4 All products become obsolete and it is accepted that the average product life cycle is shortening 2. As a result, products are tending to become obsolete more quickly. When does product obsolescence matter? Obsolescence matters most when the obsolete product is part of a larger system and other products depend upon it. The following example gives more details. Consider the now obsolete computer operating system Microsoft XP. It is no longer available for purchase and no longer supported by Microsoft. Owners of computers running Microsoft XP as stand-alone machines, were able to decide to replace their operating system whenever it was convenient to do so. Most owners did so by simply buying a new computer. Very few people continue to use Microsoft XP in standalone home or business computers. The situation for organisations running computers with Microsoft XP is very different. Health Services, Banks and Power companies are examples of organisations which continue to operate assets which rely on the features of Microsoft XP. Simply replacing Microsoft XP with a different operating system, would cause other products within the asset to fail. As a result, these other products would also need to be modified or replaced It is this knock-on effect, initiated by the introduction of one different product, which makes it very expensive and time consuming to redesign an existing asset. In some cases, it would be cheaper to build a new asset and throw the old one away. However, it is unlikely that an electrical power station would be decommissioned because of an obsolete computer operating system. It has been estimated that in early 2017, 7% of computers worldwide still use Microsoft XP. Many of these computers operate inside large complex systems. How are Capital Intensive Assets affected by product obsolescence? Considering the two obsolescence conditions mentioned earlier: 1. If a product can no longer be purchased, a customer might find it difficult or impossible to repair an asset which depends upon that product. 2. If a product used inside an asset does not meet new requirements, then the asset may need to be redesigned. If no action is taken, the asset will eventually suffer in one or more of the following ways: 2 IEC International Standard, Obsolescence Management Application Guide IEC BS EN P a g e 4 14

5 by having a reduced capability by having a reduced operational life time by costing more to operate over the design life time Faced with this situation, the customer may decide that the impact on the asset is unacceptable and that action is needed 3. As mentioned in the previous section, attempting to replace a product inside an asset once it has become obsolete can be problematic. An alternative and possibly more appealing option is to take action to solve product obsolescence before it occurs. Pre-empting product obsolescence Whilst product obsolescence cannot be avoided, it can be anticipated, planned for, monitored, assessed and steps taken to mitigate its impact. These steps take place under the general activity obsolescence management. For an organisation tasked with managing a valuable asset, product obsolescence is an everpresent threat and effectively managing obsolescence is considered an organisational strength 4. Capital Intensive Assets - Other factors to keep in mind The lifetime of a Capital-Intensive Asset is usually expected to be significantly longer than the lifetime of the products used within it. For example, a railway signalling network may have a design lifetime of thirty years, however most of the products used to build the network, would be expected to wear out and become obsolete well before this time. A second important characteristic of an asset is its dependability. The asset, e.g. the railway signalling network in this case, will be expected to meet stringent requirements over its lifetime in terms of Reliability, Availability, Maintainability and Safety, these are more frequently referred to as RAMS requirements. In order to ensure that the asset continues to operate dependably over its full design lifetime, it must be maintained. Maintenance events, referred to as refresh cycles are 3 Organisations also make the decision, whether implicitly or explicitly, to accept the impact of obsolescence. 4 E.g. a Strengths, Weaknesses, Opportunities and Threats (SWOT) analysis. P a g e 5 14

6 scheduled periodically over the lifetime of the asset. It is at these refresh cycles that changes can be made to the asset, usually under carefully controlled conditions. Where a product within an asset has become obsolete and a decision has been made to replace it, replacement would normally occur at a scheduled refresh cycle. However, in practice complexity arises because products become obsolete at any time, whereas asset refresh cycles are normally fixed. Successfully managing product obsolescence, refresh cycles and eventually replacing obsolete products, requires co-ordinated effort from several parties. Both the organisation managing the asset (the customer) and the organisations providing the products used in the asset (the suppliers) need to co-operate. The next section proposes some ways in which this can be done. P a g e 6 14

7 Collaborative Strategies to Manage Obsolescence This chapter proposes ways in which the customer and supplier can collaborate to manage product obsolescence inside a Capital-Intensive Asset. Implement a Product Life Cycle Policy In some business sectors such as Engineering, it is normal for customers and suppliers to cooperate to proactively manage product obsolescence. Products are suppled against defined Product Life Cycle Policies (see Figure 1) which are understood both up and down the supply chain. These policies help customers to track the status of individual products, plan product refreshes and decide when mitigation action is necessary. In other sectors, such as IT and Telecommunications the practice of working to defined Product Lifecycle Policies for enterprise solutions is becoming established. Cisco is a good example of a technology company which has implemented a Product Life Cycle Policy to manage product obsolescence. Cisco is a preferred supplier of IT Networking and Security solutions to thousands of businesses worldwide. Its products have been integrated into large capital assets across many industry sectors. It is no surprise that Cisco has maintained a publicly visible, comprehensive and stable product End-Of-Life 5 policy 6 since As a result, it is easy for a customer to understand the planned future availability of any Cisco product. This information is a significant help to a customer when deciding whether or not to upgrade a Cisco product at the next asset refresh. Notable benefit Product End-of-Life or End-of-Support events provide sales teams with the opportunity to contact a customer to discuss upgrade plans. Stage Abbreviation Description Pre-Production PP Manufacturer communicates intention to launch a new product and may simultaneously communicate discontinuance of an earlier version. General Availability GA Product is generally available, full support, patches, upgrades and spares are available. 5 End-Of-Life, a defined stage within a Product Life Cycle Policy 6 See Cisco s policy at P a g e 7 14

8 Product Change Notice PCN Notice to customers that a product currently in General Availability stage will change. Product Discontinuance Notice PDN Product GA will end. May be combined with LBO. Lifetime Buy Order LBO Last date to buy complete product, spares or a hardware / software support package. Last Time Shipment LTS Last date of dispatch, usually physical product. End of Support EOS End of all support and repairs. End of Life EOL Product switch off (relevant for hosted services) Figure 1 - Example of a Product Life Cycle Policy Automation In some cases, the process of communicating the status of a product against the Product Life Cycle Policy, between the supplier and customer, has been automated. Automation helps to speed-up the flow of product status information, it also provides the supplier with a written record of what the customer has been told and when. This may be necessary for contractual reasons, especially if the supplier intends to make a critical component of a Capital-Intensive Asset obsolete. Adopt common obsolescence management strategies Different strategies exist to manage obsolescence over the lifetime of an asset or product. Options include the reactive or proactive strategy. The reactive strategy is a decision to manage product obsolescence as and when it occurs 7. Conversely, the proactive strategy anticipates and puts measures in place to manage product obsolescence before it occurs. To be effective, the customer and the supplier should adopt the same obsolescence management strategy for any given product. Some products within an asset may be subject to a proactive obsolescence strategy, whilst for others a reactive strategy will suffice. Further details about obsolescence strategies and when to use them are provided later in this document. 7 Or at some point after the event when resources allow. P a g e 8 14

9 Transfer responsibility for managing obsolescence through the supply chain Parts of the responsibility for managing product obsolescence can be transferred through the supply chain between customer and supplier. The logic being that the other party will have better visibility and influence over factors that will impact product obsolescence in the future. Transfer of responsibility is usually achieved by including requirements in contractual agreements. Customers can require that suppliers demonstrate that not only has the impact of product obsolescence been considered in the original design, but also that the suppliers organisation can effectively manage obsolescence of the product(s) on an ongoing basis. Likewise, a supplier may require the customer to disclose information relevant to future product requirements as early as possible. This is to assist the supplier in planning the product roadmap and ensuring that the product is kept fit for purpose. The supplier may also need to be kept informed of planned asset refresh cycles for example. Under a contract, the customer may require the supplier to provide an initial Obsolescence Management Demonstration Report, maintain the Obsolescence Management Plan and provide periodic Obsolescence Status Reports. The supplier may require the customer to provide asset maintenance roadmaps and agree to periodic requirements review meetings. Consider obsolescence early during the Product Development Process The design phase within the Product Development Process is the first opportunity to anticipate how the product is likely to be affected by obsolescence in the future, how obsolescence can be mitigated and what steps can be taken now to simplify the mitigation process. At this stage management attention should be focused upon: Adopting a modular design with common technologies and standardised interfaces. This is to maximise the probability that compatible replacement components can be found in the future. Deciding which resources will be necessary to manage product obsolescence and ensuring that these resources are in place. Deciding how occurrences of component obsolescence will be assessed and categorised in terms of risk, impact and proximity. P a g e 9 14

10 Managing Obsolescence in Practice Managing product obsolescence proactively means regularly collecting information about products, making planning decisions and coordinating business resources to solve obsolescence issues. Where flexibility to change products within an asset is limited for reasons previously discussed, it may also be necessary to manage the sourcing and storage of spare parts. This section details some of the tangible steps that an organisation may need to take to manage obsolescence on a proactive basis. Making a Product Obsolescence Management Plan Where a Capital-Intensive Asset is to be operated over a long lifetime it is common for an Obsolescence Management Plan to be put in place. The plan provides details of the scope and organisation of obsolescence activities, frequency of obsolescence checks, information to be collected and the resources which will be needed. Plans may also detail which documentation should be kept for each component within the asset, also the type and frequency of communication which should take place between customers and suppliers. Plans may also define organisational structures and responsibilities for managing obsolescence along with reporting requirements for quality assurance purposes. The Obsolescence Management Plan should define: where the product baseline documentation is stored asset lifetime and planned refresh cycles how obsolescence should be classified mitigation processes mitigation options, including whether or not spares inventory will be held Implement an Obsolescence Programme Function Where an organisation is exposed to significant levels of risk from obsolescence on an ongoing basis, it is beneficial to create an Obsolescence Programme Function inside the organisation. The purpose of this function should include: P a g e 10 14

11 creating the obsolescence policy for the organisation and ensuring that it is followed by each business function. Ensuring obsolescence issues receive the appropriate level of management attention, up to board level if necessary that the organisation has the necessary skills, knowhow and resources at its disposal to manage obsolescence ensuring that the organisation is represented at relevant Component Obsolescence Groups (COGs) where obsolescence of critical technologies is closely monitored Coordinating activities to resolving the obsolescence backlog (where one has been allowed to accumulate) on behalf of senior management Arranging obsolescence training for the organisation Auditing the extent to which obsolescence is being managed for an asset, making recommendations to increase or decrease resources in response to external changes Developing and maintaining obsolescence clauses to be included in company contracts Maintain oversight of spares inventory planning to minimise wastage Holding Spare Parts Inventory Holding spare parts inventory of discontinued product is one of the most effective ways to ensure that obsolete products continue to be available to customers. It is also one of the most expensive as stock must be both purchased and stored. Discussions between customers and suppliers as to how much stock is required, who pays and where inventory is stored can be complex, so it is recommended to agree this early on in the relationship. Accurately calculating sparing requirements depends on many factors including number of active units, component Mean Time Between Failure (MTBF), resupply or repair turn-around times (RTATs), equipment location and fault Time-To-Resolution (TTR) expectations to name a few. Orilla Consulting can help customers to calculate and optimise spares requirements. In summary, whilst storing spares inventory for discontinued products can be onerous, customers value the capability very highly. It might make the difference to winning a competitive tender process or not. Deciding when to use the reactive or the pro-active strategy P a g e 11 14

12 The decision of whether to use a reactive or a proactive approach to managing obsolescence in an asset will depend on the likelihood, impact and proximity of the expected obsolescence event. The following guidance may help. Use a reactive obsolescence strategy if the asset or product: has low dependability requirements is available from several manufacturers / distributors has sufficient budget or margin available to continue to source spares or components has a slow rate of technology refresh has a short lifetime Is stable in that requirements on the asset are changing slowly or not at all Is purchased in a volume which is sufficient to assure that supplies are maintained Use a proactive obsolescence strategy if the asset or product: has high dependability requirements generates high amounts of revenue has a long lifetime is available from a limited number of manufacturers or distributors is subject to a high rate of technological refresh is unique and consumes spares at a low volume has a limited budget available for the purchase of spare parts or components Benefits of proactive obsolescence management To an organisation managing a Capital-Intensive Asset The asset is less likely to suffer a negative impact as a result of a product becoming obsolete Improved awareness of factors affecting the supply of essential components, therefore more likely to foresee technical obsolescence (when a product can no longer be sourced from a supplier or support is not available) More likely to spot changing external requirements early on, and have a mechanism in place to alert suppliers to take action to upgrade products. To an organisation supplying products used within a Capital-Intensive Asset: Ability to give more clarity to customers in terms of ongoing product availability P a g e 12 14

13 Product lines become less susceptible to functional obsolescence (when no longer fit for purpose), as modular and standardised designs make the product easier to redesign. Improved intelligence on markets, technology and regulations strengthens the company s product planning capabilities Greater likelihood that obsolescence mitigation actions can be planned in advance, reducing eventual knock on effect to the customer Easier to initiate sales conversations with customers to discuss product discontinuance and product upgrades Greater likelihood of compliance to current and future contractual agreements P a g e 13 14

14 How can Orilla Consulting help? Profile Orilla Consulting Orilla Consulting provide specialist Product Management expertise to companies providing products and turnkey solutions to enterprise and business customers. We provide expertise to Thales Urban Mobility, helping the group meet obsolescence requirements associated with the build and future operation of the Sydney Metro Northwest project in Australia. With a background in Engineering, we have designed solutions and successfully managed products for global customers including hibu, Vodafone, BT and the International Alliance of Healthcare Educators. We provide documentation and advice on the following: Obsolescence Management Plans to meet the recommendations of BS EN Product Life Cycle Policies Obsolescence Management Demonstration Reports Obsolescence Management Business Cases We also provide the following services: Obsolescence risk and impact audits Obsolescence backlog mitigation Bespoke spare part inventory models, spares inventory and spend optimisation Contact If you need help to manage product obsolescence or resolve an obsolescence backlog please contact Orilla Consulting. James.mann@orilla-consulting.com P a g e 14 14