Improving the Value Proposition for New Products

Copyright © 2011 by LeveragePoint Innovations Inc.No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means —electronic, mechanical, photocopying, recording, or otherwise — without the permission of LeveragePoint Innovations Inc.

This document provides an outline of a presentation and is incomplete without the accompanying oral commentary and discussion.

COMPANY CONFIDENTIAL

Improving the Value Proposition for New Products

with Dick Braun, Parker Hannifin

Monthly Webinar Series - October 2011

Today’s Presenter

Dick Braun is Corporate Vice President of Strategic

Pricing at Parker Hannifin Corporation. Dick's work wasdetailed in the Wall Street Journal feature article, "SeeingPerfect Prices, CEO Tears Up the Rules." Previously, he had a24-year career at GE. As leader of Parker Hannifin's pricingprogram, he significantly contributed to Parker's earnings

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program, he significantly contributed to Parker's earningsgrowth over the past 7 years.

Parker Strategic Pricing

Webinar

Dick BraunDick BraunV.P. Finance Corporate Strategic Pricing

Key Facts about Parker: FY2011

• $12.4 Billion in Revenue

• 839,000 Products Sold

• 471,000 Customers

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• 471,000 Customers

• 55,000 Employees

• 13,000 Distribution/MRO Outlets Worldwide

• 1,100 Markets

• 132 Divisions

• 46 Countries

Refrigeration

HydraulicsFiltration Fluid Handling

Aerospace Electromechanical

Broad Technology Platforms

5

Pneumatics Process Control Sealing & Shielding

Strong Global PresenceMore than Half of Industrial Sales now International

FY11 Sales: $12 BillionNA Industrial

6

28,000 Employees

187 Plants

1,600

Employees

5 Plants

15,000 Employees

91 Plants

7,000 Employees

33 Plants

36%

38%

18%

8%INTL Industrial

Aerospace

Climate IndustrialControls

Significant Product Mix>800,000 Products Sold

7

Diverse Markets ServedOEM and Distribution

Parker Strategic PricingIntroduction

Goals#1 Premier

Customer ServiceFinancial

PerformanceProfitable

Growth

Vision The #1 Motion & Control Company

Strategic Pricing = Key Center-Led WinStrategyInitiative

9

Customer Service Performance Growth

STRATEGIES

Internal

Acquisitions Globalization

Delivery of Quality Productson Time

Value Added Services

Best Systems-PHconnect

Suppliers STRATEGICPROCUREMENT

Operation LEAN

Customers STRATEGICPRICING

European Initiatives

Innovative Products

Systems Solutions

Strong Distribution

Empowered Employees

Parker Strategic PricingValue Streams

3 Key Value Streams With Distinct Strategies,

Processes & Objectives

10

New Quotations

~500,000 Quotes$5.6B Value

$2B Sales

List Prices

~5,000,000 Prices$5B Sales

Contract Renewals

~50,000 Contracts$5B Sales

Parker Strategic PricingMetrics

Sell Prices Win/LossQuotes Renewals

JULY AUG SEPT OCT NOV DEC JAN FEB MAR APR MAY JUNE

COUNT 75 38 62 47 55 39 79 82 89 65 72 61

NEW QUOTATIONS (CURRENT MONTH)

$0

$20

$40

$60

$80

$100

$120

$140

$160


Thousan

ds

0

20

40

60

80

100

120

Hours

$ of New Opportunity Quoted P75 P95 P75 PLAN P95 PLAN

BAD FACTOR/LOW MARGIN (CURRENT MONTH)

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500


Tho

usands

0%

2%

4%

6%

8%

10%

12%

14%

%

YTD NET SALES IN THOUSANDSAT MARGIN <10%, FACTOR >90 % OF SALES AT BAD FACTOR

HIT RATE

$0

$100

$200

$300

$400

$500

$600


Thousands

0%

5%

10%

15%

20%

25%

30%

35%

%REVEN

UE

% OF OPPT WON YTD $ WON YTD $ LOST YTD $ PENDING

Predetermined Time Lag = 3 months

Large Customer Results

Sell Price Index Price Adjustments

Untouched Quotes

New Quotes RequotesHit Rate

% Follow Up Win Rate By …Bad Factor

PRICE ADJUSTMENTS

$0.00

$0.25

$0.50

$0.75

$1.00

$1.25

$1.50

$1.75

$2.00

$2.25

$2.50

$2.75

$3.00


TH

OU

SA

ND

S

0

5

10

15

20

25

30

35

40

45

50

CO

UN

T

COUNT OF PRICE RELATED ADJUSTMENTS IN MONTH VALUE OF ADJUSTMENTS FOR MONTH IN THOUSANDS

JULY AUG SEPT OCT NOV DEC JAN FEB MAR APR MAY

COUNT OF REQUOTES 205 175 20 47 15 460 120 14 16 38 50

# THAT INCREASED 145 130 3 30 10 300 92 11 14 21 20

# THAT DECREASED 35 10 1 10 5 100 17 2 1 14 25

$ IMPACT OF INCREASES 17$ 19$ 2$ 5$ 3$ 45$ 13$ 17$ 25$ 6$ 9$

$ IMPACT OF DECREASES 6$ 6$ 1$ 3$ 1$ 16$ 3$ 13$ 17$ 3$ 3$

REQUOTES (CURRENT MONTH) ANNUALIZED

$0

$5

$10

$15

$20

$25

$30

$35


TH

OU

SA

ND

S

Annualized Price Change on Requotes Planned Impact

Pricing Team Improvement Board

At Every Division

11

YTD SELLING PRICE CHANGE (FISCAL YTD)

$0

$20

$40

$60

$80

$100

$120

$140


Thousands

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

%C

hange

SPI$ MATERIAL COST$

SPI% MATERAIL COST%

LOSS CODE REASONS BY $

$0

$20

$40

$60

$80

$100

$120

Application orProduct

Price Availability Relationship PrototypeSpeed

Quality ProjectCancelled

Quote Speed

%OF QUOTES TRACKED

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%


% OF QUOTES TRACKED BY COUNT

% OF QUOTES TRACKED BY $ OPPTY

Large Customer Results

Task ListCustomer Key Products $ When Actions Needed

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Project Acquisition

A3Date:

A3 REPORT - PROBLEM SOLVING

VI. Countermeasure

VII. Cost/Benefit Analysis

VIII. Implementation Plan

What? Where? Who? When?

Summary of action to be taken

Most likely root cause of problems in the current condition: 5-why analysis

Approval:I. Theme V.P. G.M. GLM DLM Mgr.

IX. Follow-Up

Plan Actual Results

> Predicted performance

> How, when to check?

> Date check done.

> Results, compare to predicted.

II. Background

Orig.

V. Target Condition

Diagram of proposed new process

"What are we proposing to do?"

> Diagram of current process> What about the system is not ideal?> Extent of the problem(s), i.e., measures.

Problem content and importance

III. Current Condition

IV. Cause Analysis

Large Wins/LossesCusromer Products $ Comp Reason



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Untouched Quotes % Follow Up Win Rate By …Bad Factor

Top SPI Negative Customer Impacts

-$50,000

-$45,000

-$40,000

-$35,000

-$30,000

-$25,000

-$20,000

-$15,000

-$10,000

-$5,000

$0

B4

7317

A6

3735

A2

9451

A1

4829

A0

5641

A6

3051

A6

1859

A6

3240

A6

0410

A6

5450

A6

5630

A5

9122

A6

1984

A6

0967

A6

3818

A3

7661

A6

0714

A6

5447

A8

6295

Customer Number

$P

ric

eIm

pact

Journey Assessment

A3Date:

A3 REPORT - PROBLEM SOLVING

VI. Countermeasure

VII. Cost/Benefit Analysis

VIII. Implementation PlanWhat? Where? Who? When?

Summary of action to be taken

Most likely root cause of problems in the current condition: 5-why analysis

Approval:I. Theme V.P. G.M. GLM DLM Mgr.

IX. Follow-Up

Plan Actual Results

> Predicted performance

> How, when to check?

> Date check done.

> Results, compare to predicted.

II. Background

Orig.

V. Target Condition

Diagram of proposed new process

"What are we proposing to do?"

> Diagram of current process

> What about the system is not ideal?> Extent of the problem(s), i.e., measures.

Problem content and importance

III. Current Condition

IV. Cause Analysis

Cusromer Products $ Comp Reason



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skk



dfkdf dk



skduid




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8908


UNTOUCHED QUOTES (CURRENT MONTH)

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45


TH

OU

SA

ND

S

-

10

20

30

40

50

60

70

MONTH $ OF REQUOTE UNTOUCHED (LAST YEAR SALES)

MONTH COUNT OF REQUOTES UNTOUCHED

*

Parker Strategic PricingMetrics

Parker Operational Pricing Measures

Year To Date Selling Price Change

Changes In Selling Price Index(SPI) – By Part, By Customer

12

Material Cost Recovery

Quote Speed (SPAN)

Win Rate %

Parker Strategic PricingProcesses

Lean Enterprise - Value Stream Mapping

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Pricing Cell

‘Set And Execute Prices’

Market Price Analysis

Contract Renewals

14

Contract Renewals

List Prices

PFEC – Plan For Every Customer

Pricing Guidelines

Discount on Exception Deals

y = 1E-07x + 0.0891

R2 = 0.013910.0%

11.0%

Inc

rem

en

talD

isc

ou

nt


Market Price Analysis

Stop Stupid Pricing!

Discount On Exception DealsOEM Price Index Vs Annual Sales

Market Segmentation

6.0%

7.0%

8.0%

9.0%

$10 $100 $1,000 $10,000 $100,000 $1,000,000

Order $

Inc

rem

en

talD

isc

ou

nt

15

Customer Scoring

Product Scoring

OEM Price Index vs Annual Sales

y = -2E-07x + 1.107

R2 = 0.0334

0.5

0.75

1

1.25

1.5

10 100 1,000 10,000 100,000 1,000,000

Annual Sales

Pri

ce

Ind

ex

Getting Price in the Playbook

Take of the Magic Out of Pricing

Science

Price SegmentationProduct• Prod Line• Core Status• Velocity• Lifecycle stage• Number of substitutes• Number of customers

Customer• Annual spend• Size• Industry/Type• Geography• Growth rate• Average order size

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• Pricing science applied to transactional

data to determine what deal attributes

affect pricing outcomes

• Common to include 4–10 attributes in the

final segmentation definition

• Combinations of attribute values yield

1,000s of pricing segments

• Number of customers• Performance, dimensions

• Average order size• Product breadth• Tenure• Recency• Frequency

Order• Size• Urgency• Product mix• Contract/spot

Good Deal ManagementProcess

Deal Profitability Analysis

Scoring & Recommendations

Global Quotation Platform

Scoring & Recommendations

Rule Based Exception Routines


PFEC – Plan For Every Customer

Plan For Every Customer Database

Plan-Do-Check-Act On Contract

18

Plan-Do-Check-Act On ContractBusiness

Analytical Account Scoring ToFind Leakage

Operational ProjectManagement Tool

InnovationParker’s Winovation Process

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FY10 % Sales from Winovation: 2.4%

Winovation: Creating Value

Winovation Stage Gate Process

Quantify ValueProposition

Identify ValueProposition

QualifyValue

Our ability to produce profitable growth (price value) from Winovationrelies on promoting those projects with good value propositions.

PriceValue

LaunchDiscovery Concept Feasibility Development Qualification/Preproduction

Gate1

Gate2

Gate5

Gate3

Gate4

STAGE 0 STAGE 1 STAGE 2 STAGE 3 STAGE 4 STAGE 5

PropositionProposition ValueProposition

ValueProposition

Parker Strategic PricingAnalytical Tools

Value Proposition Calculator

$1.2B In Winovation

Value Proposition Calculator Tool

Solution Type Solution Description Supplier

Value Driver: Manufacturing, Assembly & Supply Chain

Value Proposition - Calculator

Existing Solution

New Solution

Instruction Examples

21

Installed Value Calculator

Handbook And Training Program

Benefit Change

Labor Install Rate $ 55.00 X Hours 4.0

Labor Assembly Rate $ 55.00 X Hours 3.0

Labor Setup Rate $ 55.00 X Hours -

Labor Rate $ 55.00 X Hours -

Labor Rate $ 55.00 X Hours -

Capital Equip Cost ############ / # Units 125,000

Expediting Rate $ 55.00 X Hours 9.0

Receiving Annual $ Rec Change $ 350,000.00 0.6% 0.6%

Packaging $ 15.00

# Vendors Rate $ 55.00 X Hours -

Warehousing Rate 44 X Hours 15

Freight Rate Wgt/Area

Freight Rate Distance

Component Reduction $ 345.00

Floorspace Sq Ft 100 Cost $ 13.00 Years 2

In Plant Transport $ Inv $ 15,000 Rate 3.3%

Inventory Inventory $ 15,000 CCI% (15%) 15%

Other

Benefit Change

Labor Rework Rate $ 55.00 X Hours 4.0

Warranty Failures Avoided Cost per

Downtime Valur/Hr Hours

Scrap Scrap Costs per

Clean Up Rate $ 55.00 X Hours 4.0

Disposal Rate Units

Litigation Potential Ligigation Costs

Lost Sales Sales Lost GM%

Other

Benefit Change

Design Engrg Rate $ 55.00 X Hours 4.0

Testing Rate $ 55.00 X Hours 4.0

Test Equipment Equip Cost / # Units

Other

Benefit Change

Electricity kw Usage Change $/KW

Cost Rate Description



Description

Total:

Value Driver: Design & Engineering

Value Driver: Waste / Reduce Energy Reduction

Total:

Total:

Value Driver: Quality & Safety Improvement

Per Piece $ Packaging Reduced

Total Unit Cost of Components Reduced

Cost Rate

GPM/VP Pricing Review Of TopPrograms

Parker Strategic PricingLearnings And Resluts

Get Right Persons In Jobs

Focus On Process AND Prices

Measure And Track

22

Measure And Track

Layer New Capabilities Into The Program

Quote

“Value pricing represents the final frontierfor Parker pricing leaders. We arecompelled to drive shareholder value here”

Dick BraunVP Strategic Pricing

23

VP Strategic Pricing10/21/2010

These Value Propositions Are Tabulated

Value Proposition Calculator

24

Value Driver Library

Value Model

NOTE: Data sanitized for demonstration purposes

Value Price Modeling (Triangulation)

NOTE: Data sanitized for demonstration purposes

Common Mistakes

• Not understanding the value that a Parker product brings to the customer

• Seeing the value of a product from a Parker (internal) perspective

• Understanding the added value of a product, but not pricing it in – giving it

all to the customer

• Listening, but not “hearing” the customer

28

• Choosing the wrong customer(s) for feedback

• “Cost/Scope creep” - adding additional value throughout a long project, but

not re-examining the price.

• Disconnect between marketing and pricing strategies

Value Pricing Process - Recap

1) Understand all next best alternative choices; what they are and how

they performs against us

2) Understand what drives financial value for customer or segment

(determine value drivers)

3) Document how we impact each value driver for better or worse

against the customer’s/segment’s next best alternative choices

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against the customer’s/segment’s next best alternative choices

4) Quantify each impact on a per unit or per year basis

5) Rank these value drivers on impact and customer acceptance.

Discard those that have minimal impact or that the customer does

not believe

6) Sum the impacts to understand TOTAL CUSTOMER VALUE

7) Determine Parker price that retains the right amount of Value for US!

Key Takeaways

We Continue To Evolve The Practice Of PricingAnalytical Tools, Processes, Metrics, Organization, Change Management

Strategic Pricing= Key Center-Led WinStrategy Initiative

Strong Talent Pool, Bench Strength – Continuing ToBuild World Class Competencies

30

Contributed To Increasing Gross Margins AndMaintained Increasing Selling Prices Every Single Year

The World Leader in Motion and Control

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Thank You

See you in Vegas!

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www.leveragepoint.com

[email protected]

Jay Manson

(781) 727 – 5977

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