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In the United Kingdom / Service / Compressor Technique Service / Do alternative service providers create or destroy value for the compressed air user?

Do alternative service providers create or destroy value for the compressed air user?

2013-05-02

At a time of increased focus on energy prices and the need to meet environmental legislation, the desire of compressed air users to reduce their overall running costs has never been greater. As a result, there is a risk that some companies are beginning to overlook the benefits of using genuine OEM-supplied parts and maintenance services. Here Sean Fairest, Business Line Manager for Atlas Copco’s Compressor Technique Service, explores the issues and the potential pitfalls of turning to alternative service providers for perceived ‘quick-win’ savings, which can often prove to be more costly in the long term.

First of all, we have to try to understand why alternative service providers can appear attractive to end users. In most cases, there are two simple drivers, lower cost and local presence. Taking these two reasons in turn, first let’s look at the argument for lower costs. On the face of it, of course an alternative service provider can appear less expensive than an OEM service organisation. However, from an OEM’s point of view their approach is about total cost of ownership, as opposed to a single invoice related to a specific issue when an engineer visits site. It is important to show customers the benefits of this approach, and more importantly, what this type of decision can mean for their organisation in the medium to long term. Sometimes, a short term gain can bring long term pain.

Atlas Copco United Kingdom - Sean Fairest

Business Line Manager - Compressor Technique Service Division


Let’s look first at how the costs are broken down, the main components of service are labour and spare parts. If we focus on the labour costs, it is natural that the cost of managing a global service organisation, along with investment in R&D, training and state of the art systems and processes, carries overheads that simply do not exist in a small service company that has no links to a manufacturer. In the short term, these reduced costs can be passed by an independent provider to a customer as up front savings, which appear attractive. However, it should be noted that using such providers is effectively denying the customer access to the medium to long term benefits of R&D investment by manufacturers, which can result in lost opportunities for improvement that may far outweigh the short term saving.
 
To expand upon this, there have been many innovative developments in recent years, all designed to help customers reduce their total cost of ownership, some examples of these are:
 
·         Savings of up to 35% in energy costs by using integrated variable speed drive motors
·         Integrated and retrofit energy recovery systems, designed to recover up to 94% of energy
·         Compressor control and management systems, designed to lower energy and maintenance costs
·         Remote and smartphone enabled connectivity solutions designed to improve up-time and compressed air availability, as well as reducing maintenance costs
 
Because of the hectic pace of today’s world the danger here is that, in many cases, end users are left unaware of the opportunities to reduce energy and lower maintenance costs as independent service providers do not have any relationship with manufacturers, resulting in a lack of access to this technology. This can result in a reduced headline service bill, but lifecycle costs that are far higher than necessary. This can lead to a net increase in the cost of generating compressed air, which often negates the original intention of the end-user to reduce costs. If you think about the increase in electricity costs in the last three years, it is apparent where such large savings can be made.
 
Now, turning to the costs of spare parts; there are a number of options designed to offer end-users an alternative to OEM spare parts which again are perceived as expensive. Do these lower cost options really offer value for money, or just quick wins? Is it really a wise expenditure by a customer that will ultimately be focused on lowering the cost of producing air?
 
Let’s take the best example and get right to the heart of the matter by looking at oil-free compression elements.  End users may be offered opportunities to source alternative oil-free air elements that claim to deliver the same quality air, with similar running costs and reliability.  But if we analyse each claim:
 
·         If we look first at the air quality (which is normally why end users choose to invest in oil-free technology in the first place), immediately we see that, unlike the OEM compression elements, these alternative products are not sold with ISO class zero test certificates. If air quality is so important to the production process that an oil-free system was specified originally, is it wise to run these risks? Would any spoilage costs outweigh any short term savings on alternative compression elements?
·         Now to running costs. Again, unlike the OEM offer, we do not see any ISO test certification to guarantee the performance of the elements. Even if we had a situation where the air delivery of the alternative elements was only marginally down on the guaranteed standard of an OEM element, has the end user calculated what this would mean in terms of increased costs to generate air over a typical 60,000 hour lifetime? Once again, we see the potential to save in year one but thereafter, we often see increased energy costs that far outweigh the difference in price between the OEM and alternative offer over a period of years.
·         The final point on the example of compression elements is reliability. OEM compression elements can come with a warranty of up to five years whilst alternatives seldom do. In some cases, alternative compression elements have been found to be composed of component parts that were sourced from multiple locations and suppliers, raising key questions about reliability. Compared with the 100% in-house assembly and test procedures of an OEM, is this the best solution? Furthermore, whilst the OEM is innovating to push the change out intervals of the oil-free elements to 60,000 hours, we see alternative providers questioning this and encouraging customers to continue to invest in these major works at 40,000 hours. Imagine how this would drive up the costs of generating compressed air over the lifetime of the machine. Is this really creating value for customers?
 
So, to summarise on the cost of service, taking into account all the questions raised here. Does an alternative really create value for a customer, or just offer the chance of a ‘quick win’ at the expense of long term sustainable profitability?
 
In the second part of this paper, I would like to consider a second influential factor which is the attraction of alternative service providers due to their local presence.
 
If we first consider the availability of spare parts, at face value it may appear that the alternative can offer fast and personal service if they have a local workshop, however the whole logistic chain is important and this is often overlooked.
 
By definition, an independent operator has no links to an OEM so they normally establish a convoluted supply chain that can rely upon several different companies to perform well at the same time. This can work without problem when it comes to routine service that can be planned in advance. However, what we have seen on many occasions is that that in cases of breakdown or emergency, this supply chain simply cannot act as swiftly as a typical OEM, which can have a next day delivery service for 95% plus of all spare parts. Once again, this local independent offers a service that may appear more attractive in the short term but when the chips are down, does it really offer the best solution to an end-user?
 
Looking now to the local presence of Service engineers, independents often boast of the availability of factory-trained engineers but again this begs the question, how relevant is this training if there are no links to the OEM? When exactly was this training carried out? Have the engineers attended regular updates and do they have the latest software and tools? All these factors are a given for the OEM service team and its authorised distributors so which team of engineers offers the best value in the long term?
 
Finally, let’s take a look at the availability of labour. The claim is often made by independents that a local workshop and engineers can offer a faster, more efficient service than the OEM but is this really the case? OEM service organisations have invested heavily in state of the art systems and processes to plan and co-ordinate routine service and get its engineers and the spare parts needed to the heart of a breakdown as efficiently as possible. When the chips are down, does an end user want to work through a series of mobile telephone numbers to try to find someone who is free to attend the site or simply contact one, national Freephone number? This provides direct access to a dedicated on-call engineer from a team of up to 100 direct service engineers all over the UK, with real-time connection to all the OEM’s resources. Furthermore, OEM’s are now moving customers to connected service, providing on-line call-out to minimise delay and maximise productivity. For instance, some OEM suppliers have recently released apps for smartphones and tablet computers that now enable compressed air users to monitor their compressor installations from anywhere on their site remotely.
 
So once again, when we take these points into account, we have to question where value is created for an end user of compressed air. In summary, taking into account the key questions raised against both main drivers behind a decision to choose an independent service provider rather than the OEM, compressed air users need to challenge the quick wins and consider carefully if their decision is creating, or destroying, value in the medium to long term for their company.