Evidence Based, Forecast Driven Strategy for Pump Suppliers

Introduction

The evidence based, forecast driven sales approach can maximize profits for pump  companies. There are two variations of the approach based on whether the pump is in general or high performance service.

The capital investment and sales decisions are different for the two performance classifications. The evidence needed is also different with one based on logistics and the other based on product performance. ⁽¹⁾

Pump performance categories are

·         Severe service

·         Critical service

·         Unique service

·         General service

Severe service includes abrasive, corrosive, high temperature and high pressure applications.  Critical service includes sanitary and other applications where performance is important to product quality or safety. Unique includes special pumps designs for a specific customer. General includes pumps which are purchased based more on cost and delivery and less on performance.

Figure 1 shows the market share percentage for each type of pump. The critical service category excludes critical pumps which are also in severe service.

The severe service, critical and unique, are high performance service categories. In high performance service the performance is more important than price or delivery.

General service includes pumps sold more as a commodity. So in a food processing plant the pumps on the municipal water intake pipeline would be in the general category. The ones moving food products would be critical. The ones on the high pressure steam would be severe service.

From a profitability strategy perspective it is advantageous to contrast the high performance and general performance important business factors. The comparison in Figure 2 shows which type produces higher results

High performance pumps can be sold at higher prices because of their unique qualities. So high EBITA can be achieved for a relatively small number of pumps.  Many general pumps are sold in large quantities. So EBITA based on total revenue is higher than for  a small niche market.

EBITA can also be increased with lower production costs than the competition. This is more likely with large volume general performance products.

Engineering and R&D expenses per unit sold are greater for high performance products to develop the unique features.

Engineering and R&D for general performance pumps can be substantial if the focus is reducing manufacturing costs. But the cost per unit sold would be low due to the high volume.

Capital investment will typically be higher for general performance pumps due to the likelihood that the pumps are produced in a supplier owned facility. High performance pumps are likely to include castings and components supplied by others.

Sales of high performance pumps depend on conveying knowledge of the superiority. Direct sales by knowledgeable individuals is important.

General purpose pumps can be purchased with the simple total cost of ownership analysis based on price. The purchase of a high performance pump warrants a total cost of ownership analysis. One large steel company found that local purchases tended to be based on price and experience. 

This precluded consideration of new and better pumps. 

Corporate staff took over the high performance pump decision making for all the plants.  The result was a considerable reduction in total cost of ownership.

 A large chemical company has a corporate staff assigned to pumps and valves and strives to take advantage of all the improvements as they occur.

There tends to be volatility in the sales of high performance pumps. For example the market for pumps for fracking fluctuates considerably. The market for pumps used in water intakes in plants is relatively steady.

The manufacturing location is typically important for general purpose pumps where freight costs and delivery time are more important than for high performance pumps.

Importance of Detailed and Current Forecasts

Very detailed forecasts for general and high performance pumps are needed. Segmentation of high performance opportunities by critical, severe and unique is needed in order to determine the most profit potential.

In the case of high performance pumps this forecast will guide R&D and engineering efforts. In the case of general performance pumps the forecast will guide manufacturing investment.

Due to the Russian invasion of Ukraine, and the Chinese lockdown the pump markets are rapidly changing.  So continuous forecasts are necessary.

The most profitable market can be a large number of small niches. IDEX is an example of a company with close to 30% EBITA and fairly large volume. However the company consists of a number of independent divisions each pursuing a unique niche. Identifying these profitable niches requires much more detailed market analysis than is typically pursued by pump companies.

There are various levels of forecasting. The Total Available Market (TAM) includes all the opportunities whether or not they can be serviced and whether or not they are obtainable. The Serviceable Obtainable Market (SOM) reflects the market which can be pursued. However much of this market will not be very profitable. A much more detailed forecast is needed which analyzes all the niches and determines where the most profit can be achieved.

The ability to calculate any of 128 million niches relies on top down, bottoms up and horizontal iteration. It would be prohibitively expensive to conduct for just one category such as valves. But if the expense is diluted by including forecasts of equipment using valves plus complimentary air, water, energy products the cost for the valve analysis is reduced. 

A typical example would be a company of medium size who would be involved in  5000 niches or 8% of the TAM. With further segmentation in SOM the number expands to 15,000. The percentage drops to 4.

The most profitable market may involve 40,000 niches or just 1% of the total. If competitor market shares and sales quotas for territories are also included, the number can rise significantly.

This effort will be relatively expensive but as part of an evidence based sales program  the benefits far outweigh the costs.

Evidence Based Strategy

The same evidence needed to select the most profitable market niches is also what is needed to convince purchasers in those niches that a pump is superior.

This evidence includes understanding the process needs in each industry.

Once the most profitable market is determined, the evidence can be used to validate the lower total cost of ownership.

This requires analysis of the competitors pumps and determining the comparative costs.

There is a sequence  to the evidence gathering process

1.            Raw data

2.            Predicate evidence

3.            Disputed evidence

4.            Claims based on the evidence

5.            Rebuttal to counter claims made by competitors

Suppliers have the opportunity to accomplish steps  2-5 in advertisements, magazine articles, exhibition activities, white papers and webinars.

It is not enough to prove the lower total cost of a pump it is necessary to convince the customers with solid evidence. This is a challenge but a rewarding one with the potential to greatly increase revenues and EBITA

(1) Pumps: World Markets published by the McIlvaine Company