Aftermarket Report
Dean Douglas, Peerless Pump Company

Aftermarket Business in 2007 and 2008

The aftermarket business in 2007 for Peerless is steady. Growth in new pumps far surpassed the aftermarket as investment capital for projects has been widely available. Much of this growth was in the new construction infrastructure sector, which has little influence on the aftermarket business.

The Hydraulic Institute (Oct.'07 YTD) report indicates total parts business to be 2 percent below 2006 levels with continued rapid growth in other sectors-including UL/FM listed pumps, which provide little opportunity for aftermarket sales. Our expectation for 2008 is for more moderate growth, particularly in the construction industry; however, increased energy prices will provide cash for the oil and gas exploration and production sectors, where special services and quick response times are necessary. These, of course, are drivers of the aftermarket business.

2008 looks to be a challenging year because of an uncertain economy, rising raw material costs and ongoing capacity constraints in some key commodities. There may be a positive effect on aftermarket sales, as customers choose to repair equipment rather than replace with new equipment.

Critical Issues

The two most critical issues for the next two years are engineering "bench strength" and capacity. As qualified engineers become even more scarce, the challenge will be to create back fill for long term industry professionals, anticipate new technological demands (such as nuclear engineering) and manage headcounts in a flat or shrinking economy. Currently, graduates from top engineering institutions are highly sought after, and energy costs and government environmental mandates continue to increase the constraints.

Training of new engineers will be important at the OEM and plant level, but no less important will be the necessity of training through the entire channel. It will be important that end users are aware of and are evaluating life cycle costs, energy-efficient system designs, necessary preventive maintenance and spare parts inventories to minimize equipment "downtime," as well as the costs associated with operating their pumping equipment. Ongoing training will help companies to decide whether to repair or replace and the total costs involved in those choices.

Current Trends

How to manage capacity in an industry already working beyond its constraints, in some areas, is no less daunting. An overwhelmed supply chain, particularly for cast components, could provide greater opportunity for manufacturers (OEMs). As labor and raw material prices continue to increase, it is possible for a major pump repair to come in close to the cost of a new pump. However, repair remains an attractive option due to the time element. As capacity constraints in the supply chain continue to challenge the lead times of new equipment, the possibility of a timely repair becomes more attractive.

The repair versus replace option may be a trend that-coupled with the focus upon energy savings and total life cycle costs-can provide a competitive advantage to OEMs. If a pump is repaired in significantly less time, but still completely within the OEM's specifications with the result being original or even upgraded performance (confirmed by an OEM's test lab), cost may not be the decision driver (when downtime is considered).

There may also be opportunities for OEMs, service shops and/or "quick ship" integrated foundries to work together in targeted applications for the benefit of the end-user customer. The OEM's engineering, manufacturing and testing capabilities-coupled with the capacity and capabilities of replicators and service shops-may provide a geometrically precise part with better responsiveness and improved equipment performance than traditionally expected from OEMs or service shops alone.

Additional Insights

A greater focus on sales and operations planning may prove to be an important element in addressing the aftermarket. Sometimes forgotten in the flurry of new pump demand, the availability of parts for the aftermarket and OEM repair/service capacity will be essential to growth-as well as a more desirable line of communication between the OEM, the sales channel and the end user. A dedicated Demand Supply Integration (DSI) process will not only lead a company further down the "Lean Manufacturing" path, but will also ensure a balance between inventory and demand in the aftermarket. A dedicated aftermarket team with consistent and improved business process speed also allows companies (particularly OEMs) to better serve the demands of their customers.

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For more information, press only: (Fred Bock, Marketing Manager), (317-924-7347), (fbock@peerlesspump.com).

For more information on Peerless Pump Co.: http://www.peerlesspump.com