Part 2: Driving Stability Through Fixed Aftermarket-Only Part Pricing
Welcome to Part 2 of the Tenet Consulting Value Driver Series, where we continue to explore often-overlooked yet impactful opportunities to unlock and realize additional value through supplier negotiations. While achieving piece price reductions remains a cornerstone of strategic sourcing, leading manufacturers recognize that non-price benefits can significantly enhance operational value and cost efficiency when effectively negotiated. At Tenet, we go beyond mere cost savings—we help our clients extract maximum value by negotiating comprehensive supply agreements that optimize both commercial and operational outcomes.
One high-impact yet frequently neglected opportunity is the negotiation of fixed and stable pricing for parts once they transition from serial production to aftermarket-only supply.
Understanding Service Part Pricing Methodology
Once a part enters the aftermarket-only phase, its pricing often becomes less stable. Suppliers typically face declining volumes, unpredictable demand, and increased production inefficiencies for service-only parts. As a countermeasure, many suppliers seek to impose steep price increases, which can undermine the Original Equipment Manufacturer’s (OEM) ability to support customers effectively, efficiently, and profitably. Manufacturers need stable and predictable pricing, long-term supply commitments, and robust price control to protect their margins and market share in the aftermarket. However, without a formal structure in place, these competing interests often lead to ad hoc price increases, reactive negotiations, and deteriorating supplier relationships.
Tenet’s Approach to Structuring Fixed Aftermarket Pricing
To resolve this disconnect, we negotiate a formal framework that is embedded in the Master Supplier Agreement. This framework defines how service-only part pricing is established and maintained. When a part transitions from serial production to aftermarket-only status, pricing is recalculated using a transparent cost model that reflects updated assumptions, such as reduced annual usage and revised minimum order quantities. The resulting price is then fixed for the service life, apart from clearly defined exceptions.
Key cost inputs—such as overhead, selling, general and administrative (SG&A) costs, and profit margins—are fixed within this framework. Suppliers can propose price changes only under specific carve-outs, including:
- Raw material indexation
- Tooling end-of-life
- Sub-tier supplier discontinuation
- Documented financial hardship
- Extended periods of inactivity in part production
Additionally, we secure a commitment from suppliers to supply service-only parts for an extended term that aligns with the manufacturer’s requirements, thereby ensuring long-term support and continuity in the aftermarket.
Value to the Client
Tenet’s approach to fixed aftermarket pricing delivers measurable and strategic benefits:
- Cost Stability: Fixed pricing ensures predictable cost structures throughout the aftermarket lifecycle.
- Objective Pricing Framework: Reduces administrative burdens and conflict by replacing one-off negotiations with a structured methodology.
- Competitive Aftermarket Positioning: Stable part pricing enhances the OEM’s ability to compete in the service market, driving customer retention and profit protection.
- Improved Financial Forecasting: Facilitates more accurate budgeting and financial planning.
One of our clients successfully leveraged fixed aftermarket pricing to achieve an 18% reduction in part costs, demonstrating the significant impact of a structured pricing strategy.
At Tenet Consulting, we assist our clients in building resilient, value-driven supplier relationships by institutionalizing practices like fixed aftermarket pricing, ensuring sustainable success well beyond the production lifecycle.
Strengthen Your Aftermarket Strategy Today
If you’re ready to cultivate stability in your aftermarket pricing strategy and strengthen supplier relationships, contact Tenet Consulting today. Let us guide you in implementing effective pricing structures that drive long-term value and operational excellence!
