How could manufacturers define and execute an effective aftermarket strategy?

Aftermarket services are a valuable part of most manufacturers’ businesses—one that can help to ensure consistent revenue flows during an economic slowdown. To succeed, manufacturers must understand the evolving aftermarket landscape—both the current challenges and the new growth opportunities. Scaling aftermarket operations can be important at a time when new equipment orders may be disrupted and capital spending comes into question.

Manufacturers are increasingly offering more aftermarket parts and services s—not only as a means to enhance customer satisfaction, but also as a revenue-generating opportunity. The key factors driving investments in aftermarket services include these.

Need for providing greater business value: Many large original equipment manufacturers (OEMs) who haven’t focused on the aftermarket in the past seem to realize the potential value and are trying to expand their offerings. The average operating margins from the aftermarket business globally are 150% higher than those from new equipment sales. In addition, manufacturing leaders believe that in the next decade, the fundamental business model will be 50% products/equipment and 50% services. This compares to today’s 75-25% mix in favor of products.

Stabilization of profits: As demand for new equipment is likely to remain subdued due to economic pressures stemming from the COVID-19 pandemic, aftermarket products and services are expected to stabilize the industrial businesses and help partially offset the pressure. Manufacturers may consider focusing on their aftermarket businesses to generate recurring revenue streams and reinventing their customer relationships, ensuring continuous support and parts availability.

Changes in business models: As more customers emphasize service level agreements (SLAs) that guarantee product uptime, they’re looking for providers who can proactively support their equipment. Industrial product customers have defined “zero unplanned downtime” as their top priority, making it crucial for manufacturers to partner with their customers in achieving the targets. Pay-per-use and subscription-based pricing could come to the mainstream for aftermarket services.

However, manufacturers face multiple challenges in scaling and delivering aftermarket services effectively. In addition to the immediate impact of COVID-19, manufacturers face challenges in moving from their core business model of manufacturing and selling products to selling parts, services and outcomes that ultimately transform the business. Here are some common challenges:

Increased competition: Apart from aggressive competition from suppliers and partners, manufacturers are facing intense price pressure from the counterfeit parts market.
Lack of service-oriented culture: Manufacturers are finding it difficult to shift away from their product-oriented mindset.
Delivering high service quality: Customers, still hesitant to pay for services, may require significant efforts to shift their perception.
Disruption: COVID-19-related slowdown could further disrupt manufacturers’ business models as new equipment orders slump and capital spending come into question.

[pullquote]Every manufacturer begins its aftermarket services transformation journey from a different starting point and, therefore, has a different path. There cannot be a single roadmap for transforming aftermarket services. To be successful in expanding into and delivering a winning value proposition in the aftermarket, manufacturers generally require a multi-pronged approach. What may help set apart winners in the wake of the COVID-19 crisis will be a company’s ability to manage the aftermarket business efficiently and engage customers continuously. Manufacturers who focus on these four areas should be in a much stronger position to capitalize on emerging opportunities:

Sell outcomes, not only products. Manufacturers can use this pandemic as an opportunity to reposition themselves as solution providers.
Promote digital services. A potential driver of revenues in the future.
Work closely with customers. Some manufacturers are setting aggressive service revenue growth targets, expecting service revenues to triple over the next decade.
Create an ecosystem. OEMs could collaborate and partner with smaller, regional players to expand their services businesses.

Specifically, digital technologies may hold the key to aftermarket success. Manufacturers can rapidly shift toward the aftermarket by leveraging digital technologies to offer capabilities such as proactive and predictive maintenance. Digital service offerings will help manufacturers gain a competitive edge and enhance customer experience by focusing on these critical capabilities:

remote assistance capabilities that help ensure business continuity when dispatching field service technicians might not be feasible
smart connectivity in products and processes that help manufacturers monetize and provide world-class service offerings with in-depth information on their installed base, seamless integration and communication, and better visibility and data insights
digital technologies, such as AI and digital twins, that deliver customer-centric outcomes and enhance the customer experience with decreased unplanned downtime, proactive service offerings, predictive maintenance, and improved service efficiency.

The aftermarket is and will be an increasingly valuable part of a manufacturer’s business–one that can help to offset the impact of the crisis on the sale of manufacturing equipment and accelerate a new wave of growth.

Paul Wellener is a vice chairman, Deloitte, and the leader of the U.S. Industrial Products & Construction practice with Deloitte Consulting. He has more than three decades of experience in the industrial products and automotive sectors and has focused on helping organizations address major transformations. Based in Cleveland, Wellener also serves as the managing principal of Northeast Ohio. Contact him at [email protected].