Why Aftermarket and Service Are Vital to OEMs—and How to Excel
Introduction
In today's industrial landscape, the aftermarket and service sectors have evolved significantly, contributing substantially to the revenue and margins of Original Equipment Manufacturers (OEMs). Traditionally considered a supplementary business, the aftermarket now accounts for a significant portion of OEM revenues, with some observing margins up to four times higher than those of new unit sales. This transformation has been particularly pronounced among top market performers, where companies focusing on aftermarket and service have witnessed cumulative total shareholder returns (TSR) nearly three-and-a-half times higher than those that do not emphasize service.
Economic Conditions and Market Dynamics
Recent economic conditions, characterized by uncertainty, high inflation, and elevated interest rates, have prompted companies to reassess capital investments. Typically, investments in new production lines require higher capital expenditures compared to the costs associated with aftermarket and service, such as maintenance or upgrades to existing equipment. The widespread adoption of firmware-driven updates across various industries has further reduced upfront capital investment needs for aftermarket services, minimizing disruptions to operations. As a result, under budget constraints, companies may opt for spending on aftermarket and service rather than investing in new units, highlighting the growing importance of these sectors in revenue generation.
Challenges and Opportunities
Despite the commercial and strategic advantages, many OEMs still underutilize the potential of the aftermarket and service sectors. Service excellence, defined as a continuous commitment to provide superior and relevant support beyond the initial sale, serves as a key differentiator. Companies that prioritize this approach can unlock significant value, as evidenced by the performance gap between companies with a strong focus on service and those that do not.
A Framework for Success
To navigate the complex landscape of the aftermarket and service journey, a structured approach is essential. This framework divides the offerings into five stages:
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Innovation-to-Market: During product development, OEMs must determine the role of aftermarket and service, considering factors like profitability, investment requirements, and customer expectations. Service should not be seen as a mandatory strategy but as a tool for revenue generation.
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Market-to-Order: Focuses on transitioning from market identification to securing customer orders, encompassing business development strategies and order fulfillment processes.
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Order-to-Delivery: Involves procurement, manufacturing, and product delivery, ensuring seamless execution and customer satisfaction.
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Delivery-to-Cash: Completes the cycle with efficient credit management practices, ensuring timely payments from customers to manufacturers.
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Enabling Factors: Supports the entire approach with necessary resources and strategies, including technology, data analytics, and customer-centric solutions.
Emerging Trends and Innovations
Key trends shaping the future of OEMs' aftermarket and service include:
- Offering a B2C-like customer experience: Adopting consumer-focused approaches to enhance customer satisfaction and loyalty.
- Servitization: Shifting from product sales to service-oriented business models.
- Data-driven insights: Collecting, analyzing, and monetizing data for improved service delivery and customer engagement.
- Softwarization of features: Providing software-based enhancements to products post-purchase.
- Sustainability: Emphasizing environmental responsibility and unlocking new value pools.
- Remotization: Increasing reliance on remote monitoring and support.
- Localization: Tailoring services to meet regional and cultural needs.
- Online marketplaces: Expanding reach through digital platforms.
- Building ecosystems: Creating integrated solutions around products to foster long-term relationships with customers.
Conclusion
In summary, the aftermarket and service sectors are pivotal to OEMs' success, offering opportunities for revenue diversification, customer relationship enhancement, and sustainable growth. By adopting a strategic approach, leveraging modern technologies, and focusing on service excellence, OEMs can unlock new value pools and strengthen their competitive positions in the evolving industrial landscape.
