As we wrestle with global economic uncertainty, offering aftermarket services can provide a valuable continuous revenue stream, especially for manufacturers of durable goods and assets. Mark Brewer, VP service industries at IFS, examines five trends driving profitable service opportunities for the sector through 2023 and beyond.
Manufacturing comprises a major share of IFS’s core customer base. Many of these organizations use IFS to run their end-to-end operations – from sales & operations planning, procurement and distribution, to manufacturing, warehousing and logistics, often encompassing human capital management and financials.
The majority of these companies produce a product or asset that requires aftersales service, ranging from a mobile phone or laptop in the high-tech world, a wind turbine or material handling equipment such as a forklift truck in the industrial space, or an MRI scanner or blood dialysis machine in life sciences.
For all these durable goods, the business case for establishing a service, maintenance and repair operation is obvious. Manufacturers need to ensure that customers can enjoy optimum performance and availability of their assets; and they also, particularly in the current climate, recognize the customer need to maximize the lifetime of their investments.
TREND 1: ECONOMIC HEADWINDS PUT SERVICE IN THE SPOTLIGHT
Battling global upheaval across the macroeconomic environment, Manufacturing is especially susceptible. The lingering aftermath of the pandemic, production disruption in China and the geopolitical conflict in Ukraine have severely impacted global supply chains.
Automotive production, for example, has fallen victim to a global shortage of vital semiconductor chips. According to the Society of Motor Manufacturers and Traders (SMMT), UK car production fell 10% in 2022, the biggest fall for 66 years.
Yet in sharp contrast to the cyclical nature of manufacturing, at the mercy of a booming or contracting economy, the service sector remains resilient and consistent, whatever the climate. When times are tough, companies have less appetite for major capital expenditure, looking to sweat their existing assets and maximize returns from their current fleet. For manufacturers, a move to diversify into service, maintenance and parts provision offers a potential profit powerhouse in challenging times: regular, high margin revenues during periods of diminished market demand and production.
Selling profitable upgrades or multi-level SLA contracts creates long-term business growth. Moreover, OEMs who fail to secure service contract renewals can expect to see their customer base erode as third-party providers steal a march. For example, a global elevator company with 11 million units in operation owns service contracts for just 20% of them. When service revenue is typically worth up to 12X the product value over the lifecycle of the contract, that is a huge missed opportunity.
Service agreements also equate to operational and fiscal predictability for customers, essential in sectors such as construction, where project margins are increasingly tight. In the UK for example, average construction margins in 2021 were as low as 3.9% 1.
TREND 2: LEVERAGING SUSTAINABILITY AND THE CIRCULAR ECONOMY
From an Environmental, Social and Governance (ESG) standpoint, manufacturing can be costly to the environment. Increasingly, during new product development, manufacturers are baking energy efficiency into the design, thus reducing consumption and carbon emissions over the operating lifetime. The latest commercial refrigerator models, for example, consume up to 60% less power during operation than their legacy technology 10-20 year-old predecessors.
Increasingly, manufacturers embracing the 9R circular economy framework are using refurbish, repair, remanufacture and recycle operations to eliminate or significantly reduce energy consumption and their carbon footprint.
The way service and maintenance is delivered is also a significant factor in eliminating waste. Remote, assisted self-service and monitoring and diagnostic capabilities, enabled by digital technology, are eliminating physical field service visits, pre-empting failures and even enabling self-repair, enabling customers to minimize equipment downtime.
Reverse logistics – managing the efficient return of failed units to a regional center for replacement or repair – demands complex orchestration. Manually oriented systems are labor-intensive, slow and often costly. Using IFS, however, manufacturers can access advanced automation for reverse logistics, including serial number and warranty verification, multi-stage multi-party checks, part sourcing, repair and shipment. After all, repair and reuse is good for the environment, with OEMs such as Apple now providing repair manuals, parts and tooling to enable such.
Customers are routinely scrutinizing the ESG performance of their suppliers when awarding tenders. Similarly, employees are asking questions when considering job roles. Disrupter Smart service companies have sustainability built-in. They recognize it may be more efficient to use a third-party subcontractor to execute the last mile repair. Using Pick Up and Drop Off (Pudo) points can provide last-mile fulfillment for spares and returns. And identifying a locally-held refurbished part removes the need, and the wait, for a new one to be procured and shipped. IFS orchestration can optimize and automate all these scenarios and more.
TREND 3: EQUIPMENT RENTAL AS A STEPPING STONE TO OUTCOMES
In the current uncertain market, organizations are deferring Capital Expenditure (CapEx) investment and instead finding ways to finance needs using Operating Expenditure (OpEx). This strategic shift has seen a significant rise in the move to rent, rather than own, essential equipment and assets. Rental therefore provides a relatively simple, low-risk way to dip a toe in the water towards an alternative monetizing model.
For customers, renting equipment provides flexibility with reduced outlay, including the ability to terminate rentals should needs change. In addition, a rental agreement can include or exclude tiered service level contracts and even access to periodic upgrades. Whether it’s heavy plant for a slim-margin construction project, or an extra MRI scanner for a challenged health trust, rental provides customers with affordable resources. Meanwhile manufacturers, facing reduced equipment sales can earn valuable recurring revenue.
However, rental isn’t without its challenges. Manufacturers need to manage inspection, service and refurbishment of assets returned at the end of the rental. Equipment condition must be assessed to issue invoices for any undue damage or repairs. Rental operations must be able to track multiple assets that move across multiple locations throughout their lifecycle and manage the expiration of rental agreements and invoice renewal dates. With some assets in service up to 20 years, only timely, accurate reporting can ensure the necessary condition-based maintenance or equipment renewal cycles. Robust monitoring also extends to ensuring health and safety compliance. Incorrectly maintained or faulty equipment can put lives at risk and leave organizations liable.
IFS offers the technology needed to manage and track rentals at scale. Delivering the comprehensive automation and orchestration required to meet complex rental operational challenges, it also offers a stepping stone towards contracting for outcomes in the future.
TREND 4: SUPPLY CHAIN MASTERY IS TESTED TO THE BRINK
It’s easy to forget that ready availability of, and local access to, spare parts can make or break a service operation. In the same way that ‘Just in Time’ has become the mantra for manufacturing production, ‘Just in case’ is the mantra for spare parts.
Planning spare parts availability in a service operation can be highly challenging. Understanding which parts are likely to fail, and where they should be stocked, in what quantity, when, is complex. Therefore, planning and forecasting accuracy are operational pre-requisites and create decisive competitive advantage: for example driving a higher first time fix rate whilst ensuring you do not suffer from excess inventory or stock shortages.
The forecasting and planning capabilities in IFS are designed specifically to manage complex inventory networks whilst minimizing costs. Carrying costs alone can be as much as 25% per annum of the value of the stock. As an example, IFS recognizes alternate and replacement parts, supporting repairs for both current and historic revisions of equipment that may have ceased production 10 or 20 years earlier.
If equipment or devices are connected via the Industrial Internet of Things (IIoT), manufacturers can remotely determine the ‘as is’ condition. This may indicate a component is likely to fail within days, allowing replacement parts to be sourced in time to prevent a breakdown. IFS also provides the ability to optimize the pooling and balancing between stocking locations, again minimizing inventory investment, and reducing obsolescence.
TREND 5: TECHNOLOGY SUPERIORITY SEPARATES LEADERS FROM LAGGARDS
The recent IFS State of Service 2023 report shines a light on how having the right technology has never been more vital to success. When asked to pinpoint the key differentiators in service, 29% of respondents cited Technical Superiority (29%) followed by Customer Experience (CX – 26%).
It’s therefore no surprise that Digital enablement and updating legacy service management systems was the most chosen focus area. Technology adoption plans include solutions for reverse logistics, omnichannel contact center, parts and inventory management, chatbots, customer self-service, and warranty management.
Service Management technology and digital self-service enablement can help to enable a frictionless experience for both customers and employees. Effective Knowledge Management systems allow manufacturers to quickly and effectively onboard third-party service partners overseas to establish a local country presence. They also support seamless access to parts and technical and troubleshooting tools. That could mean the difference between a hotel room with faulty air conditioning being returned to service the same day, or remaining out of commission for a week, with the resulting loss in booking revenue.
SUMMARY: AN ECONOMY IN FLUX DEMANDS TRANSFORMATIONAL CAPABILITIES
In an economic downturn, manufacturers can look to service to develop valuable, recurring revenue streams. But to do so successfully requires digital sophistication and maturity. It demands fit-for-purpose solutions that can optimize and automate operations; the agility to embrace refurbishment and circular economy ambitions; advanced planning capabilities to master the parts supply chain; support for a rental model, the technological ability to scale through third party partners; and the ability to provide a customer experience that truly differentiates the brand. To learn more about how IFS transformational capabilities including powerful scheduling optimization can help, visit https://info.ifs.com/see-it-experience-it-believe-it.html
Sources:
- Turner & Townsend International Construction Market Survey 2021
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