Contact: Delphine de la Kethulle
Deloitte
+32 2 600 60 53
Long viewed as little more than a cost of doing business, aftermarket parts and services, are in fact an untapped source of profits for many manufacturers. In manufacturing companies around the world, service businesses now account for a significant 46 percent of profits, according to the preliminary findings of a Global Benchmark Study on Service and Parts Management by Deloitte.
Among the global manufacturing companies surveyed, the average profitability of the service businesses - which include aftermarket sales of parts and accessories and field services such as repairs and maintenance - is more than 75 percent higher than overall business unit profitability. In fact, in many companies there would be much lower overall profitability without the service business.
“It is evident that companies should no longer treat the service business as an after-thought,” says Christian Combes, Partner of Deloitte Belgium. “Instead, it should be managed effectively as a growth business and integrated into the manufacturer's core business strategy.”
Combes adds, “Most companies tend to focus efforts on product innovation and manufacturing efficiency, but fail to dedicate their best resources to improving “back end” aftermarket service capabilities. By offering customers an attractive total customer care package, manufacturers can strengthen customer loyalty and also gain significant benefits in revenue growth, profit contribution and repurchase loyalty. This creates barriers for competitors who seek to take these revenue streams.”
Companies who focus on developing their service business stand to benefit in three ways:
- Higher revenue and market share. Boosting the top-line through improved customer service and better parts availability and parts pricing.
- Greater customer loyalty. Increasing customer satisfaction by ensuring that customers receive the parts they need to maintain the productivity of their assets and the right services to improve repurchase loyalty.
- Lower costs and better cash flow. Eliminating inefficiencies and freeing up capital that is tied up in excess inventory and inefficient distribution networks.
The study reveals that the opportunity for service business growth in the future is immense. For example, the median company benchmarked, representing different industry sectors, captures just 40 percent of the after-sales service market and 70 percent of the after-sales spare parts market in servicing what is in essence a “captive market” - their own installed base of products.
“In the automotive sector, for example, a real growth opportunity exists to capture the post-warranty business,” says Combes. “Typically, the original equipment manufacturer captures only 20% share of the post-warranty parts business and even less of the service business.”
In addition, only a few companies have made significant inroads in servicing customers of competitive brands - a market that is typically 2 to 10 times larger than the captive market.
Christian Combes outlines five critical reasons why top executives should prioritize the service business in their overall business strategy:
- Globalization. Global issues make the service business challenges more complex and the solution even more urgent. In developed markets, main-line products are being commoditized with increased pricing pressures particularly from low-cost country sources. In emerging markets, such as China and India, service and parts operations are under attack by price competition, counterfeit and will-fit (and sometimes “ill-fit”) parts. This in turn jeopardizes profits, growth, and brand reputation.
- Outdated business models. The business model of many global manufacturers is under attack due to changing customer and consumer demands, maturing home markets, and competition from low-cost manufacturers. This is taking its toll on margins and growth in primary product sales and threatening even the service and parts business. Driving customer loyalty and understanding the customer has never been more important.
- Changing life cycles. Escalating new product introductions and shorter lifecycles for main products make service excellence even more important. Long service life cycles and short sales cycles due to product proliferation is a recipe for escalating cost, parts obsolescence, lost customer focus, and deteriorating customer service quality if it is not managed appropriately. Among the companies surveyed, the median inventory obsolescence stood at 5 percent and in many cases exceeded 10 percent.
- Quality. Quality issues and problems with service and parts can be very costly in terms of both warranty costs and damage to corporate brand. Service is, in many cases, an important point of differentiation in the buying decision. Analysts estimate industrial equipment makers will invest a total of US$1 billion over the next 5 years to overhaul warranty management and spare parts logistics.
- The economy. Service businesses can be very resilient. In times of economic downturns, service and parts sales are often far more robust than the original equipment business.
Ensuring the right customer experience - the right product, the right service, the right branding, the right price, the right place at the right time - will become even more difficult in the years ahead. But for those able to manage the complexity, the results can be outstanding.
Global Benchmark Study on Service and Parts Management
In January 2005, Deloitte initiated a survey focused in the area of Service and Parts Management. The initiative has produced in-depth benchmarking information of the service and parts businesses of some of the world’s largest manufacturing companies across a range of sectors, including aerospace and defense, automotive, diversified and industrial products, high technology and telecommunications equipment, and life sciences/medical device manufacturers. Through this research, Deloitte is able to provide insights on how top-performing service and parts organisations are leapfrogging the competition and driving continuous improvement in operational and financial performance.
For more information, visit www.deloitte.com/serviceandpartsmanagement
