Winning Aftermarket Services - Digitization of Supply Chain

Posted by Nandika Gogineni on Jul 23, 2018 3:02:49 PM

Business Value of Aftermarket Services in OEMs

"A business absolutely devoted to service will have only one worry about profits. They will be embarrassingly large,” -Henry Ford, founder of one of the world’s largest manufacturing companies. This is the golden age of services.  To survive and prosper, every company must transform itself into a services-based business.

For original equipment manufacturers (OEMs), in mature markets, such as Europe and the US, aftermarket business has already become the most important source of revenue and profits. According to global statistics, service and parts business (SPB), on average, account for more than 35% of total OEM revenues; for a third of OEM’s, the revenue generated from their SPB often contribute more than 50% of the total. In addition, profit margins for the SPB are usually higher than that of traditional vehicle sales. Within mature markets, profit margins for SPB are 76% higher than that of the conventional finished product business; for 70% of the OEMs, the profit margin for SPB is more than 25%, and for 34% of the OEMs, the margin for parts business is even higher than 40%.  As an OEM, energizing efforts to increase market share in the aftermarket is crucial for growth, but also comes with its own challenges as well.

Challenges in Aftermarket Services

Recent information by Fortune 500 heavy equipment and automotive manufacturers indicates some common challenges: a) tapping into wealth of real time customer data; b) sharing information at various levels; c) inconsistent service; d) service parts inventory carrying costs; e) increasing revenue streams from installed base.

Studies show that US OEMs and their dealers may be losing $9-15 billion in aftermarket sales annually, to competitors. OEMs and dealers could bill billions of dollars more if they knew how to constantly collect information from the installed machines for sales and service opportunities. 70% of business buyers would make purchases online, rather than through another channel, but OEMs have less than 20% visibility into their parts e-tail market and their “genuine parts” program revenue growth may be in jeopardy. OEMs suffer from limited remote equipment connectivity, leading to incomplete and often inaccurate installed base management. Unscheduled downtime, high service delivery variance, and sub-optimal data analysis lead to lower efficiencies and reduced effectiveness and cause cannibalizations and brand value dilution.

OEMs and their dealers can emerge from this conundrum, if they better capture and manage both machine-chatter and consumer chatter in a unified platform through digitization of end-to-end value chain.  

Digitization – A new era for Aftermarket services

Supply chains are traditionally linear in nature; a series of largely discrete, siloed steps taken through marketing, product development, manufacturing, distribution, and finally into the hands of the customer (Figure1). Digitization will change this approach, bringing down walls and creating a completely integrated ecosystem that is fully transparent to all the players involved. This ecosystem will depend on several key digital technologies, including logistics platforms, analytics, robots, and 3D printing. Digital supply chains (DSCs) can hold extensive information and provide superior collaboration capabilities that result in improved reliability, agility and effectiveness (Figure 2).

Traditional Supply Chain Model

Figure 1. Traditional Supply Chain Model

Digital Enabled Supply Chain

Figure 2. Digital Enabled Supply Chain (DSC) Model

A Digital Operating Model supports a more flexible organizational design, as information is no longer location dependent. To realize the full potential of being a global organization, companies must take a closer look into internal alignment committees and procedures, service level agreements, and transfer pricing schemes. For instance, demand forecasting and supply network planning require the integration of information and processes across functions and regional units. If this is systematically done, it unlocks hidden synergies in manufacturing and logistics networks alike.

Physical flows captured by “digital finger prints” create improved visibility of all corporate assets. The utilization of a specific production line, truck or administrative function can be made visible with little extra cost. The major benefit of a fully digital operating model, in terms of visibility, lies within the integration of operational and financial data, which today are often separated up to a profit center level. For instance, customer orders can be evaluated against individual process costs instead of average cost. In some cases, connecting internal data with external facts, such as market share or competitor prices, can lead to meaningful new insights.

Conclusion – Approach to Digital Supply Chain Transformation

It is important that a digital supply chain strategy be an integral part of the overall business model and organizational structure of a company to generate and measure long term value. Transforming the entire organization to a digital operating model clearly has the highest potential, but also bears the highest complexity and risk. A thorough analysis phase will highlight the value creation potential, in the existing supply chain. The identification of business benefits requires top management expertise and inputs, regarding currently perceived pain points and industry best practices. Typical outcomes of an analysis of current pain points are the identification of examples of broken processes, local instead of global optimization, low visibility (for example, on product/customer profitability, or process quality) or sub- critical size of local business units. A synthesis of these pain points will lead directly to the design principles and value potential of a digital supply chain model. Model framework of digital strategy is shown in figure 3, which helps OEMs to capture missing aftermarket revenue, due to low visibility in end-to-end value chain.

Figure Digitizarion of Supply Chain Framework-1

Figure 3. Digitization of Supply Chain Framework

At CGN Global, we embrace digitization to reconfigure supply chains and overcome traditional geographic or functional silos. We believe that highly automated end-to-end processes, flexible bundling of activities and improved visibility are the hallmarks of a fully digital supply chain.  It is more about aligning digital initiatives with supply chain goals and adopting a digital operating model to realize the untapped potential of existing resources and capabilities resulting in a higher level of performance.