Aftermarket services are key to an OEM’s business model (accounting for 40 percent of profits or more), and the delivery speeds affect this market in extraordinary ways. By now, the value of the aftermarket success for manufacturers should be obvious, but if not, check out our previous blog eCommerce for Manufacturers: Why Selling Parts is the Lifeline of Your Business.
In this article, we’ll discuss how expedited shipping and delivery impacts your aftermarket success through tightened inventory management, shipping, and delivery processes.
Delivery models are integral to aftermarket success for manufacturers for obvious reasons: 50 percent of aftermarket customers experience repair delays because of insufficient stock and slow delivery methods. Because of the very nature of unpredictable parts failures or malfunctions, OEMs face the challenge of not only stocking the right amount of spare parts, but delivering them to the customer quickly (and ideally, faster than the competition).
We can learn a lot of lessons in this balancing act from Cisco, which recovered from major failures in their initial aftermarket services. Inefficient, delayed parts and inventories that did not appropriately respond to customer needs lead to serious financial losses around the year 2000. With a commitment to their aftermarket services, however, the company reduced spare inventory by 21 percent, tightened delivery processes, and by 2005, was seeing $3.9 billion in aftermarket revenues.
A philosophical transition is taking place in the aftermarket industry regarding expedited services. Whereas these services were once considered a premium, technological advancements and a major influx of resources have begun to beg the question: should anything in the aftermarket not be “expedited” based on the very nature of this industry and its customers? To answer this question, we can turn to behavioral research on aftermarket customers themselves.
Aftermarket customers have a different set of expectations and needs compared to their traditional market counterparts. These differences result in different pricing models. An Aalto University publication demonstrated that while traditional markets typically experience price elasticity, this is not always the case with the aftermarket. In fact, of the items included in their study, 90 percent of aftermarket items reflected inelastic pricing.
According to the researchers, one major market rationale for this behavior is that aftermarket customers are less price-sensitive, especially in time-sensitive scenarios when production facilities or business operations are completely stalled because of a single faulty part.
Aalto University’s research on price in-elasticity in the aftermarket demonstrates an important point: customer behavior in this industry is driven by need. Therefore, manufacturers are competing against who can fulfill that need most efficiently. Remember: 55 percent of customers will pay more for a superior service experience. All this insight stands to support what many manufacturers have already embraced – that expedited shipping (and corresponding price modeling) should be built into a company’s aftermarket model itself.
Inventory management remains one of the greatest challenges for OEMs in the aftermarket – but also one of the most important keys to aftermarket success for manufacturers. A benchmark survey by the Aberdeen Group and IndustryWeek helped to illuminate some of the most common challenges in inventory management, and they discovered that over 80 percent of survey respondents found developing demand forecasts for spare parts either “challenging” or “extremely challenging.”
So how do you balance predictive algorithms to forecast not only demand, but also the geographical pinpoint of future aftermarket customers? It’s starting to sound like you need a crystal ball to perform effective aftermarket inventory management. However, while it’s tricky to pull off, OEMs can learn to leverage the power of predictive models against real-time data to get the best idea of what parts to stock (and how much) at any given time. This information can also help a manufacturer position stock appropriately for anticipated expedited shipping needs.
Historical trend analysis is somewhat of a marketing bread-and-butter because in most cases, looking back at historical trends and customer behavior is highly valuable, whether you’re shifting gears in marketing, expanding to a new niche, or applying for a loan. The wall that OEMs inevitably hit when they lean heavily on historical trend analysis for aftermarket strategic development is because the aftermarket doesn’t behave like the traditional market. Reliance on historical trends, therefore, can cause major slowdowns.
Let’s take a simple example of how real-time market analysis can affect shipping times: an InfoTrends analysis followed printer ink cartridges and toners through the US recession in 2006. The market recession had very different effects on the aftermarket; for one, the aftermarket for these products spurred into “build back” mode, as customers were now more likely to engage the aftermarket in an economic downturn.
Paying attention to these market changes could significantly influence inventory management, but only in real-time. If, for example, a printer company relied on 2003-2005 analysis for aftermarket industry analysis, they would run into major stock disruptions come the recession in 2006 and 2007. These disruptions would mean slower shipping and frustrated customers (and, of course, if they stocked parts to respond to 2006 aftermarket sales in 2009 and 2010, they’d have a fast turnaround for service calls, but unfortunately also an expensive, over-stocked inventory).
In short, adequate inventory management for aftermarket parts and services helps OEMs strike an important balance between fast shipping and a lean inventory.
As mentioned above, many industries are transitioning to standardization of expediting aftermarket services as a necessity to remain competitive. Fortunately, enough resources are now available to practically any manufacturer to build highly-efficient shipping and delivery systems, which means OEMs have to get creative with the use of all available delivery systems and resources in order to stay in the game.
Availability creates value. But something OEMs often overlook is that value means different things for the customer than for the manufacturer. Last year, Copperberg held its 10th Aftermarket Business Platform in Germany, which hosted aftermarket expert and academic businesswoman Dr. Irene Ng. She explained that if “a company sells a product, and they are charging money for it, that company is getting value.” For the customer on the other end of the transaction, however, “the value comes from experience, consumption, and use… [people] think the value is the same. But they are completely different!”
Applying the concept of value to aftermarket shipping services, “availability” can create value for both a manufacturer and a customer. For one, customers are more likely to engage a manufacturer who is prompt and responsive (and who delivers in a timely manner), which means more sales and more revenue for the company – especially if pricing accurately reflects expedited shipping costs. Meanwhile, the customer receives the value of a great, fast service experience. For manufacturers, availability can mean answering the phone at any time, or it can mean establishing relationships with local delivery networks in your market. Here are a few examples of tools to increase availability:
Remember: a carpenter isn’t going to use every single tool in their toolbox for every service, and neither is an OEM for expedited services. The point is they have these tools at their disposal so that when a customer calls, the very best strategy can be employed to get them the part they need quickly and affordably.
Apply Technological Resources to Boost Expedited Aftermarket Services
The Aberdeen-IndustryWeek study discussed above also highlighted unifying technological resources as a major challenge to manufacturers, and that common issues such as fragmented automation can create serious aftermarket drag and confusion. Here are some examples of powerful, unifying tools to help OEMs in the aftermarket shipping industry:
To explore more solutions for strategic aftermarket development, GenAlpha can offer industry expertise, analyses, and technologies to help you capture as much of this market as possible.