Reap the Fruit of Spare Parts Business

Point of View | 14 February 2017

Crucial Component of Customer Relations

Spare Parts are essential to ensure the functioning and maintenance of one device for years and years. There is a high chance they will be needed regularly throughout the product life cycle. Spare Parts are thus a crucial component of customer relations. Unavailable spares are unacceptable for customers: they sustain the idea of planned obsolescence, which literally ruins one company’s image. How can customers trust a brand which doesn’t supply them with spares when they need them?

Spare Parts supplied in a timely manner when they are needed contribute to the building of brand loyalty. They give the idea that one company’s products are durable, and encourage customers to buy further products of this specific brand. The aftermarket business is the most constant connection customers have with a brand, and every contact shapes their perception of its value. The better the service (quality of the parts and speed of delivery), the better the brand image.

Furthermore, aftersales services provide manufacturers with useful information about the products, which are valuable insights for the strategic and innovation departments. Efficient aftermarket support enables companies to improve product development, a reason why aftersales should not be disconnected from innovation.

A Significant Revenue Source

Spare Parts generate important income for manufacturers, whose earnings come increasingly from the services they provide their customers with. This trend is called servitization; manufacturers’ perspective is shifting from the sale of the product to the overall customer experience they offer. In the servitization’s approach, the manufacturer will provide its customers with a comprehensive experience that fulfils the customer’s expectations throughout the product’s useful life.

Spares are essential to customer care and are also very profitable items. The margin is much higher on spares than on final products, and are sold several times throughout the product life cycle, so they massively contribute to a company’s revenue (up to 40% of some Fortune 100 companies, according to the article “Profiting from spare parts” from The McKinsey Quarterly, February 2005). 

Parts Differentiation for Pricing Optimization

Top selling spares are often picked by companies repeating OEM items and producing at low prices. But OEMs have assets low-cost manufacturers are deprived of. They benefit from stronger relationships with customers, better distribution systems, engineering resources, technical support and quality assurance. When it comes to spares, customers tend to favour quality, so they might choose OEM parts over cheaper options. Building a spare parts management strategy upon those assets enables OEMs to compete with other manufacturers.

As non-OEM manufacturers produce spares only when the demand is high, price would be adjusted accordingly. During the competition phase, spare parts price would be lowered in order to compete with non OEM companies but by contrast, when the OEM is the only manufacturer to produce certain references, prices can be conveniently increased.

So, low selling parts or long tails are only made by OEMs, as they are the most expensive (with high inventory, carrying and warehousing costs).

There is barely any competition regarding those specific parts and therefore OEMs should harvest the best value of these long tails. In order to achieve this, they can apply high margin and reduce their spares cost as for instance by using the latest available technologies such as on-demand 3D printing.

From “Design for Manufacturing” to “Design for Servicing”

However, the spare parts business is often neglected. The traditional growth strategy makes managers focus on new products rather than on aftersales matters. As a result, spare parts management is completely left out of sales and product development, which leads to a lack of standardization in the spare parts catalogue. For example, if engineers pick from a limited range of standard brackets when designing a new product instead of creating a new and customised one for each product, the aftermarket management of the spares would be much easier, and spares stock will be reduced.

If the “Design for Manufacturing” rules are often followed by the manufacturers, so that the product is easily produced, products are generally not designed to be effortlessly repairable. Making sure spares as elementary parts and not sub-assembly ones, and even standardising them at best, will lead to a simplified cost-efficient spare parts management, as the lack of “Design for Servicing” focus leads to extensive numbers of references in catalogue, large warehousing and ultimately onerous cost of inventory.

When it comes to spares, manufacturers don’t systematically innovate. Yet those profitable parts could benefit from latter technologies and cheaper materials to increase their profit margin. Redesigning spares may lead to higher performance, cheaper costs, and stronger standardization: the opportunity should be considered. Introducing new technologies can also be a profit driver: for instance, long tails’ costs are drastically reduced thanks to 3D printing.

Aftersales, the Key Driver for Manufacturers

Under the servitization era, aftersales should not be an afterthought. Manufacturers should focus on providing the best experience to their customers during both usage and repair phases of the product. Thus they will significantly increase their income, improve their growth strategy and strengthen their reputation.

Differentiated pricing, design for servicing and the leveraging of latest technologies such as 3D printing present tremendous drivers when it comes to spare parts business, enabling companies to improve at best their margin. Now more than ever, spare parts are definitely an area of business that is worth paying attention to.