Spare Parts Business: Key to Succeeding in the Servitization Era
Point of View | 14 February 2017 | Last Updated: 22 November 2021
Crucial Component of Customer Relations
As we enter the servitization era, corporations must put an emphasis on the spare parts business as the availability of spare parts has become more important than ever.
Customers prefer repairing to replacing their equipment or appliances as it is much cheaper to repair and it takes much effort to replace them. They also expect their equipment or appliances to be repaired as soon as possible to minimize equipment downtime.
As the demand for spare parts is quite difficult to predict, the level of spare parts inventory often doesn’t meet the actual demand. When manufacturers fail to repair the appliances due to lack of spare parts, customers might no longer be loyal to the brand or have bad impressions of the brand. Even worse, they might sustain the idea of planned obsolescence and thus switch to the competitors’ products.
Supplying spare parts in a timely manner certainly helps companies build brand loyalty. This gives the idea that a company’s products are repairable, and encourages customers to continue buying products of this specific brand in the future. The aftermarket and spare parts businesses are the constant connection between customers and manufacturers, and every contact shapes their perception of their value. The better the service (quality of the parts and speed of delivery) is, the better the brand image will be.
Furthermore, customers provide feedback on the products as they request for after-sales services. This feedback becomes valuable insights for the strategic and innovation departments. Efficient aftermarket support fuels the product development and innovation of a company, another reason for after-sales services to always be connected with innovation.
A Significant Revenue Source
Spare parts business generates important income for manufacturers, whose earnings come increasingly from the services provided to their customers. This trend is called servitization, meaning that manufacturers’ focus is shifting from selling the product to improving the overall customer experience offered by them. With this shift of mindset, manufacturers provide their customers with a comprehensive experience that fulfills the customer’s expectations throughout the product’s useful life.
The spare parts business is one of the keys to maintaining customer satisfaction and spare parts are also very profitable items. The margin of spares is much higher than that of the final products, and are sold several times throughout the product life cycle. As a result, they could account for up to 40% of some Fortune 100 companies’ revenue, 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. However, OEMs have assets which low-cost manufacturers lack. 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 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”
Despite its potential to be quite profitable, the spare parts business is often neglected. The traditional growth strategy makes managers focus on new products rather than on after-sales 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 catalog. For example, if engineers pick from a limited range of standard brackets when designing a new product instead of creating a new and customized one for each product, the aftermarket management of spares would be much easier, and spares stock will be reduced.
If the “Design for Manufacturing” rules are often followed by the manufacturers to easily manufacture the products, products are generally not designed to be effortlessly repaired. Making sure that spares are fundamental parts and not sub-assembly ones, and even standardizing them at best, will lead to a simplified and cost-efficient spare parts management. Lack of emphasis on “Design for Servicing” leads to extensive numbers of references in catalog, large warehousing and ultimately onerous cost of inventory.
When it comes to the spare parts business, manufacturers don’t systematically innovate. Yet, those profitable parts could benefit from innovation and cheaper materials to increase their profit margin. Redesigning spares may lead to higher performance, cheaper costs, and stronger standardization, which are opportunities that 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
In 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 the spare parts business, enabling companies to maximize their margin. Now more than ever, spare parts are definitely an area of business that is worth paying attention to.