The Aftermarket Should Not be an Afterthought
By Matthew Baginski
April 8, 2013 – Manufacturers of industrial equipment and machinery are in a unique position: You can never say goodbye to your equipment. Or put another way, you’re always on the hook.
While ensuring consistent product quality and service standards, the reality is that oftentimes more growth, more differentiation and more profit is to be gained from an effective aftermarket business.
This commentary will argue that equipment manufacturers need not only to streamline aftermarket operations, but make them an integral part of the manufacturing and distribution processes. Further, organizations must embrace service key performance indicators and utilize open industry specialized technology solutions.
We will explore the recent findings of an IDC Manufacturing Insights survey into the pursuit of operational excellence and discuss the aftermarket strategies being adopted by equipment manufacturers around the globe.
The current business climate can at best be described as one of economic uncertainty on a global scale. Practical stagnation and risk averse sentiment is pervasive. Yet, all business stakeholders are still demanding greater return on investments, year on year growth, producing more with less, and other strategies.
Are there any broader factors that could give us a positive view as we learn to profit in a long-term slow growth economy?
We all know instinctively that opportunities will continue to exist, especially for equipment manufacturers. These manufacturers supply the infrastructure and industrial backbone of our economies.
However, the machinery and equipment industry is a capital-intensive and cyclical sector that tends to be severely hit by downturns, when a significant contraction of capital expenditures is evident. Activity progressively increases in an upturn, starting with construction and transportation equipment, followed by capital-goods equipment.
It is clear that the market and your ability to operate within it are becoming increasingly, for want of a better word, complex. Unless you can combat this complexity, you will find competitors stealing a march.
So what is the detailed nature of this complexity and to what extent are your peers coping with it?
I would like to draw on the findings of an industrial survey undertaken in 2012 by IDC Manufacturing Insights, which looked at equipment manufacturers. The study asked about the areas of complexity, growth strategies and what implications, if any, these issues had on their firm’s technology platform.
The industry was particularly hit by the 2008/2009 crisis, when a sudden drop in orders and a rapid consumption of order backlog led to a significant reduction in revenues and profit margins. The industry performance however has significantly improved over the last couple of years, with revenues and profit margins returning to pre-crisis levels. Over this period of time, companies restructured their business, focused on value added products and services, and created more global organizations. This translated to a prominent drive towards sustaining growth via value added services.
Nearly 80 percent of respondents want to sustain growth by selling more value added services, while mere product innovation receives only less than 50 percent of share.
Attempting to create their competitive edge in difficult times, industrial machinery firms have endeavoured to provide their clients with product-lifecycle management, selling of remanufactured products and offering repair, maintenance and overhaul services. The end goal is creating a more engaged relationship with their clients and making improvements in customer fulfilment.
To recap, the survey re-enforces what has been a trend for some time, namely that equipment and machinery manufacturers see after-sales services as the main driver of continuing high margin revenue growth, but also a key opportunity to engage with their end customers. This latter item may be either directly, or by working more closely and efficiently with their distribution channels, allowing the OEM brand to gain in reputation.
In any event, it’s clear that while the ability to improve the operational efficiency of manufacturing and investment in product innovation will always be vital, the organizations that will succeed are those that are better able to treat the manufacturing area together with the field service, parts delivery and after sales customer care as an interconnected whole.
Complexity in Evidence
What did the respondents have to say about the dreaded ‘C’ word – complexity? As evident in the IDC Manufacturing Insights survey, the emerging challenge for the industrial and equipment industry is the dramatic growth in complexity:
More than 50 percent of companies in this industry expect the level of complexity to increase or significantly increase over the next three years. No company expects less complexity to come in the future.
Market, operational, and IT complexity are the main business areas that are expected to become more complex. Compared to other discrete manufacturing industries, the equipment industry has a higher than average expectation for an increase in operational and IT complexity.
Why? Because, if designing and manufacturing equipment was not hard enough, the ever growing importance of the aftermarket adds another dimension to the business challenge, according to the IDC report.
So what strategies do your peers intend to do adopt to cope with the economic climate and the complexity that we have been discussing?
Over the next three years, equipment manufacturers around the world will undertake a number of critical business initiatives aimed at mastering market complexity and driving out complication from their operational processes and IT systems.
• Improve customer fulfilment: All initiatives equipment manufacturers want to launch will be aimed at creating a competitive edge and ensuring sustainable growth. With customer retention as the key, improving overall service level is a critical differentiating factor and customer fulfilment is emerging as the new guiding principle for industrial machinery manufacturers. According to the survey, improving customer fulfilment is the most important business initiative equipment firms will undertake over the next three years. To better serve their clients, firms need to stay closer to customers to create a more engaging relationship. To do so, most firms are keen to undertake a new strategy that does not merely focus on creating new products, but is primarily focused on increasing value added services around them. The focus on customer fulfilment will generate a better understanding of customers' requirements, which in turn will generate specifications for new services and products.
• Improve demand planning and forecasting: In the past few years, manufacturers in this industry have had to cope with a great deal of uncertainty, generated by a steep reduction in capital expenditures and the subsequent increase in competition. With the changing business model from products to services, industrial machinery organizations need to re-examine the focus of the way they go to market. The first and foremost process they need to improve is their ability to understand where the market is going by improving their demand planning and forecast process. This is particularly relevant for aftermarket services and spare parts, which invariably means working with a dedicated distribution channel or after sales division. In any event the additional links in the chain demand great transparency and collaboration between the players.
• Equipment Lifecycle Management: Companies are ensuring complete life cycle management of equipment from initial configuration of requirements by using and refining equipment configuration and attributes. These serve as a complement to equipment item numbers and provide the ability to structure information and characteristics specific to the customer. During the manufacturing phase, configurator details and established options/attributes for products are stored, which are then used in order entry and quoting. Attribute usage ensures that the right combinations will be selected. These attributes then feed manufacturing with the proper selections needed to assemble equipment and provide post sales service with accurate ‘as built’ serialization, crucial to proper servicing.
• Equipment profitability: By using both traditional cost management and activity-based costing, companies are able to not only meet typical day-to-day equipment accounting needs, but also gain insights into the long-term equipment lifecycle profitability. Focusing on equipment lifecycle changes will add to the value of future design configurations and also service requirements.
So, great news, we all now understand the big picture, the business drivers and the strategies for growth. What all of the above is telling us is that striving for manufacturing operational excellence remains vital, but it’s not enough.
The aftermarket is not an after thought. The ability to connect with your customers, the ability to add service value to your customers and the ability to kill complexity is what will set you apart.
Focus on Service Driven KPI
As equipment manufacturers continue to move their strategies from being traditional product manufacturers towards being product and service manufacturers, realization that managing a services-based process requires different controls from managing the traditional manufacturer operation is vital.
As the IDC Manufacturing Insights research states, “In order to capitalize on the aftermarket services opportunity, manufacturers need to put in place new organizational structures, processes, and tools that support services-based business models.”
Some common key performance indicators (KPI) are given below:
Supporting IT systems
From an IT perspective, the demand is for solutions and technologies that foster a holistic approach to manufacturing and the aftermarket. Equipment manufacturers understand the potential inadequacy of their current IT systems.
There is a need to overcome the system fragmentation that currently exists, and to create a more collaborative environment, with greater visibility and intelligence of information internal to the enterprise and external along the value chain.
The following findings from the survey are evident:
“More than 60 percent of respondents feel the IT systems they have in place are ineffective or inadequate to support current business challenges. These organizations feel they lack the timely information needed to make important decisions, which is primarily due to information being stored in too many segregated IT systems.
“Although firms believe their ERP system is vital to their organization, the vast majority are not fully satisfied with the ERP system they have in place. Nearly 70 percent of respondents believe that their ERP does not provide them with fast decision making capabilities. This is due to their current ERP not offering collaborative or social-networking style features that increase productivity and being too complex to seamlessly integrate with other existing applications.
“Speeding up business processes is the most critical goal, for nearly 90 percent of equipment organizations. To this end, they want to leverage IT to provide access to real-time information and support faster decision-making capabilities. Nearly 70 percent of respondents want their ERP to be able to support them in streamlining processes, rapidly adapt to business change and keep costs under control. This will invariably require dedicated software that can only be achieved with industry specific functional support.”
Managing the Equipment Lifecycle
Many legacy manufacturing systems are purely transactional manufacturing control systems with warehousing, purchasing and elementary financials thrown in for good measure, but all are still fundamentally looking within the confines of a single organization – all encompassed within one monolithic mass of software code that is perceived as complex, expensive and inflexible.
Today, there is no excuse for not knowing your inventories in any location in the world, managing suppliers, getting visibility of costing and finance. These are the basics in any enterprise application, but it’s still not enough for equipment manufacturers. Traditional ERP systems simply do not support operational manufacturing and full aftermarket support, mobility or rental functionality.
Thus the way to support fast and informed decision-making is to have accurate and trustworthy information in a form and in a place and at a time when it is needed – the shop floor, the warehouse or wherever the equipment or machine has been deployed.
Equipment lifecycle management needs a new approach based on connecting people, systems and data through open standards-based integration. The faster we can move signals up and down the supply chain the more informed we will be.
At a simple level, software application users must not only be able to benefit from a workspace that is customizable by role and by individual, but have together, in one workspace, both internal and web-based applications, thus breaking down the dreaded silos.
If they are on the move, such as field technicians, users will need to access information, not necessarily through a screen, but through their mobile devices like smart phones and tablets.
So what about complexity of integration? We live in a complicated world and a ‘one-shoe’ software solution does not fit all. Heterogeneous technologies and applications are a common reality for equipment centric companies today.
Equipment companies must seek out vendors who develop solutions that improve process flows among applications from potentially multiple vendors whether on premise or in the cloud.
What this means is that equipment companies can obtain more value from their existing investments and are also assured of focused solutions from vendors that understand the needs of equipment centric companies.
Technology is available to provide companies running applications from multiple vendors with pre-built connectivity, the business process monitoring, data sharing, and the enhanced workflows to enable them to make fast, informed decisions and speed-up their business processes.
As noted, manufacturers of industrial equipment and machinery are in a unique position: You can never say goodbye to your equipment. Issues relating to manufacturing operations, spare parts, warranties, quality control and remanufacturing keep on coming.
Don’t treat service as a ‘bolt-on’ once you have bought your manufacturing system. Just as equipment must serve pre- and after-market as one holistic supply chain, so should the systems built for the market.
That means seeking out the specialists who can help make it happen.
(Matthew Baginski is VP of Equipment Manufacturing, at Infor, a provider of enterprise applications and services for 70,000 customers in 194 countries. www.infor.com)