Circular Economy Powers Profitability Paradigm Shift for OEMs

diversity team brainstorming focused on ESG (environment,social,governance) with tablet or sdgs goals in a sustainable green office at night

OEMs across the world are now realizing that circular economy practices not only mean more sustainable operations, but more sustainable growth too.

This is because the very source of profitability is changing for OEMs. The climate emergency and tightening regulations have made clear the need for resources to be used more efficiently, meanwhile, servitization is also on the rise.

Consumers demand products with integrated services as they increasingly opt for use-based models, preferring to lease products rather than own them. Digitization, data, and AI are the glue in this profitability paradigm shift, enabling automated, data-driven processes to be woven into product lifecycles.

The result – new product opportunities and novel revenue streams. But to tap into the higher margins and ROI offered by service-based models, OEMs must understand the complexities, the risks, and how to build the right circular economy foundations. For a full overview of this topic, download our latest eBook How the Circular Economy Is Unleashing New Sources of Business Value for OEMs.

Closing the Loop

OEMs need to move away from the traditional ‘take-make-dispose’ model if they are going to generate greater value going forward. There are three main ways to introduce circularity to OEM operations, and to embrace a ‘closed loop’ approach:

  • Parts and products – focus on reusing, refurbishing, and remanufacturing to recapture precious value.
  • Product longevity – become more innovative when it comes to repair, maintenance, and service contracts.
  • Equipment-as-a-Service (EaaS) – look beyond the ownership model and give customers the option to lease the equipment they need.

We are seeing more and more leading manufacturers putting these three core tenets of the circular economy into action. From Caterpillar launching its Cat Reman® program refurbish end-of-life products, to IKEA experimenting with furniture leasing in select markets.

The goal is to maximize lifetime value for customers by significantly by offering leading equipment that is maintained seamlessly. Your highly satisfied customers are then more likely to purchase high-margin parts and services. But the path to service-based business can be complex.

Risk and reward

Making this profitability paradigm shift is not straightforward, but the transformational rewards are worth getting it right. By adopting service-based business models built on digitization and servitization, there are many new variables to manage.

On the one hand, OEMs will need to make precise predictions about the lifetime service costs of various pieces of equipment. The pieces of equipment are being used in different ways by different customers from different parts of the globe.

  • How can a service-based contract take all the variables into account without being too expensive or too cheap?
  • How can we be prepared for unexpected maintenance in advance without having done it before? 
  • How can we do this without hiring teams with scarce technical skills at great expense?

Without proper circular economy foundations in place, OEMs potentially face being lumbered with loss-making service contracts and reduced customer satisfaction. But the risk and complexity can be managed with greater precision, speed, and confidence.

Double down on data and analytics

Automating and scaling your decision-making will be essential for making the jump to service-based business – data and analytics are key. With a multitude of changing parameters and variables to monitor and work with, human teams cannot handle the volume alone.

Advanced analytics capabilities can be used to calculate risk with the many variables autonomously accounted for, including commodity prices, equipment models, market data, stock data and more. This technology can also be easily scaled across an entire business, creating a universal ecosystem that drives business-wide profitability gains.

Getting this right will equip an OEM to accurately predict lifetime service contract costs, optimize pricing to promote profitability, and manage lifecycle complexity. Not to mention the ability to actively monitor live contracts and adjust to market conditions.  

To take your data and analytics capabilities to the next level and tap into new service revenues, these three circular economy foundations will be vital:

  • Cloud-based data sharing – leverage a cloud-hosted platform to break down data siloes within the organization.
  • Create a single source of the truth for trustworthy data – this boosts data accessibility by combining verified information from different sources.
  • Machine Learning and AI – these technologies will be at the heart of the new circular economy profitability paradigm, accelerating operations and supporting human experts.

At Syncron, we are empowering OEMs to embark on service transformation journeys, enabling manufacturers to continually enhance value chain with circular economy principles and technology. Our CSX Cloud Platform is an integrated, streamlined way to navigate the complexity and access new service revenues.