We’re in uncharted territory. COVID-19 has flipped our world upside-down, changing everything from how we live and work to the products and services we consume.
Among the many impacts of COVID-19, one of the biggest — not to mention one that will linger once the imminent health threat of the pandemic subsides — will be the economic volatility we’re currently experiencing.
While the current situation is most certainly unlike anything we’ve ever experienced, the economic downturn is not. In fact, these uncertain times are leading many Original Equipment Manufacturers (OEMs) to experience a bit of déjà-vu from the previous economic crisis in 2007-09.
More specifically, the last economic crisis led OEMs to recognize the strategic importance of after-sales service in a down economy, and many OEMs could see similar patterns play out right now. With that in mind, it’s important to revisit the lessons from the past to understand how OEMs can best position themselves for success going forward.
In 2007-09, OEMs saw their customers decide to delay or forgo purchasing new products and opt to service and maintain their existing equipment instead – keeping many assets in the field months or years longer than originally anticipated. Additionally, some equipment in the construction industry went off-line due to slowing construction projects and then needed to be maintained and serviced before coming out of retirement when the economy began to recover.
When this happened, OEMs turned to their profit-rich service side of the business for relief from declining revenue on new product sales. Specifically, investing in optimizing after-sales service paid off as a smart way to harvest revenue, maintain and even grow profits and create long-term customer loyalty.
The Importance of After-sales Service
Multiple studies support the benefits of optimizing after-sales service in a down economy, suggesting that this move is increasingly strategic to manufacturers’ long-term financial performance.
McKinsey & Company revealed upwards of 15 percent of manufacturers’ total revenue comes from parts and service, while a Bain & Company report suggested that service averages a gross margin of 39 percent, which is significantly higher than margins on most new products (27 percent). The Bain & Company study also revealed manufacturing companies’ service businesses grew by 9 percent annually, compared to a 5% growth rate captured on the product side of the business.
Diving deeper, improving after-sales service creates an opportunity for OEMs to minimize the negative impacts of the economic downturn by:
- Generating a more predictable, high-margin revenue stream
- Differentiating from competitors
- Increasing customer satisfaction and retention
Key Areas of Optimization
With all the economic volatility we’re seeing right now, we can expect history to repeat itself. Early signals indicate as much, with new car sales in China plummeting 80 percent year-over-year in February 2020 and a growing list of OEMs around the world and across industries have temporarily closed manufacturing plants to protect employees and proactively respond to anticipated declines in product demand.
OEMs today have more complex service supply chain networks than ever. This, coupled with the operational and physical impacts of factories, warehouses, offices and more closing has created an unprecedented situation for supply chains. It is now more critical than ever for manufacturers to shift from a “product” to a “service” mindset and invest in the resources, infrastructure and technology needed to succeed.
A cloud-based service parts planning solution allows manufacturers to exceed customer delivery expectations and maintain an edge over the competition, while a service parts pricing solution that leverages advanced algorithms to analyze real-time data from multiple sources like customers, competitors and legacy systems allows for optimal dynamic pricing. These areas of optimization combined ensure the end customer has a great experience, while the manufacturer simultaneously maximizes revenue and margins.
Today’s Decisions Will Shape OEMs’ Futures
What companies do in the face of uncertainty will ultimately determine how they emerge from the current state of economic chaos.
During challenging financial times, it’s natural for companies to act swiftly and take action to preserve cash, but focusing too much on cost-cutting measures can lead to missed growth opportunities that improve top and bottom-line performance.
The companies that emerge from this financial storm fastest, strongest and best-positioned for success will be the ones that balance cost-cutting measures with strategic investments that positively impact revenue, profits and customer loyalty while building confidence with shareholders.
To learn more about what the future holds for manufacturing as the peak of COVID-19 passes, join us April 28 at 9 a.m. ET/1500 CET for a virtual executive conversation where Bocconi University’s Carlo Alberto Carnevale Maffé and Syncron’s Gary Brooks discuss what the “new normal” will look like.