“Halt, who goes there?”
“I’m the aftermarket paradox,” said the intruder.
“Friend or Foe?”
“Friend,” came the reply.
Faced with this particular intrusion to your manufacturing business, how would you respond at this point?
Back in 1997, I responded by letting the “intruder” into my thoughts in the same way that the leading manufacturers of engineered products have been doing for some time now.
Unfortunately, back in 1997, the Managing Director of one of my clients reacted by treating the intruder as a foe.
I’ll return to this story in a short while, but first, you’re probably wondering what the aftermarket paradox is, so let’s deal with that first.
The Aftermarket Paradox
If your business is an Original Equipment Manufacturer (OEM) making engineered products from engineered components then there will probably come a point in the life of your product where it will fail and need to be repaired or when it will need to be serviced to ensure it keeps working optimally.
This situation is more common where the replacement cost of the equipment is much higher than the cost of repair and where the useful life of the equipment spans many years.
Examples of such products include “capital equipment” such as vehicles, aeroplanes, ships, industrial machinery, military equipment, home appliances, etc.
When your customer’s equipment needs repairing or servicing, your customer needs replacement spare parts and for the sake of this example, let’s keep things simple by assuming that you sell them the spare parts for this too.
It’s worth pausing here to reflect on what’s happening.
You manufactured a piece of equipment.
You sold it to a customer who now owns the equipment.
The equipment that you made and your customer bought now fails.
Your customer then returns to you and buys some spare parts.
They fit the spare parts to repair the equipment that you made and sold them and that they now own, so that they can make it work again as originally intended when they bought it from you.
From your perspective, you’ve made extra money from this customer by selling spare parts as well as the original equipment.
You may also have made money from effecting the repairs or maintenance work for your customer too (labour charges).
You may also have made money from effecting the repairs in your workshop or facilities, with your tools and test equipment, etc. (overhead charges).
In short, you’ve profited from the failure of the equipment you made.
So it is in your interests for you to make equipment that fails more often or, optimally, as often as you can get away with before the customer decides to buy a more reliable piece of equipment from one of your competitors next time.
From your customer’s point of view, they might have needed spare parts to repair their equipment and they might have needed to take it to a workshop so that it could be worked on by trained technicians with lots of fancy test equipment, but they didn’t really want any of those things.
All those things are extra pain for them on top of the original pain of loss of use of their equipment.
What they really wanted was an equipment that never fails and never needs spare parts.
But you didn’t sell your customer one of those, because, as we’ve already established, that’s not in your interests.
This is the aftermarket paradox.
It’s The Way We’ve Always Done It
It’s not a new phenomena, of course.
SEE ALSO: Essential Guide To Servitisation
This aftermarket paradox has been around for as long as you’ve been manufacturing engineered products.
But its time is limited because the traditional aftermarket service model is not a sustainable business model.
There are some engineered products today that are no longer serviced and repaired when they fail – they are discarded instead.
Domestic appliances such as kettles, toasters, washing machines, fridges, freezers, dish washers, etc. are much like that now but they never used to be.
The last few occasions that one of our appliances broke at home, we just scrapped it and bought a new one.
We didn’t even bother to call a technical helpline or ask for a technician to come and look at it first like we had in the distant past.
We just got a new one.
Much more straight forward, less hassle and saved us the £50 call out fee (or whatever it was at the time).
It also saved us waiting for a week, without the ability to make a cup of tea or do the washing, until the technician could be scheduled to visit us because the new appliance arrived much quicker too.
Of course, as products get more complex and more costly, our ability as consumers or businesses to throw away the equipment and just buy a new one becomes more difficult.
Where the cost of the repair is a much lower proportion of the original capital cost of the equipment, it’s always more economical to repair it instead of replacing it.
And where the downtime of an equipment failure is costly because we rely on it for essential use – like a car for business travel or industrial machinery within a factory or a combine harvester during harvest time – it’s more economical to perform regular preventative maintenance to avoid or lessen the downtime or schedule the downtime for when it is most convenient.
So for capital equipment such as this, you might argue that the traditional aftermarket business model is very much alive and well?
Equipment may fail less often and require less frequent maintenance as technology improves and the products become more and more reliable (cars are a great example here) but they will always need spare parts, repairs and maintenance, won’t they?
Well, remember the story I started to tell you at the beginning of this article?
Back To The Story
It was 1997 and I was working for a 3rd party aftermarket service provider (ASP).
We purchased, stocked and distributed spare parts to UK dealers, export customers and some major national fleet account customers on behalf of our client, a truck manufacturer (OEM).
One of the national account customers at that time was the UK Ministry of Defence (MoD).
The MoD had bought several thousand trucks from the OEM and bought the spare parts from us (the ASP) from time to time.
The MoD were looking for ways to save money for the taxpayer and approached us for ideas.
Instead of just supplying spare parts when the MoD ordered them, I had the idea of providing a spare parts availability service.
We (the ASP) would hold a small stock of parts in our warehouse and provide a guaranteed level of parts availability to the MoD in exchange for a service fee and a multi-year service contract.
The MoD would enjoy a better level of availability than they experienced when managing the inventory themselves and would be able to reduce (and possibly eliminate) their own parts inventory.
We, the ASP, would enjoy an additional service fee (on top of the parts sales) and lock in the MoD to buying those spares from us for the duration of the service contract.
Hopefully, the higher level of availability they could get from us would ensure that the MoD would stay and extend their service contract even further.
It looked like a great idea to me, so I took the idea to our OEM client to see what their thoughts were.
For the OEM, the aftermarket paradox came into play BIG TIME!
Whilst they would enjoy a share of the profits made on the extra service fees and would benefit from locking in the customer to a service contract, they could see that they would suffer reduced parts sales for a while as the MoD ran down their inventory of parts previously purchased.
To cut a long story short, the OEM decided this idea was a foe, rather than a friend!
What Happened Next To The OEM?
There is a fundamental reason why the traditional aftermarket business model is unsustainable and it brings us back to the aftermarket paradox again.
Whilst in the short-term, your customer is stuck with your equipment and therefore must keep it maintained and repaired so that it can be used properly, there comes a point when your customer comes back into the market for new equipment to replace yours.
Hence, in the long-term, they are no longer stuck.
At this point, your customer is no longer an EXISTING customer, they are a potential NEW customer, free to go wherever they wish.
They are also a more educated and experienced customer than they were last time.
If they are thinking like a modern consumer or a modern business with a switched-on Procurement function, they will be looking at the Total Cost of Ownership (TCO) of any new equipment they buy.
They will factor in the cost of the repairs, maintenance, spare parts, etc. over their useful life of the equipment, as well as the initial capital purchase price itself.
Given this, do you think it more likely they will purchase new equipment from:
a manufacturer who offers parts and service contracts of some kind, where the cost is known in advance or one who pushes that commercial risk onto the customer in the traditional way?
a manufacturer who guarantees availability of critical service parts or one who pushes that downtime risk onto the customer in the traditional way?
a manufacturer who’s commercial incentive is aligned with the customer or one that is misaligned?
I could go on here but you get the point right?
What happened next for this particular OEM is that the MoD bought someone else’s trucks.
Over the next few years, the MoD bought thousands of cargo trucks, fuel vehicles, tank transporters and the like, none of which came from this traditional supplier of B-vehicles to the MoD.
This OEM had been a supplier of cargo trucks to the MoD for more than 80 years but when the MoD retired the old trucks, the OEM lost one of its key, profitable national fleet account customers.
In my opinion, the OEM put it’s own short-term commercial needs before its customer’s needs and in doing so, it put it’s business longevity at risk and ultimately fell victim to the aftermarket paradox.
What Happened Next To The Aftermarket Service Provider?
As the ASP, I took my parts availability idea elsewhere and offered it to other OEMs.
In doing so, I delivered some extraordinary results with it, not just for my OEM clients and their customers but for my ASP business too.
That’s a whole new story, but you can read more about it here.
SEE ALSO: Essential Guide To Servitisation
Are you facing the aftermarket paradox in your manufacturing business?
How are you responding to the question, “Halt, who goes there?”
If you are looking to beef up your profits, protect the longevity of your business and start giving your customers what they really want, then you need to start thinking differently and modernising your business model.
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How To Servitise Your Manufacturing Business
If servitisation is new to you then you might be surprised to know that it is not new to us.
We’ve been servitising manufacturing businesses since 1997 and would be happy to share some of our case histories and how you might achieve something similar with your business.
Here’s a couple of examples:
How is the Aftermarket Paradox impacting your manufacturing business?