Winning In The Aftermarket - The Fishman-Davidson Center

TOOL KITCompanies realize the importance of providing spareparts and after-sales services, but most could make farmore money in the aftermarket than they do. Here’s how.Winning in theAftermarketTMARTIN O’NEILLhis is the golden age of services,and to survive and prosper, we’retold, every company must transformitself into a services business. Executives swear by that services-centric viewof the world, but privately, they admitto one niggling concern: Most companies either don’t know how or don’tcare to provide after-sales services effectively. Top managements the worldover treat aftermarket services as a mereafterthought.But ignoring the promise of aftersales services is imprudent, to say theleast. Since the early 1990s, companiesin North America, Western Europe, andJapan have stopped pushing productsand started delivering the value thatcustomers get out of using those products. They changed tack because demand slowed, competition intensified,may 2006and profit margins imploded. As businesses began offering solutions insteadof products, it became evident that selling spare parts and after-sales services –conducting repairs; installing upgrades;reconditioning equipment; carrying outinspections and day-to-day maintenance;offering technical support, consulting,and training; and arranging finances –could be a bountiful source of revenuesand profits as well.How bountiful? In industries such asautomobiles, white goods, industrial machinery, and information technology,companies have sold so many units overthe years that their aftermarkets havebecome four to five times larger thanthe original equipment businesses. Although there are few reliable estimates,research firm Aberdeen Group pegsthe sale of spare parts and after-sales129YEL MAG CYAN BLACKby Morris A. Cohen, Narendra Agrawal,and Vipul Agrawal

T O O L K I T Wi n n i n g i n t h e A f t e r m a r ke tservices in the United States at 8% ofannual gross domestic product. Thatmeans American businesses and consumers spend approximately 1 trillionevery year on assets they already own.It also means that the U.S. aftermarketis bigger than all but the world’s eightlargest economies. No wonder executives at the Wharton-Stanford ServiceSupply Chain Thought Leaders Forumin October 2004 said that their firmsgenerate between 29% and 50% of theirrevenues by servicing products.After-sales services are a high-marginbusiness, and they account for a largechunk of corporate profits. Accordingto a 1999 AMR Research report, businesses earn 45% of gross profits from theaftermarket, although it accounts foronly 24% of revenues. An Accenturestudy, for instance, reveals that GMearned relatively more profits from 9 billion in after-sales revenues in 2001than it did from 150 billion of incomefrom car sales. Wall Street tracks companies’ aftermarket prowess, and studiesshow that there’s a direct correlationbetween stock prices and the qualityof firms’ after-sales services. Corporations such as ABB, Caterpillar, GE, andSaturn have won customers’ undyingloyalty by providing top after-sales services. In fact, one number that tells acompany how loyal its customers arelikely to be is how high they rate thefirm’s after-sales services.Despite the aftermarket’s obviouscharms, however, most organizationssquander its potential. They perceiveafter-sales services to be a necessaryevil and behave as though big businessto-business service contracts, smallbusiness-to-consumer warranties, andeverything in between were–like taxes–a needless expense. That’s mainly because after-sales support is notoriouslydifficult to manage, and only companiesthat provide services efficiently canmake money from them. It’s shockingto see how poorly large companies manage service networks, which the production and sales functions treat as stepchildren. Some years ago when we studiedthe after-sales network of one of America’s biggest automobile manufacturers,we found little coordination betweenthe company’s spare-parts warehousesand its dealers. Roughly 50% of consumers with problems faced unnecessarydelays in getting vehicles repaired because dealers didn’t have the right partsto fix them.Although original equipment manufacturers (OEMs) carry, on average, 10%of annual sales as spares, most don’t getthe best out of those assets. People andfacilities are often idle, inventory turnsAmerican businessesand consumers spendapproximately 1 trillionevery year on assetsthey already own.of just one to two times annually arecommon, and a whopping 23% of partsbecome obsolete every year. Some OEMsare content to let independent serviceproviders cater to customers. Indeed,third-party vendors have become soprice competitive that OEMs lose mostof the aftermarket the moment theinitial warranty period ends.Customers don’t expect products tobe perfect, but they do expect manufacturers to fix things quickly when theybreak down. Not surprisingly, customersare usually unhappy with the quality ofafter-sales support. In 1997, when weconducted the first ever study on thelinks between after-sales services andcustomer satisfaction, we found that satisfaction levels were between 10% and15% below customers’ expectations. Thedivergence would probably be highertoday, since customer expectations haveshot up over the years. In the 1980s, forinstance, semiconductor manufacturerswere content with a two-day responsetime if equipment failed; today, theyexpect suppliers to respond to requestsfor help within 15 minutes. In fact, somenewcomers have even managed to topple incumbents by providing betterafter-sales services. In the automobileindustry, for example, there’s a distinctcorrelation between the quality of aftersales service and customer intent to repurchase. Brands like Lexus and Saturninspire repeat purchases by providingsuperior service, and, consequently,they have overtaken well-establishedrivals like Ford and Chrysler.Companies can benefit in severalstrategic ways by focusing on after-salesservices. Providing support generates alow-risk revenue stream over a long period of time. Aircraft manufacturers, forinstance, can reap additional revenuesfor as long as 25 years after a sale. Thelonger the life of the asset, the more opportunities companies will find downthe line. Also, increasing sales of partsand service-related products costs businesses far less than finding new customers, though they can successfully crosssell and up sell only if the support theyoffer satisfies existing customers. Aftersales services can be a source of differentiation as well. Companies’ use ofcontract manufacturers and the development of global manufacturing standards have led to the homogenizationof products. Being on par with your rivals in performance, price, and qualitygets you into the game; after-sales services can win you the game. Finally,when businesses provide aftermarketsupport, they gain a deep understandingof customers’ technologies, processes,and plans – knowledge that rivals can’teasily acquire. That provides companieswith an unlikely, but sustainable, competitive advantage.Morris A. Cohen (cohen@wharton.upenn.edu) is the Panasonic Professor of Manufacturing and Logistics at the University of Pennsylvania’s Wharton School and a cofounder and the chairman of MCA Solutions, an after-sales services supply chain software company based in Philadelphia. Narendra Agrawal (nagrawal@scu.edu) is an associate professor of operations management at theLeavey School of Business at Santa Clara University in California. Vipul Agrawal (vipul.agrawal@mcasolutions.com) is a cofounderand the executive vice president of products at MCA Solutions.130harvard business review

Tackling AftermarketChallengesIt isn’t surprising, though, that companies find it tough to compete in the aftermarket. Across industries, deliveringafter-sales services is more complex thanmanufacturing products. When delivering service products, executives have todeploy parts, people, and equipment atmore locations than they do to makeproducts. An after-sales network has tosupport all the goods a company hassold in the past as well as those it currently makes. Each generation has different parts and vendors, so the servicenetwork often has to cope with 20 timesthe number of SKUs that the manufacturing function deals with. Businessesalso have to train service personnel,who are dispersed all over the world, ina variety of technical skills. Moreover,after-sales networks operate in an unpredictable and inconsistent marketplace because demands for repairs cropup unexpectedly and sporadically. Ontop of that, companies have to handle –may 2006in an environmentally safe fashion –the return, repair, and disposal of failedcomponents.Most businesses don’t appreciate thosemyriad challenges. They blindly applyenterprise-resource-planning thinking,processes, and software solutions totackle the complexity of support networks. In our experience, that doesn’tdeliver results; the processes and toolsthat companies use to manufacturegoods in a cost-effective manner don’twork well in the support business.Here’s a simple example. In manufacturing, a quantity and a due date represent a forecast, and the manager’s goalis to schedule deliveries so that materials are available just in time. In aftersales support, forecasts for spare partsappear only as probability distributionsbecause breakdowns occur unexpectedly. Executives have to draw up forecasts that can help mitigate risk – notschedules that match forecasts. Mostcompanies don’t realize that distinction,and they use a deterministic approachwhen predicting demand. As a result,companies face mismatches betweensupply and demand, deliver poor service to customers, and leave profits behind on the table.We’ve been studying after-sales service networks for more than two decades. We’ve worked with giants suchas Boeing, Cisco Systems, IBM, KLATencor, and Tellabs to help them improve the quality of the services theyoffer customers and to increase theirfinancial returns from the businesses.Our research shows that to win in theaftermarket, executives need to recognize that after-sales services are a commitment companies make to respondwithin a specific time frame to the customer’s need for support. That definition has three important managerialimplications.First, companies must approach thepromises they make as products thatthey design, price, produce, and deliverto customers in order to generate revenues. Many businesses don’t understand131YEL MAG CYAN BLACKWi n n i n g i n t h e A f t e r m a r ke t T O O L K I T