Introduction
This year’s most viewed article on the Middlesex Consulting blog list is “How Should I Price Spare Parts?” When I first saw this statistic, I wondered why it was so popular. Then, I realized that spare parts sales are usually the most significant component of aftermarket revenue. It is common for spare parts sales to exceed 50% of dealers’ and 15% or more of OEMs’ total sales.
For example, according to the MacKay & Company 2024 annual DataMac Canadian Distribution report:
“With 119 Canadian businesses serving the medium- and heavy-duty commercial vehicle industry (dealers, distributors, HDDs, independent garages, auto parts stores, and others), 46% of total revenue was attributed to spare parts sales and 48% of profit.”
Also, PACCAR parts sales account for 18% of total sales, Hyster-Yale’s parts sales account for 15%, and in late 2022, the Association of Equipment Distributors (AED) reported that the average dealer’s parts revenue was 20% of total sales.
Since CEOs and Service leaders are not known for their lack of drive, I have a question for you to contemplate:
Would you like to grow spare parts sales further?
I doubt anyone who read this far would answer NO. However, many people either don’t know how to begin or know how to start but have a list of all the obstacles to achieving their desired outcomes. So, let’s start removing both challenges.
When Are Spare Parts Used
Understanding why people need parts is necessary before trying to grow spare parts sales.
There are four groups of people who need parts:
- Technicians who repair equipment (either customer’s or seller’s stock) in the dealer’s or OEMs’ garages.
- Mobile technicians who drive a service truck equipped with tools and parts inventory to a customer site where the equipment is located.
- End users or their mechanics who service their equipment either on-site or at a remote location.
- Technicians who work for a value-added reseller and provide uptime support for all the equipment the VAR sells at any location.
While the individuals filling each of these four roles typically have different knowledge about the suite of products they support, they all work on equipment for these reasons:
- Perform scheduled preventative maintenance
- Troubleshoot and repair a non-working piece of equipment
- Install hardware or software upgrades
- Relocating equipment (uninstall →, relocate →, reinstall →, test) and fix anything that is no longer working.
We can now identify some of the drivers of parts sales. If the OEM works with dealers, each parts shipment represents an OEM’s sale, either a single emergency shipment or a scheduled bulk shipment of parts to replace dealers’ inventory.
- The OEM identifies the required parts for a PM, so the parts must be available before starting the PM. There is usually a relatively long lead time between when a PM is scheduled and when the technician will do the work.
- When performing remedial maintenance, someone working in a garage usually has a large but incomplete stock to draw from. Some parts will be ordered from a higher-level warehouse. Frequently, repair work will stop until the part is available and the equipment is not moveable; this can tie up a repair bay for an extended period and impact other commitments the repair facility made to other customers.
- When technicians go to a non-operational equipment location, they try to remotely identify all the necessary parts. Sometimes, all the parts are unavailable in a local stocking location, like a tech’s truck or the service office’s stockroom. The tech must decide whether to go to the site immediately or wait until all the parts are available. This affects the service level agreement compliance rate, first-time fix rate, and customer satisfaction.
Grow Spare Parts Sales
Now we know what drives someone to purchase a replacement part from somebody—hopefully, your business. You can take the following actions to increase the revenue and profit derived from required part purchases.
– Understand the installed base
If you can’t analyze your installed base, you cannot make informed decisions about what to do next. You must accept only the customers who buy parts from you or your dealers.
- Identify all the products at each unique customer location. Verify the information and include the model, serial number, installed date, and user’s name. Account for all products shipped after a date you select as new enough, so all the products should still be operating. Add in any specific products that are older and still buying parts from you or your dealer. Entytle offers a software product to help solve this ongoing problem of tracking your installed base.
- Identify use patterns for individual serial-numbered products. Capture power-on hours, miles driven, or machining cycles per month (for example). Also, try to categorize the amount of work they do per period.
- Segment items into groups with approximately the same stress on the equipment. Then, evaluate parts usage with each segment and find any users who do not seem to be buying the “right” numbers of parts. They may use knock-offs or purchase parts on the secondary market, like eBay.
– How to Increase Spare Parts Orders
- Market the concept of genuine spare parts. Your website, marketing materials, service contracts and quotes, and shipping packages should indicate that you only use genuine spare parts.
- Implement an e-commerce portal like GenAlpha, where the person ordering parts performs the process digitally. According to a recent McKinsey report, 71% of B2B respondents offer some form of e-commerce, and online sales now account for 34% of revenue for a typical organization.
The portal should, among other things, show when and how the requested items are being shipped and when they will arrive. The purchaser should be offered kits, special tools, instructions if needed, and return information for items that will be repaired.
- In many cases, you will be selling parts to repair an expensive piece of capital equipment that is not operating. Ensure your inventory records are accurate; more than 95% accuracy is needed. You must achieve and maintain an accuracy level of 99+%.
- Your delivery time should match or improve on Amazon Prime’s delivery time!
- Train customer-facing employees to show their customers the steps you have taken to ensure they get spare parts when needed.
- Track and minimize the time it takes to fill a backorder. Reread the third bullet above, which starts with “In many cases…”
– How to Manage Price
- Follow the suggestions in the article mentioned in the opening paragraph.
- In rapidly changing inflation, reprice at least two times a year.
- Reprice at least once per year in times of slowly changing inflation. OEMs generally increase parts prices by 3% to 5% yearly to recoup inflated purchasing costs.
- Check competition for common parts pricing using a pricing tool like Markt-Pilot.
Following these steps will significantly grow spare parts sales and profit.
Related articles:
- The Four Aftermarket KPIs Every OEM Leader Should Track
- When Talking About Aftermarket, It’s Time to Show You the Money
About Middlesex Consulting
Sam Klaidman is the founder and principal adviser at Middlesex Consulting. He assists his B2B product manufacturing clients grow their aftermarket (service) revenue and profitability by applying methodologies and techniques associated with value creation and customer experience. He aims to help clients design and commercialize new services and any required business transformations. You can contact Sam here.