How can inflation and supply chain issues be good for your aftermarket business?
In a recent Chief Executive magazine article, “Your Inflation Is Not the Consumer Price Index,” Business Adviser Ram Charan said, “Inflation is here to stay.” He also listed ten reasons for continuous inflation. Here are the top three:
- Increasing defense spending (globally)
- American/EU/China industrial stimulus and infrastructure investments
- Energy and supply chain choke points controlled by anti-U.S. authoritarian governments
Not all verticals or businesses will experience the same challenges simultaneously, and some businesses will never experience these challenges. However, almost all companies will face inflation or supply chain disruption, so they should prepare for the worst.
Like any great adviser, Charan lists his top four actions for surviving and growing in this environment:
- Maintain open communications with all of your stakeholders
- Build supply chain resilience into your operations
- Manage debt and preserve cash
- Train and retain employees
However, his list of actions is missing one factor that industrial OEMs can initiate immediately: focus on the aftermarket.
Focus on the aftermarket to minimize inflation and supply chain issues
Most Industrial OEMs are systems integrators, not manufacturers. There is very little metal cutting, injection molding, electrical harness assembly, or printed circuit building and testing in a “manufacturing” plant. Vendors deliver complete assemblies to the plant, and the workers attach them to a chassis, connect all the electrical and hydraulic parts to the assemblies, and eventually test and package a complete product.
So, how can supply chain issues be beneficial when so much depends on vendor deliveries? And because we buy a large percentage of our cost of goods sold, how can inflation be helpful?
The answer is easy: we raise product selling prices and stretch delivery lead times to survive. Both outcomes work together to reduce the number of new products sold, but they do nothing to change customer demand. This situation means customers will keep their older products in use longer than planned.
When this happens, we sell more parts because the old parts fail, and we create and sell upgrades. These categories yield a higher margin (but lower price) than the complete product, with the associated overhead less than the capital asset sale.
In an XM article on jet engine repair turnaround, XM notes that in addition to maintenance, repair, and overhaul (MRO) demands, “airlines experiencing delays in new aircraft deliveries are not retiring old planes, which require complex maintenance and parts.” Additionally, the article notes that engine MRO demand will likely peak in 2026 and remain high through the decade, according to Jim Harris, co-leader of Bain’s global Aerospace and Defense practice.
Another article from WTVB on GE Aerospace noted that aircraft shortages compounded with more travel demand had forced airlines to continue flying older planes and increased maintenance expenses. The article notes that this will bolster sales for GE Aerospace, with “more than 70% of its commercial engine revenue [coming] from parts and services.”
How to Focus on Increasing Aftermarket Sales
Here are your actions to take advantage of this multi-year opportunity to minimize your inflation and supply chain issues:
- If you haven’t had an unbiased audit of all your aftermarket activities, you should have an assessment before beginning the rest of this process. Middlesex Consulting is outstanding in this area and affordable. We will help you minimize the inflation and supply chain issues of your service business.
- Ensure your direct and channel service and product sellers understand your new strategy.
- Ensure that each seller understands how to sell services; it is very different than selling new products. Also, train and certify them about the benefits and details of your services.
- Review all your prices. Most companies increase parts at least twice a year.
- Work with your product managers and engineers to identify and create new upgrade kits to create new customer value. Use value pricing to set your initial price and periodically review the selling price to ensure your price is still optimum.
- According to OroCommerce, 83% of B2B buyers prefer ordering or paying through digital commerce; if you still need to deploy an e-commerce application, start now.
- Start now if you do not have a robust circular process for remanufacturing defective parts. Your cost for the parts should drop, but they still deliver the same value as a new one, so fight the urge to reduce the selling price for remanufactured parts.
- Develop a detailed installation process to treat all your upgrades like quality products. This will make the buyer feel comfortable and reduce warranty costs.
- Collect and analyze as much data as possible when a part is used. Sometimes, you can identify a cause that can be designed out.
- If you do not provide predictive maintenance for your installed products, you should start a project that leads to your company offering predictive maintenance. This high-value add-on has a relatively low material cost relative to the value delivered.
- Always listen to the people who represent you in front of the customer. Customers know what they need and spend money with you. If you are still waiting to receive more feedback, pick up the phone and talk to your sellers and technicians. This step is critical, so don’t skip it!
- Think about following the mergers and acquisition road. For example, Aviation Week reported about Boeing: Chris Raymond, CEO and president of Boeing Global Services (BGS) said, “We’re always looking at things that would be good, valuable additions to the business.” “He also said, “As it stands, it is in defense MRO where Boeing is currently making its biggest aftermarket investment.” “Now may be a perfect time to acquire a service business that is a strong fit for your business at a bargain price.
Preparing for external undefined problems is not a job for the faint of heart. For your company to survive, you must be willing to do your homework and take risks.
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About Middlesex Consulting
Sam Klaidman is the founder and principal adviser at Middlesex Consulting. He helps his B2B product manufacturing clients grow their service revenue and profitability by applying the methodologies and techniques associated with Customer Value Creation and Customer Experience professions to assist his clients in designing and commercializing new services and the associated business transformations. Contact Sam here.
Image credit: Image by Dimitris Vetsikas from Pixabay