The Uptime Blog
The April 20, 2009 issue of BusinessWeek includes innovation survey data compiled by Boston Consulting Group. The survey data makes it clear that companies across the board are reducing innovation related to new products and services. The BW/BCG poll indicates that companies have become very conservative when it comes to innovation. (Does this surprise anyone?) However, the data also indicates that companies are increasing incremental innovations for existing products and services—this includes minor changes and cost reductions.
In fact the print version of the magazine says, “More companies also are emphasizing minor changes to existing products and cutting production costs than in the previous two years. The upside: Corporations are more satisfied than in the past with the financial return on their innovation investments, suggesting they’ve scaled back to funding prospects with a shorter-term payoff.”
The survey results reinforce a previous blog post on innovation, where we suggested that improvements to existing products and services are very attractive in recessionary markets. This type of incremental innovation doesn’t have to be explained to customers because they already understand the product or service, therefore promoting new features is reduced to simply answering the question of whether the new feature does a job better, faster and/or cheaper. In the aftermarket, OEMs, customers, distributors and field technicians all recognize the value of accelerating equipment repairs and streamlining parts orders.
This leads me to ask a simple question, “Which of your products and services can most benefit from incremental innovations that deliver higher revenues and/or lower costs?” For OEMs, each company may have a different list of possible projects, but improving aftermarket sales and service should show up somewhere for all of them.
Why invest resources now towards improving aftermarket processes? Two reasons:
- In good economic times or bad, the aftermarket is one of the most profitable parts of any OEM business model.
- In a recession, like today, companies aren’t buying new equipment; rather they are trying to get the most out of what they already own.
The common perception of the aftermarket involves high costs and serious competition. While the competition is extreme, the cost doesn’t have to be. (Some of these issues are addressed in a recent webinar by Enigma and Oracle.) For short-term payoff, it makes sense for OEMs to invest in an aftermarket parts and service application that will not only reduce the cost of their aftermarket operations, but also increase their aftermarket sales and improve their customer satisfaction.
Following up on an earlier blog post titled “OEMs and aftermarket parts—a bigger piece or a bigger pie,” I wanted to mention a blog post by Carlisle & Company titled “Recession Busters and Low Hanging Fruit.” The article points out that there are some pretty straightforward steps that OEMs can take to increase market share for aftermarket parts and service.
According to Carlisle & Company, “…take it as a fact: customers go to your websites to learn about service and parts. Next, regardless what segment you are in, what’s important to customers of service and parts? We’ve really nailed this one over the past several years: (1) trust, (2) value, (3) cost, and (4) convenience. That’s pretty much it. Next, what’s important to the OEMs? (5) High service retention. Finally, what’s important to connecting these five things together? (6) Ease and (7) Innovation. It has to be easy for customers to get relevant information … or they will rely on other information sources and common opinions from their cousin Goober.”
If Carlisle is correct, and our experience shows that they are, then OEMs clearly have the ability to increase revenues by developing a highly effective aftermarket. Let’s look at each of the seven steps listed by Carlisle:
- Trust – Customer trust for the OEM, and for the dealer, requires consistency. Ensuring that service and parts are consistently diagnosed, repaired and/or delivered builds trust.
- Value – Value is measured by the customer. The right balance of price, performance and quality creates good value.
- Cost – Cost, as a competitive differentiator, is sometimes overestimated but if trust and value haven’t been established then price becomes a major factor.
- Convenience – Convenience may be associated with value, but it’s different. Customers will pay more for things of similar value based solely on convenience.
- High service retention – High service retention, or repeat business, is the direct result of OEMs and dealers providing trust, value, cost and convenience.
- Ease – Ease of access to relevant information is the key to tying together steps 1-5. OEMs know it but they don’t always know how to achieve it.
- Innovation – Innovation is required to achieve each step, and is currently lacking from the approach of many OEMs and software vendors. The key is to focus less on the IT department and more on the line-of-business and its customers, dealers and distributors.
To innovate, and make it easy to order parts and perform service, OEMs must leverage their intellectual property with a dynamic, online/offline electronic parts catalog (EPC). Since OEMs are the ones with the most accurate service and parts information, their EPC should always be up-to-date, which would pave the way for establishing trust. As long as cost is set “close enough,” dealers can leverage the convenience of a one-stop-shop of service and parts information to consistently deliver quality and performance, which will establish real value in the mind of the customer. This ultimately leads to high service retention, which benefits both the OEM and the dealer/distributor.
For me, the most important words in that Carlisle quote are “ease” and “innovation.” When Enigma talks to customers, dealers and distributors, without a doubt the number one request we hear is, “please make it easier to work with the OEM.” What they mean is that they want fast, accurate, integrated aftermarket systems that help them identify and order the correct parts and then quickly perform the right service. The seven steps towards aftermarket success are spelled out; now OEMs have to take them.
Next week Enigma’s CEO, Jonathan Yaron, will be participating in a speaking panel, “Regulatory Compliance in the Digital Age,” at MRO Americas. The panel will be discussing the future of regulatory compliance for aviation maintenance, with a particular focus on the role of industry standards and technology. Joining him will be Carol Giles, Manager of the Aircraft Maintenance Division of the Federal Aviation Administration. The panel will be moderated by Mark Yerger, Vice President of Engineering for Federal Express.
Jonathan’s presentation will address how information technology has evolved to affect all aspects of aircraft maintenance, from technical publications to digital sign-offs on job cards. His premise is that many regulations were written with the assumption that aircraft maintenance information would be printed, distributed and approved using paper. Now that airlines and MRO shops are embracing the latest technology solutions, all parties—the OEMs, airlines, MRO shops, IT vendors and the FAA—need to agree on how to assure compliance while reaping the benefits of the technology.
A friend of mine once said, “The great thing about standards is that there are so many of them.” While this is a great sound bite, in this case it is not true. With regard to managing, publishing and transmitting aircraft maintenance data there are only a few standards to worry about. So why do so many airlines and MRO shops still rely on paper? There are a few reasons:
- There are multiple ways of interpreting the standards. (To some people, a standard with multiple interpretations is the same as no standard at all.)
- Airlines and MROs are trying to implement IT strategies without considering how to share maintenance data between systems and between organizations/partners.
- Airlines and MROs are nervous about investing in modern systems because they are afraid they won’t be approved by the FAA. (Many airlines are currently relying on home-grown or highly customized maintenance systems that are more than 10-years old!)
Of course all of these reasons are really just excuses that overlook the real source of the problem—poor/ inconsistent data. Not surprisingly, it’s the data, stupid. The aircraft OEMs are inconsistent in their adherence to specific content standards, closely following some standards and sometimes…not so much. When airlines modify the maintenance content they do the same thing. (In both cases this is usually a matter of expediency, valuing a quick and dirty fix over long-term quality.)
Airlines and MROs find themselves caught in the middle of wanting to become fast and efficient while wrestling with bad data. (Putting crap into the new system results in crap coming out.) Unless all the airlines and MROs are willing to select identical maintenance systems there needs to be a different answer. (Of course, all airlines operate differently so they will never agree on standard functionality, never mind the desired advanced capabilities and integrations.) Enigma has ways to deal with bad data and help airlines automate their maintenance systems, however there are other pieces of the maintenance puzzle that are not so flexible. That is what Jonathan will be discussing next week.
For airlines to achieve maintenance Nirvana the problem of data quality must be addressed. Only then will airlines be able to eliminate the recurring delays caused while someone manually transcribes paper work records into the maintenance management system for tracking, approval and retention. We hope to see you at MRO Americas so that you can hear first hand what Jonathan has to say on this topic.
Following up on an earlier blog post where we talked about “Getting a Bigger Piece of the Aftermarket Pie,” we found more support for our viewpoint in a recent blog post by Carlisle & Company titled “The Future of OEM-Dealer Business Model for Wholesaling Mechanical Parts to Independent.”
According to the Carlisle & Company blog, “Based on the latest AIAA data, the market for mechanical and maintenance parts outside the dealer service shop is estimated to be over $60 billion (at wholesale prices), which is HUGE. OEMs and dealers maintain only a fractional share of this market – maybe 10%, but probably much less. This means if dealers could grow their already miniscule wholesale mechanical part sales by 25% (2.5 points of share) this would be worth an incremental $1.5 billion in part sales. The problem, however, is that many dealers are simply neither equipped nor engaged in a way to support the requirements of independent repair facility business owners…”
In other words, independent repair facilities (IRFs) are a vast reservoir of aftermarket parts revenues; why don’t OEMs and dealers have a bigger piece of that market?
Carlisle & Company has several noteworthy things to say but for the sake of brevity I’ll focus on the four that seem most relevant.
1) Auto parts stores (like O-Reilly, Autozone, Advance Auto, and NAPA) far outshine OEMs when it comes to providing parts to IRFs in a timely fashion. More than just parts however, they also provide help to shop technicians when they have problems repairing vehicles. It’s no wonder that IRFs frequently turn to an Autozone rather than the OEM or a dealer.
This is ironic, because OEMs are actually in the best position to provide accurate parts and service information. Dealers that have up-to-date catalog and technical data could become an integral player in the service parts value chain. The OEMs and dealers have an established distribution network that would enable dealers to dramatically improve IRF support, and by extension market share. All that is required is for the OEMs and their dealers to have the right mindset to capitalize on it.
2) Successful OEMs provide financial and non-financial support to help their dealers increase wholesale parts sales. Carlisle & Company wrote: “The fundamental dilemma for OEMs is how to meet the installer needs using their existing dealer channel. Although there are dealers who have been successful at wholesaling parts, an average dealer lacks the capabilities and mindset to support the independent repair shops and grow the business.”
We’d add that the non-financial support should include an effective electronic parts catalog (EPC) that would enable dealers to more easily provide service and parts information to the IRFs. It’s understandable that some dealers view IRFs as competition, especially since dealer profit margins are typically higher on service than on parts. However, the volume side of the equation can skew the revenue and profit numbers dramatically. One dealer I know has a wholesale parts business that covers a 70-mile radius. He supplies a lot of IRFs in that territory and the volume of parts that flow through those service bays dwarfs his own service parts business—as long as he gives them the level of support they expect.
3) It’s essential to make it easy for IRFs to locate and order parts. We agree, and as we said in the “Putting e-Business to Work” blog the best way to do that is to provide an accurate EPC that integrates seamlessly with e-business, and inventory management systems.
Giving parts managers the ability to quickly find the exact information they need—based on VIN, model and/or trim package—including relevant service bulletins and part supercessions is critically important. Giving them the ability to then order those parts with one mouse click can change the way they approach all of customer support.
4) IRFs care about more than price, they also care about the quality of service they receive from an OEM dealer. We believe that the more accurate the parts and service data (i.e., a catalog that has the most recent updates), the happier the IRF will be. Furthermore, a fully-integrated EPC feeds parts demand information into complex back-office systems that calculate appropriate stocking levels and locations, ensuring that the right parts are always in the right place when required by an IRF or dealer.
Smart OEMs are already making such changes to capture a bigger piece of the aftermarket pie. Now they need to expand the pie by helping dealers to see IRFs as their most valuable customers.
The April 6, 2009 issue of BusinessWeek includes an article by Dean Foust that lists the fifty best companies in the S&P 500—the BusinessWeek 50. The list was developed by measuring various financial criteria for each company as compared to their peers in the same industry sector. (The idea was to identify the best companies rather than the hottest industries.)
To Foust, what stands out is that these companies “created products or services dramatically better and cheaper than anything offered by rivals” and “changed the rules of engagement in their industries.” The author references a 2002 McKinsey survey and clearly advocates for innovation, concluding that “recessions are historically times when companies make the biggest competitive strides—or fall behind.” The challenge however, is to know which innovations a company should fund. (This is an even greater challenge in recessionary times, when ROI is watched most closely.)
It is important not to confuse the words invention and innovation—invention implies something never seen before, whereas innovation implies something improved. In difficult markets, innovation trumps invention because the improved product/service doesn’t have to be explained to customers—they already recognize it and must only evaluate whether it does the job better, faster and/or cheaper. Therefore, the innovations that deserve to be funded are those that are quickly understood and embraced by customers.
In the aftermarket industry, the owners, distributors and mechanics of complex machinery already understand the value of maintenance manuals, service bulletins and parts catalogs. What’s new and innovative is that they now have the ability to instantly find all the information they need, thanks to integrated electronic parts catalogs. Aftermarket service and support—whether for aviation, automotive, military, agriculture, or oil and gas—has now evolved beyond reliance on paper-based service information (although the ability to print relevant content remains important in certain situations).
Historically, it took a lot of time and energy to gather, distribute and update parts and service data to the field. Now, modern technology provides the tools necessary to automate this task, so that tech pubs, service and support become faster and more accurate—allowing up-to-date service information to be delivered via the Web, wireless and/or DVD.
Historically, customers, technicians and parts managers had to search multiple locations and databases, perhaps placing several phone calls and faxes, to get the information and parts needed to fix equipment. Now, they can quickly find the information and instantly order the required tools and parts to complete the job—improving the speed and accuracy of service and support as well.
To deliver such information is not a new invention; OEMs have always provided aftermarket information. Rather, this is a matter of innovation. Providing integrated electronic parts catalogs and service information has a two-fold benefit—lower cost and greater speed for the OEM and better customer support for parts and service; now that’s innovation that is quickly understood and easily embraced.