ThinkTank Reflections: Is the cannibalisation of spare parts a threat to service revenue or is it an opportunity to rethink the service supply chain?
ThinkTank Reflections: Is the cannibalisation of spare parts a threat to service revenue or is it an opportunity to rethink the service supply chain?
Spare parts revenue is undeniably a significant element within the service P&L and has been for a long time.
However, despite being a mainstay of service division profitability, spare parts revenue is at risk on multiple fronts. The move to servitization requires the cannibalisation of such revenue.
At the same time, if the pandemic taught one thing, we can no longer rely on centralised global distribution centres that allow for greater profitability in the service supply chain to be robust enough or adaptable enough to overcome such disruptive change. The importance of spare parts to service revenue leaves some big questions that need addressing.
This was another of the important discussions that was discussed in the November 2022 iteration of the FNS Think Tank sessions.
“Typically, our revenue from spare parts is about 3% of our business each year. However, as many of the jobs we do with warranty are included in the sale of a machine, when we look at chargeable service minus the warranty, spare parts are very important for us,” explained Thomas Bean, Service Manager, AB Graphic International.
“We are now looking at selling a lot more service and maintenance contracts and we have been incentivised to do that when the service maintenance contract comes in by improving our upselling process regarding spare parts.
“The problem we’ve had was at the same time we were asked to focus on selling maintenance contracts. The global supply issue hit us, so it was very unfortunate timing, but it is stablising now and is a continued area of focus,” he added.
“The common picture is that service revenue tends to be between twenty and fifty per cent of the total revenue,” offered Jan van Veen, Managing Director, moreMomentum
“Within that often, spare parts are around seventy to eighty per cent of that total service revenue is a typical scenario. There are, of course, companies that have a much higher volume of service compared to spare parts, but for most service companies have a very heavy spare parts-dependent service revenue.
“Some service leads that as a struggle, being addicted to spare parts, make it difficult to develop other service offerings because you have an over-reliance on the spare parts business.”
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"Maybe the bigger threat to spare parts revenue lies in sustainability policies - if it becomes standardised regulation that you’re required to offer your customers a refurbished option then what is that going to do to your spare parts revenue?" - Jan van Veen, Managing Director, moreMomentum
“I’ve seen that pushback a lot around the conversation of advanced services and servitization. Companies saying ‘no, we can’t sacrifice that spare parts revenue,” agreed Kris Oldland, Editor-in-Chief, Field Service News.
“I think that the cannibalization discussion is also, in many ways, something of an internally politicised discussion,” replied Van Veen.
“I say this because if you have good service contracts and spare parts are included, you’re still going to make those spare parts, and you will still provide them to your customers. It is just the revenue stream, and the pricing model is different. It could be that you’re a bit more efficient with spare parts, which drops the spare parts revenue a bit, but that should be balanced by increased service revenue or reductions in costs, perhaps?” he reflected.
“Maybe the bigger threat to spare parts revenue lies in sustainability policies – if it becomes standardised regulation that you’re required to offer your customers a refurbished option then what is that going to do to your spare parts revenue?” Van Veen suggested.
“I think any company that hasn’t learned about availability from the last two years won’t make it through the next time we have disruption like this,” commented Holland Winfield, UKI Service Lead, Lenovo.
“We’ve extended all the goodwill we have with our customers as far as we couldn’t plan for a pandemic. Given the impact on global supply chains, we didn’t know how long it would take parts to get in.
“Yet we saw over and then speaking with friends in similar industries they saw the same, the goodwill slowly lapsed over the course of the pandemic.
“So if it took us two weeks to fix the computer, the customer was just happy to have the computer fixed for the first year. Then for the next six months, they were annoyed at the delays, and by the end, in the last six months, there’s no excuse. We’ve had two years to fix these issues, so we should be good to go in their eyes,” Winfield added.
"For spare parts accessibility, we’ve made investments in field stocking locations, or forward stocking locations, and sustainability so the parts are easier to replace from the customer perspective." - Holland Winfield, UKI Service Lead, Lenovo.
“With that in mind, we have spent quite a bit of time and an insane amount of money preparing for the next disruptive impact because there is going to be a next one, it’s just inevitable at this point, and we’re not going to have any goodwill to build on.
“So for spare parts accessibility, we’ve made investments in field stocking locations, or forward stocking locations, and sustainability so the parts are easier to replace from the customer perspective – these have all been huge initiatives over the last year and a half, to remove the need for field service by making the customer our field service operator if needed, while still not forcing that role without forcing it upon them,” he explained.
“We can still do the field service role, but they want to they can do it, because we know that if there’s another outbreak, they’re going to want to be able to do it, even if they aren’t going to want to do it now,” Winfield concluded.
“Essentially, again, we are coming back to that convenience piece,” Oldland surmised.
“Right now, my convenience is for you to send somebody as I don’t have time to fix an asset. I want you to send a qualified technician to whichever location I’m at and make the broken thing work again. That today is the convenience I want, so it is where I see the value. I don’t care where the monetary value is; I want convenience and speed of service.
“However, in a lockdown environment, what is convenient for me, so where I perceive value, had suddenly shifted. The value is still centred on convenience, but what is convenient has changed. Now what is convenient for me is for you to tell me how to make the broken thing work again. Give me the parts I need and stay well away from my carefully constructed bio-secure area; get me the parts, show me what to do and take the broken parts away. That’s my convenience, and that’s where I see value,” he continued.
“So moving forward, I feel we need to be aware of how quickly that concept of value can change, and be prepared both in terms of supply chain and service delivery to adapt when and where it’s needed,” Oldland stated.
All members of the Field Service Think Tanks are speaking from their own personal opinions which are not necessarily reflective of the organisations they work for.
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