In times of great change, industries are left wondering what the new normal will be in a post-COVID-19 world. In the manufacturing space, an early survey from the NAM (National Assn. of Manufacturers) suggested manufacturing firms were starting to feel the effects of the COVID-19 pandemic in March. Respondents cited supply chain disruptions and the need to find alternative suppliers as early issues, and many anticipated future disruptions due to reduced customer demand and the new work-from-home model.
A lot has changed since March, and, while the pandemic isn’t over yet, many are starting to envision what the world will look like when it is over. A new report from Deloitte suggests one key change in the wake of the COVID-19 pandemic will be manufacturers’ increased focus on aftermarket services. Some of the changes manufacturers have seen in the past few months, according to Deloitte’s research, include changes in customer demands, increasing market maturity, cyclical fluctuations in new equipment sales, and pressure on pricing. As a result, many manufacturers are looking for ways to offer value-added, revenue-driving services—services like preventative maintenance, for instance.
Deloitte’s research suggests demand for new industrial equipment is declining. This makes sense, considering many businesses are focusing on reducing capital spending in a time of economic uncertainty. Manufacturers are therefore looking for alternative ways to secure consistent revenue sources that can help stabilize profits, not just during this time of pandemic-caused upheaval but also in the post-COVID-19 world. Because aftermarket services can offer significantly higher operating margins compared to new equipment sales, a shift toward services now could set manufacturers up for success in the long run.
To be fair, services are already a big part of many manufacturers’ game plans. Deloitte’s data suggests some manufacturers generate up to 50% of their profits from services and the recurring revenue streams they drive. Servitization is a trend being enabled by the IoT (Internet of Things) in sectors like manufacturing, and the resulting “outcome-based economy” will eventually become the new status quo in manufacturing and beyond. Despite the fact that servitization was already a trend in manufacturing well before the pandemic began, it appears that COVID-19 could push the industry toward this type of business model sooner.
Some benefits of servitization in manufacturing, beyond recurring revenue streams and optimizing margins on spare part sales, include the ability to offer customers continuous, remote support of equipment and improved customer relations. Offering continuous, remote support of equipment opens doors to preventative maintenance, which can extend the life of equipment and improve the customer experience over the lifetime of the equipment. Through value-added services, improved customer relations also comes from forming long-term relationships with customers and building brand loyalty by staying connected with customers beyond the point of sale.
The link between COVID-19 and servitization trends may take a while to play out, but it’s likely that businesses in industries like manufacturing will look for reliable ways to boost their bottomlines that do not rely as exclusively on equipment or product sales. By shifting business models toward providing more services, businesses can explore offering continuous value to customers while also securing recurring revenue, which is so critical in times of economic turmoil.
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