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Building a profitable aftermarket business in GCC market

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OEM's and their dealers in GCC countries are loosing $170-$230 million for every $1 Billion in this region. By implementing comprehensive aftermarket strategy, OEMs and their dealers can from at least 10% of revenue improvement. In this paper, Browne & Mohan consultants present the challenges OEMs and their dealers are facing in GCC countries and suggest an approach to gain from aftermarket revenues and improved customer satisfaction

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Building a profitable aftermarket business in GCC market

  1. 1. Page 1 of 6 Building a profitable aftermarket business in GCC market Dr T R Madan Mohan*, Rudresh S Basavarajappa** and R.M. Sanjay*** *Dr TR Madan Mohan is managing partner, Browne & Mohan, **Rudresh Basavarajappa is the CEO and Chairman of Quest Informatics Pvt Ltd and **R.M. Sanjay is the Director (Sales & Marketing), Browne & Mohan. Authors acknowledge valuable data collection and categorization support of Bangaru Vignesh, Junior Consultant, Browne & Mohan.
  2. 2. Page 2 of 6 Introduction The Gulf Cooperation Council (GCC) consisting of six Arab nations (Saudi Arabia, Bahrain, Oman, Qatar, UAE and Kuwait) is one of the fastest growing markets in the world. According to IMF, the combined GDP of the GCC countries is expected to reach around $1.8 trillion by 2015. GCC citizens are amongst the richest in the world. GCC has emerged as the 5th largest exporter after China, US, Germany and Japan. GCC is a major market for many OEM’s. For Rolls-Royce Motors, Middle East was the strongest market after North America in 2014. UAE was the 3rd largest market after US and China, while Saudi Arabia was 5th largest. Bahrain and Kuwait had more than 40% YoY growth. Middle East is the largest market for Boeing business jets (BBJ). For major partners of Boeing, including Honeywell, middle east is the market for aftersales support and revenue growth. Honeywell’s APU Maintenance Plan (AMP), an aftermarket warranty program, has high proportion from Middle East. For Component suppliers that supply cockpit systems, cabin equipment and engines, Middle East is a crucial market, as major carriers from these regions have invested substantial capacities. With Dubai turning out to be humanitarian base and regional beachhead for peace operations, OEM’s are recognizing the growth potential and reach of the market. Rising income levels, greater government spending and major events like World Cup and Vision 2020 driving large scale infrastructure development, both private and commercial vehicle manufacturers are looking upto Middle East to sustain robust growth. With large incumbent base, aftermarket is becoming an important source of revenue for many OEMs operating in the region. Aftermarket involves any product service or support provided over complete life cycle of end customer vehicle, after original purchase has been made (Bundschuh & Dezvane 2003). After-sales revenues can come from repair & maintenance of parts and service or replacement of functional parts that wear and worn out over natural usage of vehicle. The aftermarket opportunity for parts and service is humungous. Saudi Arabia with over $3 Billion aftermarket revenue is the single largest region in the Gulf region and 5th largest in the world. MNC have recognizing the potential are making substantial investment into the region. Bosch has added over 200 service workshops and service centers in the region. Bosch has been witnessing over 15% growth YoY from this region alone. Wipers, control units and diagnostics witnessed over 25% of growth YoY. Figure 1: GCC Aftermarket economics economicsleakage and opportunity in GCC region
  3. 3. Page 3 of 6 Aftermarket challenges in Middle East OEM’s across broad range of industries are facing structural and process challenges to carve out a highly defensible after market. Historically, considering the higher purchasing parity of GCC countries, many OEM’s have invested their resources and energies into sale of new vehicles into GCC markets. Only, recently, OEM’s are waking up to aftermarket opportunities. Till recently, many OEM’s bundled GCC with EMEA and lacked specific localized strategies to improve aftermarket revenues. OEM’s suffer from limited remote equipment connectivity leading to incomplete and inaccurate installed base management. Unscheduled downtimes, increased service delivery, suboptimal data analysis is leading to lower efficiencies and effectiveness. Our analysis of Middle East aftermarket indicates that OEMs either do not know or do not care enough about the effectiveness of aftermarket. Many OEMs are merely reacting to competition and do not have a comprehensive aftermarket strategy for aftermarket in Middle East. Our analysis of customer complaints across industries from GCC indicates following challenges confronting aftermarket operations. Product related Counterfeit parts and accessories is a major challenge that affects global OEMs. United State Federal Trade Commission estimated of the $12 Billion international trade, middle east region annually trades about $1Billion spurious parts. Many of the counterfeits are manufactured, packaged or represented in such a way to mislead the consumers. Many of these parts do not meet the OEM standards of quality, engineering and quality control. Oil filters, air filters, wipers are the most common counterfeits in the region. Inadequate testing for GCC ambient environment and inappropriate design consideration also affected the product quality. Customers complaints related non-functioning of SRS airbags not functioning in accidents, corrosion and EMI interference in washing machines, filters that can’t withstand sandstorms indicate poor design considerations. Many OEMs do not enforce remanufacturing and recycling policies in middle east, hence cannibalizations and brand value dilution does occur. Fragmented systems and process Existing aftermarket processes are hampered by fragmented process and incomplete IT systems. Right from service and parts planning, contract management, service execution and reporting the information flow is fragmented across various departments. OEM’s suffer from limited visibility of operations. Incomplete information on customer, repair history, bay and equipment use plagues many operations. Customer data is outdated or incomplete, thus rendering costly CRM deployed by the dealers ineffective. Equipment and field repair diagnosis are ineffective because it does not happen in real time and/or with complete information. Lack of comprehensive process affect problem resolution and first call fix rate. Inadequate delays may happen in field because of wrong technician attending machine or interventions may be repeated for same customer for same machine because of wrong or misuse of part. Another area OEMs have a challenge is in customer base management. OEMs find pricing of parts, defining right service packages for preventive & corrective maintenance, defining warranty contracts, warranty claim approval and customer management also challenging. Standard operating procedures for part administration are incomplete or are not implemented with earnest. OEM’s and their dealers experienced challenges with strategic parts planning, inventory management, parts pricing, discounts, parts claim management. Parts pricing was not taken as a continuous process. Inventory visibility suffered, quality of spare parts forecasting was poor and balancing inventory across locations was a challenge. In some OEM’s Siloed nature of the organization at their regional HQ and country offices affected variability of parts lead time. Some OEM’s had comprehensive ERP for their end of operations, but managed with batch-wise legacy system at dealer’s end. Inadequate IT integration Incomplete customer information, undirected/unmanaged campaigns, proper discount management not only lead to revenue leakages, but affect overall customer satisfaction and intent to repurchase.
  4. 4. Page 4 of 6 Dealer Management Finally, no aftermarket strategy can work without adequate planning and involvement of partners. OEMs need to build processes and systems that help their vendor to plan and stock required parts or dispatch in agreed lead time (Dennis & Kambil 2003). Dealer SOP’s involving complete sales, service and support process at dealer, pricing, dealer SOPs, dealer discounts, etc in some OEM’s is at best rudimentary. For many OEM’s dealer adoption of SOP’s is poor. Huge variations happen in service operating standards and procedures. Service planning, free and paid service plan, service requests and service campaigns management are areas of concerns. Customer administration SOP’s involving customer relationship process, pre-purchase and post purchase, campaigns, community programs, customer discounts, etc were managed in a more reactive manner. Huge variations exist across dealers and regional markets on customer relation process. Service Personnel Another major challenge OEMs face is high turnover of technicians and mechanics at dealer and field service operations. Poorly trained service engineer can cause unwanted damages. Even though technicians are available upgrading periodically on products, improvement on servicing, tools and skill level improvement is biggest constraint. The resultant effect is avoidable customer complaints / dissatisfaction and its effect on branding and intent to purchase, but also the budgeted costs of warranty and replacement parts. Lack of comprehensive process affect the issue resolution and first call fix rate. Inadequate delays may happen in field because of wrong technician attending the machine, or interventions may be repeated for the same client for the same machine because of wrong or misuse of part. How GCC companies prepare to gain $$$ from aftermarket An effective aftermarket service strategy requires OEMs to define on-site / off-site repair & replacement procedures, approvals and service completion. For a successful aftermarket function, GCC companies must focus on integration of data, technology and resources. We propose a clear three-step methodology for analyzing each aftermarket element shown in Figure 1, in order to shape a robust aftermarket value creation strategy. Figure 2: Aftermarket model for GCC region
  5. 5. Page 5 of 6 The first step involves conducting a comprehensive “as-is aftermarket process audit”. This helps to identify current processes, gaps, areas to improve productivity across dealers / network and regions. Aftermarket process audit can be focused on distinct customer “touch points” and internal stake holders along aftermarket value chain. There are important “moments of truth” interactions between OEM (their dealer) and customer (Lam et al., 2004). Evaluate performance of aftermarket services at dealer / partners and OEMs. From an OEM side evaluate service, parts revenues, dealer, model-wise, warranty cost analysis, service analysis, revenue leakages, etc. On dealer side, capture data on back end Verses front end sales, percentage of revenue growth in parts sales, gross margin growth in services, percentage of customers renewing service contracts or extended warranty, warranty and service analysis, order and execution SOP adoption, dealer sales process, Customer Satisfaction, etc. In second stage, create and configure appropriate solutions based on Supply Chain Council, SCOR framework (SCC, 2013). Solution development should focus on Scope (Enterprise, functional or activity level) – Means (Task, Technology, etc.) – Ends (cost, perception, offerings). Focus only on few key aspects of changes first, allow iteration, localized experimentation and increase scope with smaller wins at different intervals so that overall motivation for exists all through life-cycle. In third stage, define a roll out plan with key change owners at different levels and milestones to reach. Change owners at dealer are critical lynchpins in change management and buy-in from dealer management is a must. Create a continuous review mechanism and follow up rigorously. Design appropriate incentives for driving changes at all levels. Finally make assessment and change management a continuous process at OEM and dealer level. Conclusion: Aftermarket services and support do influence customer relationships to a significant level. Customer care, parts management and service can enhance effectiveness of aftermarket operations. OEMs and their dealers in GCC must invest in processes that provide an overview of services offered by them to their customers. GCC based OEMs must leverage emerging technologies including Internet of things (IOT) and specialist resources to improve service revenue by 15-20%, reduce the service cost by 10-15% and improve asset uptime by 10-12%. OEMs must begin an active assessment of where their aftermarket future lies and that discussion must at earliest. There is no time to waste or prolong their decision on focus towards aftermarket. Hence, an effective aftermarket strategy with the right operational model is a strategic arsenal for every future-oriented OEM to drive superior customer value and higher revenues.
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