Services Are Taking Off in Aerospace and Defense

The big picture: C-suite leaders in traditional aerospace and defense (A&D) companies are launching and growing their aftermarket services and related capabilities. Net profit on warranties, spare parts, maintenance and other aftermarket services can range from 50% to 70% and justify the expansion.

Why it matters: Harnessing this opportunity requires a comprehensive effort along with new skills and capabilities.

Where to begin: A&D companies need to adopt a new culture and skills to successfully compete in the services world, which is very different from their legacy OEM business. Completely new challenges in labor skills, data management, customer management and technology must be mastered to be successful.

___  ____  ___

More C-suite leaders in traditional aerospace and defense (A&D) companies are launching and growing the services business. Those who have yet to create aftermarket services and related capabilities are being urged to do so by their boards of directors. And their investors. And their customers.

The origins of this mounting pressure are easy to understand. Profit margins on equipment sales typically reside in the single digits, while the net on warranties, spare parts, maintenance and other aftermarket services can range from 50% to 70%. Wall Street has taken a shine to the annuity-based revenue and stickier customer loyalty that service contracts and warranties generate. Plus, the federal government and other large customers want to divest of the equipment maintenance investments as they sharpen their focus on core competencies. The U.S. Department of Defense now requires its original-equipment-manufacturer (OEM) suppliers to have performance-based logistics capabilities (PBL), which includes parts planning, data analytics, technician enablement and warranty/contract administration, among other aftermarket activities.

Harnessing this lucrative opportunity requires a comprehensive effort. Services consist of highly specialized skills, and the capability has few, if any, synergies with the traditional OEM side of the business. Substantial challenges related to labor, data management, technology and mindsets also demand attention. Getting started requires an understanding of what’s driving this need, the obstacles that exist, and the services building blocks that need to be installed.

Building blocks

The development of more mature, more automated field services also helps A&D companies mitigate quality and performance issues associated with manual processes, particularly those related to parts assurance. The critical importance of service capabilities was driven home late last year when it was discovered that thousands of components used to build airplane engines were falsely certified by a U.K.-based supplier; the scandal triggered a flurry of pressing service and customer responses.

In addition to profitability and performance drivers, there is a foundational technology-related reason to invest in this capability: New systems and tools are driving major improvements to most major aftermarket services components, including:

• Field schedule and dispatch: Also referred to as work management, these processes and supporting technologies manage (and optimize) the cadence of routine maintenance and emergency responses. It’s common now for these tools to analyze the different demand profiles (e.g., high-urgency SLAs) and develop an optimized labor, parts and travel solution in real time for that client.
• Repair and spare parts: Inventory planning represents a major challenge. The financial risks associated with large, complex parts – imagine a drivetrain or an engine fan blade in a plane engine – are substantial. New systems and telematics tools limit the guesswork involved in investing the right mix and volume of spare parts.
• Knowledge management: These activities relate to data on specific equipment and parts – information that is increasingly transmitted via telematics. The as-maintained data on a part or a piece of customer-premises equipment (CPE) is extremely valuable. As-maintained data on an engine purchased 10 years ago contains every maintenance event and parts replacement that has occurred in the past decade. In addition to extending the engine’s lifecycle and optimizing its performance, as-maintained data helps track service and maintenance performance via metrics like response time and Fix It Right the First Time (FIRTFT). Better data equates to better maintenance decision-making. For example, remanufacturing an engine fan blade – a decision made based on accurate and complete as-maintained data – costs a fraction of replacing that $50,000 fixed asset.

Combined, these systems also help enable the digital technician. Emerging technologies also have growing applications in services. Additive manufacturing and 3D printing enable OEMs to fabricate more replacement parts without relying or waiting on suppliers. Natural language processing (NLP) tools digitally capture an aircraft-maintenance technician’s written or spoken notes and attach those assessments to equipment and parts. Blockchain applications hold promise for capturing and securely storing the “data genealogy” of expensive capitalized spare parts.

Data, talent and attitude challenges

For many years, however, aftermarket services operated in a largely manual and ad hoc manner for many OEMs. An A&D manufacturer that produced 1 million parts might create duplicates of 10% of those parts and send them to an aftermarket warehouse, where they would be stockpiled until a repair need arose. Yet little, if any, data analytics, AI tools or new decision support technologies were used to optimally plan those parts.

The emergence of advanced systems and processes (e.g., planning, forecasting and inventory optimization) reduces the need for aftermarket service guesstimates. That said, big challenges still require attention, including:

• Mindsets: Aftermarket services may be an afterthought in some industries. Product design and mechanical engineering are treated as strategic competencies, and thus tend to attract more recruiting, retention and development dollars. While this mindset is understandable – it’s more exciting to design the next iteration of the iPhone than to work on selling chargers and AppleCare – it needs to change. The aftermarket supply chain requires a unique collection of specialized skills; managing warranties is especially complicated. Without the right skills, service and aftermarket businesses will not operate as effectively or cost-efficiently enough to achieve impressive profit margins.
• Talent: Finding and nurturing complex equipment-maintenance skills is difficult amid a worsening technician shortage throughout the manufacturing and services sector. A&D companies are struggling to hire and retain welders, machinists, HVAC technicians, aircraft-maintenance specialists and most other types of skilled technicians. The challenge of attracting, developing and retaining top talent remains high on the list of risks manufacturing and distribution firms face in 2024, ranking in second position in Protiviti’s Executive Perspectives on Top Risks for 2024 and 2034. This concern is expected to persist, rising to the number one position in terms of long-term risks for 2034.
• Data access and ownership: Data-access challenges loom large, especially in aerospace where larger suppliers, OEMs and commercial customers are battling over who owns the data history associated with large pieces of equipment and their individual parts.

3PLs and P&Ls

Again, the development of a mature aftermarket and services business involves extensive work. While there are no shortcuts, the following actions can help expedite the effort and improve its efficacy:

• Create a P&L: Thriving aftermarket operations have their own P&Ls and management structures and are obsessed with optimizing around costs and asset efficiencies.
• Engage a 3PL: Third-party logistics (3PL) providers have developed best practices in managing and delivering service parts. These companies have created parts depots and smaller parts closets close to customers so that service and maintenance calls, supported by advanced scheduling systems and telematics tools, can be completed as quickly and cost-efficiently as possible.
• Benchmark beyond the industry: A leading heavy-equipment manufacturer took over all vehicle and equipment service and maintenance from one of its largest customers, a large mine operator. A large automotive and truck manufacturer purchased a network of dealerships and its higher-margin retail, parts and warranty businesses. These real-world case examples contain valuable lessons for A&D companies looking for ideas and insights when building an aftermarket business.

As OEMs evolve and elevate their services and aftermarket capabilities, they should consider giving leaders of those operations a seat at the table where next-generation products are planned and designed. That input can help increase profit margins on both sides of the house; it also ensures that the OEM’s services and aftermarket capabilities are aligned to their customers’ needs and will position them to win in the marketplace.