Why aftermarket and

service are vital to

OEMs—and how to excel
A comprehensive approach, supported by a strong
enabling organization, can help B2B industrial
manufacturers tap into the value of aftermarket
and service.

Simone Vesco

June 2024
Cover image © Monty Rakusen/Getty Images.
Contents

Introduction 3

Part 1: Service excellence 6

Innovation to market 8
Market to order 15
Order to delivery 20
Delivery to cash 31
Enabling factors 33

Part 2: Tech-driven trends and innovations 44

Offering a B2C-like customer experience 46
Exploring ‘servitization’ 47
Collecting, analyzing, and monetizing data 50
‘Softwarization’ of features 51
Sustainability as a key to unlock new value pools 52
Higher-than-expected maturity in ‘remotization’ 54
Localization paradigm 56
Online marketplaces 56
Building ecosystems around products 57
Considering disruptions to the service workforce 58

Conclusion 60

Why aftermarket and service are vital to OEMs—and how to excel 3

Introduction
Whether manufacturers serve consumers, other businesses,
or governments, the aftermarket and service matter. For
many OEMs, what began as a relatively unsophisticated side
business selling spare parts now contributes to a majority of
their margins: these can be up to four times as high as they
are for new units. This pattern is evident among top market
performers, as companies that have excelled in the aftermarket
and service have been strongly rewarded over the past
15 years, with double the TSR of companies that don’t focus on
service (Exhibit 1).

The importance of aftermarket and service has been more

differentiating and acute amid recent economic conditions, in
which uncertainty, high inflation, and high interest rates have
pushed many companies to postpone capital investments.
Generally, capital expenditures are higher when investing in
new production lines compared with aftermarket and service,
such as maintenance or upgrades to the existing installed
base. At the same time, the increasing prevalence of firmware-
driven updates across industries has further reduced the usual
need for up-front capital investment required for aftermarket
and service, while also limiting disruptions to activities such
as manufacturing. Consequently, companies facing budget
constraints may prioritize spending on aftermarket and service
purchases over investing in new units, thereby increasing the
importance of aftermarket and service in their overall revenue-
generation strategy.

Despite its commercial and strategic value, aftermarket and

service are often largely untapped. Service excellence—
defined as an ongoing commitment to providing customers
with outstanding and relevant support and services well
beyond the initial sale—can help.

Why aftermarket and service are vital to OEMs—and how to excel 5

Web <2024>
Exhibit 1 Aftermarket & Services WP>
<MCK238147
Exhibit <1> of <10>

Total shareholder returns are higher for B2B services companies that focus
on the aftermarket.

Cumulative TSR for companies, index (2008 = 100)

1,000
Economic downturn
Recovery
COVID-19
800

Companies with high

focus on service

600 ~7×: 2× higher TSR

400 Companies with low

focus on service

~3.5×
200

0
2008 2010 2012 2014 2016 2018 2020 2022

McKinsey & Company

In part 1 of this report, we offer a five-part framework for how

to divide the offerings for the aftermarket and service journey,
from idea to payment:

1. Innovation-to-market stage. This spans the development

process and ends with launching an offering into
the market.

2. Market-to-order stage. This covers the process

from business development to the completion of a
customer’s order.

3. Order-to-delivery stage. This spans procurement,

manufacturing, and product delivery.

6 Why aftermarket and service are vital to OEMs—and how to excel

 4. Delivery-to-cash stage. This completes the journey, with
credit management that smooths the flow of payments
from customers to manufacturers.

5. Enabling factors. These ensure the success of the

overall approach.

In each part of the framework, we delve into the factors that

OEMs should consider then discuss the emerging trends and
innovations in the field. For more on the methodology that
informed this framework, see sidebar, “About the research.”

At the same time, companies that lack a strategic vision for

their aftermarket and service businesses often struggle to earn
acceptable returns on the substantial up-front investments
required. To lay a successful path for ROI in aftermarket and
service, leading OEMs use their aftermarket offerings to
expand while forging deeper relationships with customers and
making their products work better—to achieve, for example,
higher throughput, less consumption, and so forth. In part 2, we
overview the trends executives are prioritizing in this effort or
might consider if they have not yet done so.

This white paper brings together the best of McKinsey’s

published thinking on OEMs’ aftermarket and service, with
a focus on B2B companies. Drawing on the latest and most
relevant news and trends and brought to life with real examples,
this report aims to be a catalyst for new, energizing ideas. It
is intended for a broad audience, from CXOs to those curious
about the sector and seeking an end-to-end view.

About the research

The perspectives in this report are drawn and service value chain. The research
from a structured assessment of critical involved interviews with practitioners
business dimensions to analyze company from across functions (such as quality,
performance along the entire aftermarket procurement, and sales).

Why aftermarket and service are vital to OEMs—and how to excel 7

Part 1

Service
excellence

8 Why aftermarket and service are vital to OEMs—and how to excel

Three decades ago, the typical aftermarket offering for
manufacturers was an afterthought—it was reactive and
transactional.1 The aftermarket was typically more of a simple
response to customer queries, needs, or events, such as selling
spare parts, conducting repairs, or providing training. While
B2C manufacturers, particularly in the automotive industry,
were early adopters of aftermarket and service strategies, B2B
manufacturers have more recently recognized the immense
potential and benefits of these offerings, especially in terms of
generating stable and recuring revenue streams.

It was a gradual shift, but today B2B manufacturers are

becoming true aftermarket partners with their customers—
for instance, signing contracts that guarantee operational
performance. Some manufacturers are even willing to share
risks with customers.2 McKinsey research has found that
companies with a strong emphasis on becoming aftermarket
providers and delivering exceptional service to their customers
have achieved twice the TSR compared with their counterparts
with a lower focus on service.

The frontier of aftermarket and service innovation features

robust use of modern technology such as advanced
sensors, big data, and AI to offer predictive maintenance
services, manufacturing consulting, and options for boosting
productivity. For example, measurement sensors of physical
parameters (such as vibrations or temperature) can be used
to create comprehensive databases on mechanical systems’
state of health, helping predict failure and minimize downtime
with predictive maintenance.

1
A version of this chapter introduction was published in the following article:
Simone Vesco, “Aftermarket sales and service are vital to manufacturers’
strategies,” McKinsey, March 2023.
2
For more on OEMs’ “right to win” in the aftermarket, see “Selling in the
aftermarket: How to win the sales street fight,” McKinsey, February 14, 2019.

Why aftermarket and service are vital to OEMs—and how to excel 9

 In rail, a major rolling stock OEM leveraged its digitally-
enabled aftermarket service platform to reduce unscheduled
maintenance while improving availability. As a result,
maintenance costs decreased by 15 percent, an improvement
in line with the McKinsey estimate of a potential 15 to
25 percent efficiency gain in the rail sector through predictive
maintenance. While this gain does not inherently have to
accrue to OEMs, they are well placed to keep customers in their
ecosystems by knowing the products best and offering OEM
certifications.

Technological developments have also made it possible to

offer product features as a service. Some car manufacturers,
for example, have developed aftermarket offerings in which
they will—through remote activation, for a fee—increase
vehicle performance, enable its self-driving capabilities, or sell
additional features or subscriptions.

A useful framework for aftermarket companies divides the

offering journey into five parts: innovation to market, market
to order, order to delivery, and delivery to cash, all of which are
supported by a set of commonsense enabling factors.

Part 1 of this report covers each of these stages in turn.

Innovation to market
During product development, an OEM should already have a
clear understanding of the role that aftermarket and service
will play for the product. This includes, crucially, deciding
whether such service would be a source of profitability at all
based on product particulars and current customers, plus
a range of factors including geographical spread, customer
expectations, required investment, and cost to service. Indeed,
aftermarket and service should not be viewed as a mandatory
strategy to be pursued regardless of circumstances but rather
as an additional lever to generate revenue.

For example, a manufacturer of highly durable coffeemakers

chose not to offer aftermarket and service because its
product’s value proposition centered on not requiring such

10 Why aftermarket and service are vital to OEMs—and how to excel

support or spare parts throughout the product’s extended
life span. Naturally, such durability is out of reach of many
industrial companies, such aircraft, machinery, or car OEMs,
for which aftermarket and service are an essential part of the
customer experience. However, the durable coffeemaker’s
experience is a reminder that a spectrum of approaches to
aftermarket and service offerings should be carefully taken
into consideration.

Once the decision to move forward with aftermarket and

service offerings is made, the innovation-to-market stage
begins. Determining the right approach to aftermarket and
service requires addressing a couple of critical factors:
matching the aftermarket strategy to the product and tailoring
services to customer needs.

Matching the aftermarket strategy to the product

Different products will require different aftermarket and
service strategies to ensure each strategy matches customers’
needs and OEMs’ ambitions. For complex products and
equipment such as jet engines, turbines, helicopters, and
tractors, maintenance contracts can be a significant—or
even the main—source of revenue. Properly structured, long-
term binding contracts can be mutually beneficial for both
customers and OEMs: customers benefit from OEMs’ expertise
in servicing their own products, which can lead to optimized
maintenance costs and pricing models that are directly tied
to the equipment’s utilization. OEMs are best placed to be a
credible long-term aftermarket provider; no one understands
these machines better than the original manufacturers. 3

Aeroengine manufacturers were pioneers in matching an

aftermarket strategy to their original equipment by offering
pay-for-use, subscription-like aftermarket care for their
engines. 4 Commercial aeroengines are regularly sold at

3
For more on how to build winning aftermarket strategies, see Harold Brink,
Senthil Muthiah, and Shane Rieniets, “The winning moves in project-based
services,” McKinsey, February 6, 2020.
4
Filippo Gozzi, Giulia Palombi, Giulietta Poltronieri, and Simone Vesco, “How
aerospace and defense players can win in aftermarket services,” McKinsey,
September 21, 2022.

Why aftermarket and service are vital to OEMs—and how to excel 11

 or below cost for new aircraft orders but with aftermarket
maintenance and service contracts based on effective flying
hours. This effectively turns capital expenditures into operating
expenditures for OEMs and delivers steady and predictable
revenues into the future.

Such contracts can be combined with other strategies to

defend competitive advantage—such as patented materials,
complex parts, or other features that make a machine best
serviceable by its original manufacturer and reduce the market
share available to other OEMs and service-only companies.
However, if product complexity is created solely for the
purpose of locking in customers and is not born of genuine
product-related requirements, this approach is not mutually
beneficial. In such cases, customers might opt for different
providers of new units to avoid being locked into a restrictive
service model.

It is important not to assume that the goal of an OEM should

always be to lock its customers into long-term service
contracts and relationships. For example, a small- to medium-
size airplane manufacturer, primarily catering to tourists in
remote areas of the world, has decided to use commercially
available parts for all components requiring regular
replacement. The use of widely available parts helps ensure
the manufacturer’s aircraft can be easily and quickly repaired
in remote areas, from Southeast Asia to the Caribbean, where
the manufacturer could not provide adequate service on
proprietary components. Of course, such an approach strongly
limits aftermarket and service revenue, but in this case, it
delivers a desirable customer experience. The alternative to
this approach is waiting for a replacement part on location or
for transportation of the aircraft to the closest OEM service
station, meaning the customer might have to wait days or
even weeks for an aircraft to re-enter service. This delay and
complexity could affect customers’ willingness to buy new
aircraft from the same OEM in the future.

Geographic footprint is an important strategic factor for OEMs

considering aftermarket and service offerings. The business

12 Why aftermarket and service are vital to OEMs—and how to excel

Geographic footprint
is an important
strategic factor for
OEMs considering
aftermarket and
service offerings.

Why aftermarket and service are vital to OEMs—and how to excel 13

 case for opening warehouses and service stations all over
the world may not be profitable unless there is a sufficient
customer base present in the targeted geographies. The
above OEM optimizes its geographic footprint by recognizing
it cannot provide all necessary servicing in remote areas,
instead building planes with commercially available parts for all
maintenance-prone components. This ensures that its small
planes could easily be repaired in remote areas, where demand
for such planes creates strategically important markets.

Tailoring services to customer needs

Having a compelling aftermarket and service offering is a
basic requirement of the overall strategy, with customers
now requiring solutions tailored to their specific needs. As an
example, 56 percent of aerospace and defense executives who
responded to a McKinsey survey said their customers expect
need-based solutions, and 66 percent said it was a critical
element of a service offering (Exhibit 2). 5

Once company leaders articulate their aftermarket strategies,

they can refine their aftermarket offerings to optimize the
balance of profitability, market share, and market penetration.
One useful approach is to segment parts and products
according to their functional and technical characteristics—
for instance, whether a part is essentially a commodity, widely
available on the market from various suppliers (such as the
mirrors for an automotive OEM), or hard to find and mission-
critical for customers (such as complex engine components for
an automotive OEM).

The strategic approach for each is, obviously, quite different.

Focusing on commoditized parts will likely bring lower margins
per unit due to higher competition, so OEMs can optimize
these offerings by emphasizing high volume and operational
efficiency to remain profitable while keeping prices competitive.

5
For more on how to win in aftermarket services, see “How aerospace and defense
players can win,” September 21, 2022.

14 Why aftermarket and service are vital to OEMs—and how to excel

Web <2024>
Exhibit 2 Aftermarket & Services WP>
<MCK238147
Exhibit <2> of <10>

Aerospace and defense companies are beginning to provide need-based

solutions because many customers expect these offerings.

Key elements of a compelling service offering,1 % of respondents (n = 50)

Required to meet Emerging as important element

customer expectations of key offering
Advanced services2 44 82

Need-based solutions,
customized for selected 56 66
customer requirements

Advanced contract
schemes3 52 54

Network of local
partners to sell and 32 28
deliver services

1
Question: “Which of the following are key elements of a compelling service offering?” Respondents were asked to think about what their customers consider to
be a compelling offering, as well as what elements are merging as important components of future offerings.
2
For example, health and usage, monitoring systems for predictive maintenance, or virtual trainings and simulations.
3
For example, availability- or performance-based.
Source: “How aerospace and defense players can win in aftermarket services,” McKinsey, September 21, 2022; McKinsey A&D Service Survey 2022

McKinsey & Company

Another way to segment parts is to use supply and demand

data of parts across products and customers, such as how
often customers order a part or product, to determine which
products warranted inclusion in the aftermarket and service
strategy. These segmentation analyses can be complex and
technical, but our experience suggests that the process tends
to produce a manageable number of segments that help OEMs
identify the right combination of offerings and terms. OEMs
often already have the data on hand or can easily establish
data collection to better understand trends.

Finally, additional services can help convert parts of an OEM’s

offering into an “as a service” (aaS) model—without having
to completely revolutionize the product. Customers of aaS
offerings do not need to ration products and services, and
OEMs enjoy a more predictable stream of revenue and can
plan capacity accordingly. Some industries, especially the ones
dealing with low volumes and high-complexity products, still

Why aftermarket and service are vital to OEMs—and how to excel 15

 lag behind other industries in this area for structural reasons—
including long product life cycles and cybersecurity-related
constraints—and perceived risks. But aaS offerings can help
companies create significant value and achieve incremental
top-line growth of 10 to 25 percent while increasing customer
loyalty and satisfaction.6

As customers and their needs vary, OEMs must look beyond

their own equipment and understand the customer’s end-to-
end experience. These additional customer insights can inform
more comprehensive value-added services.7

One automotive OEM expanded its maintenance and repair

services by offering tailored insurance policies. The company
calculated insurance premiums using existing driving analytics
data, eliminating the need to install additional hardware to
track key inputs. Although insurance services are traditionally
outside the scope of OEMs, the innovative approach unlocked
significant margins.

There are additional innovative examples across manufacturing

and industrials. For example, an elevator OEM leveraged
its maintenance expertise to service competitors’ products.
Despite strict sector regulations that typically preclude such
expanded services, the company established a dedicated
reverse engineering division to gain the necessary product
knowledge and roll it out to a large field workforce. This
strategy enabled the company to realize economics of
scale from servicing a higher number of systems, expand
its customer base to customers not previously using their
products, and ultimately expand cross-selling opportunities
across OEM products and aftermarket services. Finally,
this virtuous circle also allowed the company to improve its
predictive-maintenance solution by collecting more data to
train predictive models, enhancing their accuracy and thereby
the overall customer experience.

6
“How aerospace and defense players can win,” September 21, 2022.
7
For more on leveraging digital tools and data, see “Five digital and analytics
battlegrounds for B2B aftermarket growth,” McKinsey, February 17, 2022.

16 Why aftermarket and service are vital to OEMs—and how to excel

An industrial battery-management company faced a similar
situation. Its customers were facing high power-management
costs stemming from large battery inventories and the
numerous technicians needed for uninterrupted operations.
The company implemented an Internet of Things platform
enabling two-way communication between the cloud and local
sites, providing identity management and insight into all the
assets. This system allowed the company to understand the
real operating conditions of its installed base and—through
automated analyses—offer predictive diagnosis tailored to
each asset and client, optimizing the battery lifetime and thus
reducing power management costs.

Finally, an industrial-equipment OEM that wanted to enhance

revenue from new warranty solutions introduced extended
warranties on specific parts. Customers could subscribe to
have covered parts replaced or repaired quickly, provided they
purchased original spare parts from the OEM. This allowed
the company to leverage its knowledge of the customer to
forecast part repair and inventory needs while helping secure
revenue and share of customer wallet. A crucial element of
this approach was identifying the right parts to include in the
subscription based on rate of failure and complexity of repair,
selecting components that were least prone to failure but also
the most complex and expensive to replace. Customers highly
value this service because it protects them from major losses;
meanwhile, it creates a strong lock-in on original parts at a low
cost for OEMs.

Market to order
The market-to-order phase spans the pre-offer period, from
prospecting, business development, and scouting to when
a client completes an order. OEMs have much to consider in
this period, including estimating the commercial potential of
aftermarket and service, setting up and using commercial
nerve centers, and pricing aftermarket offerings.

Why aftermarket and service are vital to OEMs—and how to excel 17

 Assessing the commercial potential of aftermarket
and service
Aftermarket spending is starting to account for a significant
share of revenues and margins for some manufacturing
companies, particularly manufacturers of large and complex
products, such as aircraft engines, and construction
equipment providers. These companies are using mature
contract schemes to monetize their services. According to the
McKinsey Service Benchmark, 8 65 percent of revenue in the
construction equipment industry comes from aftermarket and
service, just ahead of aircraft engines and mining equipment
(both 55 percent) and HVAC (50 percent). As more industrial
companies recognize the potential of aftermarket and service,
their leaders are carefully assessing the commercial potential.

In our experience, successful aftermarket and service offerings

can increase service sales by up to 40 percent in some areas in
just a few years. But even early movers in the industrial space
have struggled to capture the full potential of their aftermarket
and service businesses.9

These difficulties can be partially attributed to the challenge

of sizing the market and identifying relevant commercial
opportunities for aftermarket and service. Indeed, only
half the companies in our sample say they regularly do so.
The challenge is not necessarily starting the process; it’s
committing to the high level of rigor and discipline required and
iterating it over time. Aftermarket and service sit in the shadow
of new-unit sales, which tend to be higher profile and the focus
of both executive and sales teams. Overcoming this hurdle
requires changing mindsets and even cultures so aftermarket
and service—and specifically, sizing that business—can
become a high priority.

8
A proprietary database that includes average and top-quintile values of share of
aftermarket and service revenue for various industrial sectors, using more than
2,000 datapoints.
9
For more on understanding the core value in the aftermarket, see “Industrial
aftermarket services: Growing the core,” McKinsey, July 27, 2017.

18 Why aftermarket and service are vital to OEMs—and how to excel

In many companies, critical data and knowledge that could
propel the success of aftermarket and service offerings or
enhance existing ones are dispersed across various divisions
and functions, making it challenging for companies to
locate and tap into valuable expertise. Accurately assessing
aftermarket and service, then, would likely require support
from analytics and data management.

Company leaders could consider three steps when sizing the

market for aftermarket and service:

1. Create a reliable data set for the installed base (units

currently in use). This effort may require collecting,
cleaning, and consolidating information from multiple
sources going back as far as decades.10

2. Understand customer maintenance cycles. Targeted

interviews of salespeople, experts, and customers can
shed light on various aspects of maintenance, such as
reliability, efficiency, and overall satisfaction.

3. Match past service orders with the installed base, which

will help build a comprehensive view of actual service
penetration across the installed base.

Once these steps are complete, leaders could divide the

market according to the most significant dimensions for their
company—for example, by end user, product, or country. These
insights could guide subsequent decisions about factors that
help capture the market opportunity, such as sales targets.

Establishing commercial nerve centers

A commercial nerve center—that is, an agile, coordinated body
that brings together members from across business functions
such as sales, marketing, and program management—can help
companies achieve their strategic goals by bringing together
the necessary data and knowledge to develop and execute key
strategies. These commercial nerve centers can be dedicated
to helping companies achieve their top-line goals in the

10
For more on making the data as usable as possible, see “How aerospace and
defense players can win,” September 21, 2022.

Why aftermarket and service are vital to OEMs—and how to excel 19

 aftermarket, and effective commercial nerve centers can help
build momentum in companies to catalyze action and deliver
results quickly.

Because aftermarket businesses are closely linked to

equipment in the field, commercial nerve centers that focus
on this area can benefit from gaining specialized knowledge
of their customers’ operations, including how they manage
their fleets.

Take the example of a leading equipment-solution OEM that

sought to substantially boost its aftermarket and service sales
by implementing a generative AI (gen AI) solution to clean sales
and operations data, create a live aftermarket data lake, and
generate leads. The company also used a virtual sales agent
to automate personalized emails for its large customer base,
increasing outreach capacity. The virtual agent could also help
during the lead conversion process by recognizing customer
intent and needs based on their responses to outreach, then
passing those insights to the sales team. Additionally, the OEM
provided comprehensive training for both inside and outside
sales reps, focusing on proactive customer outreach and
understanding customer needs in specific verticals. As a result
of these initiatives, the company saw a 20 percent increase in
generated leads, with a validation rate of more than 80 percent,
indicating just how effective such an approach can be.

Another example comes from a defense-systems company

that launched an 18-month effort to boost top-line growth in
the aftermarket. It developed a digital solution to automatically
generate opportunities and boost capability building to
improve the effectiveness of its sales force. This training was
essential because targets tied to new tools are often missed
due to low adoption of those tools. The efforts paid off, with
service orders increasing by 40 percent in one year and by
300 percent in three years.

A principal enabler for these solutions is clean and reliable data.

However, OEMs often contend with scattered and incoherent
client data sources, and this problem only gets worse when
OEMs grow through multiple acquisitions, since databases are

20 Why aftermarket and service are vital to OEMs—and how to excel

often not uniform. Until a few years ago, organizing, cleaning,
and integrating this data was an extremely time-consuming
process that could take months or even years. But, today,
service intelligence platforms have greatly simplified this
practice by helping companies clean and integrate data from
enterprise resource management and customer relationship
management systems, and even external public documents
such as environmental, social, and governance targets. The
market is clearly moving in this direction, and many different
platforms are already commercially available.

Pricing
There are a number of different parameters that companies can
consider when determining potential pricing for aftermarket
and service: the value of rapid delivery (particularly for
proprietary, high-value, or specific parts or services); the value
of OEMs’ services; and the value of best-in-class, responsive
customer support. Pricing options available to companies also
vary and include (but are not limited to) the following:

Value-based pricing. In this model, pricing is correlated to

the value delivered. This may look like tiered pricing based
on service level, use, or outcome. Segmenting and defining
parts or customers up front can help leaders determine the
appropriate combination of prices and terms. For example,
complementary parts of a machine would need to be priced
similarly, even if demand for the parts may not be identical.
In some cases, parts that may not be inherently expensive
because of their materials or complexity can have an outsize
effect on the overall value to the customer, especially if the
parts are critical to ensuring the availability of machines and
meeting regulatory requirements.

Bundling and upselling. Companies could analyze historical

data to discover what parts are often purchased together;
they could then sell those parts in a single bundle. Meanwhile,
upselling and cross-selling can help companies maximize
revenues while also streamlining their operations by
making production planning and inventory management

Why aftermarket and service are vital to OEMs—and how to excel 21

 more predictable and further ensuring competitive service
to customers.

Dynamic pricing. This generally involves applying analytics

and market insights to determine the price in nearly real time,
using parameters such as current demand, competition, and
customer behavior. The analysis should balance profitability
and market share.

Another important factor to consider is the customer discount

policy. For example, a helicopter OEM used to give discounts
on standard aftermarket prices to more than 80 percent
of its service centers and customers. While this approach
contributed to high aftermarket revenue, it also led to lower
profitability than expected. To address the issue, the helicopter
OEM adjusted the discount strategy based on factors such
as numbers of units sold for service centers and fleet size for
customers. As a result, top service centers and customers
continued to benefit from better pricing while others no longer
negatively affected the OEM’s profitability.

Regardless of the pricing and discount approach, company

leaders should ensure that prices satisfy customer
preferences, are appropriate for the competitive landscape,
create the right profit margins, and fit within a coherent
pricing architecture.

Order to delivery
The majority of modern industrials companies purchase
aftermarket products from a complex global supply chain.
Meanwhile, OEMs maintain design and engineering authority
over the products that are sold. Consequently, the procurement
processes of these products are of fundamental importance to
both OEMs and customers. The order-to-delivery phase starts
with comprehensive planning, encompasses manufacturing
and procurement considerations, and concludes with seamless
product and service delivery.

22 Why aftermarket and service are vital to OEMs—and how to excel

Sourcing management
When developing a winning sourcing strategy, company
executives and leadership should consider an overarching
procurement strategy as well as specific elements and tactics
that enhance value. We have identified two critical steps to this
process. The first is articulating the sourcing strategy, such
as deciding the target length of agreements and whether to
use requests for proposals (RFPs), auctions, or spot buys.
The second step is identifying ways to use cost and quality to
maximize value. For example, company leaders might outline
the optimal number of respondents to engage in the RFP
process to optimize competition between suppliers or decide in
advance how transparent to be in supplier negotiations.

When it comes to implementing the sourcing strategy, five

questions are particularly influential in the execution:

1. How critical is the supplier to the OEM’s business?

2. What type of sourcing event (for example, RFPs, auctions,

market buys, and so on) is preferred, and what are
the criteria?11

3. What is the scope of sourcing? For example, is it an entire

category of materials or multiple subcategories?

4. What’s the duration of the procurement agreement?

5. How and to what extent should the firm use intermediaries,

such as fully outsourced procurement services, value-
added partnerships for specialized services, or fully
in-house procurement?

Using analytics throughout the process can optimize costs,

service quality, and lead time. However, our experience
suggests that many companies are underusing the valuable
tools available to them, such as should-cost and cleansheet

11
For more on sourcing events, see “Publishing a sourcing event (non-IT),” North
Carolina Procurement, accessed June 5, 2024.

Why aftermarket and service are vital to OEMs—and how to excel 23

 analyses.12 This is particularly true for spare parts compared
with new units; spare parts often cost much less, but even
the cheapest items can represent a significant opportunity
when considering the high volumes typically associated with
aftermarket and service operations.

Manufacturing
In the aftermarket, many parts, products, and services are
time-sensitive, with customers often eagerly awaiting delivery—
making short lead times crucial. Despite the fact that shorter
lead times also mean converting orders into cash flows more
quickly, long lead times remain a common challenge (Exhibit 3).
A recent McKinsey survey found that the top challenge faced
by aerospace and defense companies is securing operations
and competitive lead times.

A comprehensive approach to identifying and mitigating

production bottlenecks in manufacturing industries begins

Web <2024>
Exhibit 3 Aftermarket & Services WP>
<MCK238147
Exhibit <3> of <10>

Aerospace and defense industry players face a range of common challenges

in developing an aftermarket offering.

Key challenges faced in aftermarket services,1 % of respondents (n = 50)

Securing operations and competitive lead times

60

Developing a compelling service offering

40

Establishing a dedicated commercial focus and performance management system

34

Identifying customers to target and equipment on which to focus

34

Question: “What key challenges are you facing in aftermarket services?”

1

Source: “How aerospace and defense players can win in aftermarket services,” McKinsey, September 21, 2022; McKinsey A&D Service Survey 2022

McKinsey & Company

12
For more on should-cost analysis, see Mike Parkins, Mukund Prasad, and Hans
Tiedemann, “In volatile markets, embedded product costs can be a hidden
treasure,” McKinsey, August 2, 2021.

24 Why aftermarket and service are vital to OEMs—and how to excel

 with measuring cycle times to understand operational
efficiency. Cycle times are derived from analysis and shop
floor observations; they are critical inputs to overall equipment
efficiency (OEE) and overall process efficiency (OPE), both of
which provide valuable insights into the performance of each
machine and workstation.

The best way to reduce lead times is to compress the duration

of the entire sequence of events, from the receipt of a service
request or parts to the service completion or when the parts
are packed and shipped. In our experience, companies that
adopt a comprehensive set of solutions showed an overall
reduction in lead times up to 30 to 40 percent compared with
companies that only focused on one step of the value chain
(Exhibit 4).

Advanced digital tools can, of course, be crucial to the overall

process. Consider quality assurance and packing, the final
stage of the order-to-delivery process: remote quality checks,
virtual reality, digital inventory, and 3D printing for spare

Web <2024>
Exhibit 4 Aftermarket & Services WP>
<MCK238147
Exhibit <4> of <10>

Order-to-delivery lead time in service can be reduced at every step of

the process.

Calendar days, baseline indexed to 100

Typical order-
to-delivery Order Release of Release of Supply Incoming Checking
process incoming and purchase purchase and picking and packing
processing request order for delivery
100
3–4
Standard lead
time in aerospace 3–5 5–10 60–70 8–11 7–12
and defense

Best-practice
4–7 35–45 8–10 3–7
lead time
2–3
1–3 30–40%
Difference in end-to-end
order delivery lead time

McKinsey & Company

Why aftermarket and service are vital to OEMs—and how to excel 25

 parts can all support the process and the workforce. If data is
incomplete or inaccurate, OEE would need to be recalibrated.
A suite of sensors could help estimate OEE using equipment
available time, service or production volume, and observed
cycle times. The results can help company leaders identify the
most important opportunities to reduce cycle time.

Stakeholders could remove bottlenecks from production lines

quickly and efficiently by redistributing the workload. They
could rebalance tasks among resources, an approach that’s
particularly effective for tasks performed by operators. The
process can be meticulously modeled using spreadsheet tools,
with resource allocation adjusted accordingly. Iterative testing
on production lines, whenever possible, further refines the
rebalancing process, optimizing both cycle times and OEE and
OPE levels.

To achieve future-state objectives, cycle time reductions

necessitate an examination of current-state observations
and the potential elimination of tasks within each cycle—or at
least a reduction in their duration. Concurrently, OEE and OPE
enhancements are pursued through a comprehensive waterfall
analysis aimed at reducing losses.

Operator workloads are a focal point in optimization efforts,

and in response to changing production demands, careful
rebalancing becomes imperative. For example, consider a
scenario in which an OEM is transitioning from a seven-day to a
five-day operation in one area and from five days to two days in
another area: operator workloads, especially for the operators
of those two areas, will intensify. This necessitates a strategic
redistribution of tasks—notably, the transfer of activities such
as pallet handling and manual transport to a third operator—
facilitating the achievement of takt time and operational goals.

These key points are supported by lessons from the consumer

goods and retail sectors, which have long been chasing
faster cycle times from customer order to delivery. Although
the products may differ, the strategies that have made retail
successful can be applied to the aftermarket, including
understanding where speed matters the most to customers

26 Why aftermarket and service are vital to OEMs—and how to excel

and planning accordingly, selectively investing in capacity and
networks to reduce bottlenecks, and embracing real-time data
analytics and automation to increase overall productivity.

Supply chain and inventory management

The most important, formative aftermarket and service
supply chain decisions—from the footprint of the distribution
network to sales channel strategies—vary significantly by
business model, regulatory environment, and other factors. For
example, in some cases, the distribution network is mandatory,
with entities even purchasing spare parts and portfolios of
initiatives to resell to customers. In other scenarios, the OEM
directly handles sales, while intermediaries may only serve as
maintainers or assemblers of parts. It is essential to recognize
that depending on what the business model and sold products
are, dynamics can differ greatly, and while there are key
concepts to manage, companies should avoid generalizing.

Optimized networks—designed for each company’s unique

situation—could balance requirements such as cost and fill
rates. Similarly, while the optimal inventory levels for service
parts at each stocking location will vary, having them can
help minimize the lag between a customer’s order and when
equipment is restored to normal working order.

Consider the number of SKUs in the inventory. New-product

supply chains typically involve a known number of SKUs
with known start- and end-of-life cycles. By contrast, the
aftermarket involves many varied field-replaceable units with
intricate relationships, which results in more heterogeneity
and unpredictability.

This aspect is especially critical in sectors such as automotive,

where the number of SKUs can reach the hundreds of
thousands. For example, an automotive OEM was facing
frequent part shortages because of reactive spare parts
inventory management, which led to long delays and a
deteriorating customer experience. Even with limited capital
expenditures, it was possible for the OEM to implement new AI
algorithms on its legacy IT systems to precisely estimate the
demand of each SKU. This allowed the OEM to not only reduce

Why aftermarket and service are vital to OEMs—and how to excel 27

 shortages by 50 percent but also keep a very lean spare parts
inventory, increasing it by just 5 percent.

Distribution networks also differ significantly. New-product

supply chains have multiple distribution paths, encompassing
direct sales, distributors, and resellers. These distribution paths
provide redundancy and are unidirectional, focused on outbound
logistics. Meanwhile, the aftermarket tends to operate with a
single delivery network that must respond to unpredictable
demand and provide inbound and outbound logistics.

When it comes to inventory management, the focus for new

products is on maximizing inventory turns. For the aftermarket,
the focus is on maximizing fill rates so equipment in the field
can return to regular functioning.

Obsolescence and the two-speed challenge

Producers of complex machinery, such as manufacturers
of heavy equipment, encounter a frequent time horizon
dilemma.13 The products they develop typically have a life span
of 30 years or more, requiring ongoing support—including low-
volume legacy parts and technical expertise—throughout the
product’s life. However, some of the component parts of these
systems, especially newer products such as semiconductors,
electronic boards, and mechanical elements, may have much
shorter life spans, lasting only a fraction of the time compared
with the overall system.

This “two speed” challenge can lead to difficulties in sourcing

components over time and may result in their obsolescence
as suppliers grapple with raw-material shortages or cease
production altogether. Consequently, many OEMs devise
substitutes for these outdated components, taking on
nonrecurring engineering costs that escalate with the
quickening pace of technological cycles and the growing
interconnection of supply chains.

13
“How industrial and aerospace and defense OEMs can win the obsolescence
challenge,” McKinsey, April 14, 2022.

28 Why aftermarket and service are vital to OEMs—and how to excel

The two-speed challenge puts additional loads on
multiple functions:

— Operations. OEMs have to redesign systems around new

components to replace obsolete ones. The effort often
requires building out an entirely new supply chain in a
relatively short period of time.

— Inventory management. Any product redesign from

obsolescence creates a cascading effect in inventory
management. Many components in the inventory for the
equipment will not be compatible with the redesigned
product and will be turned into scrap.

— Commercial function, such as sales and marketing. The

new, often one-time costs of designing a new component
are often passed on to end customers by necessity, which
makes for a less affordable and less competitive product.

— Service. A discontinued component will no longer be

available as a spare part. This increases the cost and
complexity of delivery and reduces customer satisfaction.

A proactive, methodical approach can help OEMs address this

hard-to-avoid challenge. OEMs can take three critical steps to
minimize one-time engineering costs for obsolescence:

1. Identify additional, alternate suppliers for any components

that are ready for installation without a redesign. OEMs,
distributors, and brokers can help identify and procure the
right components.

2. Identify alternatives to obsolete components that can be

modified at minimal cost, avoiding a redesign.

3. As a last resort, redesign the component to minimize costs

and disruptions to the design of the product or system.

Anticipating components’ obsolescence can forestall

equipment-level or system-level problems. One good
strategy is to continually scan for problems that could come
from obsolescence. Resources—specifically, funding and

Why aftermarket and service are vital to OEMs—and how to excel 29

 processes—dedicated to strategic purposes of at-risk
components can help.

Tools dedicated to consolidating OEMs’ in-house intelligence

with market data can create a window into obsolete or at-risk
components. These tools can also provide information on
alternate suppliers, alternate components that could be similar
enough in form, fit, and function, and the costs associated
with them. To make full use of these tools, roles dedicated
to obsolescence can ensure that OEMs have champions of
obsolescence-related considerations and a team that’s ready
to work with suppliers to refine the supply chain to counter the
relevant challenges.

There are also alternative options for OEMs to ensure

continued availability for the long tail of product usage. In
aerospace, some original-design OEMs sell the license to
their legacy parts to trusted specialist partners to continue
manufacturing OEM-specific parts and providing maintenance,
repair, and overhaul (MRO) services. This approach allows for
support throughout the life cycle of platforms and parts that
could otherwise be a lower priority for original-design OEMs
and lead to poor customer experiences. This model offers
benefits to both clients, who gain a focused OEM-licensed
partner to deliver legacy parts and service quickly, and
OEMs, which can monetize legacy parts through the licensing
agreements and gain residual cash flows while ensuring
continued customer support.

Finally, OEMs should consider obsolescence at the

beginning and factor component obsolescence into the
R&D process. This effort will require cooperation between
multiple stakeholders, such as engineering functions and
suppliers. Stakeholders would also likely need to standardize
interfaces and modular designs and minimize the use of
specialized components.14

14
For more on obsolescence, see “How industrial and aerospace and defense
OEMs can win the obsolescence challenge,” April 14, 2022.

30 Why aftermarket and service are vital to OEMs—and how to excel

Field workforce
The field workforce has traditionally been at the center of the
service and aftermarket sector, especially in relation to break-
fix activities. Even as some activities shift to remote services,
the field service will continue to play a vital role. By evolving
their field operations, OEMs can improve service levels,
customer experience, efficiency, and productivity, ultimately
creating value for customers and potentially transforming their
field workforces into an additional sales force.

OEMs can take several approaches to improve field workforce

performance and services, with the most common involving
performance management and process standardization in
the form of standard operating procedures (SOPs). However,
SOPs are only effective if correctly applied and if technicians
implement process-based workflows. In this regard,
companies can enhance their service quality and procedure
adoption in various ways, including creating clear progression
paths toward better positions, instituting internal certifications
for skill development, and establishing transparent selection
criteria and incentives for employees. Linking progression to
compliance with SOPs, for example, can engage field operators
and improve service repeatability.

In addition to traditional levers, digital tools and analytics

can strongly improve the productivity and quality of the field
workforce. For example, a medtech OEM experiencing low
performance and margins in its service business, mainly
because of limited use of digital and analytics, increased its
service engineer utilization to 75 percent, from 55 percent,
in less than a year. The OEM achieved this by focusing its AI
efforts on aligning field technicians to customer demand with
a three-step approach: creating geographic clusters based on
historical demand; calculating headcount, including both work
hours and travel time; and allocating resources to properly
deploy technicians and also minimize travel time. After the
initial signs of success of this first AI-enabled business case,
the medtech OEM rolled out a full-fledged analytics program,
including spare parts inventory, remote resolution, and
advanced troubleshooting.

Why aftermarket and service are vital to OEMs—and how to excel 31

 The telecommunications sector offers another relevant case
study. One telco used to reactively perform installations,
maintenance, construction, and back-office work through
manual work planning, but it has since transitioned to a new
operating model. This model includes task intelligence–
focused dashboards to enhance productivity and engagement,
AI coaches to help supervisors improve workforce efficiency,
and AI-powered analytics for forecasting and scheduling
maintenance operations, considering both long-term
capacity planning and short-term work planning. These
operational process optimizations have resulted in significant
improvements, including a 15 percent increase in capacity, a
30 percent reduction in required workforce, and a 10 percent
increase in workforce utilization.

OEMs can achieve further optimization by leveraging gen

AI, as in the case of a European machinery distributor that
implemented a comprehensive solution to drastically reduce
unplanned downtime and customer costs. The solution
consists of two main blocks: a platform that integrates all
service-related information and a module for a language
learning model (gen AI). The platform serves as a centralized
hub where technicians can access manuals, procedures, and
guidelines, streamlining the troubleshooting process. AI
chatbots, or “copilots,” act as conversational orchestrators
of the service, providing live collaboration through insights,
recommendations, root cause analyses, reports, and
documents. The implementation of this solution resulted in a
10 percent increase in first-time-right resolutions, significant
cost savings for clients, faster problem identification, and
improved accessibility and efficiency for technicians.

Last, field workforces and technicians can become a powerful

extension of the sales team. By being in close proximity to
clients and interacting with them and their products on-site,
the field workforce is uniquely positioned to identify client
needs, solve existing issues, and prevent future issues. Given

32 Why aftermarket and service are vital to OEMs—and how to excel

the right tools, they can build stronger and more profitable
relationships with clients, adding value to the organization.15

Delivery to cash
The delivery-to-cash phase, the final segment of the journey
for aftermarket and service, is primarily focused on the
importance of cash management. Many industrial companies
operate with around 90 days of outstanding receivables in
terms of cash. While chasing receivables is often not the top
priority of a company, reduced cash flows from nonpayment
of receivables can nevertheless cause significant issues if
not addressed.

There are two priority delivery-to-cash activities that OEMs

should consider: structural interventions that can help avoid or
at least minimize past-due credits and the processes through
which past-due credits are collected. Addressing receivables
can be complicated and span the finance, commercial, and
sales organizations, given the complex contractual terms and
conditions often facing industrial companies. This includes
complex processes that involve multiple intermediaries,
bespoke contracts, and a significant number of invoices over
a long duration.

The most important actions to optimize the cash collection

process in aftermarket and service for industrial companies
include the following:

— defining target terms and conditions to be used in

contract negotiations

— implementing comprehensive and simplified checklists to

facilitate credit collection

— developing training programs (including digital tools) and

updating employee incentive schemes to increase focus on
cash collection

15
For more about turning the field workforce into part of the sales force, see
Markus Forsgren, Sören Jautelat, Arno Montenbruck, and Maximilian Titze,
“Industrial services’ overlooked sales force: Their technicians,” McKinsey,
May 18, 2021.

Why aftermarket and service are vital to OEMs—and how to excel 33

 These interventions are more relevant for aftermarket and
service businesses compared with selling new units because
of the higher volume of invoices and lower average transaction
value in aftermarket and service, especially for spare parts.
The complexity is further increased when intermediaries, such
as spare parts distributors, are involved, which is a common
situation in manufacturing industries.

No single solution can effectively streamline the delivery-to-

cash process, but companies could understand the specific
factors behind their organizations’ long delivery-to-cash times.
These factors could include unfulfilled deliveries to customers’
practices, incomplete documentation, and more (Exhibit 5).

Web <2024>
Exhibit 5 Aftermarket & Services WP>
<MCK238147
Exhibit <5> of <10>

Understanding the cause of payment delay is crucial to accelerate collection.

Illustrative company example

Not agreed with end client Agreed with end client Paid by end client
to intermediary
Invoice agreed
or issued

Invoice past due

Conditions to pay
recognized by client

Paid by end client

Cashed in

Total past due credits 55–60% 30–40% 5–10%

Examples of • Late deliveries leading to • Client’s standard practice is • Specific problems

root cause litigations on the application to pay with significant delay related to the
of penalties and other vs invoice past-due date presence of
“complications” • Missing or incomplete intermediaries also
• Unfulfilled or partial shipments documentation to be acting as agents
(also due to client delays) received from client (eg,
• Missing or incomplete missing letter of
documentation (eg, missing acceptance)
certificates) • Critical geopolitical context

McKinsey & Company

34 Why aftermarket and service are vital to OEMs—and how to excel

After assessing the factors behind their delivery-to-cash
performance in detail, companies could identify the best ways
to speed up cash flow and free up working capital.

One solution is to launch credit collection campaigns,

which can effectively reduce past-due credits as long as
stakeholders systematically track past-due credits and their
causes. The resulting insights could help mitigate future delays.

Enabling factors
To achieve service excellence, organizations need the right
structures, performance management systems, and digital
capabilities—all aligned to their strategies and business needs.

The organization
As with any business, optimizing the aftermarket and service
business requires the right talent and the right organizational
structure. In fact, across industrial companies, several common
but suboptimal practices can lead to revenue losses of up to
10 percent, such as the following:

— viewing services as cost centers rather than full-fledged

business opportunities

— maintaining siloed processes for design and service, with

products and services treated as separate entities

— allowing disjointed service sales and delivery departments,

causing the sales team to overlook possible leads from
field-based technical insights

— enabling excessive decentralization of delivery, leading

to higher costs because of unnecessary geographical
redundancy of functions.

Due to the impact of organization on the performance of

aftermarket and service businesses, company leaders would
need to clarify their stance on two things: level of integration
and service function centralization.

Level of integration. The first conclusion leaders should come

to is how integrated the aftermarket organization should be

Why aftermarket and service are vital to OEMs—and how to excel 35

 with the core business—that is, the aftermarket division’s
structure and how it relates to the rest of the company, the
degree of influence it has, and how to set up the aftermarket
division to minimize redundancies. There are three archetypes
currently in use among aftermarket and service companies:
fully integrated, hybrid, and separated unit (Exhibit 6). Each has
distinct benefits and risks:

— In the fully integrated model, sales and services are

integrated within the product business units. This
organization structure offers businesses a holistic view of
their products and services, enabling better planning and
optimization. It also facilitates faster decision making and
closer alignment with customer needs, leading to improved
satisfaction and competitiveness. However, leaders
must navigate the risks, including a lack of accountability
for services versus products, challenges with divergent
methodologies and technologies, and missed synergies
between business units.

— The hybrid model features a separate services business

unit that assumes full ownership of service delivery while
influencing services sales through a center of excellence.
This approach has several benefits, including scalability,
consistency across methodologies and technology, and
maintained sales proximity to the market. Risks include
reduced flexibility in addressing specific business-unit
needs, potential organizational inconsistencies that slow
down decision making and time to market, and the need for
additional processes to ensure coordination.

— In the traditional separated-unit structure, a distinct

services business unit maintains full ownership of its own
profit and loss. This model provides organizational focus
and scale, increased efficiency, fair pricing for services, and
professionalized product development, making it particularly
suitable for services with multiple business units. Risks include
losing sight of the full project life cycle, diffusing accountability,
creating duplications, and making it harder to align the sales
business unit’s goals with those of the service business unit.

36 Why aftermarket and service are vital to OEMs—and how to excel

Web <2024>
Exhibit 6 Aftermarket & Services WP>
<MCK238147
Exhibit <6> of <10>

There are three main archetypes for organization and steering among
aftermarket and service players.

Fully integrated: Sales • Products are at the core of a

and services integrated business
within the product CEO • Service is mature and can be
business units managed effectively within the
product business units
• End-to-end ownership exists
Product Product elsewhere
business unit business unit • Products are highly diversified
• Customers are the same for
both initial and service sale

Region Region
or country or country

Segment 1 Segment 2 Services

Hybrid: Separate services • Service is becoming more

business units fully central to a business but is
owning service delivery CEO not yet core
and influencing • Service is not fully matured
and requires central
services sales coordination to drive
execution consistency
Services Region Product
• Products are highly
business unit or country business unit
diversified

Service delivery R&D, engineering,

Service sales Equipment sales
regional heads and manufacturing

Separated unit: Separate • Service is at the core

services business unit with of a business
full ownership of services CEO • Service is immature and needs
profitability profit-and-loss focus to drive
execution excellence
• Products have common
elements
• Service customers are different
Services Product
business unit business unit
from initial-sale customers

Region Region Region Region

or country 1 or country 2 or country 1 or country 1

McKinsey & Company

Why aftermarket and service are vital to OEMs—and how to excel 37

 In choosing the right organization model, companies
must consider several factors, such as target customers,
workforce mindset and skills, leadership involvement,
potential cannibalization, and the emphasis on new business
development (Exhibit 7). While there is no single recipe for
success, major companies have generally favored freestanding
service and aftermarket business units to ensure agility and
relevance to the unique characteristics of such a business.

Service function centralization. The second area to consider

is the level of centralization across various service functions.
Centralized models involve managing tasks and responsibilities
from a single responsible center, providing standardized

Web <2024>
Exhibit 7 Aftermarket & Services WP>
<MCK238147
Exhibit <7> of <10>

The extent of organizational integration depends on aspects such as

customer interactions, employee skills, and leadership attention.

Considerations for deciding on whether to integrate or separate solutions and services sales

+ Level of integration –

Customers Selling to same clients Selling to Selling to new

within existing customers different clients customer base
within existing
customers
Employees skill Same skills and Complementary skills Different skills and
and mindset mindsets required as and mindsets required mindsets required as
selling existing as selling existing selling existing
products products products
Leadership No extraordinary Some extra senior Heavy senior
attention senior leadership leadership leadership time
time required attention and required
steering required

Cannibalistic nature Minimal cannibalization of Some cannibalization Huge cannibalization of

of business existing business for and overlap with existing business for
customers and sales people existing business customers and sales
people
Business Minimal focus on new Some focus on new Large focus on business
development business development business development development

McKinsey & Company

38 Why aftermarket and service are vital to OEMs—and how to excel

services to multiple locations or business units. This approach
offers several advantages, such as economies of scale;
standardization; specialized talent; cross-fertilization of data,
knowledge, and expertise; and more-effective prioritization of
resources. It may also result in a lack of proximity to business
units and a shortage of region-specific offerings.

A regional model, in contrast, involves situating service

functions in specific regions or countries, offering local
expertise, flexibility, proximity to business units, and regional
capacity. However, the regional model may face challenges
with standardization, leading to fragmentation and duplication
of efforts.

An organization’s choice between the centralized or regional

model depends on various factors, including product regional
differentiation, the distribution of the customer base, the
average size of client companies, production’s business unit
footprint, and regulatory differences within the company’s
footprint. (Exhibit 8).

A notable example is the supply chain, in which companies can

take on a number of different forms. To determine the right
structure, leaders could consider the scope of the aftermarket
supply chain, how difficult it would be to centralize the supply
chain management function, and the most appropriate kind of
supply chain for the company. For instance, a global company
that works with complex parts for machinery may lean toward a
decentralized structure to better manage regional variations in
demand and to have a buffer against supply chain disruptions.
On the other hand, a company with a smaller geographic
footprint and simpler products might find a centralized
structure more efficient and easier to manage.

Other measures to increase working capital could include

negotiating and enforcing more-stringent payment terms,
offering incentives aimed at pushing credit collection, and
providing employee training for best practices for monitoring
and managing past-due credits.

Why aftermarket and service are vital to OEMs—and how to excel 39

Web <2024>
Exhibit 8 Aftermarket & Services WP>
<MCK238147
Exhibit <8> of <10>

There is no one-size-fits-all model for service organizations, which can be

structured centrally or regionally.

Central A
By subregion

Why choose it? B C D

• Global customer
base who interacts
with multiple regions
• Significant E I L
operational overlap
among regions F J M

G K N

H O

A. CEO of services H. Marketing sales O. Planning and

B. Product and support scheduling
C. Sales I. Parts sales
D. Delivery J. Service and repair sales
E. Pricing K. Contractual sales
F. New hardware offerings L. Parts and supply chain
(including engineering) M. Procurement (dedicated
G. Digital offerings to aftermarket)
(including digital labs) N. Service centers

Regional
A
Profit-and-loss
ownership

B C D E F G H
Why choose it?
• Products are highly
differentiated across
regions I K N
• Region-specific
expertise can provide
better customer service J L O
and provide a quicker
feedback loop to
M
product and
commercial teams

A. CEO of services G. Middle East, North K. Parts procurement

B. Sales support Africa, and Türkiye L. Repair centers
C. Digital H. Asia–Pacific M. Parts warehouse
D. Supply chain I. Pricing N. Sales
E. Americas J. Sales analytics and O. Execution tech force
F. Europe sales operations

McKinsey & Company

40 Why aftermarket and service are vital to OEMs—and how to excel

Performance-management systems
Many aftermarket organizations have distributed structures
and many layers. This means company leaders would need to
put in continuous effort to communicate and ensure that the
entire aftermarket organization understands its performance
management system.

For instance, aftermarket and service businesses’ productivity

and cost efficiency could be measured through KPIs such
as the number of panels produced per work week per full-
time employee. Deviations from benchmarks and the ratio of
used hours to sold hours (such as time spent repairing a part
compared to the time sold to a customer to complete that
repair) can be helpful measures of efficiency. In some cases,
the effectiveness of quality and service delivery might be
measured by the number of service cases per 100 installations,
shedding light on the efficacy of service delivery. Safety might
be measured by the number of site visits or the time elapsed
since the last recorded accident, customer satisfaction
measured with a customer satisfaction score, and employee
engagement and organizational health measured by scoring
workforce pulse surveys.

Digital tools and capabilities

Digital tools have been unlocking value for industrial
companies for the past few decades and have done so more
recently in service and aftermarket. AI, particularly gen AI, has
the potential to reinvent how services are delivered, with a
number of use cases emerging in recent years (for examples,
see Exhibit 9).

Industrial companies can apply these use cases across all

steps of the service and aftermarket excellence journey, with
the following examples being some of the most impactful:

— Innovation to market. Companies can implement digital

twins to reduce development lead time and can reduce
physical testing time in favor of virtual simulations (for
example, replicating years of deterioration of a spare part
in minutes).

Why aftermarket and service are vital to OEMs—and how to excel 41

Web <2024>
Exhibit
<MCK238147 9 Aftermarket & Services WP>
Exhibit <9> of <10>

Generative AI has reinvented how B2B services are delivered.

Generative
AI–enabled Key functions Traditional world Tech-enabled world
Product Offering design Customer focus groups Customer insight collected across full
management installed base

Marketing Standard broadcast Offering design informed by customer

material profiling and voice
Auto-generated dynamic content for
targeted segments

Price setting Cost-plus pricing Deal-scoring engines and

dynamic pricing
Real-time negotiation guidance and
predictive pricing

Sales Granular Manual lead generation Granular view of installed base

opportunity view and qualification using
AI-driven lead identification
outdated or incomplete
data sets Generative AI–powered lead
prioritization

Sales pursuit Customer outreach mostly AI-powered lead-generating models

via sellers, focused on Virtual sales assistants with
largest customers hyperpersonalized content

Customer Customer Traditional, mostly reactive Customer experience metrics

experience experience customer experience tracked live
management
Real-time tracking of parts delivery
and repair
24/7 customer care

Field service Demand planning Analysis of historical Intelligent forecasting using multiple
job data data sources for optimal accuracy

Scheduling and Periodic job allocation subject Real-time intelligent job allocation
routing to dispatcher judgment

Job delivery Jobs done based on AI-recommended next steps and

individuals’ expertise synthesis of technical documents

Inventory Expert-guided spare parts AI-guided inventory replenishment

management selection and replenishment Proactive part validation for
specific jobs

42 Why aftermarket and service are vital to OEMs—and how to excel

Web <2024>
<MCK238147 Aftermarket & Services WP>
Exhibit <9B> of <10>

Key functions Traditional world Tech-enabled world

Failure root cause Predictive Analysis of historical failure Real-time predictive analytics
maintenance data based on usage patterns (failure
modes)

Self-service Equipment-based Control panel displaying Step-by-step instructions for

support fault code customer self-diagnosis of simple
issues
Accelerated technician servicing

OEM platform Online platform with FAQ AI-enabled knowledge management

and search bar for (eg, intelligent search bars)
troubleshooting guides

Remote first Remote Real-time condition Equipment self-healing based on

monitoring monitoring condition

Remote Phone-guided or remote Remote troubleshooting via

troubleshooting troubleshooting augmented and virtual reality

Support services Administrative Manual paperwork AI-automated order tracking

processes processing

Back office Manual paperwork Automated consolidation of sources,

processing research, and documents in desired
formats

Performance Scheduling Weekly huddles using Holistic performance feedback,

management and routing historical performance informed by performance metrics and
data unstructured data

McKinsey & Company

Why aftermarket and service are vital to OEMs—and how to excel 43

 — Market to order. Companies can leverage AI to anticipate
customer needs based on several factors, such as
maintenance cycles and products usage, and can support
the sales force to close better deals (Exhibit 10).

— Order to delivery. Companies can develop a remote offering

for field services using augmented reality, often reducing
both costs and lead time of intervention because no travel
is needed.

— Delivery to cash. Companies can create dynamic digital

platforms to monitor the cash flow situation at the item
level (often many contracts with lower values) and the latest
interactions with customers and suppliers for better follow-up.

Web <2024>
<MCK238147 Aftermarket & Services WP>
Exhibit 10
Exhibit <10> of <10>

AI-enabled aftermarket and service organizations support the sales force

across commercial capabilities.

1 2 3 4 5
Granular view of Offers that meet Sales force Right price to Outstanding
opportunity at clear customer relentlessly maximize value customer
customer level needs pursuing top
Deal-scoring
experience
opportunities
Granular view of Mapped customer engine to support NLP-powered1
installed base and needs and Best-of-breed digital decisions on large virtual assistants
penetration by willingness to pay stack to automate parts deals answering customer
customer and asset Offering design customer outreach Dynamic parts
questions on parts
tasks deliveries and
AI-driven sales leads informed by voice pricing to maximize
of customer Live digital value services
dashboards for sales Seamless
managers to coach e-commerce
reps storefronts for parts
Customer
experience metrics
tracked live
1
Natural language processing–powered.

McKinsey & Company

44 Why aftermarket and service are vital to OEMs—and how to excel

While the benefits may be obvious, deploying, using, and
harnessing digital tools can be challenging. Many industrial
companies are struggling across the board—for example, in
areas such as data preparation, cleaning, and warehousing—
and many lack the required internal capabilities and expertise
to deliver effective digital capabilities, such as cybersecurity
and software development. In a McKinsey survey for industrial
companies conducted in 2022, respondents revealed that their
most pressing concern involved identifying the right software
partners within the ever-growing landscape of established
businesses and new, more agile start-ups.16 Because the
importance of digital capabilities will continue to grow, this
area will likely require even more attention in the future.

16
“How aerospace and defense players can win,” September 21, 2022.

Why aftermarket and service are vital to OEMs—and how to excel 45

Part 2

Tech-driven
trends and
innovations

46 Why aftermarket and service are vital to OEMs—and how to excel

In an era dominated by technological innovation, tech and
tech-adopting companies have emerged as trendsetters
and reshaped the landscape of services across industries,
from manufacturing to consumer goods. Harnessing and
implementing new digital tools can help to grow revenues by
30 percent.17

The pioneers’ experience offers ten pivotal lessons, illuminating

how those companies are forging a new paradigm for the future
of service industries:

1. Offering a B2C-like customer experience. This includes

expanding the product portfolio to encompass postsale
products and services that are useful and offer easy-to-use
experiences.

2. Exploring “servitization.” This entails offering products

as services, including through ongoing, performance-
based contracts.

3. Collecting, analyzing, and monetizing data. For example,

companies can leverage data to drive predictive
maintenance regimes and offerings.

4. Pursuing “softwarization of features.” This involves

improving product performance though a state-of-the-art
service offering.

5. Accessing new value pools through sustainability. This

is increasingly a requirement from both customers
and regulators.

6. Expanding on higher-than-expected maturity in

“remotization.” Companies can leverage in the new normal
the remotization maturity developed during the pandemic.

7. Leaning into the localization paradigm. This ensures a

consistent delivery model everywhere and resilience to
supply chains disruption.

17
Guy Benjamin, Markus Forsgren, and Nicolas Guzman, “From defense to offense:
Digital B2B services in the next normal,” McKinsey, August 28, 2020.

Why aftermarket and service are vital to OEMs—and how to excel 47

 8. Establishing online marketplaces. Such marketplaces
are redefining the standard in terms of on-time delivery
of quality products and can also be considered in a
B2B context.

9. Building ecosystems around products. Through

ecosystems, users can fulfill a variety of needs.

10. Handling disruptions to the service workforce. Disruptions

push organizations to rethink their talent strategies.

Offering a B2C-like customer experience

There is a fundamental paradigm shift under way in aftermarket
and service, characterized by the imperative to replicate
the personalized experiences typically associated with B2C
interactions. This sectorwide transformation has required
companies to recalibrate their focus and allocate time and
resources to providing more postsale products and services
such as maintenance, accessories, product upgrades, and
training. These services, like those commonly available
and expected in the B2C spheres, are already helping B2B
businesses maintain and enhance their product portfolios
while providing customers with more-satisfying experiences.

A 2023 McKinsey survey of B2B companies across sectors

and geographies identified the implementation of the
personalization (and hyperpersonalization) of marketing,
sales, and products, akin to B2C experiences, as a primary
differentiating feature for winning companies. More than half of
companies involved in the survey that saw their market share
grow by more than 10 percent had invested in tools, customer
journeys, and products to deliver B2C-like personalized
experiences for their B2B customers.18

For example, some leaders now offer specialized maintenance,

cleaning, and restoration services, accompanied by bundled
accessory offerings. Additional services, such as product
engraving and customization, elevate the customer experience.

18
“The multiplier effect: How B2B winners grow,” McKinsey, April 13, 2023.

48 Why aftermarket and service are vital to OEMs—and how to excel

Training sessions, both in person and virtual, empower
customers to understand their product’s full potential. And the
introduction of upgrade options and vintage product trade-ins
reinforces the commitment to long-term customer satisfaction
and retention.

These initiatives can also help improve internal processes.

A leading heavy-equipment OEM, for example, developed
dedicated digital apps to streamline communication with
dealers (such as communications regarding virtual showrooms,
financial quotes, and the resale of used items), resulting in an
up to 80 percent reduction in order deviations. This saved the
company time and money in complaint handling.

Exploring ‘servitization’
Servitization enables companies to convert the one-off sale
of products into recurring sales or subscriptions to better
utilize those products, such as the leasing of machines, critical
components, tools, or traditional services. Put another way,
servitization is providing access to capital-intensive products
for an agreed period of time. This transition offers profound
value for businesses that goes beyond the typical aftermarket
propositions of simply selling spare parts or basic servicing.

The provision of products as a service helps players expand

their scope along the value chain and life cycle. One of the
most prominent examples is the transformation of Rolls-Royce
from selling aeroengines to selling pay-by-the-hour contracts
for engine operations. While servitization is a relatively
straightforward concept, it can take on many different forms
based on capabilities, products, and customer needs.

Servitization has enabled players to broaden their reach into

previously untapped customer segments, particularly those
that have a temporary need for the product or a shortage of
resources to afford the full capital investment. Products sold
as a service are generally bundled with additional features and
services. For example, a subscription-based rental of heavy
machinery often includes periodic maintenance, installation,
and upgrades and can transform costly capital expenditures

Why aftermarket and service are vital to OEMs—and how to excel 49

The rise of servitization
underscores the
importance of a
customer-centric
approach to the
aftermarket.

50 Why aftermarket and service are vital to OEMs—and how to excel

into operating expenditures financeable through cash
flows rather than debt. Remote monitoring and predictive-
maintenance service offerings also benefit OEMs—through
predictable future cash flows and data that can be leveraged
in R&D—and customers, who can devolve maintenance
responsibilities to another organization with an expert
maintenance workforce without having to manage one directly.

Indeed, the rise of this model underscores the importance of

a customer-centric approach to the aftermarket. Shaping the
appropriate product-as-a-service and commercial structure
requires a strong understanding of customers’ needs and
purchasing behaviors; otherwise, there is a risk of losing rather
than gaining competitive advantage.

Furthermore, servitization offers the potential for a more stable

and recurring revenue stream, shifting from one-time product
sales to ongoing service contracts. End-of-quarter fire sales
could then fade in intensity, smoothing cash flow and allowing
for adjustments in pricing or pausing payments—flexibility
that can create added value for customers. An IFS survey
across the industrials sector found that manufacturers that
offer planned maintenance and service contracts were mostly
likely to have profitable aftermarket services, with 62 percent
reporting profitable service businesses.19

One leading industrial equipment manufacturer began offering

hardware-as-a-service, when traditionally it had been sold
as a product. This European OEM develops, installs, and
operates compressor systems at customer sites, providing
maintenance and repairs bundled for a fixed fee. With ultimate
control of compressors in the hands of the company instead
of customers, faults decreased, improving security, and costs
decreased thanks to better predictive maintenance.

In general, many companies in many industries could benefit

from embracing servitization. Recently, B2B companies that
needed to automate their operations but were hesitant about

19
Charles Rathmann, Industrial servitization and field service technology, IFS,
April 13, 2022.

Why aftermarket and service are vital to OEMs—and how to excel 51

 the investment opted for subscription models for autonomous
robots in warehousing, mobile picking, delivery, and logistics.
This commercial model gave these companies the flexibility
they needed to adjust to changes in demand, reduce upfront
costs, and stabilize ongoing costs thanks to the periodic
subscription plan.

As industrial companies expand into servitization, some have

introduced advanced contract schemes, such as performance-
based service contracts (the exact KPIs of which may differ
but often relate to availability). About half of respondents to
the McKinsey A&D Service Survey 2022 consider these
contracts to be critical elements of a compelling offering.20
Done right, these contracts can foster better equipment and
platform performance at lower and more predictable costs for
end users while enabling companies to achieve higher margins,
sign longer contracts, and improve their knowledge of end
users’ needs.

However, there are many challenges in the servitization

journey, including risk aversion, incomplete service solutions,
suboptimal risk and contract management, underpricing,
outdated commercial engines, and internal alignment issues.
Addressing these hurdles will be pivotal as organizations
navigate their unique path forward using all the potential
commercial models at their disposal.

Collecting, analyzing, and monetizing data

Data collection, analysis, and monetization have proven
transformative to the services sector and are likely to remain
a crucial pillar of future successes across the industry.
Predictive maintenance exemplifies the potential of data-
driven strategies. For instance, using AI to predict failures and
minimize downtime in electrical systems, such as ball mills,
is becoming increasingly commonplace for new sales and
installed additions to legacy equipment. This process involves
several important steps, including analysis to identify failure

20
“How aerospace and defense players can win,” September 21, 2022.

52 Why aftermarket and service are vital to OEMs—and how to excel

probabilities, the evaluation of sensors to pinpoint those with
the highest correlation to time to failure, and the establishment
of a predictive model using algorithms such as heat maps and
power variance.

A tier-one aerospace supplier providing aftermarket

components and MRO services for aircraft employed an
AI model to project ten years of repair events creating
aftermarket MRO demand. This model allowed the supplier to
tap into uncaptured MRO revenues and build accurate long-
term plans that reduced time spent on nonpriority components.

Another prominent industrial manufacturer has taken the

technologies, tools, and learnings from using predictive
maintenance to increase the uptime of its own advanced
manufacturing production lines and created a new business
offering for other manufacturers. It now offers sensors and
a cloud-based analytics platform to develop predictive-
maintenance regimes for third parties, with pricing based on
the value of increased production uptime.

Predictive maintenance is one of many applications of AI that

can cut costs in not only services but also operations. In many
areas—including manufacturing, distribution, and inventory
management—data-enabled operations optimization can
enhance service performance at every step of the supply
chain. Such optimization entails supply chain transparency for
superior planning, improved forecast accuracy drawn from
existing data, and streamlined field-service input costs through
analytics-driven staffing and scheduling solutions aligned with
real demand.21

‘Softwarization’ of features
Just as servitization involves the transition of products into
services, “softwarization” refers to the transformation of
technology that is traditionally associated with hardware and

21
For more on harnessing data for analytics-based maintenance, see Harold Brink,
Adam Krych, Orlando Ramirez Cardenas, and Sanchit Tiwari, “Establishing the
right analytics-based maintenance strategy,” McKinsey, July 19, 2021.

Why aftermarket and service are vital to OEMs—and how to excel 53

 physical infrastructure into software-based solutions. This
concept can offer significant benefits, including flexibility,
scalability, and cost-efficiency.

Car manufacturers, for example, are investing heavily

in the transition from a focus on mechanical features to
differentiating electronic features. Not only has this helped to
reduce costs overall, but it has also been driven by customer
sentiment, with more than 80 percent of customers willing
to pay for mobile services. This transition has ranged from
replacing traditional physical buttons for user functions with
a touchscreen to some OEMs exploring pilots of autonomous
vehicles. In the service arena, this shift has resulted in an
evolution of the skills needed to maintain cars, such as
interrogating analytics rather than disassembling an engine,
as well as the use of software rather than hardware updates or
physical replacements to fix faults.

Tesla has been a pioneer in this area, using softwarization

as a strategic tool to retain clients and expand postsales
revenues. Tesla’s value proposition revolves around electronic
features that enhance the customer experience, differentiating
the company from competitors. The much-discussed
Autopilot, a signature feature of Tesla vehicles, exemplifies
this differentiation. All cars from 2019 are designed, from a
hardware perspective, to include the autonomous-driving
options. Customers can decide to purchase a car without any
self-driving option installed initially and then later install the
required software through their personal Tesla account.

Sustainability as a key to unlock new

value pools
Sustainability has emerged as a pivotal key to unlocking new
value pools, ushering in innovative approaches and practices.
Companies are focusing on minimizing the carbon cost of
products and are interested in increasing the circularity and
overall materials cost. Two illustrative examples underscore
this transformative shift in the service landscape.

54 Why aftermarket and service are vital to OEMs—and how to excel

Sustainability is expected to become a defining theme in the
automotive aftermarket, with a focus on “green parts” and
sustainable material sourcing. Initiatives such as recycling
programs for lithium-ion batteries, boasting recycling rates
of up to 95 percent, are emblematic of this commitment. The
adoption of remanufactured parts further contributes to
reducing CO2 emissions, energy consumption, and the use of
natural resources, aligning with strong regulatory mandates
in the European Union. This is an area in which OEMs are well
positioned, with many automotive customers still preferring
OEM parts over substitutes and more than half of customers
open to refurbished or remanufactured parts. Green logistics
practices, including more-efficient distribution and lower
return rates, promise to spur sustainability even more. Green
workshops are becoming qualified to handle new technology
incidents, enabling over-the-air updates and recalibrations
to enhance efficiency. Leveraging analytics and technologies,
such as digital twins and machine learning, aids in forecasting
vehicle failures, optimizing maintenance effectiveness, and
advancing sustainability in the automotive aftermarket.22

The second example illustrates the paradigm shift in the

healthcare sector, particularly with the next generation of
anesthesia machines. These innovative machines are designed
to adapt to evolving clinic needs and offer a compact and
cost-effective solution, enhancing workflow for medical
professionals. The approach prioritizes flexibility, enabling
the addition and customization of applications per physician
requirements. This approach minimizes environmental impact
by reducing the use of disposables and cuts development
costs via the utilization of existing components. Notably,
the product boasts more than 90 percent recyclable parts,
significantly lower manufacturing costs, and sustainable
materials, further exemplifying the fusion of innovation and
sustainability in the service sector.

22
For more on the trends in the automotive aftermarket, see Daniel Christof, Jonas
Hofmann, Denis Hörner, and Sebastian Kempf, “Making every part count: A
component view on disruption in the automotive aftermarket for light vehicles
until 2030,” McKinsey, May 17, 2021.

Why aftermarket and service are vital to OEMs—and how to excel 55

 Higher-than-expected maturity in ‘remotization’
A notable trend in the future of the services sector is the
continuously growing maturity in the “remotization” of
offerings. This has been particularly prominent in workforce
management (WFM), including both strategic and operational
planning aspects. WFM covers a range of functions, such as
forecasting, scheduling, and the optimization of labor-related
business processes, all of which have been affected by the
remotization trend.

This development is applicable across diverse workforces,

ranging from store associates and call center representatives
to field technicians and construction engineers. WFM
processes have traditionally been predominantly manual,
relying on statistical models rooted in historical trends and
often subject to manual overrides because of entrenched
practices. Errors in WFM can have significant business
repercussions, including over- or understaffing, compromised
service levels, excess idle time, and increased overtime costs.
The COVID-19 pandemic has exerted substantial pressure
on WFM while simultaneously opening new opportunities
for innovation.

Changing workforce dynamics and the evolving nature of

work require more-complex forecasting models that consider
multiple variables to comprehend underlying drivers. This,
in turn, has paved the way for innovative service models,
harnessing sophisticated WFM tools.

One compelling facet of this evolution is the emergence

of fully remotized offerings for field services, with leaders
implementing three main technologies: assisted activities,
featuring interactive step-by-step guidance for complex
interventions and voice-controlled interfaces for hands-
free operations; remote support, facilitated by video
connections and augmented reality instructions; and video
tutorials, available to the workforce on open platforms. These
advancements not only enhance operational efficiency but
also ensure consistency and broad reach across the workforce,
reflecting the maturation of remotization in the services sector.

56 Why aftermarket and service are vital to OEMs—and how to excel

One compelling facet
of remotization is the
emergence of fully
remotized offerings
for field services.

Why aftermarket and service are vital to OEMs—and how to excel 57

 Localization paradigm
The localization paradigm is gaining prominence in the service
business, with customers increasingly looking for local service
providers for global brands.

This trend toward localization may be new for many

manufacturers, but it has been a familiar paradigm in the
automotive industry for much of its existence, with OEMs
building symbiotic relationships with their independent dealer
networks in local communities across the world for years.
The lessons learned from these partnerships, which involve
developing integrated strategies to create seamless customer
experiences, are valuable for other industries as localization
becomes more important.

To deliver standardized aftermarket services through local

workers or partners, companies are increasingly investing in
extensive training programs. To ensure a consistent delivery
model across various locations, this training can be in-house or
for dealers and can be provided online or at dealer campuses.
Additionally, companies forge partnerships with professional
training vendors to provide comprehensive training solutions,
while certification courses align with customer expectations
gathered from surveys and other expressed customer needs.
This localization approach ensures standardized excellence in
service delivery across the board.

Online marketplaces
Taking cues from B2C spheres, online marketplaces for B2B
business have been growing in volume and breadth as well. The
importance of B2B online marketplaces has helped to redefine
customer journeys and open new sales channels.

Companies such as Aero-Bay are pioneering innovative

platforms where end users, MROs, and OEMs can seamlessly
trade aftermarket parts for a variety of aircraft and
components. These digital marketplaces are streamlining
the procurement and distribution of critical components,
fostering greater efficiency and transparency. Such platforms

58 Why aftermarket and service are vital to OEMs—and how to excel

offer a centralized hub for buyers and sellers, facilitating cost-
effective transactions, reducing lead times, and enhancing the
overall supply chain ecosystem.

As online marketplaces continue to evolve, they are expected

to play a pivotal role in shaping the future of various service
sectors, optimizing operations, and fostering collaboration.
These marketplaces can create both opportunities and
threats. On the one hand, they offer additional sales channels
and opportunities to sell into the aftermarket; on the other,
they make it easier for sellers of non-OEM refurbished parts
(for example, used-serviceable-material parts in aviation)
or substitute parts (such as parts-manufacturer-approval
parts in aviation) to find and sell to customers. It’s therefore
important to participate in these marketplaces with the OEM’s
differentiation at the forefront of the conversation.

Building ecosystems around products

Many leading companies are investing in building ecosystems
for their aftermarket offerings. These ecosystems are made
up of interconnected sets of services that enable users to
meet diverse cross-sectoral needs within a unified, integrated
experience. Within these ecosystems, value creation occurs
through the integration of customer journeys, addressing
critical pain points with tailor-made solutions.

This approach to building ecosystems around products has

gained traction across various industries. For instance, telcos
across geographies have made efforts to cultivate vibrant
ecosystems around social networking, messaging, gaming,
entertainment, financial services, and business tech solutions.
These interconnected ecosystems keep customers engaged
with the telco conveners, keeping them relevant and providing
additional revenue streams beyond the core offering.

In mobility, there has been growth in the use of digital platforms

that facilitate the trading of repairs and spare parts. These
platforms streamline the entire customer journey, enhancing
the overall experience. Some automotive players are offering
subscription-based services that provide all-inclusive

Why aftermarket and service are vital to OEMs—and how to excel 59

 packages (such as maintenance, tire changes, and insurance)
that goes beyond the traditional car-buying offer. They also
offer third-party services, such as connections to mobile
phone operating systems, mobile data subscriptions to
power infotainment systems, and charging network and fuel
subscriptions. While these might not all be core offerings for
OEMs, they are relevant services for which OEMs have a right
of first refusal to keep within their own ecosystems.

Even the agricultural sector has embraced digital platforms.

Manufacturers are now providing farmers with a wide array
of administrative, consulting, and financial services within
a cohesive ecosystem, leveraging their deep and trusted
relationships with customers.

This shift toward building ecosystems around products

reflects a profound transformation in how industries deliver
value, enhancing customer experiences and fostering
integrated, cross-sector collaborations. It does, however,
require increased attention toward the selection of the most
appropriate partners or the development and integration of
additional business units.

Considering disruptions to the

service workforce
Significant disruptions are anticipated in the service workforce,
spurred on by the continued rapid development of technology. It
is important to note that jobs themselves will not disappear but
rather will likely undergo a transformation, with a change
in focus and required skills. Many leaders identify having a
skilled workforce as the primary barrier to implementing growth
strategies, highlighting the critical role of finding the right talent.

Automation, by leveraging existing technologies, has the

potential to partially replace a number of aspects of current
aftermarket service jobs. This includes a reduction in the
required effort for diagnostics and fault finding, as well
as administrative functions. On the other side, increased
digitalization is expected to change existing jobs and create
entirely new jobs. This global change across industries will

60 Why aftermarket and service are vital to OEMs—and how to excel

likely necessitate a shift in the skill sets required from the
workforce. Therefore, the current workforce will need to
transition to different occupations or undergo significant
upskilling or reskilling within the next decade. Most global
executives concur that upskilling and reskilling of existing
employees should constitute a substantial part of their
strategy to address skills gaps.

Given the scarcity of in-demand technology-based skills

(which are often two to four times undersupplied), and in light
of the costs and uncertainty associated with hiring and with
shifting workforces, the business case for up- and reskilling
employees is increasingly appealing—especially with the costs
for providing such training decreasing. The continuing influx
of millennials and Gen Z into the workforce brings in fresh
skills, attitudes, and expectations, shaping the workforce of
the future. Considering these recent developments, large
tech firms invested significantly in the rollout of reskilling
programs through digital training and learning platforms to
ensure that their workforce is future-proofed and that critical
capabilities, such as technological, social, and emotional skills,
are available internally.

The rapid spread of gen AI has accelerated the need to

onboard tech-related skills, but it also provides a great
opportunity for efficiency in aftermarket processes. Two main
use cases apply to industrial companies:

— content generation to enable fast and automatic

generation of contracts and reporting, with personalized
communication advertisement reducing internal manual
work and potentially speeding up processes

— customer and operator interactions to improve agent

productivity and the quality of answers, referencing all
internal technical reports (both software- and hardware-
related) to significantly increase first-time-right responses

Again, the workforce required might be reduced, but on

the other hand, setting up and maintaining these disruptive
technologies will require workers in highly skilled roles.

Why aftermarket and service are vital to OEMs—and how to excel 61

 Conclusion
For manufacturers of durable goods, the aftermarket has
emerged as a crucial driver of growth and overall business
success. By offering parts and services to customers after
the initial sale, companies can tap into a lucrative revenue
stream with profit margins that can be up to four times as
high as they are for new units. A robust aftermarket strategy
can not only increase operational cash flow but also mitigate
risk and improve the customer experience. However, each
company must tailor its approach based on market dynamics,
the competitive landscape, desired customer relationships,
and the ability to seamlessly integrate aftermarket offerings
into core operations. As companies develop their overarching
business strategies, it is essential to consider how
aftermarket services align with their goals and make
informed decisions accordingly.

Simone Vesco is a partner in McKinsey’s Milan office.

The author wishes to thank Andreas Tschiesner, Antonio Canale, and
Markus Forsgren for their contributions to this report.

62 Why aftermarket and service are vital to OEMs—and how to excel

June 2024
Copyright © McKinsey & Company
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@McKinsey
@McKinsey