Aerospace Aftermarket Integrated Product-Services Strategy

In this article I look at the strategic flow and business case outlook for how aerospace manufacturers can utilize aircraft health monitoring and predictive maintenance data analytics to expand its aftermarket value chain into integrated-products services portfolio offering adjacent to selling core products and spare parts. The output is the aftermarket portfolio with targeted segment offerings - providing flexible pricing models to customer fleet and operational requirements.

Introduction

Original manufacturers looking to capture aftermarket and larger share of the market must continuously innovate their products and engage into services offering to take advantage of large opportunities that will be offered by the aftermarket over the next decade as the in- service fleet grows

As age of the aircraft is increasing, the operators and customers are looking for greater economic life through life-extension programs to sustain the fleet more – this has put pressure on aftermarket business. Though this has been one of the strategic focus areas of many OEMs for a few years now, the level of activity and focus on aftermarket has increased only recently.

This project explores the potential of integrated product and services offering by OEMs to grow from core products - selling products (systems or airframes) and spare parts - to adjacent services market providing solution based offering to it’s customer leveraging aircraft big data; hence expanding the full aftermarket value chain of the aircraft life cycle.

External Business Environment

Few of the key external factors that drive the integrated product services market forward are; 

?               Currency Exchange Fluctuations

?               Used and Serviceable Material

?               Third Party Service Providers

?               Technology Advancements

?               New Safety Mandates - Industry Regulations Standardization

Market Assessment – Value & Size \ Global Growth Outlook

The aircraft aftermarket data is collected from various industry white papers, websites and forums.

Next 20 years, the total worldwide aerospace industry aftermarket services spend will reach US$3 trillion. On an annual basis, the services – MRO (including fleet management, training and big data analytics) spend will grow from $53 billion to over $135 billion per year, representing an average year-on-year growth of 4.6%. over next few years.

Global aerospace industry current aircraft production is worth > $ 180 billion. This puts services market as 75 % of current value of production of aircraft – a huge market share currently not tapped fully by OEMs

As new production, sales expected to go slow and probably stagnant in next few years OEMs has can benefit to capture and take control of services market through strategic expansion of core capabilities into services aftermarket.

Aircraft Big Data Outlook:

With new technology on board in commercial and military platforms from thousands of sensors and various new systems, the amount of raw data being generated is huge. It is estimated that Facebook accumulates around 600 TB of data per day. If we take the Boeing 787, for example, it generates 500 GB of data from every flight

Customers and operators are relying on technology and data to drive smarter business decisions and improve the customer experience, improving maintenance and operation cost, as well as safety and effectiveness of the fleet.

For OEMs and its competitor’s, the efficient and value utilization of this data can enhance their market presence bringing more OEM services and enhancing customer experience in a long way through aircraft life cycle.

How to cash in this market opportunity – requires strategic and value driven thought process with integrated product services offering.

Value Chain Analysis

Majority of OEMs focus mainly on traditional aftermarket value chain – selling products and spare parts. The following aftermarket value chain mapping provides the full cycle of aircraft aftermarket value chain including products, services and sustainment parts/services. he key stakeholders and competitors for this aftermarket value are;

?               OEMs,

?               Suppliers,

?               Operators/customers (Fleet operators)

?               3rd party MRO service providers

As evident from above aircraft big data outlook the aftermarket value chain over the next decade the services industry is expected to grow at an average CAGR of 4- 4.5% among all lines with the aftermarket worth for all services segments - 75% of the value of the current production of aircraft. This is a huge market opportunity and revenue stream for the OEMs to capture and explore.

Value Extraction and Strategic Control Points

The value chain analysis indicates OEMs can capture the major share of the aftermarket from 3rd party MROs, operators and to some extent OEM suppliers by leveraging their strong Products based footprint and sophisticated supply chain networks by offering new integrated product services to include MRO, fleet management and big data services.

However, the vital to aftermarket services is the efficient use of aircraft big data – digital transformation utilizing health monitoring and predictive maintenance that is the key for the long-term sustainment of fleet and aircraft life-cycle management.

Value Extraction and Strategic Control Points

The value chain analysis indicates OEMs can capture the major share of the aftermarket from 3rd party MROs, operators and to some extent OEM suppliers by leveraging their strong Product based footprint and sophisticated supply chain networks by offering new integrated product services to include MRO, fleet management and big data services.

However, the vital to aftermarket services is the efficient use of aircraft big data – digital transformation utilizing health monitoring and predictive maintenance that is the key for the long-term sustainment of fleet and aircraft life-cycle management.

Capability Assessment – Gap Analysis

The value chain matrix further maps OEMs and competitor capability assessment with high, medium and weak capabilities across the value chain and strategic control points. The gap analysis leads to critical strategic question to OEM to obtain these competencies in-house, through acquisition or joint venture (partnership).

 The deep analysis of value chain matrix shows that Suppliers has strong capabilities in big data services capability than OEM and 3rd party OEM has strong capabilities in MRO aftermarket services.

Core Market Competency and Adjacent Market Move

OEMs have strong core competencies in the Product area of strategic control and low level strategic control over Services portion of the aftermarket value chain. This is where OEM can take leverage of their strong Products aftermarket value chain strategic control points and enter aircraft big data and MRO services aftermarket - OEMs can provide an integrated aftermarket product-services offering to capitalize major share of the $135 B aftermarket services industry. Refer to Exhibit 7 providing core competency and capability matrix evaluation.

Key Benefits – Transitioning to Adjacent Market

Some key strategic benefits to transition from core to adjacent services market in providing integrated product-services solution.

1.  Enhancing customer operations through continuous life cycle improvement
2. Work closely with customer for the entire product life cycle – keep engaged for the sustainment phase – helps understand future product requirements – capturing greater life cycle value.
3. Develop new products based upon customer experience and sell new products as part of integrated product services solution strategy.
4. OEMs can take advantage of being platform type certificate and having integrated knowledge base of aircraft to provide operational improvement to its key segments.
5. Greater market share and more margins with services portion to grow tremendously

Key Disruptive Technologies – Pivot to Enter Aftermarket Services

As the technology advances into aircraft, OEM can provide and take leverage of OEM product design and introduce and adopt key technologies to exploit in today’s aftermarket world. Further research and analysis indicates following key advance technologies:

• Predictive Maintenance (Advanced Analytics)
• Aircraft Health Monitoring Systems
• New Repair Technologies
• Live Maintenance and Support through wearable and mobile tech
• Real-time Aircraft Operational Data

Capability Deployment Options

With OEM’s strong Product base aftermarket provides the good rational to acquire big data services (health management and predictive maintenance) in-house for key products and force the suppliers to enter into partnership scheme with OEM to deliver their service to end customer in this niche B2B aftermarket.

Market Segmentation

The aerospace aftermarket is very niche – for OEMs it is more of a traditional B2B market with familiarize market to sell its products and services mainly in commercial, defense and business community. However, with integrated product services aftermarket the OEMs business model requires to approach B2B in a B2C model to align with end user values – adopting incentive alignment strategy.

Segmentation Strategy

With this the traditional approach for market segmentation, the strategy organizes the customer or business based upon demographic, geographic, behavioural, or psychographic lines—or a combination of them.

The real need is to perform market segmentation in a way that the customer and business can easily identify and purchase the product or services that is right for them irrespective of demographic or geographic lines. Therefore, the attribute based segmentation approach is utilized in defining the target market that is measurable, differentiable, actionable and substantial for OEM aftermarket integrated product services.

The segmentation tree below illustrates the OEM aftermarket segmentation into a meaningful distinct group of customer and customer needs – each group can be identified and offered a different mix.

Segmentation Analysis

The segmentation analysis process is utilized to identify the market to be segmented needs of the market and identify the best segmentation scheme. The key attributes in terms of reliability, availability, predictive analytics, integrated logistics support, life cycle engineering support, costing/pricing model and product to service coverage are utilized to group and bundle the key segments together.

The segment validation matrix Exhibit 10 and Exhibit 11 provides key insights to OEMs for aftermarket segmentation analysis. Based upon matrix scoring, the OEMs can approach various closely positioned segments as one large segment to offer integrated product services or with some tailoring to attributes can position their offering to target and key segment as per-segment validation tree above – a flexible approach in delivering key value proposition

Further, the attractiveness of various segments is carried out to selectively invest in the segment that is most attractive – this helps aerospace OEMs to position their portfolio of products especially onboard avionics and health monitoring systems with an integrated product services to MRO segments or as a standalone Big Data services segment – both deem to be key attractive segments.

The weighted approach methodology is utilized to develop segment evaluation. Figure 8 rate the segments attractiveness on a scale of 1-10 and apply weighted scoring. The segmentation evaluation indicates that utilizing and adopting integrated product services big data services for aftermarket fleet with

Outcomes like reliability gains, long fleet life cycle support and MRO cost savings are tangible benefits (attributes) for OEMs in justifying further investment in big data integrated product services to capitalize. This is a shift from traditional diagnostic practises to prognostic maintenance that customers can adapt with evolution of new airborne technology and upgrade of legacy systems via OEM.

Value Proposition - The integrated product-services solution provides best in class aftermarket support maximizing aircraft life-cycle support - reducing component and airframe maintenance and inventory cost - with enhanced in-service reliability and analytics than its competitors’ due to comprehensive product to service coverage and flexible pricing models

Conjoint Analysis

With key segments identified and the value proposition established above, it is rudimentary to extract and evaluate customer insights – further gain competitive advantage to rightly position aftermarket integrated product services big data and MRO services with attractive pricing model and framing key attributes that value fleet operators.

The lack of comprehensive field data and the time directed the project study to leverage already established and available studies done in B2B market and utilize it for this project – basically to demonstrate principles of conjoint choice analysis. The project utilizes Oliver Wyman 2016 survey on aircraft big data innovation and adoption study for MRO.

First it is necessary to further expand on the key attributes of big data and list the values it can bring to aftermarket fleet. Within aircraft big data segmentation the aircraft health monitoring and predictive maintenance adoption deems to be growing trend among the customers and operators that support aftermarket key attributes defined in aftermarket segmentation

• Reliability Availability and Maintainability (RAM)
• Integrated Logistic Support (Includes spare parts/inventory management)
• Life Cycle Engineering Support
• Product to Service Coverage
• Costing \ Pricing Model (Comprehensive to Standalone Cost)

As a result, the respondent survey indicates the perception of customers among various competitors (OEMS, 3rd party MRO providers and airlines) how various players many operators report modest big data utilization. As per survey and indicated below the expectation is to utilize 50% predictive maintenance data and around 29% aircraft health data by OEMs.

Further, the survey list key values it brings to fleet operators and customers with the adoption of integrated product services big data (includes predictive maintenance and health monitoring).

• Increase in reliability
• Decrease in maintenance costs
• Improved total cost of ownership modelling
• Decrease in spare parts requirements
• Decrease in airframe maintenance cost
• Decrease in inventory costs (such as parts, warehousing, operations)
• Decrease in spare aircraft needs
• Decreased need for preventive maintenanceExhibit 15 E

The survey indicates that outcomes like reliability gains and cost savings are tangible benefits operators/customers can point to in justifying further investment in big data - suggesting significant work remains to tap the full potential big data services with in the aftermarket.

Further, the additional survey conducted within industry experts and big aerospace management organization shows that only 8% of respondents believe the aircraft big data technology has reached the level of sophistication and utility ultimately expected - 59% (22%+37%) see aircraft big data evolving into a core decision support tool for aircraft aftermarket.

The Exhibit 17 survey provides estimating and validating the customer value system and to help OEM in developing utility function and framing optimal global pricing strategy. Further it helps to cater various customer base and operational needs. For example, customers with ageing products and systems or fleet are more cost sensitive than those with new ones, since repairs or parts may equal or exceed the value of an airframe. To increase the share of lifetime at such customers, OEM can use the integrated product- services offerings utilizing big data to analyze which parts or portion of maintenance offer can be upgraded at what time - offering refurbished parts or even provide a buy-back guarantee for spare parts. Such service not only offer lucrative incentive and aligns with the end customer operational requirements but provide OEM to maximize the lifetime penetration by ending up long term contacts – hence maximizing market share and growth for product life cycle.

A utility function can be established employing above conjoint analysis that can provide a variety of value cost models depending upon key value attributes that matter to end customer and what level of operational requirement needs to be maintained and achieved.

Portfolio Analysis

As OEM get themselves aligned and engaged towards integrated aftermarket product services big data and MRO segments, the need is to develop a portfolio of service products. This is because; though the customers fall into one big segment but usually different customers have different service needs even though they may own the same OEM product - as evident from above utility function and choice analysis.

Further service needs also vary at different times – a grounded aircraft means more to the military air force during a war than it does during a training exercise and a grounded commercial transport aircraft (like B777) for as schedule flying from J.F Kennedy Airport to Vancouver has different requirement.

Therefore, OEM can utilize the utility function above to study fleet and customers’ operational needs, and offer integrated product-services that satisfy different needs and price them according to customer willingness to pay (WTP).

This provides OEM the portfolio of integrated product-services for big data and MRO - position their offering on the BCG matrix (Exhibit 18 - Concept Example below) to evaluate which level of integrated-product services provides high growth market and further, the decision making on the allocation of assets, calculation of risks and attainment of investment objectives.

With limited data and time, the detailed portfolio analysis could not be achieved, however the concept is addressed above for this article that shall help OEM to utilize the methodology for offering the integrated product services to valued markets based upon growth and market share

Pricing Strategy – Value Based Pricing

One of the key elements of offering integrated (big-data & MRO) product services is to formulate the aftermarket services and business models that OEMs can use to deliver them in a flexible and value based methodology – this is because they drive the incentives of to all the stakeholder in the aerospace aftermarket supply chain: OEM, service provider, logistics provider, and customer.

OEMs can do a high product sale price cut and spread the cost over the entire product life cycle leveraging big data and harnessing aftermarket services offering to recover the cost. This is not only attractive to suppliers to sell more parts but offer customers to minimize inventory and spare parts costs.

 Using conjoint analysis and utility function above various value based pricing model for the same asset depending upon the stages of life-cycle can be formulated. For instance, OEM can offer cost plus service model to the customers or suppliers when a brand-new product and systems is purchased because the historic failure rates and accurate service levels are hard to predict. As the product goes in-service and used more and more, the performance-based and flight hour (power by hour) costing can be offered.

Vertical Incentive Alignment Strategy

The flexible pricing offer and methodology provides the key advantage to OEMs, over traditional suppliers and 3rd party MRO provides, aligning incentives and providing vertical integration across maintenance cost and inventory management through performance-based pricing and/or fight hour costing – customer pay per hour for the asset (product) and services for the agreed service levels to keep the fleet operational. Table provides fours (4) recommended pricing models.

Go to Market Tactics

Point of Positioning – Value Proposition

The market segmentation and value proposition extracted from OEM strategic control point by offering integrated product services provides valued and unique single-minded proposition differentiating it from suppliers and third-party providers.

Point of Time – Offering Time

The key strategy for portfolio of integrated-product service offering and to increase the life time aftermarket penetration, OEMs have potential to match customers life cycle needs and provide one of the portfolio to as per advertising section.

Point of Access - Distribution Strategy

To deploy integrated product service offering and to increase the life time aftermarket penetration, OEMs need to evaluate their current product sales strategy which often involves working with distributors in a B2B environment.

OEMs use multiple channels to sell their products to end customers - familiarized to selling to distributors and third-party providers. However, deciding to focus on the entire life cycle opens additional channel - dealing directly with end customers in addition to suppliers and third-party providers.

Strong channel control and aligning integrated product-service strategy to customer needs with a direct route like B2C channel, OEMs by deploying big data analytics will own the fleet life cycle and customer data – hence, translating that into right service offering utilizing various pricing model and utility function variables that values end customer needs. Further it will cut the distributors cost – saving substantial overhead cost for the end customer.

At the same time deploying the product-services solution to third party, provides suppliers and partners (in a B2B environment) to sell and market OEMs product and services efficiently – as MRO and suppliers will sell the services to end customer ultimately.

Point of Value – Flexible Pricing Matrix

Flexible and portfolio of pricing offering to provide integrated product -services to match customers’ needs and operational cycle dictates strong value - hence, translating into right service offering utilizing various pricing model and utility; as discussed in pricing strategy.

Point of Touch – Adaptive B2B and B2C Model

Utilizing mix of B2B and B2C channels to suppliers a, 3rd party providers and end customers – multiple venues like developing own digital channels for B2C market and harnessing distribution for B2B market for portfolio of services gives a unique advantage to OEM to sell products and integrated product-services offering