In general, service is important in the manufacturing industry. In a food processing business in particular, service should be the backbone of the organisation, adding value to the bottom line through high margins on spare parts, service products and contracts. If it is not, there is something is wrong which needs to be addressed.
Let´s start with explaining why service should be the backbone of your food processing manufacturing business.
Customer relationship with food processors
While your sales organisation initiates the business relationship with a customer only once (closing the deal might take 12-16 months), your service organisation will continue to grow and foster that relationship for many years after the deal has been concluded. If your customer spent €1 million to buy your equipment initially, it is likely that over the next 10-15 years (depending on equipment lifetime) this customer will spend at least €1 million more on maintenance, spare parts, consultancy/training, and break/fix services to keep the equipment running optimally and in compliance with strict regulations under which the food processing industry operates. The cost of sales of service products is much lower than the cost of selling equipment initially, especially if the customer has purchased a service agreement where they pay a fixed amount for parts and services.
Margin and profitability
The average margin on sales of OEM spare parts, according to bench-mark data is around 25%, while the margin on the initial sale of equipment is much lower (around 10%). So, for every 1€ invoiced by service, another 25 cents get added to the profit. There is a caveat here - this only works if your customers do not purchase pirate parts online, or at a corner hardware store. It is recommended that parts are offered in optimised (modularised) packages, preferably also via a service agreement, so you can properly plan in terms of time required for manufacturing and delivery.
Economic cycle and situation
In times of economic upswing, investments in new equipment are high because borrowing money is relatively easy to get with low interest rates. This is great for service organisations in the manufacturing industry, as they typically source installation of new equipment in factories. In times of economic recession or during a pandemic however, businesses hold back on major investments, such as buying new equipment. Instead, they would rather spend money on repairs and maintenance (service hours and spare parts) to get the best performance out of their initial investment. In conclusion, whatever the economic situation, there is usually always a steady demand for service and spare parts. If your service organisation has the correct set-up of processes, people, and systems - it will serve as the backbone of your food processing business, adding considerable profits to its bottom line. If not, there are several actions that you can take to fine-tune the aforesaid variables.
In conclusion, whatever the economic situation is, there is always a steady demand for service and spare parts. If your service organisation has the correct set-up of processes, people, and systems you make sure that your services are the backbone of your food processing business, adding considerable profits.
Article written by Aart Schalk Noventum Senior Associate Consultant.