Long Read: the Secondary Market and the Servitisation of Machining

11 June 2024
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For manufacturers, the opportunities presented by the second-hand market are vast. As buyers themselves, the second-hand market provides cost-effective access to the latest technology and equipment. As sellers, the benefits go beyond a single sale of used equipment. 

As after-market investment grows and discussions rage about the servitisation of manufacturing, job shop owners may consider moving away from a product-based business model entirely.

How can job shop owners navigate the secondary market both as buyers and sellers?

 

The pressures on manufacturers

Photo courtesy of Sven Daniel on Unsplash
Photo courtesy of Sven Daniel on Unsplash

AMFG has written extensively about the positive global outlook for machining. The industry is enjoying innovation and economic growth due to increased demand from sectors such as aerospace or semiconductors. Despite this, the picture is not entirely positive. 

It’s impossible to read industry news without hearing about the ongoing labour shortage. While this continues to dominate the conversation, studies show that job shop owners are also facing intense financial pressures. 

Data released by the National Association of Manufacturers (NAM) outlines that a significant proportion of companies are facing economic challenges resulting from a weaker domestic economy (53.18%), unfavourable business climate (58.86%) or expected increases to raw material prices and other input costs (58.52%). 

Rising energy costs have put a strain on consumers and manufacturers alike. The energy needed for production means that manufacturers are likely to be hit hard by these price hikes. In recent years, retail energy costs have soared to 8.32 USD per kilowatt hour in 2022 and 8.06 in 2023. This view is echoed among machinists more specifically who reported inflation as a top concern in 2023.

Facing these pressures, a large investment in new equipment or automation technology may be inaccessible to some shop owners. So is there a cost-effective way for job shop owners to take advantage of these developments?

The second-hand market

Photo courtesy of Surplex
Photo courtesy of Surplex

A new 5-axis mill may offer new capabilities in more faster and accurate machining, but with price tags in the thousands or hundreds of thousands of dollars, buying a new machine may be beyond some job shop owners’ budgets. In these cases, the second-hand market offers an opportunity to get good quality equipment more cost-effectively. 

Price is only one benefit of buying used equipment. Moreover, access to more efficient machines will also reduce the energy expended during the production processes leading to savings on energy bills.

Surplex, an e-commerce company specialising in the digital auction trade of used machinery, points to the availability of equipment as another major draw. When buying second-hand, job shops can avoid “the long wait times that occur with the current full order books of machine manufacturers”. With the increase in digital marketplaces, buyers can also take advantage of sales across the world no longer limited to their region or country.

There’s good news for sellers too with the secondary market bringing high demand for machines and quick liquidation. 

Nevertheless, buyers must be savvy when it comes to buying new machinery. CNC machine tools supplier GNC Makina points out that buying used CNC machinery inevitably comes with some degree of risk. “One of the biggest mistakes made is that second-hand CNCs, which are planned to be invested by purchasing from any country abroad, are evaluated only for their prices. However, whether the machine is working or not, the deficiencies, if any, must be determined by experts, and the necessary costs to eliminate these deficiencies must also be taken into account.”

These comments echo concerns raised by the RPC who say that to ensure the reliability of the used machines, there must be some degree of authentication or accreditation for the goods sold to ensure that buyers are receiving quality goods.

Remanufacturing

 

Photo courtesy of Quick Grind
Photo courtesy of Quickgrind

 

Reduce, reuse, recycle, remanufacture?

Remanufacturing is a process wherein parts or equipment are restored to being like new or even better than new. This is not to be confused with refurbishment which may extend the lifespan of a product for a short while but does not fix the part or machine long term. Put simply: if refurbishment is putting tape over the leak then remanufacturing is rebuilding the pipe.

The benefits of remanufacturing seem to offer the best of buying second-hand equipment or parts while circumventing the risks. CNC Precision Machine Rapid Entershop outlines a number of ways that manufacturers can take advantage of remanufacturing. 

The first of these is by updating old equipment, for example by converting an NC machine into a CNC machine, “Machines like boring and milling machines, lathes, and grinders are ideal for upgrading.” They also recommend remanufacturing as a way to incorporate old machines into an automated workflow. “Many solid, old machines still deliver precision cutting but just don’t fit in an automated workflow. The addition of a processor and other auxiliary equipment can easily transform your dated equipment.”

The results are promising. Estimates show that savings of between half and two-thirds of the cost of a new CNC machine can be saved by remanufacturing a current machine. Adding high-speed spindles or automatic pallet changers will significantly reduce those savings.

Remanufacturing then is a sustainable way to bring a new lease of life to old equipment, increase productivity and, crucially, align with job shop owners’ budgets.

 

The rise of the aftermarket in manufacturing

Photo by Acton Crawford on Unsplash
Photo by Acton Crawford on Unsplash

The second-hand market and remanufacturing are two avenues for buyers to take advantage of cost-effective solutions to new equipment or technology. The case of our hypothetical job shop owner looking for updated equipment is just one example of how manufacturers may interact with the aftermarket. 

The aftermarket covers everything that needs to be done after the sale of a product to maintain it, improve it or upgrade it. In automotive, this is nothing new. The aftermarket and spare parts sector is a huge market set to grow to over $400 billion in 2025

In recent years, studies have shown that the aftermarket is a growing area of interest for manufacturers. In an article for McKinsey, Simone Vesco points out that aftermarket services have evolved over recent decades. No longer operating responsively, companies have, “evolved their aftermarket approaches to take advantage of the gold mine of opportunities presented by aftermarket sales and service.”

Investing in aftermarket services has a multitude of benefits. Providing both the original product and additional maintenance, repair or spare parts services creates new opportunities to develop the customer relationship. 

Companies can evolve a single transaction with a customer into a longer longer-lasting relationship. As a result, companies have access to additional and more consistent revenue streams. The customers benefit too. As Simone Vesco points out, customers enjoy “extended product life and improved product performance. Who understands an industrial machine, for instance, better than the OEM that created it?”

In the machining sector, Kip Hanson outlines how job shop owners are taking advantage of aftermarket services as customers to streamline their services. According to Hanson, by outsourcing work such as calibration, cleaning and tool maintenance, smaller job shops make more efficient use of their employees’ time.

 

Digital infrastructure

Photo courtesy of Myriam Jessier EveI on Unsplash
Photo courtesy of Myriam Jessier EveI on Unsplash

While this may sound like a win-win deal, there are still barriers in place before buyers and sellers can fully take advantage of the aftermarket.

The concept may be beneficial but the reality is that companies are held back by outdated systems. As Boris Lokschin, CEO of Spryker Systems points out, “Unfortunately, out-of-date downloadable spreadsheets with product numbers and scant descriptions are unlikely to drive a high level of additional business and inevitably lead to customer confusion.”

Instead developing these systems to become a pleasant user experience through technology can increase the success rate of aftermarket and e-commerce services for both buyers and sellers. 

Beyond the obscure information offered by these spreadsheets companies may look at “integrating digital tours of products using VR or AI can help potential customers get a much better idea of the used equipment they are buying.”

Studies show that investing in these services is more than just a recommendation but is increasingly becoming a priority for different companies. A survey conducted by Valtech showed that the number of organizations relying on e-commerce for aftermarket services has more than doubled from 7% last year to 15% this year.

Evidently, harnessing the capabilities of ecommerce, particularly for use in the aftermarket is becoming an increasing concern for manufacturers.

For job shops, providing aftermarket services may prove lucrative. However, these services must be supported by a robust digital infrastructure. 

 

The servitisation of manufacturing

Photo courtesy of Siemens
Photo courtesy of Siemens

In January of 2024, giant of industrial manufacturing Siemens announced a new collaboration with Salesforce, a provider of customer relationship management software. 

The announcement centred around the release of the Teamcentre SLM app on Salesforce AppExchange. According to Siemens, “This new app enables manufacturers to adopt more service-centric business models, improve the customer experience and increase service revenue.”

While this announcement may mark a new opportunity for manufacturers to connect to their customers, it also marks a move towards the servitisation of manufacturing. 

The servitisation of manufacturing describes how some companies are rethinking their business model away from a product-based offering to a service or outcome-based one. 

According to Dr. Arsham Mazaheri, we can think of servitisation as a “value-added bundle, where you’re not only delivering a tangible product but also accompanying services that enhance its use and lifespan.” 

Dr Mazaheri goes on to describe 3 levels of servitisation: Level 1 follows the traditional model of manufacturing where companies focus on creating and selling products. Level 2 includes offering auxiliary services such as product repairs maintenance, and condition monitoring. Finally, at stage 3 manufacturers build on the level 2 services, offering more complex solutions, which can include pay-per-use contracts and integrated solutions.

 

The companies rethinking their business model

Photo courtesy of Alucast
Photo courtesy of Alucast

On a smaller scale, the story MNB Precision Engineering shows us how this might work for job shops. Based in the US MNB is a family-run company that provides manufacturing and precision engineering services. After adapting their business to a servitisation model, they saw a 78% decrease in lead times and cost savings of up to 10%. 

To achieve this, MNB Precision began to offer the services it had previously been outsourcing, such as shot peening, magnetic particle inspection and liquid due penetration, in-house. The result offered benefits for MNB and their customers. Their customers now had access to a wider spectrum of machining services under one roof and MNB had an additional revenue stream.

UK-based manufacturer Alucast saw similar success with their move towards a servitisation. Tony Sartorius, Chairman of Alucast, pointed out the need to stay competitive and add expand the scope of their services as the rationale behind the expansion. 

He commented, “Manufacturing is extremely competitive, so the more value we can add to the customer, the more chance we will have of building strong, lasting relationships. […] Our business model was already unique in that we offered fully finished and machined castings from one source, and we decided to build on this by embracing servitization, developing new services that would deliver extra revenue streams.”

Alucasts now offers a wide range of services to customers including expanded CNC machining services, simulation software and advanced metrology. The results are promising with the expansion predicted to bring in an extra £800,000 in revenue a year for the company.

Could moving towards a service-based business model be a repeatable approach for job shops looking to scale?

 

Final thoughts

Photo courtesy of MNB precision engineering
Photo courtesy of MNB Precision Engineering

The secondary market and aftermarket services provide job shop owners as both buyers and sellers.

Traditional business and production models are threatened with obsolescence in the face of advancements in machine technology and automation. Job shop owners as buyers must find ways to update their systems and equipment. For those with limited budgets, these updates may require a creative approach to implement. Solutions such as the second-hand machine or the remanufacturing of existing machinery market present themselves as solutions to this issue. 

On the other hand, this single function is only a drop in the ocean of the secondary market and aftermarket services. Job shop owners have an opportunity to update their business practices as well as their equipment. 

Job shops that can expand the scope of their services can access additional streams of revenue and maintain long-lasting relationships with their customers. As a result, increasing numbers of job shops may adopt servitisation models.

In our article regarding the future of machine shops, we discussed how job shops may be forced to evolve and scale up to stay ahead of the competition. As the infrastructure to implement servitisation develops and makes these practices more possible, we could be left wondering if this is the future of the job shops.

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