Creating value in the specialty-pumps market

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Industrial pumps are critical to modulating the flow of the liquids, gases, and slurries that constitute the lifeblood of process industries such as oil and gas, chemicals, and water and wastewater management. The design of industrial pumps is as varied as their end-market applications and depends on complex operational requirements, including corrosion, abrasion, viscosity, temperature, and purity specifications. Standardized applications, such as residential water pumps, are well served by commoditized equipment that is built to stock, while more demanding use cases in high-temperature or corrosive environments often require build- or design-to-order specialty solutions.

Our research shows that the global industrial pumps market is worth approximately $70 billion today and is projected to reach $85 billion to $90 billion by 2025. As low-cost players in Asia have steadily increased their shares in the commoditized pumps segment, specialty-pumps OEMs and distributors have focused on differentiation through product quality, reliability, and service to drive organic growth, especially in regulated or critical applications such as oil and gas. Furthermore, leading OEMs and distributors have continued looking toward acquisitions as a means of creating value.

The global industrial pumps market is worth approximately $70 billion today and is projected to reach $85 billion to $90 billion by 2025.

Given the prevalence of strong brands and niche applications, both independent and private equity–owned players have merged with regional firms to sew up customer and supplier relationships. While defending traditional end markets and targeting M&A will continue to be important strategic tools for growth, players will ultimately need to respond to shifting secular trends in a post-COVID-19 environment by adapting go-to-market strategies that set companies apart from the pack.

This article outlines several ways for pump manufacturers and distributors to secure leading positions in the marketplace. OEMs should expand beyond traditionally attractive core markets such as oil and gas—which is expected to face persistent headwinds—to faster-growing sectors such as chemicals, pharmaceuticals, metals and mining, and water and wastewater. Meanwhile, distributors should scale up solution design and delivery capabilities for end customers, expanding their portfolios of products and brands while pursuing complementary acquisitions.

Where the specialty-pumps sector is heading

Specialty pumps are used to meet demanding application specifications across a wide range of end markets, including crude-oil refineries, civil construction, and food-and-beverage process manufacturing. Several recent trends—including OEM and distributor consolidation, incremental product innovation, automation and Internet of Things (IoT) disruption, and the COVID-19 pandemic—are shaping the specialty-pumps market and transforming how players can move forward.

The specialty-pumps OEM and distributor landscapes are highly fragmented, with individual companies typically serving multiple product categories and end markets, some of which require OEMs to produce products for critical or high-cost-of-failure applications. Examples include oil and gas refineries, where pump failures can result in safety hazards and significant financial losses from unplanned downtime, and food-and-beverage and pharmaceuticals manufacturing, heavily regulated industries in which pump failures can result in detrimental product-safety defects.

Successful OEM–distributor partnerships enable companies to deliver superior service to end customers via integrated solutions with rapid lead times and robust aftermarket support. Best-in-class distributors must find ways to differentiate themselves to both OEMs and end customers. Leading distributors typically provide OEMs with access to regional customers through local service centers, established customer relationships, and supply-chain partnerships such as commitments to dedicated inventory.

OEM and distributor consolidation

End users increasingly demand integrated solutions across a broad range of engineered products while minimizing supply-chain complexity—for example, by limiting the number of suppliers. To better serve end users, OEMs have used M&A to expand customer relationships, product offerings, and geographic reach—for instance, CIRCOR acquired Colfax Fluid Handling in 2017 for $855 million to complement its product portfolios in industrial, defense, oil and gas.1

At the same time, local and regional distributors are aligning with larger players to pursue growth in adjacent end markets and geographies. For example, from 2010 to 2020, Applied Industrial Technologies made around two dozen acquisitions, including FCX Performance, a leading distributor of flow-control and process-automation products.2

Marketwide, such actions led to a shift from small OEMs and distributors serving regional markets to consolidated entities serving broad geographies with expanded line cards, superior in-house technical capabilities, and reduced reliance on third-party providers.

Incremental product innovation

Investment in R&D remains an important strategy that enables OEMs to differentiate on high-quality products, many of which need to meet increasingly demanding technology specifications. Over the past decade, customer pain points have spurred incremental product innovations. In oil and gas, for example, worn-down impellers in hydraulic fracking operations have led to additional use of ceramics to increase average time to failure, and in healthcare, leakage of fine solids has prompted the development of new materials and designs to improve seal quality. Over the next ten years, innovative new products will be needed to address new challenges on the horizon, including evolving regulations of energy efficiency and sustainability, lean operation of increasingly complex integrated-flow solutions, accident prevention in high-risk workplaces, and reliable equipment performance in extreme environments.

Automation and IoT disruption

Traditional growth levers are unlikely to suffice to meet demand in the fast-paced digital world. Customer demand for connected hardware solutions integrated with software controls can unlock new digital value streams, including maintenance-as-a-service, predictive maintenance, remote support, and data-driven product-line development. Meanwhile, automation, sensing, and virtual- and augmented-reality technologies can be applied to OEM production lines to create cost efficiencies through automated regulation, system management, and maintenance programs.

The COVID-19 pandemic

While operational spending has remained robust, the COVID-19 crisis has resulted in a slowdown in the growth of capital spending, with the exceptions of the power-generation, food-and-beverage, and healthcare sectors (Exhibit 1). First, corporate operating expenditures grew 0 to 3 percent in 2014–19 (pre-COVID-19) and are forecast to remain consistent through 2024 (post-COVID-19), which suggests that industrial aftermarkets could help drive resiliency for OEMs.

The COVID-19 pandemic has largely slowed capital-expenditure growth  across industries.

However, marketwide capital expenditures are expected to fall in the near term with fewer new builds and are unlikely to recover to prepandemic levels for another three to five years. Despite companies’ general reluctance to invest in new capital projects, pockets of growth in select end markets will remain, particularly in process industries such as food and beverage and healthcare, where capital spending in 2019–24 is expected to remain stable or increase slightly over capital spending in 2014–19.

How OEMs can create value in the specialty-pumps marketplace

There are six key areas in which OEMs can create value in today’s competitive landscape.

Getting more from the installed base

Our research shows that customers’ key buying factors for new purchases are—in order of descending importance—product quality, price, brand confidence or familiarity, lead time, domain expertise or technical support, and quality or availability of aftermarket support. In response to these factors, OEMs can use established brand reputations, entrenched customer relationships, and proprietary intellectual-property and engineering capabilities to defend core market positions and expand revenue streams with the existing install base.

Key levers here include developing single-source relationships with existing customers, negotiating exclusivity agreements with key channel partners, collaborating with end customers on after-sales support and services, and cross-selling complementary product lines. For example, a US-based manufacturer converted long-standing competitive sales relationships with several smaller customers into sole-source agreements. This manufacturer also developed regional exclusivity with select local distributors covering different states while partnering with those distributors to build out field-service networks to improve local support capabilities and service levels.

In another case, a manufacturer’s large-scale build-out of service centers enabled it to recapture revenue that had leaked to distributors and independent servicing teams. This move increased retention of customers who needed reliable, trained personnel for time-sensitive equipment repairs. Furthermore, the broad product offering that the company built through M&A simplified purchasing for customers and diversified revenue sources across the oil and gas, power-generation, and chemical markets.

Pursuing IoT-enabled applications

Traditionally, specialty-pumps OEMs have lacked the capabilities and scale for cost-effective direct engagement with end customers; customer engagement was often characterized by reliance on distributor feedback or sporadic maintenance requests when equipment failed or needed to be upgraded or replaced. Today, however, OEMs can implement IoT technologies such as smart sensors to monitor customer-usage data in real time. OEMs can use that information to create new opportunities for proactive customer engagement, such as pushing predictive maintenance alerts, and to inform product development, such as focusing engineering efforts on parts that are frequently breaking down.

As an example, an IoT-based platform that integrates pumps with broader flow-control systems can facilitate OEM collaboration with customers on technical product applications through the following:

  • enabling real-time and predictive maintenance through smart sensors to monitor pressure, temperature, and velocity
  • developing a proprietary machine-learning algorithm to process collected data to optimize equipment health and trigger alerts
  • collecting customer-usage patterns to inform long-term product-development goals
  • centralizing systemwide flow control into a single nerve center

Developing a strategic geographic footprint

OEMs and distributors often serve fragmented customer bases across multiple regions, where a company’s top ten customers typically account for only 10 to 20 percent of revenue. Thus, companies need to optimize manufacturing, distribution, and service footprints to manage the trade-offs between service levels and costs with such a scattered customer base.

Companies need to optimize manufacturing, distribution, and service footprints to manage the trade-offs between service levels and costs when working with a scattered customer base.

OEMs aiming to deliver superior customer service can optimize their footprints across various geographies and end markets through organic growth or M&A. A strategic geographic operational footprint includes centralized global manufacturing centers complemented by local assembly plants and service centers. One company’s growth strategy focused on acquiring small to medium-size brands in oil and gas, power generation, and chemical end markets to plug into a global sales network and service support centers. The results were threefold: improved resilience in global manufacturing and distribution from diversified end-market exposure; enhanced regional customer service from combining niche expertise of smaller OEMs with the scale of an existing global service network; and tailored, one-stop-shop solutions from an expanded product portfolio.

Managing channel partners

As market conditions evolve and OEMs build new channel-partner relationships, legacy channel-partner architectures and incentive schemes can become imbalanced. An outdated channel-partner architecture can result in too many distributors placed into the highest tiers and rewarded with the most favorable discounts. In other words, OEMs may find themselves awarding steep discounts to distributors that may have performed well in the past but are currently not performing as well as they were.

Improved channel-partner management can yield benefits for both OEMs and end users. OEMs can create incentives for channel partners and collaborate with them to promote growth by setting clear goals for sales, service capabilities, and inventory commitments. At the same time, end customers can expect a standard of consistency and predictability in service levels from similar-tiered distributors.

To maintain a balanced tier architecture, OEMs should regularly review and rationalize channel-partner incentives to clearly differentiate between high and low performers. These measures of performance often yield benefits for everyone involved: OEMs gain improved transparency into channel-partner performance and can focus their efforts on helping underperforming distributors meet clear goals for sales, service capabilities, and inventory commitments. In turn, distributors can better understand OEM expectations and can focus on meeting a well-defined bar to reach a higher partnership tier and realize more favorable discounts. And end users can achieve improved consistency in service levels and make supplier-selection decisions accordingly.

Pursuing pricing opportunities

Analytics-based SKU and customer microsegmentation can be used to target specific price changes across a full portfolio (Exhibit 2). OEMs can capture more value from highly differentiated products and rationalize prices against the cost to serve for slow-moving SKUs or smaller customers. That said, SKU- and customer-level pricing decisions should always remain consistent with broader business goals. For instance, SKU pricing should be weighed against defined category-level objectives aligned with businesswide margin and growth targets. Individual customer discounts should be tailored commensurate to the risk and relative importance of each customer, including share of wallet and future growth potential.

Microsegmentation pricing or margin architecture can provide granular  price-change insights.

Capitalizing on aftermarket sales and support opportunities

The aftermarket can provide margin growth even under challenging economic conditions. Our research reveals that aftermarket sales can drive as much as 65 percent of company-wide gross margins, especially in high-wear applications (Exhibit 3). Sources of aftermarket revenue include the following:

  • replacement parts manufactured by OEMs, relabeled private brands, or third parties and used on key pump components such as impellers, pump housings, and shafts (estimated gross margins of 20 to 80 percent)
  • replacement parts for third party–provided subcomponents serviced at the same time, such as seals or bearings (estimated gross margins of 10 to 15 percent)
  • service for maintenance, parts replacement, or overhauls (estimated gross margins of 15 to 20 percent)
Aftermarket sales drive as much as 65 percent of company-wide gross margins, especially in high-wear applications.

Enhanced data and analytics capabilities can enable OEMs to identify target accounts with the largest aftermarket entitlement and growth potential. Once these accounts are identified, OEMs can rapidly reallocate their sales forces to the most promising opportunities and use a centralized digital platform to facilitate cross-functional collaboration, accelerate sales cycles, and improve conversion rates. Best-in-class aftermarket organizations implement live performance dashboards to track aftermarket entitlement opportunities in real time and conduct regularly scheduled account reviews to identify and execute on new customer opportunities.

How distributors can create value

Customers are increasingly seeing traditional distributor services—such as product expertise, inventory management, and financing—as table stakes. Next-generation leaders will provide new value-added services such as customized digital reporting and omnichannel access. Distributors will need to push their limits on commercial and operational excellence to offer enhanced solution design and delivery capabilities in the modern marketplace.

Developing commercial excellence

Best-in-class distributors should develop scalable commercial processes to promote faster growth and margin expansion. These processes can include customizing sales-force structures and pricing strategies to customer or end-market microsegments, performance management cadences to limit pricing variability and margin leakage, and advanced analytics to aid the sales force with customer negotiations.

Commercial excellence requires the development of a strong account-management function through a “field and forum” approach to build account-manager capabilities, clearly define account objectives, and shift the value proposition from pricing to value added. Excellence also requires a sales force equipped with digital tools for account-pipeline management, streamlined reporting and omnichannel ordering, identification and prioritization of customer targets in pockets of potential growth, and rigorous performance management to address roadblocks and ensure execution against sales targets.

Our research shows that customers increasingly demand the same omnichannel convenience from industrial distributors that consumers have grown accustomed to for household goods. A recent McKinsey survey reveals that about two-thirds of B2B buyers prefer remote human interactions or digital self-service. The COVID-19 crisis has only accelerated a shift to B2B digital purchasing channels—with eight in ten B2B leaders saying that omnichannel will be as effective as or more effective than traditional sales channels.

Digital channels will likewise become increasingly important in specialty-pumps distribution, yet distributors largely lag behind in adoption of digital technologies. Although general industrial distributors have made significant recent investments in online platforms, many specialty-pumps distributors lack sophisticated e-commerce platforms; some lack any platform at all. Another recent McKinsey analysis of 350 industrial companies reveals that digital leaders have already achieved revenues and shareholder returns higher than those of laggards (47 percent total returns to shareholders for leaders versus 27 percent for peers). In the face of accelerated digital transformation, investment in omnichannel capabilities will become a necessary condition to meet market expectations.

Maintaining operational excellence

Distributors can continue to pursue reductions in operational costs through category management, logistics optimizations, and zero-based budgeting. First, distributors can improve category management through data-driven procurement to optimize volume discounts and negotiate better pricing with suppliers. Distributors can establish standardized processes, tools, and metrics for merchandising and assortment optimization. Finally, they can reduce supply-chain complexity through supplier consolidation and SKU rationalization.

Next, companies can reduce logistics costs by optimizing their distribution footprints and service-center locations, adopting lean-warehousing practices, conducting rigorous capital planning, and implementing dynamic route optimization. Companies that pursue cost excellence along these lines should also conduct regular reviews to identify opportunities to reduce costs through third-party logistics providers.

Finally, distributors should consider carrying out a bottom-up comprehensive cost transformation. This approach entails zero-based budgeting and fundamental restructuring of organizational practices including demand justification for major cost categories every year, top-down and bottom-up targets, and rigorous performance management.

Consolidation has become a fact of life for specialty-pump OEMs and distributors, and it will continue to be a core growth vector for industry leaders. That said, best-in-class organizations will recognize that optimizing the customer experience is the key to driving sustainable growth and resilience—even during times of uncertainty. Therefore, as the market expands and shifts more rapidly than ever, commercial and operational excellence will be required in equal measure to meet the evolving needs of customers.

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