Severe Service Valves – An Important Revenue Source

AI, smart tech, and VAR metrics provide suppliers with the leverage to turn service and support into promising revenue streams.

By Robert McIlvaine – CEO – McIlvaine Company

The severe service valve market exceeds $10 billion per year and is growing at a rate faster than the general valve market. The repair market, too, is quite large. Over the life of a severe service valve, repair and support revenues can be three times the initial price. The performance of these valves is required to be closely monitored, and adjustments are made as needed. Oversight and service, which is traditionally undertaken by the manufacturer, are now more commonly being transferred to third parties, including valve suppliers.

Condition and performance monitoring systems continually alert the operator of changes that need to be made. Expert service engineers can be involved virtually in any of the operations to analyze and repair valves at sites thousands of miles away.

With AI, analytical tools are now being employed and proving to be the most useful. If a valve manufacturer has a site capable of producing 6,000 six- inch severe service valves per year, with the list price being $5,000 a piece, the annual list price revenue for the manufacturer is $30 million.

The challenge and cost of providing replacement valves will drop considerably due to the abilities of AI. Every plant of any size must obtain air and water permits so we can identify the plant and the specific opportunities. For example, here is an opportunity identifier:

Each individual valve is a solution but not necessarily an opportunity because acceptable EBITDA is not possible. However, the valve can be pursued as a group. There could be 20 steam drain valves that can be pursued together. Depending on the pressure, the trim requirements will differ, but the valve design will be the same.

This quantification ability has immense value for suppliers and distributors. It ensures on-time delivery for owners. This level of detail has typically appeared only in location diagrams and simulated digital twins. However, from an analytical standpoint, it is necessary to have an accurate descriptor.

There is a new tool called Volume Adjusted Revenue (VAR), which in this case would be $30 million annually. In some hypothetical cases, due to discounts, the actual projected revenue is $27 million. However, this is the price for the distributor who also takes a cut of usually 10%. So, the revenues from the distributor are $24 million per year.

The big players in the valve industry and investment firms are buying service companies. So, actual reported revenues by the valve manufacture jump back to $27 million and are 90% of VAR.

With smart technology and automation, manufacturers can capture a large percentage of the support revenue. The end result is the valve supplier can generate revenues several times the VAR by including all the smart technology opportunities.

Severe service valves require a great deal of knowledge on the part of the valve suppliers. This also ensures higher Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) than with general service valves.

Even though severe service valves initially represent only 15% of the total valve market on a total revenue basis, they end up generating an additional 30% of the total revenue.

Since they account for only 15% of the initial market, severe service valves have the profitability equivalent of 45% of the market. The VAR represents a new way to evaluate the potential of valve manufacturing facilities. With smart technology and automation, these suppliers can triple the revenues from this facility.

This is a very useful tool in assessing severe service valve opportunities. Volume Adjusted Revenue is a constant that can assess the variables. As valve companies acquire distributors, there is an increase in both revenues and expenses, but the VAR remains constant. The support revenue opportunity is also assessed as a multiple of VAR.