The servitisation of manufacturing, when companies supply services as well as products, provides firms with more revenue streams and a hedge against a downturn, writes Professor Tim Baines
The world once seemed simple; manufacturers made things and other companies provided services. But now more and more manufacturers are competing through a portfolio of integrated products and services that deliver business capability for their customers, rather than simply sales transactions. This is the process of servitisation.
Celebrated icons of such strategies in action include aero engine manufacturer Rolls-Royce, printer giant Xerox and French industrial group Alstom, and in all cases various aspects of product lifecycle management (PLM) have been implemented. The role, and potential and ultimate limitations of PLM become apparent once the servitisation concept is understood.
Manufacturers can deliver various forms of services. These can range from spare parts, help desk, maintenance, repair and overhaul, through to availability contracting, performance contracting, managed services and solutions. It is these advanced services that are most inspiring.
Xerox’s Managed Print Services is one example. Rather than simply selling printing equipment, the company offers “document solutions” to customers such as British Airways and British Telecom. The outcome of these contracts can be thought of as a capability for a customer to perform a business function or process. Often these contracts are based on pay-for-use, over two years or more, with risks managed by the manufacturer, and a commitment to providing rolling process improvement and cost-savings.
These advanced services can benefit both manufacturers and their customers. For manufacturers, benefits include growth through improved customer intimacy brought about by closer and stronger relationships. This often results in new market opportunities. For example, Rolls-Royce services such as TotalCare have supported the creation of low-cost airline operators.
It is about seeing the manufacturer as a service provider that, far from focusing only on production, sets out to improve the processes of its customers
Consequently, original equipment manufacturers (OEMs) have reported a growth in services revenue in the region of 5 to 10 per cent a year, significant in an otherwise generally slow-moving economy. The relationship with profit is more complex. Many factors affect this relationship, in particular the through-life management of costs and risks. However, in some instances, profits can be two to three times greater than those on product sales alone.
Customers benefit principally through cost reductions that can be as high as 25 to 30 per cent, and service quality can also improve. Alstom Transport has described how improved standards of rail travel on the West Coast mainline led to an increase in passenger numbers, with current figures up to 32 million passengers a year.
Such customers of these “manu-services” also experience improvements in safety and environmental sustainability. MAN Truck and Bus UK reported that the services it provided improved customers’ fuel consumption by at least 10 per cent and reduced CO2 emissions by 10 to 15 per cent.
Servitisation is not simply a new phenomenon brought about by the recent recession. The origins of power-by-the-hour lie in the practices of aircraft manufacturer Bristol Siddeley in the 1960s. Rather, the benefits of servitisation are simply more apparent during a recession. Economic resilience is facilitated through diversification and increased customer intimacy, which creates high-entry barriers for competitors.
Perhaps what is new, however, is our willingness as a business community to recognise that “manufacturing” is not just about product innovation, process technologies and production.
Industry is abandoning a production-centric paradigm to embrace a broader view of manufacturing. Servitisation challenges our perception that manufacturers can only compete through faster, cheaper or better products.
Instead, it is about seeing the manufacturer as a service provider that, far from focusing only on production, sets out to improve the processes of its customers through a business model, rather than product-based, innovation. The manufacturer then exploits its design and production-based competences to give widespread improvements in efficiency and effectiveness to its customer.
Manufacturers in developed Western economies face intense competition from emerging economies who gain advantage by low labour rates and rapidly growing local markets. Yet, from a service perspective, these Western manufacturers are themselves advantaged by the relatively large installed base – products already in the field – in their own economies.
This is often vast, for example the installed base for civil aircraft is about 150 times average annual sales volumes. Such economies also tend to have strong environmental and sustainability agendas, which are complemented by the dematerialisation (reducing embodied energy and materials) of servitisation.
Moreover, while desires for increased ownership, hyper-consumption and the disposable society can challenge some services businesses, such as laundrettes and TV repair shops, products can also create platforms and great opportunities for new services, for example Apple’s iPad, iTunes and apps.
Early adopters of servitisation have tended to be large organisations offering complex and expensive products. Yet the concept can be applied to companies both large and small, and from aerospace and medical through to materials handling.
The demand for advanced services is anticipated to grow. According to Oxford Economics’ Manufacturing Transformation Report, produced in June 2013 with PTC, by 2015 the use of performance-based service contracts among manufacturers globally will leap to 65 per cent. Indeed, their survey suggests that in this period 71 per cent of manufacturers will use services to differentiate their products.
In Europe, 82 per cent of manufacturers will focus on services, which is more than in the United States (67 per cent) or Asia (66 per cent). Of these, 65 per cent will use performance-based service contracts (advanced services), led by aerospace (74 per cent) and medical devices (70 per cent). Moreover, 56 per cent of manufacturers will establish service-as-a-profit centres within their business.
Information and communication technologies (ICTs) are among those increasingly unlocking the potential of servitisation.
The successful delivery of advanced services is enabled by ICTs that capture in real-time the location of products, their condition and how they are being used. Such data is then integrated with business processes to inform decisions on the use, maintenance, repair, and ultimately design of products and contracts. Servitisation emphasises the importance of products being designed for service and so PLM-style processes provide one backbone for the delivery of advanced services.
Paradoxically, PLM rarely features in debates about servitisation. There is little doubt that PLM helps product manufacturers manage complex, cross-functional processes, co-ordinating the efforts of distributed teams to consistently and efficiently create the best possible products.
And here lies the issue. The focus moves away from the product to the lifecycle of the services contract and the delivery of this with the minimum of products. The notion of a through-life (product) service becomes defunct. As a consequence, PLM has become extended to service lifecycle management (SLM). This optimises the system of people, processes and technology to enable greater service performance and improvement.
There is no doubt that the planning for products, services and manufacturing are top success factors for servitisation. Manufacturers will innovate more across the organisation, while in product design, supply chain and service, the emphasis on innovation will continue to rise. The principles and processes of PLM will continue to evolve, with the emphasis moving away from the product itself, and instead to the complete customer experience.