Servitization 2016: live coverage

Yesterday was the Servitization 2016 Conference, an annual event delivered by The Manufacturer Thought Leadership Network. Below is a recap of the day's presentations, which offered real-world examples of the benefits of a service-based business model and the growth companies can derive from embracing it.

Servitization 2016 card

Servitization 2016 is an opportunity to hear from those who have lived through a manufacturing services-based transformation and are now more profitable and sustainable as a result.

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Watch our recent Servitization webinar titled: ‘Time to intensify your drive into services

The manufacturing industry is changing, over the next three years 65% of the worldwide manufacturing industry will switch from a focus on products and production and build their revenue streams through services. This is true for manufacturers of all sizes and levels of complexity.

This shift in focus aims to nurture a relationship with customers that endures well past the sale of a physical product.

This idea of a service-based/outcome-based solutions is known as servitization.

Supporting your customers in delivering value is the primary premise of a servitized business model. This requires a fundamental shift in the way we think about where, and how, value is created.

The changing industrial landscape:

Lee Hopley, chief economist, EEF.
Lee Hopley, chief economist, EEF.

Lee Hopley – chief economist, EEF

Manufacturing in the developed world has not been short of challenges over the past couple of years – uncertainty, slowed growth and the end of the ‘commodity super-cycle’ to name but a few.

Some sectors have been worse hit than others, such as the turbulence which has affected the steel industry.

Clearly Brexit has changed the dial for many economic predictions for 2016. I see a lot of caution across the UK manufacturing sector, but also a lot of optimism.

The UK’s productivity puzzle is not lost on manufacturers, many of which have told us that they want to drive efficiency, raise productivity and become more competitive, in a global sense.

One of the biggest challenges UK manufacturing now faces is the homegrown uncertainty created following the EU referendum, but I don’t want to dwell on Brexit too much.

Setting Brexit aside, there is an increasing narrative surrounding world trade of decline. China’s tact to focus more on domestic production and focus less on imports, for example, will have a far-reaching impact on world trade and particularly manufacturers.

This ongoing diversification into manufacturing services is a key way of generating additional revenue streams and becoming more competitive, with a growing tendency to offer solutions not stand-alone products.

We are seeing an increasing number of manufacturers embrace digital technologies within their own operations and in their supply chain. We are still at the very early stage of the so-called fourth industrial revolution, but the sands of change are shifting.

Historically, the UK has arguably stayed still while others have moved more quickly – a tact which may have lost the nation ground. However, manufacturers today are telling us about their healthy appetites regarding innovation, R&D and technology.

There is a vital need to ensure that the future workforce that we are creating today has the necessary digital and technical skills required to support manufacturing. This needs to be a key aspect of the government’s industrial strategy.

The productivity revolution:

Mark Elborne, UK&I CEO, GE.
Mark Elborne, UK&I CEO, GE.

Mark Elborne – president and CEO, UK & Ireland, GE

We are in a world of slow growth, alongside that we are getting real volatility in markets and jobs which affect investment decisions. This is having a real impact on productivity.

Industrial productivity has seemingly hit a wall. Why? Lean initiatives are tapped out; just 3% of data is utilised in traditional industrial control systems; the incredible pace of technology with many struggling to stay ahead of the competition; constant competitive pressure, and fears surrounding cyber security.

To smash through this wall, companies need to access and harness the most powerful tool at their disposal – data.

Modern data intelligence is allowing analytics-enabled increased uptime, software-enhanced output/performance and remote inspections.

Conservative estimates suggest that the industrial internet is going to be worth $125bn by 2020, compared to the consumer internet at $80bn.

So how do we realise this and how does it tie into servitization? At GE, we call it a ‘Digital Twin’, where every physical engine is replicated digitally, a collection of algorithms that provide us with continuous insight. We can also run full simulations and predict future occurrences.

To realise and utilise the industrial internet requires three core building blocks to transform your business – deliver outcomes, not standalone products (i.e. servitization), investing in the right technology and embedding the right talent / creating the right culture.

Dealing with customer data:

Steve Gummer, head of UK service cloud, Salesforce.
Steve Gummer, head of UK service cloud, Salesforce.

Steve Gummer – head of UK service cloud, Salesforce

How do we use technology, which is more than a knowledge base, to serve our customers betters? We think artificial intelligence (AI) is a very important way of doing that.

The challenge many of the manufacturers tell us about is, how do we differentiate? Almost half of CEOs have told us that the next three years will be more critical than the previous 50 in manufacturing. Central to differentiation is agility, something the cloud provides.

Through agile systems – powered by the cloud, you gather smart data and offer a single customer view; all things that are becoming increasingly more important in the modern manufacturing landscape.

The manufacturing industry has grown through powerful revolutions; 20th century process improvements like automation, six sigma and robotics all focused on making products faster and cheaper. That’s still pretty much where industry is at today.

All of these investments that most manufacturers have already made all focus on products, not people. Only 41% of manufacturers have a system to collect and manage customer information in real time. There is a clear need for manufacturers to have a platform for intelligent engagement – encompassing cloud, mobile, social, Internet of Things (IoT), and artificial intelligence (AI).

What we call a ‘ 2020 business model’ combines service excellence, a connected supply chain and integrated management, and allows an organisation to deliver a joined-up experience to the customer – the core of servitization.

Positioning your business into the servitization landscape:

Professor Tim Baines, founder, MSTLN
Tim Baines, professor of operations strategy, Advance Services Research Group.

Tim Baines – professor of operations strategy, Advance Services Research Group

The paradigm of manufacturing is absolutely changing. Some see it as a digital change, some as a social change. What is irrefutable is that change is happening.

The idea that we have products here and services there, as two distinct offerings, has become obsolete. The lines between the two have blurred.

Most companies who get into servitization do so through ‘intermediate services’ – i.e. offering an outcome based on product condition.

What is exciting is the transition to ‘advanced services’ – i.e. offering an outcome based on product ability, a step that many more manufacturers need to make.

When we talk about advanced services it can be beyond simply the product, and is the role of your product in the customer’s overall processes.

One of the big challenges manufacturers have when they move into this space is a lack of engagement from customers – they offer a contract for services in the same way as they previously offered a contract for a standalone product and haven’t explored the true value proposition.

This transformation journey to advanced services is complex, it’s not easy. To visualise this journey, you need to understand the whole process and how it moves from exploration to traction, onto acceleration and ultimately exploitation. The challenge for organisations is moving through those phases successfully.

How fast a manufacturer moves through these phases depends on factors such as market pull, its distribution ecosystem, its level of readiness (both in terms of product and organisation) and technology-push. There are a variety of different pathways, there is no one-size-fits-all, and none can be classed as either right or wrong.

The role of Through-Life Engineering Services (TES):

Paul Tasker - professor of integrated systems design, Cranfield
Paul Tasker, professor of integrated systems design, Cranfield.

Paul Tasker – professor of integrated systems design, Cranfield

Through-Life Engineering Services (TES) focuses on value creation, through life. Customers increasingly don’t want to own a product outright, rather they want – and value – the capability that product offers.

TES comprises the design, creation and in-service sustainability of complex engineering products, with a focus on their entire life cycle. It’s much more than than just maintenance, integrating manufacturing, engineering and technology, as well as business and economic models.

Some of the example activities of Cranfield’s TES Centre include developing self-healing technologies, exploring the degradation of linear machines, creating a knowledge hub, and helping to form TES-related standards.

Cranfield’s TES Centre has also launched a national steering committee earlier this year, which has helped to drive our TES strategy. It’s a strategy geared towards helping owners and operators – ‘TES users’ – to derive the best value from their assets, alongside manufacturers and maintainers – ‘TES makers’ – to capture value by actively supporting their customer base.

Our research has shown that a huge proportion of GVA is critically dependent on using or making high-value, long-life assets.

Some 16.8% – or £275.2bn – of the UK economy is attributable to sectors that could be influenced by engineering services.

The strategy’s goal is to achieve a 20% reduction in cost with a 20% improvement in asset viability across more than £20bn of the UK economy.

Creating a servitization business model:

Matthew Skipworth - UK head of service and solutions, Terex
Matthew Skipworth, UK head of service and solutions, Terex.

Matthew Skipworth – UK head of service and solutions, Terex

Focusing on the rental channel, historic purchase criteria centred around specification, equipment price, cost of capital and familiarity.

Today, purchase criteria includes risk mitigation, specification, equipment price, cost of capital, familiarity, cash flow, planned maintenance cost, non-chargeable repair cost, rental rate, end of life residual value and disposal.

One tool that I identified back in 2013 was to get our customer base to understand the total cost of ownership (TCO). By partnering with some of our customers and better understanding what the challenges they were facing were was vital to not only develop our own offering, but getting them to grasp TCO in turn.

TCO is apparent cost (asset and maintenance costs) plus the concealed cost (acquisition, operating, infrastructure support, environmental impact, insurance, financing, disposal, and deprecation).

Since embarking on this TCO journey our progress has seen the implementation of a TCO calculation tool, the development of business systems both internal and external, the introduction of new offerings (contract services, training, finance, telematics), the launch of a new logistic and distribution model, enhanced residual value, and disposal (including refurbishment and second life-cycle).

The OEM opportunities in terms of TCO at Terex include: developing service revenue streams (reduce downtime, maximise asset productivity, compensate recruitment and skill set challenges, increase operator safety, significantly reduce overall maintenance cost); service excellence delivery; data capture for new product development (NPD); stabilise cyclic market, and create customer loyalty through partnering and consultation.

We aren’t just looking at the next machine order, we are looking at our customers’ entire ecosystem, and we aren’t just focusing on our large customers, it’s being offered to our entire network.

Four ways technology supports servitization:

Stephen Fox, business development manager, Columbus.
Stephen Fox, business development manager, Columbus.

Stephen Fox – business development manager, Columbus

I’m going to be discussing four technologies and concepts today, but there are more.

They are the internet of things (IoT), collaboration (particularly ERP), cloud, and big data.

Interestingly, research this year has revealed that businesses consider security in the cloud to be as good, if not better, than alternative on-premise platforms. That represents a real sea-change in sentiment.

Simply put, IoT is connectivity; every product connected to every other product, person and place. The list is endless. So how does that support servitization.

Principally: monitoring, control, access and communication through mobile devices, intelligent machines and interconnected devices (i.e. Industry 4.0), and confidence (becoming predictive rather than purely reactive).

Combined, these allow organisations to transform their processes and services to create new business models. Many of these technologies have reached a suitable entry price point that mainstream adoption has become more realistic.

Data is one of the greatest challenges of IoT, the amount being collected and collated is monumental. As you’re streaming this data in real-time, you need to ensure your IT infrastructure is robust and scale-able to cope. Modern ERP systems have seamless workflows so that you are only really responding to exceptions.

According to Gartner, big data revolves around the four V’s: “high volume, high velocity and/or high variety” (text ,video, image, etc.), and high veracity (accuracy). Big data is supporting servitization in so much as it is providing huge amounts of data into your organisation, and you need to decide what to drill down into and analyse.

Big data is relatively new for manufacturing, there is still uncertainty over how to use it and whether or not to trust it.