Add service, add value: developing new revenue with manufacturing services

“The most exciting paradigm in UK manufacturing currently.” That’s how one attendee described servitization – i.e. the growing trend for manufacturers to shift their focus away from products to instead build revenue through services.

There are several factors driving the increasing adoption of servitization, namely: ongoing geopolitical uncertainty and market disruption – both internal and external, alongside ever evolving customer demands and needs.

Faced with such challenges, offering value-added, contract-based services enables a company to even out ‘peak and trough’ cash flows and generate more predictable, secure revenue streams.

An evening of stimulating conversation got underway with guest speaker, Des Evans – former CEO of MAN Truck & Bus UK and honorary professor at Aston Business School – providing his assessment of the companies sat around the table.

Representing a variety of sectors, from aerospace to metalworking, and both sides of the supply chain – Tier 1s and suppliers, Evans noted that all are either still operating a product-led business model, or were at the base-level of offering services.

That analysis reflects what’s happening across the country’s manufacturing sector as whole; however, momentum is building steadily and has been over the past 18 months.

Like many Western nations, the UK economy is largely driven by services, close to 70% versus manufacturing’s contribution of between 10 – 12%, depending on which metric is used. The big question companies need to ask themselves, according to Evans, is: “Is making things enough for today, for tomorrow, and the months and years ahead?”

That’s a difficult and multi-faceted question, one which probably requires senior managers and directors to ask many other questions. Evans suggests the following as a possible starting point: How could we move away from our competitors? How could we increase connectivity across our entire value chain? Is our business driven by innovation and, if not, could it be? What do customers value? How could we revolutionise the customer experience?

Servitization in practice

Evans closed his opening speech by discussing the transformation of MAN Truck & Bus UK. Faced with declining sales and profitability, and that of its customers (fleet operators and hauliers), the decision was made to take the business in a radically different direction.

The new business proposition wasn’t based on the cost of selling a truck in a single transaction, but around helping customers understand, reduce and predict the total cost of operation their MAN fleet.

One of the ways the business achieved this was by assisting transport operators to design and implement driver performance and incentive programmes to improve operator cost control. This could only have been achieved by leveraging new digital technologies and gaining competency in data analytics.

At the same time, a new revenue model was implemented, one based on paying for the capability (i.e. miles moved) that was being delivered. Though by no means an overnight transformation, it was one which paid off. MAN UK went from a being a £50m turnover business to a £500m business in 10 years, with financial services, service and fleet management contracts, and vehicle rental now accounting for 50% of turnover.

The Manufacturer’s Henry Anson added that in many of his conversation with those manufacturers who have already, or were on the road towards, adopting service-led business models, the common theme was that change had been driven from the top-down.

Data-driven insights

It’s becoming increasing evident that data represents a business’ competitive advantage. In a service context, collecting, collating and managing data through business intelligence cloud-based analytics systems allows a manufacturer to quantify exactly how, where, when and why its products are being used.

Through continuous feedback loops, these insights should drive improvements across every business function, from R&D and design, through production and distribution, to service and maintenance. In essence, your customers will dictate the direction of your business, rather than your sales team.

The benefits are compelling for every business, but particularly so for those seeking to forge closer, more meaningful relationships with their customers. One delegate, representing a world-leading automotive manufacturer, noted that the organisation’s well-established and far-reaching dealership network historically represented an intermediary layer between the business and its customers. A strong focus for her team now and moving forward is using telematics to better analyse customer usage and close that entrenched gap.

Another attendee, a director at one of the world’s most recognised construction machinery manufacturers, explained how services have played an important role in the business for more than five decades, predominately asset finance-based. The big change in more recent years has been a move towards capability, rather than machinery. Once again, a vital facilitator has been the real-time granular detail provided via telematics

SME perspective

Cash flow can be a major challenge for small and medium-sized companies. As previously mentioned, servitization can alleviate cash flow concerns by generating more predictable, secure revenue streams. However, one of the biggest barriers for small businesses, particularly those who supply into Tier 1 or Primes, is getting the necessary face-time to understand their pain points.

“Learning what capabilities our customers’ need and would value is quite difficult if you can’t get a seat around the table,” explained the director of an innovative sheet metal pressings supplier. “Without that insight, it can be tough to identify the best area to focus our attention and resulting servitization journey.”

A department head at a leading aerospace and defence company agreed, but extolled the virtues of offering maintenance as a value-added proposition.

“Securing maintenance and service contracts should be a no-brainer. Your engineers and technicians designed and built the product, and you have the necessary expertise and tools in-house. Why would you let someone else win those contracts, not to mention take the lead from your intellectual property?” he said.

‘Analysis paralysis’

Aside from the obvious monetary benefits, another reason why servitization is such a tantalising prospect is the ability to gain visibility. Digital technologies and big data are fundamentally redefining not just manufacturing, but every industry. The volumes involved, however, can be daunting, with too many businesses succumbing to so-called ‘analysis paralysis’ as a result of not clearly defining which metrics are important and why.

All attendees concurred that data by itself was relatively meaningless, data only becomes valuable once it’s contextualised and actionable insight can be interpreted from it. One attendee summed it up by noting, “Understanding how your product is being used in the real-world could transform your R&D, your supply chain, your purchasing cycles, your production processes and your distribution. In short, it changes everything, creating an entirely new business landscape. Ignore this new digital transformation at your peril.”

Similarly, all agreed that iterative, incremental improvement – largely based around “more of the same, just a little bit better” – were no longer good enough. Every sector of manufacturing is experiencing disruption from every conceivable angle, from incumbent and start-up alike.

Attain and retain

The key to not only survival, but realising significant business growth lies in attaining and, crucially, retaining customers.

Having the ability to solve a customer’s problem plays a fundamental role in the modern world of fading brand and company loyalties. These problems will change overtime, so it’s vital your business stays agile and responsive.

An attendee added that customers aren’t always aware of what they or their business truly needs, so an important part of any sales conversation must be devoted to re-educating buyers as to how and why your offering would be mutually beneficial.

Servitization offers companies the ability to forge stronger, deeper customer relationships, based on long-term, high value propositions and a significant competitive differentiator. Customers are placed at the centre of a business’ growth strategy, with data generating meaningful insights to create a superior customer experience and more responsive, agile internal processes.