Now’s the time for manufacturers to innovate their business models

Posted on 16 Jul 2020 by The Manufacturer

There are real opportunities for differentiation within manufacturing and we are already seeing increasing use of servitization as well as manufacturers going direct to the end-user. The benefits of a new approach can be; more share of wallet, longer-term contracts, better relationships with customers, steady cashflow forecasting and more. Lee Collinson reports.

Almost every UK manufacturer (94%) is alive to new ways of operating to achieve growth, according to the Annual Manufacturing Report 2020.

That’s an overwhelmingly positive mindset, with only a small handful of businesses looking to persevere with methods that have – traditionally – proven successful.

Even more encouraging is that almost the same amount (91%) of industrial businesses are conscious of the changes and challenges in the marketplace, and adapt their business model accordingly.

The past four months have certainly brought more changes and challenges than anyone could have anticipated. But with lockdown measures easing and sector-specific guidelines from the government helping make workplaces as safe as possible, many manufacturers are looking to ramp up activity and get their businesses back on track.

Business Meeting Investment Finance Money - image courtesy of Depositphotos.

However, rather than simply looking to go back to business as usual, many management teams have used this unplanned interruption to step back and reassess their end to end operation, from marketing and sales through production and delivery to whatever happens next.

One of the ways manufacturers are looking to ‘build back better’ is to understand what does actually happen next, an area which has remained something of a mystery for many businesses.

Levelling up

Historically, most manufacturers have pursued a ‘fire and forget’ approach with little visibility of where their products end up or what they’re used for once they leave the factory.

A small proportion have built on this product provision level by offering intermediate services such as maintenance and repair, condition monitoring, field service and customer support.

Even fewer have taken that one step further and built their operation around providing an outcome rather than a product. These more advanced services can include pay-per-use, fleet management, availability contracts and integrated, turn-key solutions.

But research indicates that the trend is growing, and for a variety of reasons:

Trends driving adoption of servitization strategies - taken from Discrete manufacturing in a changing world: Leaping hurdles and identifying opportunities (IDG-Sage, 2020) report

Discrete manufacturing in a changing world: Leaping hurdles and identifying opportunities (IDG-Sage, 2020)

This selling ‘X-as-a-Service’ business model is by no means a new concept to industry. Rolls-Royce has been offering ‘Power by the Hour’, its pioneering approach to aviation engine maintenance, for almost 60 years. Machine tool manufacturers, too, have been selling these advanced services for decades.

However, access to the latest digital technologies allows this offering to become much deeper and richer – both in terms of customer experience and valuable insights for the manufacturer.

Crucially, the affordability of these systems and tools today places such an offering within reach of every organisation, regardless of size, sector or pedigree.

“You can create competitive advantage from traditional differentiators like quality, or functional differentiation on a hardware level. But real differentiation comes from features that are on the service layer,”

Frank Piller, founding member of the MIT Smart Customization Group at MIT

Gaining insight

The combination of sensors, big data analytics, intelligent algorithms, virtual models and accurate forecast simulations enables a business to provide preventive and predictive maintenance, even shipping components or sending an engineer before the customer is aware an issue has happened or is about to.

Being able to provide that level of insight and maximise uptime creates a stronger, more direct customer relationship, one that helps maintain loyalty and safeguard recurring revenue streams.

It also means a manufacturer is better able to understand exactly how and where their products are being used, knowledge that helps improve future models and spark potentially lucrative innovations.

Connected Factory ERP IIoT IoT Ecommerce - image courtesy of Depositphotos

It’s a tantalising prospect and likely the reason why more than three-quarters of UK manufacturers (78%) are developing or have developed some form of service-based business model.

That corresponds with research from Barclays Corporate Banking that shows the UK manufacturing sector could add £13.3bn of revenue in 2025 by selling direct to customers, rather than via wholesalers, retailers and other third parties.

The journey to adopting a more direct, service-focused business model is going to be different depending on your particular market requirements and product mix, there is certainly no one size fits all solution.

And recent events may have led to these plans being mothballed or passed over, but now is exactly the time such a change in direction can pay dividends – quickly and long-term.

Is your business actively pursuing a more service-oriented business model, or does your product mix make applying the concept more challenging? What methods are you using to form deeper relationships with your customers and a greater understanding of the marketplace?

I’d love to hear your thoughts, so please connect with me on LinkedIn.

What is Servitization? – a short animation from Aston Business school, part of Aston University in Birmingham:

*All images courtesy of Depositphotos