Frank Partners’ Nick Frank deconstructs whether there is any truth in the concept that servitization is only for complex equipment.
Is it really true that servitization business models only really work for companies with complex engineering products such as jet engines, trains and wind turbines?
My own experience is that it’s not the complexity of the product that’s key. It’s the complexity of the customer’s value chain and the hidden profit pools that open up the opportunity for service-based business models.
Complexity is just more obvious where the equipment is seen as being highly technical or mission critical.
But apparently simple products can also have a significant impact on the buyer’s business, which is disproportionate to its cost.
Take the UK industrial fastener market that over a period of 30 years has transformed from being dominated by manufacturers, to just-in-time (JIT) distributors that now have near 80% market share.
In this market, customers put greater value on simplifying their supply chain than on fastener innovation. They felt that they could gain more value from a single JIT supplier.
For example take industrial fasteners, a seemingly simple product with no moving parts.
But look closer and it is anything but simple:
- Typically only 20% of the total in place cost of a fastener is the cost of the fastener itself. The remaining 80% is made up of the assembly time, the logistics costs, quality, purchasing, and engineering.
- Fasteners are an operational pain in relation to their value. In a typical car assembly plant fasteners make up 2% of the value, but represent 25% of the parts in the assembly plant.
- A 50p part can stop a multimillion pound production line, cause major recalls or at worse a fatal accident: the part may be perceived as simple, but the performance is often critical to safety, or integral to the assembly process.
Suppliers who have developed solutions to these business problems, have grown faster and are more profitable.
Having the product delivered to line-side only when they needed it, saved logistics and buying costs, as well as enhanced cash flow.
Access to a low cost, high quality global supply base enables distributors to offer competitive pricing, so further reducing the cost of the Bill of Material.
In the automotive OEM segment, value is perceived very differently. OEM’s want to engineer cost out of the product through better design that reduces the assembly costs, part number complexity, and injects the manufacturer’s expertise directly into the design teams.
For example Ford Europe has reduced its fastener supply base from 150 plus to three or four strategic full service providers.
These companies provide engineering, logistics, purchasing and manufacturing services to deliver a full bill of material to the point of fit in their vehicle and engine assembly plants.
Other OEM’s such as BMW Mini, Land Rover and Jaguar have all implemented similar programmes.
The key lesson is that it is not the product’s complexity that is key to being able to increase value through services, but the difference you can make to your customer’s value chain.