Servitization offers a different approach

Posted on 31 Mar 2015 by The Manufacturer

What are some of the key benefits in taking on a service model? Tim Baines of Aston Business School finds out and reveals which firms are already seeing the results.

Professor Tim Baines, founder, MSTLN
Professor Tim Baines, Aston Business School.

Manufacturing and service industries are often seen as largely independent. Yet manufacturers can base their competitive strategies on services, and the process through which this is achieved is commonly known as servitization.

Servitization is a process of business model and organisational transformation, and implicitly is targeted at manufacturers that currently focus their business on products and production.

Icons in this world are companies such as Rolls-Royce Aerospace with power-by-the-hour, Xerox with document management, and Alstom with Train-life services.

These are all examples of “advanced services” incorporating maintenance, repair and overhaul contracts where revenue generation is directly linked to asset availability, reliability and performance.

Improved customer intimacy underpins servitisation. In the traditional world of production, products were designed and made, then placed in a showroom in anticipation of a sales transaction.

Designs were informed by analysis of customer trends, innovation was centred around product features, and satisfaction was recorded by aftersales surveys.

To manufacturers in this world “service” meant fulfilment of orders on time, and to cost; customers were relatively remote.

But this changes with servitisation. Servitisation promotes intense customer relationships. With advanced services in particular, the focus is the customer’s own business processes, and the manufacturer provides offerings that target its efficient and effective delivery.

Servitization - PQ

Offerings manifest typically as 10-year service contracts, where the manufacturer takes some responsibility (or risk) for fulfilment, and is paid as the capability it offers is consumed.

One such consumer of an advanced service is Hoyer, a German logistics company with a base in Yorkshire. Hoyer use the manufacturer MAN’s trucks on a pay-as-you-go basis.

Costs are based on “per mile driven” and this helps to ensure that the customer only incurs expense when it is generating revenue.

Such servitisation demands an organisational transformation for traditional manufacturers. To deliver such a contract successfully requires many things of the manufacturer.

It must:

  • operate facilities that are co-located and distributed throughout customers’ operations and integrated within their supply chains
  • be responsive and innovative
  • be staffed by personnel with humanistic skills-sets
  • have business processes that integrate with the customer’s own operations
  • be supported by Information and Communication Technologies that enable remote product monitoring
  • work to performance measures that reflect outcomes aligned to individual customers, and are cascaded down into various forms throughout the service delivery system.

This organisational transformation is demanding. Yet, the successful development and delivery of such advanced services rewards the manufacturer with:

  • improved commercial resilience
  • the ability to respond to customer demands
  • a way to prevent competitors from gaining a foothold in the market
  • improved customer intimacy leading to opportunities for new services.

The customer is similarly rewarded, with reduced financial risk and improved asset management as well as improved focus and investment. The commercial benefits of servitisation are convincing yet, arguably, servitisation is still in its infancy.

We have many leading examples in the UK, but many of our manufacturers are yet to wake up to the potential of this phenomenon.