Servitization: reimagining order to cash

Servitization, as defined by Aston Business School, is the concept of manufacturers offering services tightly coupled to their products and, as a result, moving from a transactional, to a relationship-based business model.

These services are typically classified as below:

• Basic (provide spare parts)
• Intermediate (maintenance/repair/overhaul etc.)
• Advanced technology-enabled services (the outcome is based on the capability)

– An example of this is Alstom’s “TrainLife Services”, where Alstom provides trains; equipment; depots; train cleaning, and preparation. It is responsible for project management, implementation of all the new technology or the new workflow. It also manages third parties e.g., the freight companies, cleaning operators etc. on its customers’ behalf.

The manufacturer looking for maximum impact on both top and bottom lines is ideally striving to deliver advanced services with long-term contracts. The traditional approach to manage the order to cash business flow is just not good enough as the customer is only interested in the timely and successful business outcomes, rather than just equipment delivery.

A fresh approach

Order management and fulfilment has long been considered a core competency of supply chain and business success. It has always been critical to deliver customer expectations and manage cash-to-cash cycle efficiently.

However, this process has become tougher than ever. The fulfilment complexity has grown due to the global nature of the supply chains and customer expectations have risen.

Servitization makes this process even harder, as the only measure of customer expectation is the delivery of promised business outcome on a recurring basis. The companies, however, need to ensure profitability as they deliver perfect orders.

Perfect order profitably

To manage customer and shareholder expectations successfully, the order to cash process will need to be re-imagined. Three important factors need to be understood:

Revenue – recurring rather than one-off

Rather than a one-off payment collected on the delivery of the goods, the payments are split, typically monthly subscription, over the duration of the contract and tied to an outcome.

This marks a fundamental shift in the attitude of both the sales and finance teams. The processes to capture orders and invoice customers need to be much sharper in terms of ease and, processing cost and time.

Cost to serve – promise profitably

Increasing margin per order has become a top priority for manufacturers as the fulfilment complexity has grown. Servitization results in staggered cash flows over the lifecycle of an order. So each promise needs to be delivered profitably to ensure overall positive cash flow at all times. Total landed cost needs to be understood and a single view of the supply is essential to fulfil at the lowest cost.

Flawless execution – time to deliver the customer expectations

Servitization is all about delivering the promised outcome. The supply chain now needs to manage all the complexity to bring various pieces to work together at the customer site and any issues in the delivery have direct bearing on the revenue stream.

The supply chain needs a single view of all orders and supply through-out the network, and pro-active alert mechanism to successfully manage the fulfilment complexity.