What we’ve grown accustomed to in our personal lives is becoming the norm for business transactions as well. On-demand access has become standard and the idea of ownership is losing significance.
Customers do not necessarily want to own things, but to benefit from using them.
Changing customer preferences as well as the need to better understand and serve the customers are driving the demand for service-oriented business models.
Service-oriented manufacturing
Servitization refers to a process of moving from a traditional product-based business model to service-based manufacturing.
Previously, services such as after-sales support, repairs, and other, have been left to third-party companies rather than the manufacturers themselves. Extending the traditional offering requires a significant change in the company’s organizational structure and business processes, which is why for many manufacturers this shift is going at a slower pace than desired. Industry statistics reveal that at least one third of manufacturing companies are in the process of adopting servitization1.
Reassessing business models
Service contracts and subscription models seem to be the next generation business model for many original equipment manufacturers (OEM’s). One of main advantages is the possibility of customization: manufacturers can provide service and product combinations that are tailored to individual customer requirements.
Three main types of services have been identified in this context so far:
BASIC
provision of mostly products, including repair kits, spare parts, and tools
INTERMEDIATE
provision of continuous after-sales services, which can include everything from field service to product repairs and remote monitoring services
ADVANCED
provision of more complex services and integrated solutions based on outcomes
Examples can be found across many industry sectors, with most companies currently focusing on the intermediate level of service provision. For instance, Caterpillar offers a portfolio of services beyond production, such as remote tracking and preventative maintenance monitoring of components.
Rolls-Royce serves as a strong example of advanced services in engine manufacturing. With their service package they effectively rent the engines to airlines – customers pay by the hour according to the amount of time an engine is in flight, while alleviating the burden of engine maintenance.
Service-oriented subscription models
There are numerous benefits manufacturers can obtain as a result of servitization. One of key benefits is the ability to develop a longer-term relationship with its customers. In a service-based model, a customer is reliant on the manufacturer for more than just the supply of the project.
Manufacturers can stop relying on one time sales and offer a subscription model that enables more predictable revenue.
On the other hand, it also provides the customer with a predictable expense on a regular basis. Through subscriptions, both parties benefit from making longer-term contracts, which help develop sustainable business eco-systems.
The customer may also benefit from a pay-per-use model, as it eliminates the need to make a large investment upfront. Through this, the customers are guaranteed a certain level of service and support, as well as commitments regarding product development and enhancements. After all, the customer is in it for the outcomes, not the physical product.
What to expect in the future
The technologies needed to bundle service offering with different products are already available, and with technological advancement and ease of access the scope will only increase.
One of the main objectives will remain executing as much of the services as possible remotely, with the purpose of eliminating time, cost and resources spent by frequent visiting of customer’s locations.
Investing in technologies such as digital twinning enables manufacturers to optimize their design, production and maintenance process. Remote monitoring and predictive maintenance are another important example, which enable replacement of components before they break down.
Sources:
1 Servitisation, Service and predictive maintenance contracts, Business Innovation Observatory, Contract No 190/PP/ENT/CIP/12/C/N03C01.