Business management

Manufacturing and the shift to servitisation

UK manufacturers are increasingly looking at value-added service models to beat off competition and boost revenues.

For centuries the driving force of the UK economy was manufacturing, but in modern times that leadership role has been replaced by services.

It makes sense then that UK manufacturers are now increasingly seeking to marry the two worlds together to fight back against global competition.

Servitisation means manufacturers no longer just making products but adding services as well. According to The Manufacturer’s Annual Manufacturing Report 2018, 79% of manufacturers believe it will help broaden their customer base.

A leading example is engine manufacturer Rolls-Royce, which, through its TotalCare service, offers its aerospace customers maintenance contracts guaranteeing engine availability. Customers pay for engine power when they require it rather than owning an engine outright.

“Servitisation has been around for decades,” says Adrian Botham of Servispart Consulting. “In the software industry, people in the past would buy a software package. Today it’s in the cloud and you pay a subscription fee.”

It is vital, he says, for manufacturers to adopt servitisation as well. “They are facing a product commoditisation problem where everyone is competing on price,” he says. “They need to differentiate and offer product service. It opens up a new customer offering.”

Understand what your customer needs

The first stage for manufacturers is to consider the type of services that can be amalgamated with their products. This depends on the nature of the product and customer needs.

“You need to understand how your customers use your products,” says Botham. “That’s a challenge for manufacturers who only see customers as a purchaser of their goods.”

Antony Bourne, president of software provider IFS Industries, describes different levels of servitisation. The base level is offering a product and an intermediate service that includes maintenance, repair, condition monitoring and customer help desks. At the top are advanced services incorporating pay per use, availability contracts and risk-and-revenue models. Examples could include a parts manufacturer supplying to distributors or stockists, developing a vendor-managed inventory (VMI) service, providing extended warranty services or product-durability guarantees.

“With an inventory service, your customer is still getting the parts, but you are guaranteeing a level of service availability,” explains Botham. “You hold stock on behalf of your customer, and you create an exclusive service contract that locks them in. You’re not competing so much on price because you have agreed the price at the start. It’s a different way of selling spare parts.”

Buoyed by the fourth industrial revolution, manufacturers are also utilising digital technologies such as machine learning to help evolve their traditional product-based models into software-driven value-added services. They are using internet of things-connected technology to gather and store data transmitted via a sensor on the product. This data is then analysed and can be used to provide preventative maintenance services.

“It gives data back to the manufacturer about how that piece of kit is being operated,” says Botham. “Has it been overused or sat idle? Is it lasting as long as it should?”

Bourne adds: “We worked with an electronics box manufacturer who was worried that global competition would break his business. So he wrapped software around his product, giving customers the ability to better manage the performance of their display units.”

You may need to upskill

On top of thinking about products, manufacturers need to tackle practical and cultural barriers when adopting servitisation. It’s about transforming not just a product but also the business model.

“If you want to use sensors then you need to know how to develop them – that’s worrying if you’re a traditional manufacturer with no IT capability,” says Botham. “You need new skills both in-house and from a third-party provider. It’s a complete rethink of what manufacturing is, and change has to be led from the top.”

Processes also need to change. “Manufacturers need to realise that customers don’t want to own their product any more; they want the outcome and the experience instead,” adds Botham. “That could mean offering them product-leasing contracts, a pay-as-you-use service or output-based service contracts. Manufacturers ask me what do these contracts look like, and how do they create and price them, given they’re carrying more business risk?”

Manufacturers need to realise that customers don’t want to own their product any more; they want the outcome and the experience instead

Adrian Botham
Servitisation specialist, Servispart Consulting

They are also worried that the old model of making, selling products and receiving immediate cash flow to recoup the investment is altered.

“In a world where you don’t sell the kit and just charge a fee over the length of a contract then you have a financial hole in your cash flow,” says Botham. “How do you finance it? That’s another question to think about.”

Bourne says manufacturers, when trying to work out what to charge for their service, need to take a three-year view and assess factors such as how many times they will have to visit a customer’s site to carry out maintenance, and the cost of developing a software solution.

‘Scary’ challenges

Dr Ali Bigdeli of the Advanced Services Group at Aston Business School agrees that manufacturers can face ‘scary’ challenges when it comes to adopting servitisation. Its Advanced Services Group runs a servitisation programme for Black Country manufacturing SMEs.

“We work with manufacturers identifying how servitisation will help, what revenue and process models are required and what organisational change will be needed,” Bigdeli explains. “They can be complex contracts and it does prove a challenge to SMEs. They are also concerned about how to change the mindset of an organisation, finding people with the skills of selling services and how they can best finance these initiatives.”

If manufacturers have developed unique processes or software, they might be able to leverage these intangible assets with IP lending, a new and niche form of asset finance.

A wide range of benefits

Bigdeli stresses the financial benefits of servitisation. “You get recurring revenues from customers on service contracts, which improves your financial sustainability,” he says. “It helps you deal better with cyclical downturns. You also have to be very close to your customer, so that leads to more localisation of manufacturing and a more circular supply chain.”

Of the manufacturers it has worked with on the programme, Bigdeli says they saw an overall productivity improvement of 16%.

One of the firms on the Aston programme was Birmingham-based UV Light Technology, which makes products such as UV hand lamps for clients ranging from engineers to auction houses. It began looking at servitisation five years ago and now offers its customers training, equipment hire and performance advisory services by remotely monitoring products.

“It’s a step-by-step process because it can be complex,” says managing director Paul Jackson. “We’ve upskilled our people and engaged in strategic alliances with technology providers. We’ve increased cross-functional work because it isn’t just about production any more; it’s about service and monitoring as well.”

The firm’s next stage is to offer more advanced services such as predictive maintenance.

Jackson says servitisation has led to closer customer relationships and boosted profit margins. “It protects our business from commoditisation and gives us a better value proposition. There’s more appetite for customer services now,” he says. “It’s the perfect storm and we need to be in that space.”

Botham agrees. “It’s no longer having a better widget than your competitor or making it cheapest. It’s how do we satisfy and service our customers? You can’t afford to stick your head in the sand.”

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