Posted on 09 Mar, 2017 by Neil Sharp
If someone were to ask you what your current business goals are, it is likely that "sales growth" would be on your wishlist. The UK is the 11th largest manufacturing nation in the world and makes up 45 per cent of UK exports - and both original equipment manufacturers (OEMs) and electronics manufacturing services (EMS) providers are looking to capitalise on this and climb higher up the rankings.
This means that OEMs and EMS providers must implement strategies that enable this objective – and one such strategy is servitisation.
At its heart, servitisation is about putting the needs of your customers first. Writing for The Manufacturer, Antony Bourne describes it as moving from a product-centric model to a service-centric model. In doing so, firms can boost their manufacturing sales growth. In fact, in their 2013 report, The Future of Manufacturing, the UK government highlighted servitisation as a means of "unlocking innovative new revenue streams".
The term servitisation was coined by Sandra Vandermerwe and Juan Rada in 1988 in their paper, "Servitisation of business: Adding value by adding services". The Future of Manufacturing report gives this definition: "Servitisation is the provision of services to clients by manufacturing firms, with services typically supporting or complementing products and helping manufacturers to establish long-term relationships with consumers."
In other words, servitisation is about adding value to your core offerings through services. It's about putting the focus on the needs of customers. Professor Andy Neely, head of the Manufacturing and Management Division of the University of Cambridge Engineering Department and of the Institute for Manufacturing (IfM), identifies five key trends that underpin the transition to more service-based business models, which are characterised as "shifts". These trends are:
- Products to Solutions
- Outputs to Outcomes
- Transactions to Relationships
- Suppliers to Network partners
- Elements to Ecosystems
Professor Neely writes: "Many customers don't want to own the physical products that manufacturers provide – they just want the end result (or the outcome) that the product delivers. When manufacturing firms become more focused on outcomes they often 'contract for capability', guaranteeing uptime and/or the availability of their equipment through life.
"[…] A significant advantage of contracting for capability is that the incentives of the customers and the original equipment manufacturers are aligned. If companies are deriving significant income from 'spares and repairs', it suits them if the equipment breaks down. When contracting for capability or outcomes, however, the manufacturer gets paid only when their equipment is working, so it is in their interest to make their equipment as reliable as possible – which also suits their customers."
The servitisation model nurtures the relationship between manufacturer and customer, ensuring both parties are on the same page - thereby enabling successful and holistic long-term partnerships.
Rolls-Royce: a case study
Rolls-Royce is generally considered to be the first big player on the servitisation field. Their pioneering approach is known as "Power-by-the-Hour".
The company states: "'Power-by-the-Hour', a Rolls-Royce trademark, was invented in 1962 to support the Viper engine on the de Havilland/Hawker Siddeley 125 business jet. A complete engine and accessory replacement service was offered on a fixed-cost-per-flying-hour basis. This aligned the interests of the manufacturer and operator, who only paid for engines that performed well."
According to this model, the customer theoretically buys the power that an aeroplane engine provides, rather than the engine itself. Rolls-Royce then provides an ongoing support and maintenance service, to ensure that the engine runs optimally. After all, what the customer really cares about is that their planes can be flown safely and consistently – this is the value provided by the physical product.
The Future of Manufacturing report found that over a third of UK manufacturing firms with over 100 employees derive revenue from services – although, the real figure is unknown, as not all manufacturing firms report service revenue separately.
However, the report states that many manufacturing firms still focus more on products than services. Antony Bourne suggests that manufacturers need to have four processes in place, to successfully deliver a servitisation model:
1. An enterprise solution that can handle what they are delivering to customers.
2. The ability to record and control the type of service that they are offering.
3. The ability to schedule people (including subcontractors) to perform jobs in the field.
4. The ability to record what has happened in the field so that an accurate service contract is maintained (this is often done using mobile devices).
While most manufacturers likely recognise the benefits of implementing a servitisation model, many of them may simply have more work to do before they can make it a reality within their organisation. However, in an increasingly competitive environment, it is clear that embracing this business model will enable manufacturing firms to offer additional value to their customers.