What is Servitization?
This article will discuss:
• The meaning of servitization of the machine and provide examples of its application by equipment manufacturers
• The benefits of servitization to the manufacturing industry
• Diverse servitization options manufacturers can explore
Servitization refers to the services an enterprise provides to support the optimal functioning of the conventional products or goods the enterprise sells to its customers. To bolster flattening revenue growth, due to a reduction in productivity and the Covid-19 pandemic, and to seek other sources of income, equipment manufacturers within the manufacturing industry are embracing the concept of servitization.
As defined earlier, servitization is the process of gaining multiple revenue streams by providing supportingservices to produced goods. Three main levels of servitization exist:
• Basic services – This involves turning basic services such as the provision of spare parts.
• Intermediate services – This process involves offering external services such as maintenance and repairtasks.
• Advanced service – This option refers to the process of offering produced machines on a contractual basis where the output or use of the machine is focused upon.
The first two levels of servitization options – basic and immediate services, have been applied across the manufacturing industry as a means of generating external revenue for the coming years. Manufacturers consistently offer maintenance and spare part services as subscription-based plans alongside the equipment they sell. Providing advanced services, takes things to the next level for both the equipment manufacturer and the end-user. The end-user gets to utilize expensive equipment through subscription plans while the OEM gains revenue and leverages the insight from machine utilization to improve its business strategies.
Servitization of the machines by original equipment manufacturers
The servitization of machines involves providing a subscription-based plan to manufacturers interested in utilizing a manufacturer’s original equipment for specified periods. For example, a heavy equipment manufacturer who sells individual units of equipment for hundreds of thousands of dollars has a limited customer base that will consist mainly of large enterprises with the financial resources to purchase this equipment. Small
and medium-sized manufacturers who have a need for these machines are generally not able to purchase them and end up outsourcing machining tasks to third-party service providers.
The heavy equipment manufacturer can choose to ‘servitize’ available stock which has not been bought by offering SMBs a pay-for-use plan which will require less capital expenditure compared to purchasing the equipment outright. To successfully implement a servitization of the machine process, equipment manufacturers must consider taking advantage of diverse revenue structures to capture a larger customer base. The revenue or payment structures could be a long-term contract or a cost-down contract which reduces the cost of using the equipment for the end-user.
Regardless of the payment structure utilized, the servitization of the machine process comes with some important responsibilities for the equipment manufacturer. A subscription-based plan ensures the repair and maintenance process is handled by the equipment manufacturer providing the service, which gives SMBs the flexibility to invest scarce resources in other ventures. An example of basic and intermediate servitization is Caterpillar’s Cat Product Link program. The program involves the equipment manufacturer capturing the data of individual equipment that a manufacturer uses to provide after-sales services such as maintenance support. The buyer allows Caterpillar to remotely track its usage of a Caterpillar product, and the data is used to provide additional services to which the buyer must subscribe to. An example of an advanced servitization of the machine plan is the engine servitization package Rolls-Royce offers. Jet engines are large-scale purchases that many small airlines struggle to make due to the total overhead cost of owning an engine. The Rolls-Royce servitization program provides end-users of its jet engines with a pay-per-use option whereby airlines pay according to the hours for which an engine is used. In this scenario, the data from engine usage is captured and utilized by Rolls-Royce to improve its design, engine performance, and maintenance. It is important to note that Rolls-Royce also handles the repairs and maintenance tasks associated with the engine.
The benefits of servitization of machines to the manufacturing industry
The benefits of servitization of machines cover both the equipment manufacturer providing the service and the end-user taking advantage of the offered services. The benefits to the equipment manufacturer offering
servitization packages include: Gain insight into equipment utilization – Gaining insight into how original equipment is used by the end-user provides added information that remote data collection processes or routine maintenance cannot give. Thus, servitization of the machine allows OEMs to visualize the equipment they produce in action and how humans interact with it. This insight helps the manufacturer develop optimized strategies to manage available assets as well as predictive maintenance packages which can also be monetized. Improve asset management – Servitization of the machine offers OEMs the opportunity to put unsold assets or equipment to use. The servitization process ensures the OEM generates revenue from available equipment while collecting important data sets to develop optimal equipment utilization New revenue stream – Stakeholders in the equipment manufacturing industry are in the process of expanding their portfolio to meet increasing customer demands and to remain viable by generating new income streams. Advanced servitization is a business model that enables OEMs to create new revenue generation models by offering their customer base varying services according to their financial capacities.
The benefits of servitization to the end-user
The benefits of servitization to the end-user focus on ensuring businesses remain financially flexible by not investing too much by purchasing cutting-edge equipment. These financial benefits include: Cost-savings from reduced or no maintenance charges – The cost of repairing or maintaining manufacturing equipment is a considerable aspect of the total overhead cost of running a manufacturing facility. SMBs who take advantage of servitization of the machine save huge sums from limited maintenance costs allowing them to invest the cost-savings in other areas of the business.
Flexible payment plans – The option of utilizing expensive equipment according to either order rate or available finances enables SMBs to retain some financial flexibility with capital. SMBs which pay for machine time only when processing customer orders can easily integrate production cost into the selling price of their products to make a good profit.
Linking OEMs to end products – Servitization gives OEM access to the data from the final products produced with its equipment. The insight gotten from the link between an OEM and its end products can lead to improved equipment design which is developed for the end-user in the form of intuitive, easy-to-use equipment.
Conclusion
Advance service for servitization is made possible by the digital transformation of traditional processes within the manufacturing industry. With digital transformation technologies, an OEM can capture the data needed to provide the extended support that defines servitization. The captured data also serve as the analytical foundation for devising diverse servitization plans to generate considerable revenue for an OEM.
The Business Case for Servitization
• Advanced servitization and its importance to the industrial manufacturing sector
• The business case for considering servitization in the manufacturing industry
• The benefits of advanced servitization
Improving revenue generation rates and earning profit is the main reason for the existence of every business and manufacturing enterprise. Today, the average manufacturer is challenged by multiple disruptive forces with the capacity to affect productivity and increase revenue. These negative influences such as a disrupted supply chain have led manufacturers to explore servitization as a means to growing new revenue streams.
An introduction to advanced servitization Servitization is the process of building product-service systems to offer customers more value and generate
continuous revenue streams for service providers. For manufacturers, offering servitization means extending production-based systems to include services. This inclusion leads to a product-service system with certain capabilities and different responsibilities shared between the service provider and its customers. The service provider or manufacturer, in this case, delivers a product-service system through which a servitized good is provided alongside supporting services. The customer enters a contractual agreement to use the system and is responsible for using the system correctly to get the expected throughput quality. By leveraging this arrangement, customers gain an optimal operating system, and the supplier gains an additional source of revenue and insight into how servitized products are used.
The primary incentive for choosing servitization is due to the extended revenue lifecycle attached to servitized goods. The average contract lifecycle associated with servitization is 20 years or more, which highlights the value proposition it offers. Other incentives also apply and broadly include competitive reasons, meeting governmental approval, market considerations, and the adoption of technology.
1. Competitive reasons driving servitization adoption rates
The global manufacturing dynamics continue to change as the years go by. Across the globe, Asian countries have leveraged the combination of low wages and an increasing knowledge base as their competitive edge while the west focused on producing high-quality products to generate revenue. Although this arrangement worked for a while, the challengers to western manufacturing dominance have increased their ability to develop high-quality goods, leading to more intense competition.
Advanced servitization offers manufacturers in the west a pathway to level the playing field and increase their revenue bases. Thus, manufacturing enterprises across the developed countries are either undertaking servitization or are seriously considering it as a means of offering more specialized services to customers that the manufacturers from the developing countries can’t provide.
2. Government regulations and policies
Large-scale manufacturing processes are human activities that increase emission rates and release volatile organic compounds (VOCs) and other hazardous elements into the environment. Despite the increased use of alternative energy sources domestically, these sources of energy are not yet stable enough to support large-scale industrial manufacturing. Thus, to limit the effect of VOCs on the environment, governments have put specific regulations in place to lower emission rates. The product-service system associated with servitization supports reducing the carbon footprint associated with manufacturing in multiple ways. One example is reducing the amount of heavy machinery used across shop floors by providing a centralized facility in which industrial activities occur only when necessary. Centralized facilities are also managed by technical experts who monitor equipment to ensure proper usage and limit the emission rate from industrial processes.
OEMs (original equipment manufacturers) can consider advanced servitization as a means to meet government regulations and policies with respect to implementing green initiatives that do not harm the environment.
3. Social considerations
Manufacturing equipment is still filed under the asset column of many enterprises. This makes ownership of these assets an important consideration for business owners. Advanced servitization offers to take asset ownership off the table and replace it with an optimal performing environment. While this environment removes the burden of maintenance or repair costs, it takes away the social capital attached to ownership. OEMs interested in offering servitization must make a compelling argument to manufacturers who would like to own servitized assets. The argument must include the benefits of the servitized environment, and a real-time demonstration of how product-service systems will help customers to meet the most pressing painpoints.
4. Technology advancement and adoption rate
Technology implementation supports the delivery of an optimized product-service system. Sustaining advanced services requires constant vigilance, recognition of patterns, and development of the ability to respond to disruption instantly. Implementing these features of advanced servitization requires adoption of digital-transformation and technology solutions such as edge computing, IIoT, and centralized computing platforms.
Manufacturers utilize these digital-transformation solutions to implement condition monitoring, remote monitoring, and predictive analytics frameworks to ensure servitized systems function optimally. The implementation of condition monitoring empowers the manufacturer to deliver a reliable product-service system.
Reliability is critical to delivering advanced services. Unreliable product-service systems come with penalties, and the customer has the right to exact these penalties anytime the provided service falls short of its contractual agreement.
Conclusion
The business case for advanced servitization is not limited to the technical considerations, government regulations, and the need to beat the competition. Other important factors such as the knowledge perspective and market considerations also apply.
