Manufacturing businesses looking to differentiate themselves are wrapping new services around traditional products. By learning how to derive value from servitisation with new technology, manufacturers can rise above the competition. Cultural challenges, however, should not be underestimated, writes Antony Bourne.

Manufacturers today live in a very competitive, price-sensitive and crowded world. Companies that operate in developed economies can no longer compete on cost alone and are looking at how to achieve a more stable revenue forecast. The need to differentiate from competitors is also a key priority. One way this can be done is to look at servitisation (the shift from selling just a product to selling a product and a service) as a way to provide a complete solution to customers.

Many of the companies I speak to are investing in disruption and innovation, and they aren’t doing it merely from a new product development perspective but something far more advanced. They are going from a ‘make and sell’ business model and evolving it into one that increasingly adopts and embraces services, which in turn helps build long-lasting customer relationships.

Why manufacturers are servitising their businesses

The main benefit for companies adopting servitisation is that it will introduce a brand new revenue stream, one of selling services and/or service contracts. It also helps reduce the cost to the customer. With more information about the customer’s products, for example, you can be more efficient in the way that you maintain them.

If performed well, customer loyalty will increase, as well as further opportunities to sell more service-orientated offerings. Another advantage is that it offers the ability to smooth out ‘lumpy’ revenue streams, which in turn give a more predictable and secure cash flow.

Servitisation leads to a better understanding of customer needs by forging closer working relationships with them and analysing the data acquired in the process. This transition from making goods to selling services represents a huge change that creates major challenges for many traditional manufacturers, as their product effectively becomes the platform from which to deliver those services.

For some, the solution lies in developing combinations of products and services to deliver the outcomes their customers want and value. However, they will also need to bring in new technologies to help in this transition.

The three levels of servitisation

Manufacturers can adopt varying levels of servitisation within their operations, starting with a base level where they centralise the supply chain for product consumables and spare parts within their remit and revenue model. At this stage, additional resource requirements in terms of people and materials are minimal and there is no great financial commitment.

The next level of servitisation requires a service team to oversee customer requirements for product maintenance and service. This demands either a level of internal investment or outsourcing to a third-party supplier. It does, however, bring opportunities for upsell from a well-trained service team.

Businesses who fully embrace servitisation commit to investing the entire supply chain in the success of the project for an agreed time – one, three, ten or more years – beyond delivery of the product. As such, they may accept responsibility for service and maintenance for a fixed term under a contract, which means if unexpected failures or repairs are necessary they will bear the costs. However, to compensate for this risk they will be rewarded with regular revenue. With significant projects where costs are high, there is the potential to receive a share of the profits from the project on a performance-related basis.

From the customer’s point of view, this is an incentive for manufacturers to focus attention on maintaining the asset in peak condition. Accordingly, this should ensure an investment in a high-quality product to begin with and a focus on preventative maintenance rather than just responding to failures as they occur.

How technology can enable servitisation

Digital transformation is a critical enabler of servitisation. With recent technology advances, specifically around cloud and the Internet of Things (IoT), manufacturers can now look at using digital technologies to add new services/offerings to their portfolio.

These technologies can and do include predictive analytics to forecast future breakdowns, remote monitoring of usage, and allowing updates to be proactively pushed out to customers. If you use IoT technology then you will be able to receive data about how long the product has been used, which in turn will help you be more predictive about when maintenance work will be required.

With sensors detecting when your product or equipment needs service, data can trigger an automated service action that will realise significant benefits to make your service organisation more effective. This type of automated predictive maintenance will become more and more common as it is a natural next step after implementing IoT to optimise service efforts. It will also allow you to gain insight into when and how products are being used – with the potential for game-changing competitive advantages.

Digital and mobile technologies can deliver significant efficiencies to service teams in the field. They also enable enhanced on-site servicing and maintenance capabilities, customer retention and the opportunities for upsell of product and service contracts.

Manufacturers need to change their mentality

However, manufacturers also need to change their mentality from a “Let’s make it and then sell it” mindset, to more of a “Let’s support it throughout its lifecycle” ethos. There are risks with this approach since it needs buy-in and to be driven by top management. This conscious shift in mindset and strategy is easier said than done.

Companies will need to invest in skills training since a more customer-centric approach will be needed, new departments may be created and existing job roles may need to evolve. There are many challenges that they will encounter and need to overcome. As a result, according to the Annual Manufacturing Report 2016, some 70% of manufacturers see availability of resources (“people, materials, financial”) as the principal hurdle for increasing their service portfolio.

From a people perspective, the main issue is that salespeople need to be trained to sell an outcome as opposed to a product, which for many is a difficult cycle to break. When looking at materials used in the product structure, designers may have to change the way that they develop a product since they want to ensure that it is built for service as opposed to just built to last the warranty period.

Lastly, when it comes to the financial aspect, the big issue is that from a short-term revenue point of view, there will be a big impact, as it will now be spread over many months and years and will not be received all in a single payment upon delivery and acceptance.

Transformation from manufacturer to consulting company

IFS has a number of customers that have adopted the servitisation approach. One of them is Nowy Styl, a company who transformed themselves from a pure manufacturer of furniture to a world-class office interior consulting company.

Founded in 1992 in Poland by the Krzanowski brothers, Nowy Styl originally set out to supply office chairs to its domestic market. The company made the early decision to invest in ERP software and chose IFS Applications, even before the complexities of supply chain and production demanded it.

The initial implementation involved Nowy Styl, which distributed customer orders, and Fotel Style, the principle assembly company. Within a few years, IFS Applications was rolled out through other Slavic territories and into France, Germany and the UK.

The result has been to increase operating effectiveness and, in particular, to simplify the supply chain, streamline the customer service process, shorten lead times and to carry out controlling and accounting functions at the corporate level. The implementation simplifies the management of the entire organisation.

The design gurus at Nowy Styl were not happy to stop at office chairs – and why should they when the entire office environment was their canvas? The business now delivers an all-encompassing Workplace Space Planning service that embraces all the drivers of workplace efficiency – light, acoustics, air-conditioning, the need for meeting places and communal areas.

The business has a dedicated Workplace Research and Consulting Department where the starting point begins with a view of what an office is – and that is a place where people realise business processes. As experts in arranging offices, Nowy Styl not only presents products but also specific solutions that are then implemented to deliver communication, concentration and relaxation environments.

The opportunities of servitisation are a major game-changer for the entire manufacturing industry and the supply chains that surround it. New digital technologies, integrated with enterprise software solutions, are now available to drive this change. However, the challenges of transforming the mindset of those who will need to adopt and adapt to the new business model should not be underestimated.

Antony Bourne Is the Global Industry Director of Industrial and High-tech Manufacturing for enterprise software company IFS.