With manufacturers around the world looking for new revenue streams and opportunities, many are finding significant potential in servitisation. By Gary Katzeff.

The Australian manufacturing industry is a difficult industry to be in right now. The COVID-19 crisis has put immense pressure on global supply chains, which has shone a spotlight on the importance of domestic manufacturing capabilities. Despite being a critical part of the Australian economy, manufacturing accounts for only 6% of Australia’s GDP in 2021. There is a widespread recognition that more needs to be done to build the resilience of this critical sector.

However, market forces such as international competition mean companies in Australia cannot gain a competitive advantage through price. Many overseas manufacturing competitors have lower wage bills, raw material costs, and overheads. Meanwhile digital disruption is shaking up the way we do business, leaving companies who fail to digitally transform behind.

Manufacturers around the world are looking for new revenue streams and opportunities. Many are turning to services and solutions such as implementation, maintenance upgrades and product lifecycle services.

Rolls-Royce is often cited in business schools as a case study for how to separate manufacturing and services to create separate business streams. In fact, Rolls-Royce went one step further. It was one of the first companies to abandon the straight sales model in favour of the ‘power by the hour’ principle. This means almost every aspect of maintenance, monitoring and modernising of its engines are the responsibility of Rolls-Royce engineers.

This is a significant departure from the traditional manufacturing model whereby manufacturers would sell a product and then charge for repair work to that product as required.

Rolls-Royce is just one example of how servitisation is helping the manufacturing sector to secure more long-term revenue than a straight-through manufacturing model can provide.

Manufacturers also struggle to position themselves as ‘market leaders’ – bringing unique products to market is becoming increasingly difficult and expensive in the modern era. One way companies can differentiate themselves, and continue to drive revenue, is through servitisation. The combination of systems, services, technology and interconnectivity can drive a service-driven mindset.

Data for insights

Companies need to look for new technology solutions in order to provide the services customers are looking for. Much of the insight is sitting there ready to be harnessed.

Products and machines create data every time they complete an action and provide updates on their status and operational readiness. Manufacturers can use data to provide efficiencies in their supply chain process. Indeed, at Sage we have seen many examples of manufacturers that have spotted anomalies in the supply chain and stopped production before the issue cost them too much.

Another example is cyber-manufacturing, which links together data from different machines, creating smart production lines that can adapt to change and recover from failure more quickly.

Of course, projects with thousands of machines in different locations means there can be a mass of disconnected data. Making sense of all these data points is vital to produce better customer insights. This is where machine learning and artificial intelligence (AI) is so important to help assimilate data and make rapid decisions.

Naturally, the primary factor hindering servitisation for many brands is leadership, or an innate cultural and technical inertia to rapid change. An outdated business model and a lack of IT infrastructure is holding many back from progressing with a service-orientated strategy.

This is where technology can be a great enabler through offering new ways to connect. The latest techniques in the Internet of Things (IoT), AI, machine learning devices, and predictive analytics can join the dots for the data points, allowing analysts to extrapolate greater insights. IoT and AI tools play a key role in providing proactive value-added services to customers. Interconnected smart devices collect valuable data that can be used to provide services in addition to products. Ultimately, that delivers additional, personalised value to customers. Fundamentally, IoT allows business owners to extend the base services that they already offer.

Manufacturers can start with simple projects involving tracking or visibility, to more sophisticated advanced services requiring automation, artificial intelligence or predictive analytics. Cloud-based business management systems create the platform for servitisation. It turns a business from one that just builds products to one that offers customer-focused services with products.

Finding success with servitisation

While there’s no silver bullet when it comes to implementing a successful servitisation strategy, there are some essential factors which can help ensure success:

  1. Create alignment between client and manufacturer through regular connection and engagement with customers. This is the key group that will benefit most from value-added services, while providing the data that will assist with innovation.
  2. Prepare case studies of successful servitisation examples to showcase the value of your customers.
  3. Ensure new services do not compete or conflict with what you already offer to avoid the potential cannibalisation of services.
  4. Make sure the service offers fit or differentiate the brand or image of your manufacturing firm.
  5. Drive momentum by tapping into current market trends, and stay up to date with the changing needs of your customer.

Servitisation will help to build better long-term relationships, provide better visibility and open the door to new products and services to unlock new revenue streams. Manufacturers can turn an era of disruption on its head by using the window of change to find new innovations and relevant services to support their core products. In the age of acceleration, it could be the key to unlocking sustainable competitiveness.

Gary Katzeff is General Manager – ERP at Sage Software Australia & New Zealand.