Expert advice on how manufacturers can provide services and solutions that supplement their traditional product offerings.
In this Q&A, I ask our industrial manufacturing industry expert, Antony Bourne, to answer six questions on how manufacturers can benefit from service-based business models.
Meet our industrial manufacturing industry expert
As the Vice President of Global Industry Sales at IFS, Antony’s responsibilities include acting as the Global Industry Director for Industrial Manufacturing and High-Tech Manufacturing as well as managing the other global industry directors.
Antony has over 20 years of experience in the IT industry, including working in the manufacturing sector. Prior to joining IFS in 1997, he held Business Analyst positions with Ford Motor Company and AlliedSignal. During this time, he implemented enterprise resource planning (ERP) software as well as business process improvements.
Question 1
How do manufacturers remain competitive and overcome the commoditization of products?
Answer: This is an interesting question to which there is no single answer, since for different companies there are different answers, as manufacturers today want to maintain their competitiveness, achieve higher margins as well as respond to customer demand. Many of the companies I speak to are investing in disruption and innovation, and they aren’t doing it merely on a new product development perspective but rather 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.
Question 2
Recent research found that 65% of the manufacturing industry will switch from product- to service-based revenue in the next three years. What does that mean and why?
Answer: The reason for this statistic is that manufacturers today live in a fiercely competitive global market and their product margins face increasing pressure, which forces them to look for ways to differentiate their businesses. Many are going down the servitization route, a digital transformation that enables them to provide services and solutions that supplement their traditional product offerings.
It also means gaining a better understanding of customer needs by forging closer working relationships with them, but 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 this transition.
Question 3
What are the benefits of servitization?
Answer: This is based on the fact that manufacturers are adding a new revenue stream to the business that didn’t previously exist. It also helps reduce the customer cost due to the process of having more information about the customer’s products that can help you be more efficient in the way that you maintain them.
For example, if you use Internet of Things (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. It will also allow you to gain insight into when and how products are being used.
Another advantage of servitization is that it offers the ability to smooth out the ‘lumpy’ revenue streams, which in turn give a more predictable and secure cash flow.
Question 4
What’s the principal motivator behind manufacturers expanding their service offerings?
Answer: There are a number of reasons why manufacturers want to expand their service offerings. One of the main reasons is that they want to create a closer relationship with their customer (source: The Annual Manufacturing Report 2016). As a result, this will help the company maintain the revenue moving forward since the customer will benefit from the servitization approach and give them another reason why they should stay as a customer.
For some manufacturers, the motivation behind this approach is that of survival. For some of the customers that I speak to, they’ve cited issues with competitors copying their products and producing them at a lower cost. Therefore, if they can move the customer into buying the service as opposed to just the product, which will help protect them from this issue.
Question 5
Are difficulties being reported when it comes to expanding service portfolios? If so, how can they be overcome?
Answer: For those manufacturers that transition to a servitized company, there are a number of challenges that they will encounter and need to overcome. 70% of manufacturers saw “availability of resources (people, materials, financial)” as the principal hurdle for increasing their service portfolio (source: The Annual Manufacturing Report 2016).
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, the 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/years and not received all in a single payment upon delivery and acceptance.
Question 6
Is there a successful use-case you can share?
Answer: Yes, there are a number of customers that have adopted this approach. One of them is Nowy Styl, a company who transformed themselves from a pure manufacturer of furniture to that of a world-class office interior consulting company. They did this in three stages:
- Starting as a start-up company that produced office chairs
- Moving from a chair producer to a company offering complex solutions for offices and public areas
- Becoming an expert in comprehensive solutions for office and public spaces
Want more on this topic?
For more expert-to-expert advice and insight on the use and benefits of service-based business models, download the Manufacturing: Transforming mindsets to embrace the opportunities of servitization eBook.
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