“Servitization” Is A Growing Manufacturing Model

More manufacturers are shifting their focus from products to end solutions in a means to enhance their competitive advantage.

A survey of 750 manufacturers in 16 countries by enterprise applications company IFS found a growing number are offering “servitization.” Anthony Bourne, Vice President of Global Industry Solutions at IFS wrote a white paper on the trend and said this is where the manufacturer expands its product line with implementation, maintenance, upgrades and a lifecycle approach, offering not just a product but an outcome.

“It’s ultimately changing the manufacturer from selling products to offering capability. It’s a fundamental change in how you approach customers, as well as how you bill them and maintain the products you sell them,” Bourne said.

Nearly 70 percent of those surveyed said they were offering some level of servitization. The Barclay Annual Manufacturing Report also found that nearly three-fourths of managers saw servitization as a means to establishing a closer customer relationship.

The term was first coined in the 1980s and can be traced back to the 1960s when Rolls-Royce created its “power-by-the-hour” concept, which sold fully-maintained aero engine use by the hour rather than by the unit.

“it’s a fundamental change in how you approach customers, as well as how you bill them and maintain the products you sell them.”

What’s fueling growth in the concept now is that the commoditization of many products is encouraging manufacturers to seek differentiation and added value. New technologies such as IoT devices, sensors and big data also are making it easier for manufacturers to monitor, analyze and manage their products on the market.

Bourne says there are three levels of servitization. The first level is simply offering parts or consumables which all manufacturers already do. At the second level, manufacturers become involved in scheduling and performing maintenance and monitoring on the equipment that they sell. At the most advanced level, the manufacturer goes to the customer and offers to help with products and solutions. Rather than charging or selling directly, it may involve a risk and revenue-sharing agreement. “Very few manufacturers are at that level, because it’s a very different mindset that they need to operate with,” Bourne said.

He said a successful servitization strategy calls for an infrastructure to tap predictive analytics, remote communications and consumption monitoring. The manufacturer also will  need strong buy-in from the C-suite as it could require radical shifts in departments. And in many cases, manufacturers may need to recruit new managers who can lead such a service.

One great challenge is that servitization can require a radical change in how manufacturers view their products, costs and customers. Whereas most manufacturers are driven by units and costs, servitization requires them to think more about lifespan, performance and use.

For example, while a traditional manufacturing model may use lower-cost components to ensure optimal performance in a stated warranty period, servitization requires consideration of lifespan, usability, maintenance and service for years.

“Manufacturers traditionally want to minimize the cost of their products. But servitization they can raise the cost to extend the life, so there are some conflicts. They really need to look at the right metrics to see what’s right,” Bourne said.

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Craig Guillot

Craig Guillot is a business writer based in New Orleans, La. His work has appeared in Wall Street Journal, Entrepreneur, CNNMoney.com and CNBC.com. You can read more about his work at www.craigdguillot.com.