While the manufacturing landscape is changing, one thing remains the same – the pressure to grow revenue.
Growth requires evolution. Manufacturers must respond and adapt to changes in today’s market, including evolving customer demands, global supply chain shifts and inconsistent new equipment sales.
Manufacturers used to build strong businesses by making products, but that’s no longer enough in today’s competitive landscape. Over the last decade, revenue share from new product sales for manufacturers has declined. Additionally, when there is economic uncertainty, capital purchases tend to be restricted, so new equipment orders are slow.
One way manufacturers have stabilized business during uncertain times is to grow their aftermarket service business. This service-based operational model is known as servitization and includes the sale and delivery of spare parts, maintenance and other value-added services.
With the growth of smart, connected products, manufacturers have new opportunities to offer customers Internet of Things (IoT) software and services in addition to physical products.
According to survey results shared in Microsoft’s IoT Manufacturing Spotlight, manufacturers who responded said 33% of their revenue comes from smart products. These products generate data that can then be used for other value-added services. Over the next three years, respondents expect the penetration of smart products to increase to 47%.
Servitization gives manufacturers a way to improve performance, enhance resilience and stay in front of customers after the initial product sale with additional services. In addition to increasing revenue, servitization can improve the customer experience, increase customer loyalty and differentiate your company for a competitive advantage. Plus, margins are higher for services than they are for products.
Many manufacturers operate in an open-loop system with no ongoing link to customers. As a result, they lose opportunities to provide additional services after the initial product sale. Servitization changes that.
With a product life cycle potentially spanning more than 50 years, a servitization business model is appealing to manufacturers to build recurring revenue. Equipment is more complex and technical than ever before, so it’s simply impossible for customers to have the in-house expertise to service equipment effectively.
You are perfectly positioned as the manufacturer of their equipment to understand how to operate and repair equipment and guide customers on ways to maximize their investment.
Servitization could benefit you if you’re considering ways to optimize your business. With the right cloud ERP, taking the first steps toward a servitization business model is easy.
Why pursue servitization
Customers still want high-quality products, but that’s no longer enough. They also want a manufacturing partner who will be a resource to optimize equipment and provide parts and service when equipment fails.
And, manufacturers who adopt a servitization business model with the right platforms, tools and processes increase their aftermarket revenue. That's why Watson Marlow, our customer and a global pump manufacturer, are moving away from selling products such as pumps individually to becoming a solutions provider.
Benefits of servitization include:
- Increased revenue and profitability
When you offer your customers additional services, the obvious result is an increase in revenue. When you do it effectively and are supported by the right tools and technology, services can be a highly profitable part of your operation.
- Financial stability
An ongoing engagement with your customers through regular service and equipment maintenance provides recurring revenue. The byproduct of this predictable revenue is financial stability for your organization.
- Better product development and service solutions
A servitization model naturally keeps your customers’ needs and goals top of mind. With regular touchpoints through the years and seeing equipment deployed in actual use cases, your team can adapt your products and service solutions to better respond to what customers require today.
- Improved customer satisfaction and loyalty
With a responsive service and maintenance division and better results from optimizing equipment, your customer experience improves. Stronger customer relationships help build loyalty.
Stages of servitization model development
Manufacturers experience four stages when transitioning from solely producing products to offering services to customers throughout a product’s life cycle. Most manufacturers haven’t moved beyond product-based and basic services phases.
In the first stage of servitization, the focus is getting the equipment installed properly and keeping it operational. Service at this stage reacts to issues and responds as they occur. At this level, manufacturers would also provide spare parts, repair kits and tools so the customer can perform maintenance.
At the basic services level of servitization, manufacturers would offer repair services or help customers prevent unwanted machine downtime with proactive services such as regularly scheduled maintenance, remote monitoring services and other pay-per-use service models such as updates to equipment. Some manufacturers use augmented reality (AR) and mixed reality (MR) to improve efficiency in the field and to enhance the customer experience. With these technologies, quality checks can be done virtually without sending technicians to the site.
Even simple services can be modernized with new technologies to achieve better cost efficiencies.
At the advanced services level, customers are paying for and manufacturers must deliver outcome-based services such as a performance guarantee on equipment or advanced training. This is the level to realize data-driven service business models. With smart parts and connected assets, data is collected by equipment sensors and sent to the cloud for analysis allowing customers to make informed decisions. With remote monitoring and diagnosis, early intervention and predictive maintenance reduce downtime.
The final stage of servitization predicts trends and customer demands when a manufacturer becomes an integrated part of its customers’ value chains and systems. Cloud-based solutions generate insights from real-time data generated within the ecosystem. This data allows manufacturers to proactively analyze, predict and increase asset utilization and availability, such as fleet analysis, predictive maintenance and efficiency monitoring for fuel consumption for an airline.
Capabilities and features already supported by cloud business applications
The good news is you don't have to completely change your current technology systems. Instead, you can gradually add new components to the existing systems and products to support servitization.
For example, your cloud ERP system already has the right capabilities for your organization to take the first steps forward. It provides you with the ability to exchange data between different systems and products, which is crucial for making products and services work together seamlessly.
Gain visibility in asset service life: You can reduce unplanned downtime with preventative maintenance. The platform makes it simple to schedule maintenance with work orders and plan and procure spare parts. With cloud ERP, it’s easy to create and view all preventive maintenance plans/requests, including deep-clean and hygiene work.
Efficiently manage spare parts: Because cloud ERP integrates seamlessly with various procurement systems, users have real-time visibility into spare parts inventory. The system is configurable to support all inventory and procurement policies and supports shared services. Automate orders with Power Automate or other RPA tools.
Increase useful service life with insights: Cloud ERP analyzes data to deliver insights for condition-based maintenance. This proactive maintenance eliminates machine downtime and increases throughput.
Maximize useful service life of an asset: Advanced analytics, sensors and integration of assets and maintenance systems allow users to move from predicting problems to prescribing solutions.
Improve throughput, quality and uptime: Leverage real-time inventory to optimize resource scheduling.
Bill service and spare parts: Accurate billing for service and spare parts is seamless with asset management.
Challenges Manufacturers Face with Servitization
As with any major shift to your business, your company may encounter a few challenges when you switch to a service-based operational model. The Microsoft IoT report found that while 84% of the surveyed manufacturers were well on their way to digital transformation, they also experienced several challenges as they scaled. This is not an overnight transition and will require patience, communication and flexibility.
Any transition requires a cultural shift – and that vision starts at the top. Changing processes and mindsets is not easy, but leading and managing people through the changes is central to any business transformation, including when you shift from a product-focused mindset to a service-first approach. A recent report found 33% of manufacturers felt their ability to manage change was the biggest obstacle to achieving their business goals.
Before starting your servitization initiative, explain the value of this model to all stakeholders. It’s important to get buy-in from them. When each individual can understand how this can benefit the organization – and most importantly the outcomes that matter most to them – your people will be more willing to collaborate on how to achieve the vision even when that’s changing processes, incentive structures and processes.
Technology can be a game-changer. Manufacturers must leverage technology enablers such as IoT, AI and data analytics to be successful with servitization. Cloud ERP empowers your team with the insights necessary to be proactive service providers to your customers.
However, adopting technology can often be challenging too, especially when integrating technologies into existing systems, requiring investment in infrastructure and expertise. We understand the challenges and helped many customers execute their digital transformation journey with our OnTarget delivery methodology, designed to help you avoid the common traps and get our experience on your side.
One of the biggest skills gaps for manufacturing teams is data management and security. Yet the collection, management and analysis of data is crucial for a servitization business model to succeed. Instead of trying to find data experts internally, partnering with Columbus allows you to gain our robust data management practices and services to keep your data secure and private while delivering insights to help you grow.
Servitization initiatives will require new expertise that may not exist on your current team. The talent shortage exacerbates the situation, so manufacturers may face challenges when it comes to upskilling employees, attracting and retaining talent, and cultivating a service-oriented culture. Your team will have to adapt to new ways of doing their jobs. This requires the use of new technologies to do more with less, such as mixed reality that can streamline operations and make things more efficient. Support this transition with training programs to help them acquire the skills they need to succeed.
As these common challenges illustrate, enhancing your aftermarket services should be approached as a holistic business transformation. It’s critical to consider all aspects of it before you start your journey. Each manufacturer has unique circumstances that require tailored strategies to get the most of servitization’s benefits.
It’s important to find a partner to connect all the dots for you: technology, people and your business processes. Your partner needs to have skills across key critical business areas, such as experience implementing ERP and customer service solutions, data management and security, strategic consulting and more. This eliminates the need to work with multiple partners and the time and energy required to coordinate efforts, giving you more time to focus on your company processes and business value, not technical solution capabilities and limitations.
Do You Have a Roadmap for the Future?
The future includes smart, connected products that give manufacturers many opportunities to offer aftermarket services. It’s time to act, given the dynamic and highly competitive environment.
If you’d like to learn more about how a servitized business model can enable new revenue opportunities for your manufacturing business, we invite you to our free workshop where we’ll cover the following:
- Why a servitized business model opens new opportunities for your business growth
- How to get started with enabling servitization capabilities
- Which Microsoft technologies you should consider to support servitization