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The Business Case for Servitization

The Business Case for Servitization

Machine Manufacturer, Servitization

The Business Case for Servitization

12 Aug, 2021

This article will discuss:

  • Advanced servitization and its importance to the industrial manufacturing sector
  • The business case for considering servitization in the manufacturing industry
  • The benefits of advanced servitization

Improving revenue generation rates and earning profit is the main reason for the existence of every business and manufacturing enterprise. Today, the average manufacturer is challenged by multiple disruptive forces with the capacity to affect productivity and increase revenue. These negative influences such as a disrupted supply chain have led manufacturers to explore servitization as a means to growing new revenue streams.

 

An introduction to advanced servitization

Servitization is the process of building product-service systems to offer customers more value and generate continuous revenue streams for service providers. For manufacturers, offering servitization means extending production-based systems to include services. This inclusion leads to a product-service system with certain capabilities and different responsibilities shared between the service provider and its customers.

The service provider or manufacturer, in this case, delivers a product-service system through which a servitized good is provided alongside supporting services. The customer enters a contractual agreement to use the system and is responsible for using the system correctly to get the expected throughput quality. By leveraging this arrangement, customers gain an optimal operating system, and the supplier gains an additional source of revenue and insight into how servitized products are used.

The primary incentive for choosing servitization is due to the extended revenue lifecycle attached to servitized goods. The average contract lifecycle associated with servitization is 20 years or more, which highlights the value proposition it offers. Other incentives also apply and broadly include competitive reasons, meeting governmental approval, market considerations, and the adoption of technology.

1. Competitive reasons driving servitization adoption rates

The global manufacturing dynamics continue to change as the years go by. Across the globe, Asian countries have leveraged the combination of low wages and an increasing knowledge base as their competitive edge while the west focused on producing high-quality products to generate revenue. Although this arrangement worked for a while, the challengers to western manufacturing dominance have increased their ability to develop high-quality goods, leading to more intense competition.

Advanced servitization offers manufacturers in the west a pathway to level the playing field and increase their revenue bases. Thus, manufacturing enterprises across the developed countries are either undertaking servitization or are seriously considering it as a means of offering more specialized services to customers that the manufacturers from the developing countries can’t provide.

 

powerful edge device to drive your servitization plan

 

2. Government regulations and policies

Large-scale manufacturing processes are human activities that increase emission rates and release volatile organic compounds (VOCs) and other hazardous elements into the environment. Despite the increased use of alternative energy sources domestically, these sources of energy are not yet stable enough to support large-scale industrial manufacturing. Thus, to limit the effect of VOCs on the environment, governments have put specific regulations in place to lower emission rates.

The product-service system associated with servitization supports reducing the carbon footprint associated with manufacturing in multiple ways. One example is reducing the amount of heavy machinery used across shop floors by providing a centralized facility in which industrial activities occur only when necessary. Centralized facilities are also managed by technical experts who monitor equipment to ensure proper usage and limit the emission rate from industrial processes.

OEMs (original equipment manufacturers) can consider advanced servitization as a means to meet government regulations and policies with respect to implementing green initiatives that do not harm the environment.

 

3. Social considerations

Manufacturing equipment is still filed under the asset column of many enterprises. This makes ownership of these assets an important consideration for business owners. Advanced servitization offers to take asset ownership off the table and replace it with an optimal performing environment. While this environment removes the burden of maintenance or repair costs, it takes away the social capital attached to ownership.

OEMs interested in offering servitization must make a compelling argument to manufacturers who would like to own servitized assets. The argument must include the benefits of the servitized environment, and a real-time demonstration of how product-service systems will help customers to meet the most pressing pain points.

 

Industrial cloud

 

4. Technology advancement and adoption rate

Technology implementation supports the delivery of an optimized product-service system. Sustaining advanced services requires constant vigilance, recognition of patterns, and development of the ability to respond to disruption instantly. Implementing these features of advanced servitization requires adoption of digital-transformation and technology solutions such as edge computing, IIoT, and centralized computing platforms.

Manufacturers utilize these digital-transformation solutions to implement condition monitoring, remote monitoring, and predictive analytics frameworks to ensure servitized systems function optimally. The implementation of condition monitoring empowers the manufacturer to deliver a reliable product-service system. Reliability is critical to delivering advanced services. Unreliable product-service systems come with penalties, and the customer has the right to exact these penalties anytime the provided service falls short of its contractual agreement.

 

Conclusion

The business case for advanced servitization is not limited to the technical considerations, government regulations, and the need to beat the competition. Other important factors such as the knowledge perspective and market considerations also apply. 

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Machine Manufacturer - Servitization