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What is Servitization?

Machine Manufacturer, Industrial Cloud Computing, Industrial Edge Computing, Servitization

What is Servitization?

6 May, 2021

This article will discuss:

  • The meaning of servitization of the machine and provide examples of its application by equipment manufacturers
  • The benefits of servitization to the manufacturing industry
  • Diverse servitization options manufacturers can explore

Servitization refers to the services an enterprise provides to support the optimal functioning of the conventional products or goods the enterprise sells to its customers. To bolster flattening revenue growth, due to a reduction in productivity and the Covid-19 pandemic, and to seek other sources of income, equipment manufacturers within the manufacturing industry are embracing the concept of servitization.

As defined earlier, servitization is the process of gaining multiple revenue streams by providing supporting services to produced goods. Three main levels of servitization exist:

  1. Basic services – This involves turning basic services such as the provision of spare parts.
  2. Intermediate services – This process involves offering external services such as maintenance and repair tasks.
  3. Advanced service – This option refers to the process of offering produced machines on a contractual basis where the output or use of the machine is focused upon.

The first two levels of servitization options – basic and immediate services, have been applied across the manufacturing industry as a means of generating external revenue for the coming years. Manufacturers consistently offer maintenance and spare part services as subscription-based plans alongside the equipment they sell. Providing advanced services, takes things to the next level for both the equipment manufacturer and the end-user. The end-user gets to utilize expensive equipment through subscription plans while the OEM gains revenue and leverages the insight from machine utilization to improve its business strategies.

 

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Servitization of the machines by original equipment manufacturers

The servitization of machines involves providing a subscription-based plan to manufacturers interested in utilizing a manufacturer’s original equipment for specified periods. For example, a heavy equipment manufacturer who sells individual units of equipment for hundreds of thousands of dollars has a limited customer base that will consist mainly of large enterprises with the financial resources to purchase this equipment. Small and medium-sized manufacturers who have a need for these machines are generally not able to purchase them and end up outsourcing machining tasks to third-party service providers.

The heavy equipment manufacturer can choose to ‘servitize’ available stock which has not been bought by offering SMBs a pay-for-use plan which will require less capital expenditure compared to purchasing the equipment outright. To successfully implement a servitization of the machine process, equipment manufacturers must consider taking advantage of diverse revenue structures to capture a larger customer base. The revenue or payment structures could be a long-term contract or a cost-down contract which reduces the cost of using the equipment for the end-user.

Regardless of the payment structure utilized, the servitization of the machine process comes with some important responsibilities for the equipment manufacturer. A subscription-based plan ensures the repair and maintenance process is handled by the equipment manufacturer providing the service, which gives SMBs the flexibility to invest scarce resources in other ventures. An example of basic and intermediate servitization is Caterpillar’s Cat Product Link program. The program involves the equipment manufacturer capturing the data of individual equipment that a manufacturer uses to provide after-sales services such as maintenance support. The buyer allows Caterpillar to remotely track its usage of a Caterpillar product, and the data is used to provide additional services to which the buyer must subscribe to.

An example of an advanced servitization of the machine plan is the engine servitization package Rolls-Royce offers. Jet engines are large-scale purchases that many small airlines struggle to make due to the total overhead cost of owning an engine. The Rolls-Royce servitization program provides end-users of its jet engines with a pay-per-use option whereby airlines pay according to the hours for which an engine is used. In this scenario, the data from engine usage is captured and utilized by Rolls-Royce to improve its design, engine performance, and maintenance. It is important to note that Rolls-Royce also handles the repairs and maintenance tasks associated with the engine.

 

The benefits of servitization of machines to the manufacturing industry

The benefits of servitization of machines cover both the equipment manufacturer providing the service and the end-user taking advantage of the offered services. The benefits to the equipment manufacturer offering servitization packages include:

  • Gain insight into equipment utilization – Gaining insight into how original equipment is used by the end-user provides added information that remote data collection processes or routine maintenance cannot give. Thus, servitization of the machine allows OEMs to visualize the equipment they produce in action and how humans interact with it. This insight helps the manufacturer develop optimized strategies to manage available assets as well as predictive maintenance packages which can also be monetized.
  • Improve asset management – Servitization of the machine offers OEMs the opportunity to put unsold assets or equipment to use. The servitization process ensures the OEM generates revenue from available equipment while collecting important data sets to develop optimal equipment utilization
  • New revenue stream – Stakeholders in the equipment manufacturing industry are in the process of expanding their portfolio to meet increasing customer demands and to remain viable by generating new income streams. Advanced servitization is a business model that enables OEMs to create new revenue generation models by offering their customer base varying services according to their financial capacities.

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The benefits of servitization to the end-user

The benefits of servitization to the end-user focus on ensuring businesses remain financially flexible by not investing too much by purchasing cutting-edge equipment. These financial benefits include:

  • Cost-savings from reduced or no maintenance charges – The cost of repairing or maintaining manufacturing equipment is a considerable aspect of the total overhead cost of running a manufacturing facility. SMBs who take advantage of servitization of the machine save huge sums from limited maintenance costs allowing them to invest the cost-savings in other areas of the business.
  • Flexible payment plans – The option of utilizing expensive equipment according to either order rate or available finances enables SMBs to retain some financial flexibility with capital. SMBs which pay for machine time only when processing customer orders can easily integrate production cost into the selling price of their products to make a good profit.
  • Linking OEMs to end products – Servitization gives OEM access to the data from the final products produced with its equipment. The insight gotten from the link between an OEM and its end products can lead to improved equipment design which is developed for the end-user in the form of intuitive, easy-to-use equipment.

 

Conclusion

Advance service for servitization is made possible by the digital transformation of traditional processes within the manufacturing industry. With digital transformation technologies, an OEM can capture the data needed to provide the extended support that defines servitization. The captured data also serve as the analytical foundation for devising diverse servitization plans to generate considerable revenue for an OEM.