Leadership in high-value services: What it takes for manufacturers to compete through servitization and Product-Service Systems

Tim Baines Professor of Operations Strategy Aston Business School t.baines@aston.ac.uk

What is the outlook for manufacturers in the developed economies of Europe and North America?

Unfortunately competitors in emerging economies are just not playing fair

Country Hourly compensation costs in manufacturing in USD Increase in output per manufacturing employee (index, 2002 = 100)

2010
USA UK Germany France China* India* Singapore Taiwan PR Korea Japan 34.74 29.44 43.76 40.55 1.36 2.3 19.10 NA NA NA

% change (USD) since 1997

3.2 3.6 3.2 3.8 2.19 1.44 3.5 NA NA NA

1997
76.1 83.1 90.5 88.4 NA NA 78.4 78.7 66 91.5 149.8 128 112.9 120.9 NA NA 143.7 176.9 160.7 134.9

2010

% change in output since 1997

197 154 125 137 NA NA 183 225 243 147

and the global markets for mass consumption are changing

Services by manufacturers
For sometime researchers in the USA have studied how manufacturers can build revenue through services (or servitization)
Profit margin in sales of rail equipment 3 - 6%, profit margin in services 8 10%. While Scandinavians have advocated the environmental benefits of manufacturers delivering product-service systems. Transport accounts for ~70% of C02 emissions, how would this look if the manufacturer paid the fuel bill?

Key questions
So what does it really mean to compete through services?

Is servitization a new concept? Does it simply means adding services to products? Are products only a platform for delivering services? Does it mean relinquishing manufacturing activities?

Is all about new Information and Communication

Technologies (ICTs)?

Can it generate greater revenues and profits for the

manufacturer?

Going to Gemba!

Knowledge from previous studies

R-R Survey of 400 UK companies MAN

CAT
ALSTOM XEROX 4 yrs Understand leading practices and technologies

Process of servitization
They are manufacturers Adopting a servicesled competitive strategy

Focusing on advanced services

Delivering highvalue

Coupled with longterm risk and reward agreements

Outcome is a capability rooted in production competences

Services on offer
Services supporting customers

Advanced services
Customer support agreement, Risk and revenue sharing, Revenue-through-use contact, Rental agreement

Outcome focused on capability

Intermediate services
Scheduled maintenance, Help-desk, Repair, Overhaul, Operator training, Condition monitoring, In-field service

Outcome focused on product condition Outcome focused on product provision

Services supporting products

Base services
Product & spare parts

A document management capability

Use Cash

Disposal

Service

Cash

Monitor Consumables Technology

Relationships Risks and rewards between services, revenue and profit

+

Base

Intermediate
Type of services offered

Advanced

So how do leading So how do leading adopters view of adopters servitization? servitization deliver to their customers?

Characteristics of a traditional factory

Centralisation to exploit economies of scale and natural resources Integrated where needed to control cost and quality Focused on the planning and control of material flow Focused on cost, quality and delivery of products Staff who are technically capable, analytical, and dependable Reactive to demands for aftersales support and tendency towards heroic recovery

Remote product sensing

A technology systems focused on informing and advancing actions on maintenance, repair and use Monitor Transmit Store Analyse Respond

Transducers

Base data
Data storage Fault code generation Fault code recording
Satellite, cell phone, radio, Internet

Get more data

Fault code data

Hard and soft storage system

Exception reporting & Asset maintenance reporting

Plan contingencies Repair/ replace

Inform customer
Modify design Modify delivery system

Links to enterprise processes and systems

Practices and technologies key to success

Facilities that are co-located and distributed throughout customers operations

Rolls-Royce pre - TotalCare

Rolls-Royce post - TotalCare

Performance measurement and demonstration

Customer facing measures External

Macro measures

Local measures & indicators

Demonstration of value

Internal performance measures & indicators

Practices and technologies key to success

Vertically integrated into design and production activities to ensure control over responsiveness and continuous improvement
Materials
Conventional manufacturer Combined original equipment manufacture and product-centric services Exclusive focused on product-centric services Conventional service provider

Production Design
Production operations Production operations

Service

Use

Servitized operations Servitized operations Service operations

Position and extent of vertical integration within supply chain

Practices and technologies key to success

Staff located in a front-end office and who are flexible, relationship builders, service-centric, authentic and technically adept
I feel the pain my customer feels if my product fails

I have meaning full conversations with my customers, and great team behind me I am prepared to work varying hours or tasks to meet customer demands

I only make commitments against which we can truly deliver?

I understand the technicalities of the product I am selling?

Practices and technologies key to success

Formalised to deal proactively with the condition, use and location of assets in the field Old world Asset fails

New world Agreed condition & action

Asset failing

Manufacturer

Customer

Manufacturer

Customer

Negotiation Asset fixed

Communication
Asset in use

Service delivery system

Facilities that are co-located and distributed
Vertically integrated within supply chains Exploiting ICTs for remote asset monitoring

A complex integration of practices and technologies.

Staff that are servicecentric, flexible, skilled in relationships, and resilient

Performance measurement systems replicating those of customers

Process that are proactive and integrated with customers

What we now know

Well established examples of servitization exist To succeed, the manufacturer views themselves as a services provider The product platform is critically important Exploits technical competences firmly rooted in design and production Information and Communication Technologies are key, but only as a component in a tightly integrated system It can generate greater profits, though they reduce as a proportion of revenue ...but there are a few things we still dont know.

Leadership in high-value services: What it takes for manufacturers to compete through servitization and Product-Service Systems
Tim Baines Professor of Operations Strategy Aston Business School t.baines@aston.ac.uk