Leadership & General Management

Servitization: Manufacturing Paradigm Shift or Simply a Business Model? – By Dr Howard Lightfoot

Is ‘Servitization’ a paradigm shift in manufacturing or simply a manufacturing Business Model to deliver services specifically supporting the customer’s use of the manufactured product? Most of the UK based research on the topic is in the main focused on high value capital equipment (Rolls-Royce’s Aero Engines, MAN Trucks, Caterpillar off-road products, Alstom’s Train-Life Services and Xerox’s move from photocopier manufacturer to “technology led service provider”). These were considered to demonstrate the provision of ‘advanced services’ – contracts for pay per use, fleet management, availability, outcome, and integrated solutions.

As a word Servitization has been around since the late 1980s. It was coined by Sandra  Vandermerwe and Juan Rada in their 1988 article in the European Management Journal “Servitization of Business: Adding Value by Adding Services”. They defined servitization as “the increased offering of fuller market packages or ‘bundles’ of customer focused combinations of goods, services, support, self-service and knowledge in order to add value to core product offerings”

Researchers at Cranfield University in England, following an extensive review of the relevant literature, defined (2007) Servitization as ‘the innovation of an organisations capabilities and processes to better create mutual value through a shift from selling product to selling Product Service Systems’ (PSS).

A (PSS) can be thought of as a market proposition that extends the traditional functionality of a product by incorporating additional services. Here the emphasis is on the ‘sale of use’ rather than the ‘sale of product’. The customer pays for using an asset, rather than its purchase, and so benefits from a restructuring of the risks, responsibilities, and costs traditionally associated with ownership.

For over two decades academic literature has encouraged manufacturers to ‘go downstream’ and move towards their customer’s end of the supply chain and ‘add value’ by integrating services with their products. Looking to the aftermarket where for many products the installed base can be orders of magnitude greater than annual sales of products – cars 13/1; trains 21/1; tractors 30/1 and civil aircraft 150/1 – this presents a revenue generation opportunity and a potential moderator of cyclical business downturns. Today, more and more manufacturers are finding that their best means of competing in the market is to provide a portfolio of integrated products and services. Offering services has now turned into a conscious and explicit strategy for many manufacturers with the provision of product-centric services becoming a main differentiating factor – this has become known as the servitization of manufacturing. The quoted classic iconic examples being Rolls-Royce Aerospace, Xerox, and Caterpillar.

Product-Service Systems research focused on business models with sustainability impact based on dematerialization and product re-use.

For me Servitization is a ‘special case in PSS’ and NOT the reverse as stated in some of the academic literature!

It has become the generic term (Servitization, Servitisation, Servicisation) for a manufacturing business model that moves from simply selling product to selling product-centric services. A move from a transactional manufacturing business model to a relationship based model where through service provision value is co-created with the customer as the product is used.

Skills to deliver service agreements are fundamental to ensure the aims and objectives of the service agreement are met, and by the very nature of a long term service agreement the supplier is able to make required investment decisions in people, thus providing a pipeline of new talent to the industry for the longer term.  Innovation is key to ensure a culture of continuous improvement within the service environment, and by the very nature the contract being long term and output related, the supplier is incentivized to develop a culture of innovation, and adopt new technologies to deliver continued added value to the end customer.’

So when is it appropriate to use the term servitization to describe a manufacturer moving from selling products to selling product-centric services? My book ‘Made to Serve: How manufacturers can compete through servitization and product-service systems’ highlights ‘six hidden lessons’, which highlight what is common amongst servitized manufacturers.

These are: Facilities that are co-located and distributed throughout customers operations; Vertical Integration to ensure control over responsiveness and continuous improvement; Technology Systems focused on informing and advancing actions on repair and maintenance; Performance measures focused on asset availability, reliability, performance and cost; Staff who are flexible, relationship builders, service-centric, authentic and technically adept; Organisational processes formalized to deal proactively with the condition, use and location of assets in the field.

The services described are termed ‘advanced services’ – business models delivering ‘pay per use’, availability, outcomes and performance. The other thing they have in common is that the products are generally complex systems that have connectivity and can be remotely monitored by their manufacturer as they are used in the field. This is key to enabling the manufacturer to offer their product-centric services and adopt additional risk whilst ensuring their ability to deliver services effectively and efficiently at a profit.

This brings me to the field of ‘Smart Connected Products’ and the Internet of Things (IoT).

Products, assets and other things embedded with processors, sensors, software and connectivity allow data to be exchanged between the product, the manufacturer, user and other products and systems. Connectivity also enables some capabilities of the product to exist outside the physical device, in what is known as the product cloud. The data collected from these products can be then analyzed to inform decision-making, enable operational efficiencies and continuously improve the performance of the product – these are smart connected products

The world is moving to connected products. Companies are leveraging the data and intelligence from these connected products to create smart business processes to differentiate their offerings, drive improvements in efficiency and effectiveness and to change the customer experience. Smart, connected products create new opportunities and reasons for organisations to transform their value propositions and address completely different markets and refined customer segments.

What are Smart products? A ’Smart’ product comprises: Physical components, Smart components and Connectivity. Let’s look at these in turn: In the case of physical components the product is composed of mechanical, electrical, and other material components. Smart components comprise microprocessors, sensors, software, controls and data storage with an embedded operating system and user interfaces.

What is Connectivity? Via ports, antennae, and protocols enabling wired / wireless connections it allows data to be exchanged with the product. The connectivity may be point to point, hub and spoke or as part of a network of products. Information is exchanged between the product, its manufacturer, other products and systems and its operating environment. In addition it allows some product functionality to exist outside the product in what is known as the ‘product cloud’.

Thousands of trucks and trailers in the UK and abroad are now being monitored and managed in a completely different way through the use of telematics solutions with access to health and location information, which is increasing operational efficiency and utilisation of fleets. Trucks have become smart connected products.

For example, in analyzing a MAN truck we can see the elements that constitute a smart connected product. The vehicle has physical components such as its engine block, wheels and tyres, transmission and an alternator. Its smart components include an EMU which controls the engine in operation, approximately 25 sensors (some of which are multi-purpose) for things such as temperature, oil pressure, ABS braking. There is a CANbus on the engine, a serial bus system that serves as the basis for digital data exchange between sensors, actuators and control units. The data from this bus system is stored in an on-board data acquisition unit connected to the CANbus. GPS location data is also recorded.

The vehicle connectivity is provided by a mobile cellular device which transmits data from the vehicle to a central control centre provided by MAN. This is a spoke and hub system with all vehicles operating under MAN’s fleet management contracts sending data to a control centre.

This smart product enables MAN to capture information about the way in which the product is used, and then use this to modify driver behaviour to improve, for example, fuel efficiency. Critical parameters recorded and analysed include the rate of truck acceleration, the extent to which cruise control is used, and the harshness of braking.

This data is used to monitor vehicle use and or abuse in fleet management contracts, where the vehicle is provided on a pence per kilometer use basis. If the recorded data shows adverse use of the vehicle then MAN can increase the cost per kilometer to the customer.

The ability to collect data on the use of their trucks has enabled MAN to offer a value-based pay-per-use proposition for the vehicle as opposed to a transactional sale of the vehicle to the customer.

The whole relationship with the customer is changing because companies are now able to stay in touch with the product after the initial sale. Companies can gain insights into customer bahaviour and practice by collecting and analyzing product usage data to understand how the product is performing, how much is it being utilized, which features are being used, and which features are not. This allows companies to improve segmentation, deploy targeted pricing models, deliver new value added services, and anticipate the needs of their customers.

Let’s now look at some other example of business models developed through providing customers with smart connected products.

Tesla Motors Automobiles a smart product with an intelligent maintenance system that periodically monitors itself and can autonomously alert Tesla to issues so that they can be resolved quickly and easily. Many issues can be resolved remotely with a corrective software download.

Philips Lightning Hue Light Bulbs and Bridge – provides users with a connected device for home automation. Users have the ability to customize their interaction though a smart phone, as well as connects their system to the wider world. With it, a user can control their lights remotely or link them up to the rest of the web, newsfeeds, or even their inbox.

Joy Global’s Longwall Mining System – able to operate autonomously far underground, overseen by a mine control centre on the surface. Equipment is monitored continuously for performance and faults, and technicians are dispatched underground to deal with issues requiring human interaction.

Medtronic’s Continuous Glucose Monitoring (CGM) – a smart device with wearable technology. This digital blood-glucose meter uses a glucose sensor inserted under the skin that measures glucose levels. A transmitter sends the glucose information from the sensor to a monitor that displays glucose levels on a screen and notifies the user if it detects that glucose is reaching a high or low limit. People with diabetes get a more complete picture of their glucose levels, which can lead to better treatment decisions and better glucose control.

Babolat’s Play Pure Drive Racquet System – a smart product that looks like a regular tennis racket on the outside. However, sensors integrated into the handle allow players to have access to a lot of information and analysis through a smartphone application: power, impact locator, type and number of strokes.

Smart Products are complex systems that combine hardware, sensors, microprocessors, software, data storage and connectivity. This has been made possible by device miniaturisation, improvements in processing power and data storage capability at ever reducing cost. This combines with the benefits of the establishment of communication protocol standards and the benefits of wide ranging wireless connectivity.

These smart connected products are driving the need for organisations to establish new technology infrastructures comprising the product, product cloud, and connectivity to enable secure user access, input from a range of external data sources and the ability to integrate with business systems.

MAN certainly fits the bill of a servitized manufacturer and of the other examples above so does Joy Global.

However, of the other manufacturers I would argue that none of these would be sensibly characterised as ‘servitized’, simply they have adopted business models that are being shaped by data and technology.

Servitization is clearly not a manufacturing paradigm shift as was Lean Manufacturing but is a special case in Product-Service Systems and a business model adopted by manufacturers of complex high value capital equipment providing advanced services to deliver pay per use, availability, outcome and performance based contracts centred around their manufactured product.

 

Howard Lightfoot PhD is a Si2 Expert in Servitization, Service Strategy and Transformation, Innovation and Technology. Howard was Director of the Operations Excellence Institute and a Senior Senior Research Fellow in Service Operations in the Innovative Manufacturing Research Centre at Cranfield University, focusing on Product-Service Systems and the configuration of servitized manufacturing companies where he is considered to be a leading authority.

 

Further articles on this and other topics can be found in the Si2 Partners Resources Page and the Si2 Knowledge Center

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1 reply »

  1. I find your evaluation of the Servitization trend a bit too narrow, if you focus it only on product-centric services of manufacturers of complex high value capital equipment. We find this trend also in the it-industry where hardware and software is “servitized” into platform-, infrastructure- or software-as-a-service offerings and revenue streams.
    Isn’t Servitization not more the trend in hightech product business to enlarge the share of services in total revenue streams of industrial companies without reducing the product business volumes?
    I also suggest to avoid focussing only on product-centric services of manufacturers. They offer and deliver more and more services which help customers to improve their manufacturing and other business processes without direct relationship to the equipment. These sometimes called “value added services” contribute also to the Servitization.

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