Are you being served?

Manufacturers are to become service providers to meet the pressures of globalisation.

To remain competitive, many manufacturing firms are having to look beyond their focus on production excellence.

In a global marketplace, where production and assembly of goods are frequently 'offshored' to lower-cost areas and prices are driven downwards, firms are increasingly seeking to become service providers to add value to their product offering and boost profit margins.

This process has become dubbed 'servitisation', a term coined by Professor Sandra Vandermerwe and Juan Rada in the 'Harvard Business Review' back in 1988, although its relevance for manufacturers has become increasingly apparent much more recently.

They defined servitisation 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 corporate offerings."

Some companies have found that adding services to their product offering has proved to be more profitable than selling the goods. Producers of paper machines, for example, can make five times as much profit on providing services as on the hardware. In power equipment the multiple is four times. In rail vehicles or machine tools the services gain is a smaller but still-respectable doubling of the hardware margin.

At your service

One of the best examples of a manufacturer-turned-service provider is UK aerospace group Rolls-Royce. Sensor technology allows suppliers of, say, aero-engines or other complex systems to diagnose problems remotely long before the systems actually give trouble and offer a better service to airlines. In 2006, 53 per cent of Rolls-Royce's £7.4bn revenue came from such services.

US computer giant IBM, once a hardware supplier, is now a services company. A smaller-scale example is agricultural equipment maker John Deere, which has come to offer satellite-navigation equipment to help farmers use its equipment more productively.

Xerox, the photocopier maker, responded to tough competition from its rivals by offering supply, maintenance, configuration and user support. Xerox took time to recover but now competes with Hewlett-Packard, Kodak and Canon for document-management and other consultancy services to energy companies, car makers, public libraries, airlines and large retailers. It has rebranded itself as 'The Document Company'.

Telecommunications hardware makers Motorola of the US, Alcatel (now Alcatel-Lucent) of France, and Ericsson of Sweden have trodden the same path.

Cut to the bone

Even volume-product companies have moved into services. Twenty years ago SKF of Sweden, the world's number one bearings maker, decided to do something about flat profitability and return on assets. Rationalisation and automation had cut costs to the bone, and SKF couldn't cut research and development while preserving leading technology and quality. So SKF Bearing Services arose to offer, not bearings, but 'trouble-free operations'. Today, SKF offers asset management condition monitoring and other services such as training and logistics.

Even carton makers are going the same way. Last year Sweden's Tetra Pak sold 138 billion packages to milk and juice customers all over the world.

Tetra Pak customer operations manager Ian Hughes told a recent seminar: "Retailers have all the power. They are putting pressure on all our customers and driving profitability out of the industry. If we are to survive, we have to have healthy customers who invest."

Tetra Pak keeps its customers healthy by helping them cut their operational costs. The company's new operational cost reduction unit has been set up to drive up customers' overall equipment effectiveness (OEE), a measure of a production machine's speed, quality and use as a percentage of the total possible.

Hughes calculates that a 12 per cent improvement in OEE, achieved by eliminating breakdowns, slow running and other inefficiencies, would save Tetra Pak's customers €1.7bn.

No Panacea

Moving to services isn't a cure-all, and usually proves harder than its adopters suspect.

Companies think that moving to services will generate extra revenue, says Graham Clark of the Cranfield School of Management. "But they tend to muddle through rather than analyse what they need to provide."

Developing services poses several new issues for a business, says Professor Andrew Neely, also at Cranfield: "If you're going to move from pure manufacturing to services, you have to invest in people with different skills."

Tetra Pak developed its own skills. An external consultancy, Suiko of Bath, helped it identify the behaviours that would be needed to provide OEE consultancy. The company then set up internal assessment centres to invite internal applications and match candidates to behaviours. Suiko helped Tetra Pak develop training materials and train the recruits.

Another issue, says Neely, is that firms with services are more complex businesses to manage. That applies financially, in infrastructure, people, dealer network, and so on.

SKF's service focus caused turmoil throughout the organisation, from structural design, to rewarding and motivating people, and from reformulating the product and service portfolio, to branding and repositioning. It also meant recasting the way SKF worked with its vast distribution network.

A service may have to be run from new premises, adds Neely, which implies an investment in new assets. "The question then is how quickly you can recoup the investment in that asset base."

For Clark, there's an even bigger barrier: "It's not just about the skills or the materials. It's the belief system underneath the service. It's harder to change the culture than you think to make the sort of shift we're talking about. You need to do a lot more than announce that 'we're now a service'." And your customers will not necessarily see you in that light.

Tetra Pak's Hughes admits: "Getting customers to sign up to this [OEE service] has been difficult for us, even though we don't charge if they don't make any savings. Why don't companies embrace that? I wish I knew, because I don't understand it either."

Sometimes customers will pay more for services, but it's not always clear how the producer should charge for a service offering. Neely cites the example of a laser-cutting machine tool. If the user wants to use the machine in a particular way the provider will write the code and download it to the user's equipment.

"Each of these things is a valuable service but they are being given away for free as part of the sale of the original product." Capital equipment providers would find it very hard to change this business model.

"Traditionally, in a product sale, service has been given away free by the sales people," says Clark. "If you want to change that, you're targeting the sales force to do something completely different. You're moving the sales force to a consultative approach. It becomes a value-based sale rather than 'buy now and we'll give you 20 per cent off'." For the sales people, he says, it's a major culture shift.

Businesses haven't defined services closely enough to make sure they are consistently managed and delivered, says Clark. This isn't about service level agreements (SLAs). SLAs are usually only partial, says Clark. "They don't cover it completely. What's covered

in an SLA needs to be the bits that are easy to measure rather than what needs to be measured. It's a whole can of worms, but it comes down to the difficulty of definition.
"People don't really think through what service means. Because it's 'services', they think they don't have to define it the way they would a manufactured good. This area needs a lot more work."

Risky Transition

Last year Prof Andrew Neely of Cranfield School of Management, UK, analysed data from 10,000 manufacturers in 23 countries to compile a picture of the range and extent of servitisation.

Three in ten offered services in one form or another. About 22 per cent offered design services, 16 per cent systems and solutions, 12 per cent retail and distribution and 12 per cent maintenance and support.

Though only a small number - 216, or 2 per cent of the total - had declared bankruptcy, more than half of these were 'combined' product and service businesses - a significantly higher proportion than pure production or service firms. Neely says: "The transition from a manufacturing firm to a combined manufacturing and service firm might be problematic.
"If you are investing in extra infrastructure it takes time to recoup value from that investment, exposing the organisation to more risk, so it may not be a surprise that more combined businesses go bankrupt."

Small Firm At Cutting Edge

UK company Carlton Laser Services is a 76-employee Leicester subcontractor supplying the automotive industry, mechanical handling equipment suppliers, electrical and electronic systems makers and a variety of original equipment manufacturers.

Its traditional business was cutting flat-blanks from metal sheets. Improving technology brought intense competition from UK low-volume and Far Eastern high-volume producers. Carlton has moved from high-volume batch work to low-volume complex jobs.

These imply higher skills and closer relationships with customers earlier in the design of the eventual product, advising them whether, for example, certain tolerances can be relaxed for some work or tightened for others.

The closer Carlton is to its customers, it argues, the less likely it is to see them place their business with competitors.

The change required investment. Carlton spent £1.5m on fully-automated laser cutting and robotic folding cells. The company now offers laser cutting, punching, bending, welding, powder coating, and even assembly work with built-in electronics. The factory operates around the clock, including some 'lights out' periods without staff. Today, nearly a third of Carlton's workforce provide customer support.

Carlton won government funding for investment and staff training, and the Manufacturing Advisory Service helped it solve IT problems and reduce lead times from three weeks to two.

Now sales have risen - it expects to double turnover to £8m in "the next few years" - and performance has improved to the point where customers will pay Carlton more than its competitors.

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