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The key to long-term success is selling light, not light bulbs

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Manufacturers are increasingly focusing on outcomes rather than products, in the hope of benefiting from a long-tail revenue strategy that makes them more resistant to downturns.

The UK manufacturing sector saw a sharp decline in expected output in March 2020, according to a Confederation of British Industry study. Survey respondents expect output volumes to contract by 20 per cent, the most pessimistic manufacturers have been since April 2009, in the aftermath of the global financial crisis.

Some manufacturers are experiencing a demand shock due to much of the economy being put on hold. Others are experiencing a supply shock of their components and raw materials, because they are part of the 75 per cent of manufacturers reporting supply chain disruptions in a recent Institute for Supply Management study.

While many manufacturers have been focusing on profitable growth, the immediate priority is revenue. One business practice has the potential to generate reliable, sustainable revenue for much of the UK manufacturing sector: servitisation, or the augmenting of product-line offering with services delivered over that product or asset’s whole lifecycle.

In some cases, the manufacturer may stop selling products completely and just sell the service that its product provides. A manufacturer starts down this servitisation journey when it begins selling aftermarket parts for its products, extending the revenue-generating portion of the product lifecycle past the initial sales transaction. It continues by offering a warranty and then either depot repair or field service. It may sell annual maintenance or service contracts, often with service-level agreements for mean time to repair, response, or guaranteed uptime. Finally, the business switches entirely to selling an outcome rather than a product, for example selling light not light bulbs.

Servitisation is an essential tool for creating new revenue streams, increasing customer loyalty and future-proofing a manufacturing operation with little or no increase in plant and equipment. Those who go down this road will have more reliable and recession-resistant revenue, while those who don’t will be more vulnerable to the ups and downs of market demand for net new product.

Whereas a machinery manufacturer may see a drop in new orders during a demand shock, customers can’t ration maintenance. Contractual arrangements and the ongoing requirement for maintenance and operational support make for a long-tail revenue strategy that is resistant to downturns.

How can businesses reach that stage? Through technology. More specifically, by adopting enterprise resource management (ERP) and enterprise asset management (EAM) solutions that offer tools for things like field service management, depot repair, predictive maintenance and reverse logistics. Capabilities like artificial intelligence and the internet of things (IoT) facilitate servitisation. As companies learn to use data from connected devices over the IoT to trigger service transactions, they can ultimately automate business processes, with help from machine learning and cognitive services.

For the foreseeable future, people and businesses will always need the products that manufacturers create. However, we arguably now expect far more – often at a more affordable price-point and in a more agile fashion.

As a result, we’re seeing growing interest in products delivered through a subscription or as-a-service model. In the consumer sector, examples include ride services like Uber and Zipcar, that sell the ability to get from one place to another rather than a physical vehicle. Automakers are having to contend with this shift in thinking through servitised approaches to vehicle marketing. We’ve also seen end users expect and demand more from the companies that continue to sell goods. They are increasingly interested in what their customer experience will be like over the lifecycle of the product. Can I get a service, repair or parts? Can I access and make use of data captured by this product? 

Manufacturing will become less about the product itself and more about the outcome the product and the business can offer to the end user. Consumers and businesses still need traditional products and utilities, but the difference – the ‘problem’ – is expectations. Smart consumers want the slick customer experience of Monzo and the prompt, seamless service of Amazon.

Industries are aware of these shifting tides, but not enough is being done to enable them to ride the disruptive wave, boost business, deliver more – and deliver better – for customers. In 2018, IFS conducted a survey of over 200 executives and found that 38 per cent of respondents’ businesses sold only products, with no aftermarket or other service revenues. Only 4 per cent reported full servitisation.

Among companies that were involved in some level of servitisation:

19 per cent sold products and some aftermarket service parts

15 per cent sold field service for break-fix repair

16 per cent sold planned maintenance contracts with service level agreements

4 per cent are selling products on a subscription rather than as discrete items – full servitisation

The study results offer a strong incentive for manufacturers to move further along on their servitisation journey. Firms involved in planned maintenance or service contracts were most likely to report service as a profit centre, with 62 per cent reporting profitable service operations.

The move to servitisation won’t happen overnight, in large part because manufacturers need to implement internal software, systems and processes. This requires long-term vision, and a strong partnership with your enterprise software vendor.

Colin Elkins is vice-president of manufacturing industries at IFS.

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