Servitization: service is the future of manufacturing

by: David Kemps , Roderick Vos

From product sales to service

Servitization is the process whereby services are given an increasingly important role in the business model of manufacturing companies. In addition to – and sometimes at the expense of – traditional product and machine sales. Service turns from being a cost item into an opportunity to provide better service for the customer and thereby generate additional revenue. Servitization is nothing new. The term was first used in 1988 in an academic paper by Vandermerwe & Rada. Loosely translated, they define servitization as: ‘offering customer-focused combinations of goods, services, support, self-service and knowledge, with the aim of adding value to the core product’. A fairly broad definition, but one that nonetheless makes clear that the combination of products and services is a key characteristic of servitization.

Servitization in the manufacturing industry can consist of companies proactively offering repair and overhaul services, spare parts and training in addition to their core products. But servitization also includes broader services such as consultancy, financing, insurance and logistics services. Servitization is more relevant than ever in the manufacturing industry. One of the reasons is the declining added value of production activities. Rapid copying by competing companies worldwide means that products and production processes stay distinctive for ever shorter periods. Price is now the only distinctive factor, but many OEMs (original equipment manufacturers) and suppliers prefer not to join the race to the bottom. They look for other ways to add value.

servitization

Servitization is in keeping with the times

The smiling curve by Acer founder Stan Shih shows that the biggest opportunities lie in the first and final phases of the production process. On the one hand development, branding and design are lucrative activities, while on the other hand logistics, maintenance and after-sales service proportionately generate a lot of added value. Manufacturing companies therefore have a financial reason to move into servitization.

Servitization is also a response to the increasing demands made by customers on their suppliers and products. There is a strong demand for customization, support and after-sales service, for example to guarantee the uptime of a machine. Service thus becomes an important distinguishing feature of product manufacturers. In the case of faults, unfamiliar situations or customization, they can make the difference for the customer.

Finally, servitization fits in with the general trend of companies refocusing on their core activities. The more companies divest and outsource in-house services, the more opportunities there are for other companies to take over those services. Many machine users already expect their supplier to provide services such as installation, maintenance, repairs and replacements. Demand for asset management, financing, training and advice is also growing.

Servitization: SMEs on the springboard

At first sight servitization seems attractive particularly to large manufacturing companies: they have the international networks and financial power necessary to switch to a service-based business model. But it is also becoming increasingly attainable for smaller producers. Thanks to developments in software (modern CRM, ERP and MES systems) and connectivity for machines, SMEs are increasingly able to develop a service proposition.

Small manufacturing companies also have an important advantage over their larger counterparts: they are much more agile, so they can implement changes more rapidly. In addition, the biggest challenges in the transition to servitization lie not in large investments in technology but particularly in business culture and the flexibility of employees.

In this report

In this report ABN AMRO and Praetimus discuss the advantages, but also the challenges involved in the transition to a service-oriented business model. In the second section we present the various models of servitization. In the third section we describe the steps which OEMs and suppliers can take in the SME sector to move to a service-oriented business model. Servitization also offers opportunities for Dutch business. The final section deals with the impact of servitization on employment in the Dutch manufacturing industry.

ABN AMRO Full Report Servitization Oct 2016.pdf (2 MB)
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