Servitisation – the five core characteristics of successful OEMs. By Gary Brook
Manufacturing models of the past were very black and white: manufacturers would make and sell their products, and then their service organisations would repair those products after they broke down. In recent years, however, more and more manufacturers have been adding a competitive edge through a portfolio of integrated products and services, which has seen companies changing the way they do business.
Technologies such as artificial intelligence (AI) and the Internet of Things (IoT), as well as increasing customer expectations, are all redefining the role of the original equipment manufacturer (OEM). Consumer preferences are also shifting from ‘ownership’ to ‘access’. For example, rather than owning a car, long-lease car rental or subscription to businesses like Zipcar for one-off trips are gaining popularity. This is driving manufacturers to look for new revenue streams, based on selling outcomes and services instead of strictly selling products – a trend now referred to as servitisation.
With consumers having become accustomed to 24/7 service, access via any device and switching suppliers to obtain the purchase they want, at the right time, for the right price, manufacturers cannot afford to keep customers waiting. These changes are forcing manufacturers to evolve their often suboptimised after-sales service operations, moving from a reactive, break-fix service model to one focused on maximising product uptime. Technologies such as sensors, IoT and machine learning enable the pre-emptive repair of equipment before it ever fails, therefore allowing manufacturers to focus on maximising product uptime, increasing performance and many other servicerelated metrics.
It’s fair to say the industry has been slow on the uptake, because the move from making products to delivering product-centric services is no mean feat – it means transforming both the organisational structure and processes. Particularly over the past few years though, the widening gap between customer expectations and after-sales service realities, in addition to the emergence of Industry 4.0, has accelerated demand for the model, serving as the catalyst for manufacturers to make major changes, and ultimately, shift towards servitisation.
The industry still has a long way to go – with many OEMs, industry analysts and academics suggesting the complete realisation of a servitisation-centered economy could take anywhere between five and 15 years. However, a number of core characteristics of leading OEMs are beginning to emerge – with the most common five noted below:
1. Optimised service parts supply chain.
Executives globally are clocking on to the often sub-optimised, but lucrative, after-sales service space. According to McKinsey; “growth through aftermarket services offers a comparatively short and straight path to new revenue streams” and an optimised after-sales service organisation can offer “improved financial performance that sustains the company through the larger, long-term bets it makes.”
For years, manufacturers have based after-sales service on a reactive, break-fix business model. This essentially means that the time between a piece of equipment breaking down and a technician servicing the machine can be huge, and the risk and the cost of downtime are all on the customer. In a servitisation-centered business, however, manufacturers must ensure they have a sophisticated service parts management solution in place to pre-empt repairs so that service parts are always available when and where they are needed.
2. High-level of service part fill rates.
By identifying potential product failures prior to a breakdown occurring, manufacturers are able to transform their service parts supply chain from a costly and inefficient “just in case” model, to a highly efficient “just in time” model, where inventory levels are optimised, and service part fill rates are near 100 per cent.
3. Executive buy-in.
Successful manufacturers are the ones which are working to establish the necessary infrastructure, resources and budget to make a shift to servitisation possible. Research from Worldwide Business Research (WBR) and Syncron shows that 66 per cent of manufacturers are beginning to feel pressure from the executive suite to shift away from a reactive, break-fix service model and move towards one that is focused on maximised product uptime. However, 98 per cent of equipment end users indicated they want to see more manufacturers offer service agreements that include maximised product uptime. Those succeeding are the ones finding ways to accommodate these demands – those who don’t risk being left behind.
4. Optimised service part and service contract pricing.
It may seem obvious that selling a service part or service contract for the optimal price is a key way to create competitive differentiation, but too many manufacturers are still using outdated methods like cost-plus or simple spreadsheets, which discourage efficiency and cost containment. With e-commerce players like Amazon and eBay becoming more focused on the service parts space, competitively priced parts will become more important than ever. Modern service parts pricing technologies ensure the end customer has a great experience, while the manufacturer is simultaneously maximising revenue and margins.
5. Subscription-based uptime service models.
In the future, OEMs will no longer report on the number of new products sold, or even service parts revenue. In fact, they will follow the path many SaaS companies have taken, reporting on recurring revenue from subscription-based services. Customers will subscribe to their equipment much in the same way as they do their Netflix subscription, paying for output and value.
Developing this portfolio of services is challenging and takes time, so it needs to be thought of as a marathon rather than a sprint. But, it’s the OEMs that have a strong vision for maximising product uptime, with executives who are driving their company to make the vision a reality, that are leading the way. Knowing where to place investment is tough, but a targeted approach which embraces technologies like sensors, AI and IoT, as well as the necessary resources and training is the key to success in a servitisation-focused world.
Gary Brooks is CMO at Syncron. Syncron empowers the world’s leading manufacturers to maximise product uptime and deliver exceptional after-sales service experiences, while driving significant revenue and profit improvements. From industry-leading investments in research and development, to providing the fastest time-to-value, Syncron’s award-winning, cloud-based service parts inventory, price and uptime management solutions are designed to continually exceed customer expectations.