The implications of Servitization on manufacturing companies over the next five years

Copperberg
News
Mar 8, 2017

following paper is intended to raise more questions than provide solutions to you, however if it stimulates you to think “Is my company doing enough towards my customer” then it has achieved its intended purpose. The global aftermarket business is changing rapidly yet many companies are still focusing on short-term problems rather than thinking about the implications to the business over a longer period of time, believing that their margins are safe.

Throughout my career within Engineering/Manufacturing companies I have never seen a complete offering towards the customer, and when I consider this, I sense excellent companies are missing a significant opportunity to connect with their customer and offer true value which translates into improved customer satisfaction and retention.

Figure 1 is typical of many companies who operate within a Manufacturing/Engineering business.

Time for change
Business silos exist today where many companies are developing strategies and organisations to deliver only one part of the total solution to their customer, often missing out on a cohesive offering to doing business, which will leave many renowned names in danger of allowing new entrants into the marketplace.

However there is a real opportunity to allow developed companies to change their business model and offering and make a significant impact on their business, servitization may be a savour for many western developed companies and a concept which needs further exploring to see what opportunities are available through this concept.

When I think about my previous positions within established and market leading companies, the only real issue that concerned me on an ongoing basis was the threat from the Asian market. My career has been built around Aftermarket and Service, which traditionally has been the area which created the profit for the companies who I worked for; however, this is now changing. Many people will recognize that parts generate significant margins, but this is changing and companies must start to realize that margins of 50%+ over the next five years will start to spiral downwards out of control due to increased competition and a disconnection with the customer over what value truly is. For many, the high margins previously achieved will move more towards the mid 30%, and there will be no plan to recover this: sales people will discount to win business based on revenue targets, suppliers will seek a direct route model to market to maintain their margins, and the customer will have more choice than ever over where they purchase parts.

But the real issue is that companies will move even further away from connecting with their customers, who they say are their most important focus.

Defining Servitization
So why does it go wrong? Customers do not buy products, they buy solutions to their problems. So, what is “Servitization”? There are many people offering their view of what it is; however, I offer my view, which hopefully is easier to understand.

“Servitization is the innovation of an organisation’s capabilities and processes to shift from selling products to selling integrated products and services that deliver value in use.”

Most businesses today are driven by monthly revenue targets and their businesses are considered as performing as long as they achieve financial based targets, so day to day invoicing is critical and gains significant focus. However, for me, supplying parts has not achieved anywhere near what the customer really wants. If companies anticipated, for example, machine failure and then had the parts and technician on the customer site before the machine failed, then this would have provided a solution where parts are consumed and where the customer considers his supplier to add real value towards his business. It adds value and reduces risk, and therefore Servitization has been achieved. (Figure 2)

The future leaders of aftermarket profitability need to be thinking differently about their current business model. Customers will in the future expect the product “machine” and service “parts” to be a complete offering, which has a fee to deliver an outcome. How this translates will see extended warranties and maintenance contracts disappear and all that will be left is a monthly fee to provide machinery and optimum operating performance set by customer demands. When this happens, the OEM will no longer have a dominant position and will become a supplier with little control over the customer experience. New entrants will be able to enter the market probably from the financial marketplace, where they buy products from suppliers OEM’s, and then provide the customer the true requirement of product to fulfill the job required. The financial company will manage not only the customer relationship but will dictate terms and conditions on the OEM over specification, cost, features and future development requirements.

So what will be left for the OEM? Very little, unless they act now. Manufacturing must change to a service business and recognize that product differentiation against competitor is less and less, investment in service truly opens the door to allow OEM’s to survive the coming years and beyond.

A couple of predictions over the future of OEM’s and Aftermarket:

Margins will drop across machinery and service
Greater consolidation and competitor collaboration in core areas
New entrants entering aftermarket from new markets
Greater need for data, and integrated technologies
Solutions will be the focus, and the companies that succeed will be totally integrated to the customer and provide a single solution
Pace of change will be rapid and existing complex organisations will not be able to cope with the pressure of customer needs and competition

The market is changing and the future is still to be discovered. In our upcoming Aftermarket Business Platform, let’s discuss and debate the future and hopefully learn what needs to be changed within our businesses.

Malcolm Youll

Malcolm is an experienced international executive who has successfully operated within leading manufacturing and engineering companies to deliver increased revenues and profits across a variety of industries. Pragmatic in approach, he delivers results ahead of targets; using best in class methodologies, processes and systems to deliver unrivalled financial returns and customer service.
Malcolm earned his MSc in Manufacturing, Management & Technology from The Open University and attended the Lausanne Leadership Program at IMD (International Institute for Management Development) – Business Programs and MIT Driving Strategic Innovation.