What is Servitization in Manufacturing?
Dr. Arsham Mazaheri . July 30th 2023
What is Servitization in Manufacturing?
Servitization is a bit of a buzzword in the manufacturing industry these days, but what exactly is it? Simply put, servitization in manufacturing is the process of shifting from selling products to offering services related to those products. Think of it as a value-added bundle, where you're not only delivering a tangible product but also accompanying services that enhance its use and lifespan. In more advanced phases of Servitization, you may not even sell your product, rather only use your product as a means just to deliver a function or output as the desired value. This strategy is gaining traction in the manufacturing industry, where traditional product-centric models are giving way to service-oriented approaches.
Servitization Levels in Manufacturing
Just like any substantial endeavor, servitization in manufacturing isn't an overnight transformation. Instead, it unfolds as a journey through different stages or levels, which can be broken down into three main tiers:
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Level 1: Product Provision Only - At this initial stage, manufacturers concentrate solely on creating and selling their products, echoing the traditional model of manufacturing.
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Level 2: Aftersales Services - Once manufacturers have the product provision nailed down, they can start introducing ancillary services like product repairs, maintenance, and condition monitoring. This marks the beginning of a more customer-centric approach.
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Level 3: Advanced Services - This is where things truly start to shift gears. Manufacturers build on the Level 2 services by offering more complex solutions, which can include pay-per-use contracts and integrated solutions.
This comprehensive and holistic approach aims to maximize customer value. It is at this stage that manufacturers may retain ownership of their products as their own assets, but use them as a means to deliver function and output to the customers as the final desired value.
Why Manufacturers Should Implement Servitization Business Model
So, you've got the levels down, but you're wondering, "Why should I bother?" Well, let's dive into the enticing benefits of servitization.
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Financial Stability: Servitization offers a steady stream of revenue from service contracts, providing more financial predictability than the cyclical nature of product sales.
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Increase in Revenue: Beyond financial stability, servitization can boost overall revenue, thus increasing the topline. Customers are often willing to pay for the convenience and efficiency that services provide. Moreover, offering services normally have better margin than products, thus improving the bottom line, and bringing better financial stability.
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Better Customer Outcomes: Through service offerings, manufacturers gain insights into their product's performance, enabling them to better meet customer needs and improve product design.
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Better Customer Relationships: In addition to having better customer outcomes, services enable regular interaction (and in most cases direct relation) with customers, fostering stronger relationships, loyalty, and repeat business
Increased Innovation: The deep customer insights gained through service offerings fuel innovation, leading to superior products and services. Over time, this can contribute to enhanced business stability.
Examples of Servitization In Manufacturing
If you're still pessimistic regarding Servitization in Manufacturing, consider these real-world examples. Companies like Xerox, Rolls Royce, and Philips have successfully implemented servitization. But it's not just these well-known giants who've embraced the change; there are also lesser-known yet equally successful players in the game.
# Example 1
Xerox didn't just pivot from selling standalone copiers; they undertook a transformation to become providers of comprehensive document management services. By embracing the servitization model, they replaced the traditional transactional approach with service contracts. This strategic move not only ensured a consistent revenue stream but also allowed them to be more attuned to customer needs. Their journey from a product to a service-centered approach has made them a role model for successful servitization in manufacturing.
# Example 2
Rolls Royce has always been synonymous with luxury and sophistication, and they brought these qualities to their servitization journey too. Rather than selling aero engines outright, they innovatively shifted their sales model to 'power by the hour.' This service agreement allows customers to pay based on engine performance time instead of purchasing the physical engines. The result? A customer-focused solution that balances cost-effectiveness with high performance.
# Example 3
In the era of green solutions, Philips made an eco-friendly and budget-conscious shift by offering 'light as a service' to its corporate clients. Instead of merely selling lighting products, they now provide an end-to-end service that includes installation, maintenance, and updates. This forward-thinking move has allowed Philips to ensure optimal lighting conditions for their customers, reduce waste, and increase their own operational efficiency.
# Example 4
Moving away from familiar names, let's look at MAN Truck & Bus. This German engineering company has expanded its offering beyond the product. They now provide an impressive array of services, including fleet management, driver training, and even telematics support. By ensuring their customers can maximize product utility, they've demonstrated how servitization can drive customer value and create ongoing revenue streams.
# Example 5
Last but not least, Alstom, a French multinational operating in rail transport markets, is another standout example. Alstom offers comprehensive services like maintenance, spare parts supply, and fleet optimization. By focusing on enhancing customer experience and building long-term relationships, Alstom underscores how servitization can foster customer loyalty.
Servitization in Manufacturing: How to Lead the Industry
Now, how can you, as a manufacturer, join the servitization journey and become a champion? Here are some best practices to get you started:
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Develop a performance-based or outcome-based offering like a "pay per use" model Instead of or in addition to selling products, so you can charge customers based on usage, which is a win-win situation for both you as the value provider and for the customer as the consumer of the value
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Build solutions and offer maintenance services. This way you shall look at your products as solutions and means for delivering value, so you can provide complementary maintenance and consulting services around your solutions!
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Use technology to offer real-time support services, enhancing customer experience and satisfaction, and thus gaining your customer trust and loyalty.
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Utilize cutting-edge technologies like IoT to track product usage, learn more about your customers, and provide services like predictive maintenance, along with productivity and process improvement. Consider using predictive analytics to foresee your customers' upcoming service requirements. By taking a proactive approach, you can deal with potential problems before they become serious, which will help you anticipate customer needs and go above and beyond their expectations.
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Equip your workforce with the skills needed to provide superior service, and train your team to think from a service perspective when trying to design a solution/product to solve the problem of your customers. This way you will make sure the service-oriented mindset is embraced throughout your organization. This entails putting the needs of your clients first and continuously working to enhance the services you offer.
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Every customer is unique, and so are their needs. Create and offer customized service packages that fit each customer's individual requirements. This personal touch can lead to stronger customer relationships and loyalty.
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Provide a wider range of services, and think about collaborating with other service or solution providers. These alliances can increase your customer base and broaden your service offering.
At its core, servitization is a result of digital technology. Take advantage of these technologies to streamline your services and provide value-added solutions, whether it's cloud computing, artificial intelligence, or big data.
Conclusion
Servitization in manufacturing is not just another buzzword; it is an innovation that holds the promise of financial stability, increased revenue, improved customer relationships and fostered innovation. It's a transformative strategy that's been successfully embraced by both industry titans and lesser-known manufacturers alike.
As you consider this journey, remember you're not alone. Avrogan, a leading servitization strategy, and solution provider, is here to help you navigate this transformation. We offer expert advice and our cutting-edge service contract management solution, Avrogan Service Excellence™, to help you lead in this new era of manufacturing.
Dr. Arsham Mazaheri
Chief Operating Officer
Arsham is a data scientist by background, with 17+ years of industrial and managerial experience in various disciplines. Throughout his career, Arsham has helped many of Fortune 500 companies with their data and requirement challenges and has been involved in many IT solution implementation projects. Arsham has both mechanical and industrial engineering backgrounds and has a D.Sc. in Risk Management from Aalto University in Helsinki, Finland. He is a certified change and problem manager (CCM & CPCM) and holds an MBA in shipping and logistics.