What is servitization of manufacturing? A quick introduction
28th January 2020
Read our introduction to how manufacturers build revenue streams from services resulting in product innovation, new revenue streams and increased customer loyalty.
According to Baines et al, the definition of servitization has coalesced as "a process of building revenue streams for manufacturers from services." Baines et al distinguish three levels of services that can be offered by manufacturers:
- Base services – goods and spare parts
- Intermediates services – product repairs, maintenance, overhauls, helpdesks, training, condition monitoring
- Advanced services – customer support agreements, outcome contracts
Examples of companies delivering advanced services include Rolls-Royce, Caterpillar, Alstom, MAN, and Xerox.
Benefits of the servitization business model
The potential benefits of competing through advanced services are being documented by researchers. According to Baines et al, these include:
- Growth in revenue and profit
- Improved responses to customer needs
- Improved product innovation
- The building of new revenue streams
- Increasing customer loyalty
- Setting higher barriers to competition
The potential to achieve such benefits is causing a growing number of manufacturers to explore the servitization business model, and especially advanced services. However, precisely how to deliver advanced services is a challenge for many companies.
A framework for servitization
The biggest challenge for servitization practitioners is how to transform a manufacturing organization into one which offers services. Delivering advanced services requires different capabilities to those used during manufacturing. This is made yet more challenging due to the lack of an established framework for companies wishing to servitize. Current research from scholars such as Baines et al seeks to create a roadmap for companies who intend to servitize, to address the barrier that many companies are facing.
Servitization case studies
A growing number of case studies demonstrate how manufacturers can successfully servitize. Here are five examples from manufacturing companies who have evolved their business model to generate significant revenue from the services they offer.
Rolls-Royce offers a strong example of servitization. Rolls-Royce manufactures engines, and for some years has offered a service package whereby customers pay by the hour according to the amount of time an engine is in flight.
This is a significant shift from traditional business models used by manufacturers, in which the manufacturer sell a product, then charges for repair work as often as it is needed. In such a model, manufacturers ultimately profit from unreliable products that need more repairs – a poor arrangement for clients.
With the TotalCare® service package that Rolls-Royce offer to airlines, engines are rented to customers. Rolls-Royce monitors data from the engines to predict potential maintenance problems, meaning that maintenance work is only carried out when necessary. This saves costs on unneeded maintenance work, and also reduces the need for unplanned maintenance and engine downtime.
The greater alignment between the needs of the client and manufacturer that is enabled by this service has had proven business benefits for Rolls-Royce, which has been covering the majority of engines with their service package since 2010.
Caterpillar provides another strong example of a servitized manufacturing company, offering a portfolio of services beyond production.
One such service is the Cat® Product Link, a remote tracking and monitoring service. This service provides clients with updates on the location of equipment, and preventative maintenance monitoring of components to extend the life of components and reduce the need for downtime.
Caterpillar remotely monitors the equipment, using data sent from Caterpillar vehicles to help make decisions that optimize performance.
You can learn more about the advanced services that Caterpillar offers in this video from Aston Business School, in which Prof Tim Baines visits Caterpillar’s Finning dealership.
Alstom offers extended maintenance services that prioritize performance for its clients, based on the principle of “lost customer hours.”
This means that a key aim is to minimize the length of delays caused by train failures, and to minimize the number of passengers affected. As part of the contract, Alstom incurs financial penalties from the customer if they are let down during busy times.
The TrainLife Services (TLS) package that Alstom offers includes services such as condition based maintenance, support for managerial and technical operations, and performance improvement – supporting the customers’ need for a reliable, quality service.
MAN Truck and Bus UK
MAN Truck and Bus UK provides an example of market-driven servitization. In a market that saw product demand drastically decrease in a small number of years, MAN diverted its energies towards service operations for its existing customer base.
Through their "Trucknology" fleet management service, MAN focuses on helping to make its customers more profitable by improving the performance of their fleets. Using sensors, MAN helps their customers identify inefficiencies, providing data that can help reduce costs. The technology means that MAN can see if a driver leaves the engine running while stopped, drives too fast, or other inefficiencies.
Ultimately, the technology helps customers to improve fuel efficiency, decrease maintenance costs, reduce accident rates, and reduce fleet size by improving the overall performance of individual vehicles and drivers so that less trucks are needed.
This customer-focused approach has enabled MAN to retain its leadership position, achieve high customer value scores, and increase revenue.
Another manufacturing company that is now successfully offering advanced services is Xerox. A firm initially known for photocopiers, Xerox now positions itself as an enterprise for business processes and management. Today, over half of Xerox’s business comes from services.
In recent years, Xerox has branched out to offer document publishing and production services, document management, and business process outsourcing. Examples of services in practice include providing Hertz with learning solutions including curriculum content, administration, and learner support services. For Siemens Italy, Xerox created a digital archive and interface to improve document control and reduce paper waste and usage.
On the Xerox blog, the process Xerox has gone through is described as “the essence of servitization; utilizing technology to offer services tightly coupled with existing products.”
Servitization, Big Data, and the Internet of Things (IoT)
The Internet of Things and Big Data play an important role in the services that are now being offered by many servitized manufacturing companies. The above companies all, to differing extents, incorporate the use of networked sensors to collect data in order to inform management decisions. This is achieved by the use of sensors connected to the Internet of Things, on assets from aircraft engines, trucks and trains in order to collect data. The sensors gather data on the health of components, potential maintenance issues, and other relevant performance indicators. This knowledge can then be used to inform decisions that drive efficiency, cost-reductions, and other benefits for clients.
In their research article, “Servitization: revisiting the state-of-the-art and research priorities,” Baines et al examine 232 different articles on servitization, drawing conclusions about the state of research today, as they look towards creating a roadmap for servitization.
Journals for further reading about servitization of manufacturing.