If you thought that servitization was still a concept or something only applicable for large manufacturers, it's time to think again, says Professor Tim Baines, Director of the Centre for Servitization Research and Practice, Aston...
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If you thought that servitization was still a concept or something only applicable for large manufacturers, it's time to think again, says Professor Tim Baines, Director of the Centre for Servitization Research and Practice, Aston University Business School, Birmingham.
There’s an excitement about servitization at the moment. "People are asking questions such as: Is it relevant to my business? Will it work for my products? Are my competitors adopting it? What does a Servitization model look like?" Servitization in general and Advanced Services in particular are attracting interest, says Baines, because they offer the prospect of new revenue streams through post-sale services and the greater financial sustainability that comes with it because manufacturers are no longer totally reliant on transactional sales of products for income.
However, as more services are being built around products, says Baines, so process are becoming more complex. "There are three levels of manufacturer-led product services: spare parts, proactive and reactive product condition maintenance, and Advanced Services such has outcome-based contracts. As companies realise the benefits and value servitization can deliver, both they and their customers are becoming more excited about the possibilities of the Advanced Services element." He points out the parallels with the lean manufacturing journey many manufacturers have already been to remove waste and cost from production processes. “Just as Kanban inventory control and just-in-time logistics processes were advanced elements in lean manufacturing, so Advanced Services are a sophisticated element in servitization."
There’s still a lot of uncertainty about whether the servitization model fits all manufacturers and whether it is relevant to all business sectors.
All of this is challenging for manufacturers to take on board, he concedes. "While there’s a lot of interest, there’s still a lot of uncertainty about whether the servitization model fits all manufacturers and whether it is relevant to all business sectors. Part of that is because people often think servitization is difficult because of the process changes that need to happen. However, rather than look at servitization per se as being difficult, it’s more useful to focus on how receptive your organisation is to change. It’s as much about the culture and attitudes within the business."
Neither is company size is relevant to whether change will be embraced or resisted, says Baines. “Big companies have more resources to initiate change but also more inertia when it comes to changing existing processes. SMEs can be much more nimble having fewer constraints with, say, legacy processes." There is no doubt that SMEs are interested in servitization - in 2015, out of 100 companies that Aston consulted with on servitization, 77 were SMEs, reports Baines.
The intimate relationship with your customer and long-term partnership that the servitization model demands, beings other challenges. "Who has the intimate relationship with the customer: you, the manufacturer of the product, or your distributor? How do you ensure your distributor has the same commitment to your customer needed to make the Advanced Services model work?”
Professor Baines will be hosting Aston Business School's 2016 Spring Servitization Conference on 16-17 May 2016. For more information click here.
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Faced with high fuel costs, congestion, driver shortages and changing delivery patterns, the UK road transport industry has to change radically to improve profit margins and survive. Servitization is the solution, recommends this report by...
Faced with high fuel costs, congestion, driver shortages and changing delivery patterns, the UK road transport industry has to change radically to improve profit margins and survive. Servitization is the solution, recommends this report by Eleanor Musson and Dr Ali Bigdeli of the Aston Centre for Servitization Research and Practice
The road transport industry is crucial to the UK economy; 68% of freight goods are moved by road according the UK's Department for Transport Transport Statistics 2014. But the industry faces the challenges of fuel costs, driver shortages, congestion and regulation. Moreover changing consumer behaviour in the UK is turning the industry on its head; 74% of adults bought goods or services online in 2014, compared with 53% in 2008, according to the Office for National Statistics, Internet Access in Households 2014, and the demand for flexible, fast delivery is growing rapidly according to the Guardian newspaper. These are just some of the factors behind the low profit margins in the industry: 3% for operators , reports the Freight Transport Association in its 2014 Logistics Report, and 6% for manufacturers.
This industry has to change radically. There is little to be gained from piecemeal changes to products or pricing; the customer’s priorities and requirements must be placed at the heart of operational strategies. This is achieved through what we call advanced services, which are implemented in an organisation through servitization. Advanced Services are provided by manufacturers and technology innovators with an intimate understanding of the customer’s business priorities, and their difficulties in achieving these. They are a package of a product, and the services that go around the use of the product, consumed as a single offering, which help the customer achieve its requirements.
In order to understand how advanced services and servitization are being adopted in the road transport industry, we interviewed a panel of senior executives from within vehicle manufacturers, component manufacturers, operators, fleet management companies and technology providers, and we outline some of our findings here.
There are three categories of advanced service currently been offered in this industry: [ordered_list style="decimal"]
- The first is vehicle condition and safety related services. Real-time reporting about the condition and performance of the vehicle helps the service provider (e.g. manufacturer, fleet management company) to see how the vehicle is being used by the customer, which mitigates the contractual risk and gives opportunities for service and product improvement. Data are used to help fleet managers monitor costs and identify problem vehicles, either by sharing the information with the customer, or by the manufacturer providing this function as a service. For fuel efficiency and safety, manufacturers test tyre pressure and tread depth, with real-time reporting to alert drivers to problems, and service operatives on hand to make repairs or replacements.
- The second type of services is driver-related services. Through the use of telematics, the manufacturers and operators are able to assess how the truck is being driven, to examine any incidents such as harsh breaking, speeding and idling, and to inspect driving and rest periods. This data is analysed to identify training requirements and in some cases pay performance bonuses.
- The third type is route planning and delivery services. Real-time reporting allows operators to manage routes, taking into account live road conditions. Data on deliveries made compared to schedule and route information enable managers to identify opportunities for improvement.
Advanced services have a three-fold impact in the industry:[ordered_list style="decimal"]
The greatest efficiencies are achieved by maximising the uptime of vehicles, planning routes efficiently, and processing orders. To illustrate:
• The use of technologies and data by skilled route planning staff reduces mileage driven by up to 10%
• Uptime is maximised by reducing roadside failures thanks to greater visibility of the vehicle, its condition and how it’s being used
• Operators can expect at least a 5-15% reduction in vehicle maintenance and service costs as a result of condition monitoring according to telematics specialist Microlise
- Safety and better image
Driver-related services have had a significant impact on driving standards, and in turn the image of operators and the industry. In this regard:
• Microlise reports customers see annual reductions in speeding incidents of up to 90%, and a reduction of up to 60% in the number of accidents.
• The same report states operators are seeing a 5-15% reduction in carbon emissions as a result of optimised routes and better driving.
- Cost Savings By enabling improvements in driving performance and better, more informed route planning, technology is helping to deliver cost savings in terms of fuel usage. According to the Freight Transport Association's Manager's Guide to Distribution Costs, fuel represents on average of 30% of the cost of a vehicle . The average unit costs £49,000 per year in fuel. Microlise reports an average 10% (£4-5000) saving on each unit’s fuel consumption being achieved by customers using driver management and training tools.
While the leading organisations demonstrate what can be achieved, our research demonstrated that advanced services are not being adopted universally or uniformly in this industry. In order to accelerate this, we recommend that manufacturers ensure advanced services are properly led and embedded. Servitization is a wide ranging, complex process that requires transformation and coordination of an entire organisation. In most companies, it doesn’t fit neatly within the realm of one department. Just like any other organisational change, servitization needs a champion to lead it and generate buy-in across departments.
Servitization provides an opportunity to ‘be closer to the customer’ which can also be facilitated by innovative pricing models which assure the prospective service user of the level of commitment, and create alignment of objectives between service provider and user. Selling and supporting services is a very different proposition to selling products, requiring different skills and reward structures. Manufacturers will need to invest in training their staff, and consider the incentive and reward structures that will generate the desired outcomes.
The full whitepaper report Delivering Growth can be downloaded here:
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“I think a lot of the fundamentals are the same in terms of business logic” Kowalkowski explained “but the problem with some of the business model concepts in general is that two key components are missing. One is culture and how to foster a service culture; that’s often much harder than just acquiring the necessary resources.”
“The other one would be leadership and how to really drive this because it is a change management process. How to motivate the employees at all levels within the organisation to form a strong coalition and to be able to show short term gain on this journey – because it’s a long journey” he added.
One of the interesting concepts Kowalkowski raised in his own presentation was that of ‘reverse servitization’ where some companies are offering advanced services and complex solutions, which they have been offering for many years, or even in some cases decades.
There are many companies that are operating on a business model very close to that of servitization without necessarily having ever planned to do so...
Indeed Kowalkowski believes there are many companies that are operating on a business model very close to that of servitization without necessarily having ever planned to do so, who arrived there simply through adopting a highly customer centric business outlook.
Air France KLM
Indeed, one very high profile company in attendance at the conference had done just that: Air France KLM are the oldest and second largest airline in the world. Harman Lanser who heads up the product development and logistics division within the airline's maintenance and engineering division was another of the keynote speakers at the event. During his presentation he outlined how he realised that the organisation was actually operating on a very similar system to servitization.
“Last year I was at a presentation where Tim Baines showed me the concept of servitization and I realised we were doing something similar to that, not knowing how close it was. I have been going through the process of moving from component availability to total aircraft care to an integrated service support for the airline KLM. Now I am exploring if this is something we can offer to customers”
“Doing it for the airline you work for is one thing doing it for an airline where you only do the service for, where your not responsible for the end product of the airline is different. What does it take to be able to give a completely integrated services product to a third party customer?"he asked. “The trust you need, the reliability you need and the dependency you create between the companies.”
And herein lies perhaps one of the biggest keys to unlocking a successful servitization model. It is fundamental that there is trust built up over many years of good relationships with customers to get their understanding and buy-in of how and why you are proposing to move to an outcome-based business model.
Trust: one of the biggest keys to unlocking a successful servitization model...
Technology is an enabler
In addition to strong customer relationships, and the culture and leadership that Kowalkowski referred to, the other key enabler discussed at length during the conference was the technology.
Indeed, Kowalkowski believes that technology is the final key enabler that is allowing such companies to now make the final transition into being a fully servitized businesses. “You can find academic papers that go back 90 years that talk about selling transportation instead of cars, selling mileage instead of tyres but back then you didn’t have the technology,” he explained. “Today with all the digitalisation you can do so many new things. Technology really is the key enabler”
With so many layers to discuss and in depth explorations of what is a truly exciting area, one that will of course have huge implications for the delivery of field service the more the movement gains pace, the Aston Spring Servitzation Conference proved to be an engaging two days for this vibrant global community.
"One of the things we’ve tried to do and have managed to do successfully is to try and keep the whole community together as we go through some forty presentations and to do that in one room over two days has been a very demanding thing to do but it’s been the right thing to do because we, as a community, debated these concepts”
“I’m delighted that we’ve demonstrated that we are moving forward in this space so overall it’s been a great two days, it’s been an exhausting two days but it’s been really worthwhile and next year…. we’re going to do it all again.”
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The world of academia and industry came together at the end of May to discuss the latest theories and trends in servitization at the Aston University Spring Servitization Conference. Held in the purpose-built Aston conference centre in the heart...
The world of academia and industry came together at the end of May to discuss the latest theories and trends in servitization at the Aston University Spring Servitization Conference. Held in the purpose-built Aston conference centre in the heart of the University and hosted by the Aston Centre for Servitization Research and Practice, the conference holds a unique position within the servitization community in bringing together representatives of both academia and industry. Kris Oldland was there.
Aston's own Professor Tim Baines is widely considered by many to be one of a handful of people at the very top of this field and he was joined by academics from across the globe from Helsinki, to Tokyo, from Hangzou to Glasgow. Industry was also well represented with companies of all sizes in attendance ranging from third generation family-run Nicklin Transit Packaging through to blue chip companies such as Air France and Goodyear.
“The purpose of the conference is best expressed as three objectives,” explained Baines. “Firstly, to bring the researchers in the field together to really consolidate the knowledge base around servitization, so where are we today with servitization.”
“Secondly it’s to bridge theory and practice, to bring practitioners into the mix, talk about their experiences and let the academics learn from that and vice versa.”
All too often the community of servitization is disparate and fragmented...
There certainly was a genuine buzz of community throughout the two days, which was greatly enhanced by the format itself. With no less than forty presentations being presented across two days the danger of death by PowerPoint ran higher here than at most conferences. However, the ten minute rule – strictly enforced by Baines and his colleagues - kept everyone on their toes and the sessions were well supported by a slick app which allowed for feedback and questions for each presentation. This added a good interactive element which kept the audience involved throughout.
The advantage of so many presentations, of course, is that there were a phenomenal number of talking points being generated from each session, so as we made our way to the networking coffee breaks each time the courtyard area was full of debate and discussion.
Whilst servitization is indeed gaining a lot of traction at the moment, it remains an unknown area for many or at best an area of confusion for others. In it’s simplest sense servitization is the shift from a traditional transactional manufacturing approach (whereby we build a build a product, sell it and then offer some form of aftermarket service to help maintain that product for a specific period of time) to a model where we build a product in order to sell the service itself.
Sony and Telemadrid
A great example of this approach is the brand new state-of-the-art system Sony Professional Systems Europe have just installed for Spanish news company Telemadrid, replacing an existing suite. However, instead of Telemadrid having to pay a big lump sum they are paying Sony on a pay-per-usage basis.
Instead of Telemadrid having to pay a big lump sum they are paying Sony on a pay-per-usage basis...
The benefits for Telemadrid are that they have a far more manageable cost line on their proft and loss sheets, they have access to the very latest technology and they need no internal technicians to service that technology. Most importantly, it is in Sony’s best interests to ensure that Telemadrid receive 100% uptime otherwise they will face severe financial penalties. Result: Telemadrid knows the service they receive will be reliable.
(For the full story on how Sony is transforming its service business in Europe read our in-depth two-part interview with John Cooper, Head of IT and workflow Management, Europe here)
This trend will continue as more and more companies are pulled into a servitization model by their customers. Rolls Royce’s power-by-the-hour is one of the best-known examples of the servitization model and was the direct result of American Airlines demanding such a service from the jet engine manufacturer some thirty years ago). Other companies are seeking to adopt a servitization model for reasons such as improving profits or differentiating themselves from their competition.
One company that has just made the transition to servitization is mining, utilities and recycling organisation Metso. John Cullen, Vice President of Marketing and Brand, was one of the keynote speakers at the conference and outlined how and why Metso had made the shift.
“At the moment I would say we are at the beginning of the process,” Cullen began. “We’ve actually been going through a process of servitization within our company but it’s a journey that started some three years ago when our services unit was put into a separate division having previously been attached to the different product businesses.”
But why have they made this move? In fact there were a number of different reasons that led Metso went this path. “There were a number of different drivers for us,” Cullen stated. From a customer perspective we weren’t delivering to our customers everything that they wanted. They were looking for us to take a more active role in their business processes and support them, where we tended to be very much more reactive.”
We had a lot of great service products within the company but they weren’t recognised because we weren’t selling them as a servitized products
“So we really needed to change the way we were doing things from being reactive to proactive. For us, it helps our business develop new revenue streams, but it also means we deliver a better service to our customers.”
The cultural challenge
Of course such a radical shift in business strategy needs not only the buy-in from the executive level but also from all members within the organisation. Something which can prove to be a significant hurdle for companies to overcome when moving to a servitized business model.
“When we presented these concepts they’ve actually been embraced by our people but one of the challenges is that we are changing the way people do their job in everything. So what we are asking people to do is throw away maybe twenty years of doing things and look at things in a completely different way and that’s hard for anybody to do,” explained Cullen.
One of the challenges is that we are changing the way people do their job...
It is, of course, a cultural shift for Metso’s clients too. It’s a big point of discussion: should companies try to roll out such an approach to all of their customers in one go or is it better to perhaps apply the Pareto principle and roll the changes out to those customers your closer to first?
For Metso the intention is to take the first approach although the reality of doing so isn’t particularly straightforward. “It’s an approach that we are trying to put out to every company but the practicalities are that we have to start with a few customers within various territories and then actually develop competence within the organisation to deliver,” Cullen explained.
“But it’s not something we want to limit,” he added, “It’s a culture and we want to change the culture everywhere.”
Look out for Part 2 of this report from the Servitization conference where we'll hear from Christian Kowalkowski of the Hanken School of Economics on how servitization has evolved over the past decade.