Defining "servitization" and why it matters to manufacturers and distributors
February 23, 2018The speed of change in today’s digital world is astounding. Blink and the entire market landscape has shifted. This is especially true in the world of industrial machinery and equipment, where the stakes are often very high. For both manufacturers and distributors of equipment, disruptive technologies have made sweeping changes in the entire product lifecycle, from design to delivery and aftermarket service.
For decades, this was an industry which operated in much the same way, unchanging. Innovation and R&D budgets focused on the equipment being produced, not on the way the products were being manufactured or sold.
Then, everything changed overnight
In the 2008 economic downturn, investment in capital-intensive equipment dropped. Global competition increased. Customer expectations rose. Lean processes and MTO efficiency became must-have capabilities. Buyers could drive prices lower, but demand more value. Those equipment companies which could, become flexible, nimble and responsive to customer demands for more value. Those that couldn’t, went away.
Today, manufacturers and distributors of machinery and equipment must do much more than simply sell products. They must stay relevant, offer new services, and keep a steady stream of revenue, continually winning new business. Many equipment-centric companies have also found they must add or enhance their service offerings to stay in the game.
Service is the new product
This approach is known as “servitization.” The term has been a part of Industry 4.0 and digital dialogue in Europe for a few years and is now also gaining acceptance in North America. To some, it may still be an odd phrase. Put simply, servitization means applying a service to a product in order to create additional value or a new offering to customers.
Providing ongoing, reliable services can be the critical differentiator companies need. Advanced service offerings also deepen and extend the relationships they have with their customers, adding value. Price is no longer the only bargaining point.
What’s new or different?
Service isn’t new, industry veterans may be quick to point out. True. The equipment industry has been offering aftermarket service to customers since belts have needed changing, brakes have needed inspections, and fluids have needed topping off.
Manufacturers of industrial equipment, like elevators, pumps, and generators, have stood behind their equipment, offering warranties, extended warranties and service contracts. Distributors of mission-critical products, like restaurant equipment, commercial HVAC, and medical equipment, have had to offer installation, inspections and preventive service as part of their sales pitch. Dealers and rental companies specializing in construction equipment, road or farm machinery, have also had to be in the service and repair business to keep the machinery running without failures.
Now, customers expect even more. Aftermarket service has taken on a white-glove approach. “A company may offer its customers a contract that covers the cost of ongoing maintenance and repairs over a period of time, for example. It is somewhat like a standard warranty, though with a certain “white glove” aspect that provides customers with the peace of mind that they will not have to worry about the assets they purchase not meeting expectations,” says Dick Hyatt, President and CEO of Decisiv, in an Industrial Distribution article, “The Value of Servitization.”
Now, enter the digital era. What else changes? Now, sensors have become smaller, cheaper, and more powerful. Sensors can measure a wide range of conditions, from motion to weight, density, vibration, temperature, viscosity, pressure, and volume just to name a few. The use of satellites and GPS tracking has also greatly been enhanced, with precision accuracy.
So, where a construction crane may have once had two or three sensors, to monitor basics like location, weight load, engine temperature or hydraulic fluid, now the same type of crane may be equipped with dozens of sensors, monitoring operational performance, machine efficiency—even how well the driver is conforming with safety protocols. Safeguards may be built-in so the operator cannot exceed weight limit, load distribution, rate of incline, or speed.
Service offerings can also go a step further. Now, instead of offering standard repair and maintenance, equipment companies are offering the end-result, plus peace of mind—a guarantee. “A company committed to servitization is one that is dedicated to giving its customers maximum utility, flexibility and lifetime returns on their investment. These are the OEMs that sell an asset with the promise that the asset will run hot for 60 hours a week, or maintain 97 percent uptime under certain specifications. They do everything they can to make sure that promise is kept, and that their customers achieve goals,” explains Hyatt.
This can take many forms. The dealer leasing road equipment may sell the contractor the ability to pave x miles of road/ for x dollars. It’s all about the result, not which piece of equipment is leased for how long, or even how many hours are used. In fact, several pieces of equipment may be used to obtain the result, if needed. By focusing on the result, the customer is certain to have objectives met, without worrying about how the dealer will make it happen. The dealer assumes the responsibilities—and risk.
Data has value, too
The focus on results changes the role of the manufacture, dealer, or distributor. Increased volume of data from sensors changes the complexity of the machinery, servicing the equipment, and how to manage or consume the data.
That brings the second element of servitization: the ability to turn data from service-related tracking into a value-add offering for customers. The information that is collected about the machinery’s performance has value. The individual equipment’s data has value. Plus, data which is collected from several pieces of equipment--when aggregated and analyzed--is highly valuable, too. This data can become industry benchmarks, best practices, and predictive forecasts. This all can be monetized.
Balancing service and profit
As Hyatt explains, “A servitization approach benefits both the customer and the manufacturer/distributor. It builds trust and makes it more likely that the customer will continue to buy from the manufacturer/distributor — both new products and replacement parts and upgrades on existing purchases — creating sustainable revenue streams with the potential for growth.”
Service technicians play trusted advisor role
Service technicians build relationships with customer and, often, become trusted advisors which can make recommendations about upgrades and replacements. When technology supports this role, service technicians can check status of inventory and schedule delivery of new models while on at the customer’s site, facilitating the purchase. This can bring in sizable revenue.
Technology will also help the service operation be highly efficient, increasing profit. Technology can help achieve high first-call resolution rates, by ensuring details are in place. For example, service management software can help ensure the right technician is dispatched to the right place, at the right time, with the right tools and parts. Efficiency leads to profitability.
Key take away
Servitization, whether it is a term new to you or one you have already embraced, is one you will be hearing more and more. As manufacturers and distributors search for ways to align with customers and leverage data from sensors, they will be turning to the service department, building an operation that is responsive and efficient. Service is the new product offering that can differentiate a company, build relationships, and drive revenue.