Servitization in Manufacturing: Dawn of a New Business Model
Published on : Tuesday 06-07-2021
Servitization needs a high degree of flexibility in design, manufacturing and delivery of the asset, says Sujata Tilak.
In recent years every sector that needs expensive and complex assets is looking for options that will help in reducing upfront capital investments and bind equipment manufacturers and suppliers to promised outcomes and services. Especially as manufacturing starts moving from mass production towards mass customisation, which may be dynamically driven by end clients, such models become necessary. This is going to create an entirely new business model, which will be the dawn of a new era for manufacturers.
Looking from the supply side this model can be termed as ‘Servitization in Manufacturing’. In simple terms, servitization is a business model in which manufacturers build new revenue streams from services related to their products. In other words, manufacturers offer a portfolio of integrated products, services and outcomes. This is a conscious and explicit strategy to create a critical differentiating factor in the marketplace against similar products offered without integrated services.
Looking from the consumption side, the model will assure committed partners (and not just vendors), who will have as much stake in upkeep and productivity as their clients. These partners will provide not only agile support but also outcome commitments. These of course will be driven by work discipline and associated detailed SOPs that will improve overall efficiency and productivity. One of the important outcome will be the optimised investment into capital equipment
Levels of Servitization offerings
There are different levels of servitization offerings based on maturity of entities involved, type of product, technology used, etc.
1. Basic level servitization – maintenance, repair, overhaul (MRO) and support for the asset. These are traditionally provided by most manufacturers in reactive mode. Meaning that services are provided on customer request or at a fixed frequency, e.g., send technician for maintenance every quarter.
2. Intermediate level servitization – same MRO and support services provided proactively and enabled with remote monitoring and diagnostic capabilities. This also means rapid and precise service to each customer rather than a vanilla model for everyone.
3. Advance level servitization – There are variations in advance servitization as listed below.
a. Product as a Service (PaaS)/pay per use – instead of paying for the asset, the customer pays for usage of the product or per unit of service provided by the asset.
b. Availability and/or quality Service Level Agreement (SLA) – Manufacturers take contractual responsibility for asset availability and/or output quality.
c. Outcome based model – OEMs sell business outcomes rather than assets. This can be looked at as a combination of (a) and (b) above.
d. Advisory services – advisory services for asset/process optimisation with outcome based revenue including benchmarking and other inputs.
IIoT makes servitization possible
An obvious question: What is driving the change that makes this new business model a possibility? As you can see, being connected to the asset and being able to access entire operational and diagnostic data in real time is critical in every step of this model. You can’t and won’t want to depend on manual reporting for outcome-based models or SLA that are legally enforceable.
Thus Industrial Internet of Things (IIoT) and advanced analytics platforms are the key to servitization. This is the technology enabler that allows manufacturers’ access to the asset in real time, evacuate data to analytical tools and deliver value insights to all stakeholders in real time.
Let’s explore how IIoT enables delivery of different servitization models described earlier. I have also included some examples.
1. Intermediate level services – OEM provides support/maintenance proactively before a fault or a breakdown occurs. OEMs use remote asset monitoring to continuously monitor asset health and intervene if a problem is building up. Techniques like condition monitoring, machine learning (ML) based predictive algorithms are used. Example: A customer of Ascent Intellimation (AIPL) leverages PlantConnect RAMS for monitoring complex and expensive Paper Processing Machines to ensure that breakdowns were avoided with proactive intervention and advice. Fact that their client base is spread across the globe makes it even more imperative. They also use the same data to enforce best practices of usage and enforce operator behaviour.
One game changer in this will be to make the asset itself smart and run systemic checks and algorithms. This will reduce dependence on “support centre” teams and help reduce costs of support. Example: A technology enabled and advanced car sends alerts to service centres when maintenance is required based on various sensors that are monitoring the car.
2. PaaS – PaaS is possible if the product itself is SMART and keeps a detailed record of the output. Example: Some asset types where PaaS is used are generator sets, pumps, compressors, jet engines, etc. Non-industrial examples are photocopy machines, coffee machines.
3. Availability and/or Quality SLA – A more advanced level of proactive maintenance that guarantees certain % of availability and/or quality of output generated by the asset. Technologies like Digital Twin are used to monitor the asset in operation and keep it available and in top condition through remote and onsite services. Using advanced analytics, the manufacturer is continuously improving the asset and deploying these upgrades in the field. Needless to say these improvements are software driven. These contracts also include specific operating environments, trained operators etc. Example: some high end medical equipment manufacturers offer such SLAs.
4. Outcome based model – OEMs guarantee certain levels of outcome and pay by use pricing. Example: an automotive MNC offered buses to a public transport authority with defined operating performance. The transporter purchased mileage rather than the bus itself. Here the OEM has to deploy continuous monitoring of not only the asset, but operating conditions as well.
5. Advisory services – Manufacturers feed continuous production data to AI/ML based advanced analytics models to provide advisory service for performance improvements, fuel savings, safety, energy optimisation, etc. Deep expertise of product and customer domain is essential to build these analytics models. Some examples are vibration analysis for turbines, fuel efficiency advisory for ships and airplanes, route advisories for ships and airplanes, energy optimisation services for entire plants, etc. Example: One of AIPL customers has deployed PlantConnect RAMS to provide advisory services for boiler performance optimisation. Another customer is using AIPL product MarineIoT for providing fuel efficiency and route advisories for maritime vessels.
Pros and cons of servitization
On one side servitization presents a Win-Win opportunity for both supplier and customer.
For the supplier
a. Higher and recurring revenue
b. Continuous relationship with customer
c. Supplier moves up the value chain
d. Sale of spares, consumables.
For the customer
a. Product bundled with reliable and high quality service
b. Higher availability, quality and guaranteed outcome
c. Capex to Opex model.
On the other side, there are many challenges, especially for availability/quality SLA and outcome based models
a. The contracts are tricky
b. Creating a measurable success metric acceptable to both parties is not easy
c. Premium to be paid for servitization makes sense if the product is critical to the customer and/or is high value.
Servitization mind-set
Technology alone is not enough for building a successful servitization portfolio. What is needed is a deep understanding of customer’s needs and willingness to constantly adapt and evolve the asset and services to achieve desired outcome. This is not easy. It needs a high degree of flexibility in design, manufacturing and delivery of the asset. It also needs very high quality, reliability and robustness in the asset itself. And doing all this in a cost effective way to remain competitive in the market. In other words the manufacturers themselves have to adopt Industry 4.0/Smart manufacturing as a way of operating!
Sujata Tilak is a thought leader in Industrial Internet of Things (IIoT) and convergence of IT and OT. Sujata is Founder and first Director of ISA Smart Manufacturing and IIoT Division. She has wide ranging experience in conceptualisation and delivery of technology products as well as consulting in areas like environmental monitoring, smart manufacturing, digital transformation, etc. Sujata is Founder and Managing Director of Ascent Intellimation (www.aiplindia.com). Under her leadership, AIPL has conceptualised and developed an IIoT platform, PlantConnect and multiple products based on this platform. These products have a total install base of 1500+.
Contact: [email protected]
www.linkedin.com/in/sujatatilak
