Servitization describes the trend in which organizations are creating value through product-service systems. With the rise of the Internet of Things (IoT), embedded sensors and the power of cloud computing offer businesses the opportunity to monitor the performance of their products in real-time. This enables manufacturers to complement their products with, at times, entire field service support systems customized to meet the needs of their customers.

Services and innovation expert, Andy Neely, explains the servitization model using the example of Rolls-Royce's TotalCare airplane engine program. Rather than purchasing a plane engine, customers can now pay for access based on a number of hours an airplane is flown through Roll-Royce's "power by the hour" program. Under the service agreement, Rolls-Royce is obligated to monitor the performance of the engine, make repairs and replace broken parts.

A study out of Aston University suggests that servitization can help manufacturing customers reduce costs by up to 30% by helping them simplify business operations and streamline labour-intensive processes, while manufacturers may experience growth of up to 5-10% per year. But there is more that servitization offers in terms of advantages and challenges.

The benefits of servitization of manufacturing

Servitization aligns the needs of manufacturer and customer

Returning to Neely's example of Rolls-Royce, under the servitization model, customers don't want unreliable engines that are constantly in need of repair and Rolls-Royce similarly doesn't want to send its technicians to repair aircraft. And more importantly, through continual performance monitoring, Rolls Royce can harness data that can lead to improvements in the efficiency of their customers' businesses.

Servitization offers greater financial stability

In addition to the financial advantages noted above, suppliers can receive regular, recurring sales revenue, while anointing technicians as lead generators who can play a crucial role in developing customer loyalty and up-sell customers with solutions that best fit their specific needs. Customers can also achieve financial stability by eliminating the risk of incurring large repair costs.

Challenges of shifting toward a servitization model

Shifting toward a servitization model can be especially challenging for suppliers. Dr. Taija Turunen of Aalto University School of Business and University of Cambridge followed a manufacturing company while they struggled to make the transition. Dr. Turunen and her team observed the following critical challenges:

  • Creating an optimal service portfolio,
  • Internationalization of services and solutions (even for an existing multi-national company),
  • Encouraging service orientation and creating a service culture within the organization,
  • Identifying target customer groups for services and differentiating the offering accordingly.

According to Dr. Turunen, in addition to the economic potential, customer needs and the supplier's strategic intentions, environmental reasons are also compelling businesses to adopt a more circular approach, further supporting the servitization model.

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