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Digital Services Design for Equipment Manufacturing Companies
aart.schalk • 23 oktober 2020
Digital Services Design for Equipment Manufacturing Companies
In this article Aart Schalk, Senior Management Consultant at Linde Consult and Noventum, shares how you can start designing digital services and how to manage the service transformation.
Equipment manufacturing companies increasingly innovate their (service) product portfolio by creating solutions that combine product and service components. However, shifting from a product-centric perspective to a service-centric perspective is challenging for a number of reasons. In this article I explain how to successfully transform into a service-centric organisation by using the Product Service System (PSS) approach in combination with Service Dominant (SD) logic to design and deliver the right digital services for your customers. In simpler terms: combining product related and customer business related service design.
From product-related to customer business related service design
Typically, equipment manufacturing companies apply product related service design and do not pre-produce value but strictly offer value propositions that customers convert into value through usage. Think of product related services such as (extended) warranty, preventive maintenance schedules, and availability services through service level agreements.
Here, customers are always co-creators of value by integrating the company’s offerings with their collection of resources, including personal skills and capabilities. Example: A food processing customer has an issue with a cutting machine and orders a spare part via an online portal. The part arrives the next day in the hands of the maintenance crew who replaces it as described in the manual and restarts the machine. Problem solved, right?
This product-oriented perspective has influenced how services are designed and led to a) the development of product related service offerings that facilitate customer value co-creation processes and b) to focus on service levels and outcomes for customers. While good reactive service and quick delivery of parts is appreciated by customers, the manufacturing industry has the opportunity to offer more advanced services that generate higher customer satisfaction, loyalty, and more margin at the same time. Let’s see how!
Bundling product related service solutions: Servitization
To address globalization and rapid technological development, manufacturing companies now start to use the customer business related service design approach in combination with product related service design in an attempt to integrate services in their product offerings to create more complete solutions. This transition is referred to as ´Servitization´. It consists of shifting the business from selling products to offering product-service system solutions.
Product related service solutions are bundles of product and service components intended to co-create value-in-use for customers and are usually supported by organisational networks and systems. Good examples here are Rolls-Royce (power by the hour) and Xerox (managed print service).
This perspective has influenced how services are designed as well and has led to a) customer business related services and b) addressing latent customer business needs through proactive service delivery. These more automated and advanced services typically include customer process and business optimisation via outcome-based services, business transformation and even value chain optimisation. To become a successful proactive service organisation enabled by digital services takes time and effort. Let’s take a look at how you can achieve your goals.
How-to-guide: Service transformation journey
So, where do we start? Noventum Service Management defined a three-phased transformation journey grounded in research; tried and tested for over 20 years in various industries and all around the world.
1. Setting the climate for Servitization
- Identify customer service needs
- Calculate growth potential
- Design customer experience per segment
- Assess internal operations
- Calculate the profitability potential
2. Deal with organisational resistance
- Set up regular steerco’s with senior management
- Design transformation and engagement strategy
- Inform organisation with senior management
- Execute transformation and engagement strategy
3. Develop internal skills and capabilities
- Design and pilot the value proposition and service business models
- Design service delivery model
- Define IT infrastructure
- Redesign organisation with senior management
- Fill in the new organisational design and train people on new role
- Implement net organisation
- Scale up services
To conclude: Service transition is a journey, not a destination. So approach it accordingly. Celebrate your successes along the way; and use failures as learnings so you can do better next time.
Note1: This article was first published on the Noventum LinkedIn pages and website in October 2020.
Note2: In case if you want to learn more about how to develop new digital value driven business models, Noventum just launched the Leadership in Digital Service Transformation, an online training about how to lead a service transformation.
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Early 2020, Linde Consult started an extensive research project with the objective to create a full insight in the competitive landscape of the 100 most prominent manufacturers of food processing & slaughterhouse equipment in the industries of Fish, Meat and Poultry ( see here ). Research results Besides describing, analysing and presenting conventional market data such as company size, turnover, number of employees, product portfolio and head quarter location we mapped the relative competitive power of the big-100 (using strength of vision, and ability to execute as coordinates) and presented current trends and challenges that influence how manufacturers develop their business. The research results are in fact the recipe for growth in the food processing equipment manufacturing industry. How trends influence growth One of the main findings of the research are that currently, technological and economical mega-trends affect the Food Processing Equipment Manufacturing Industry most. Political, Sociological and Environmental trends also play a role but have less impact on growth so we focus on technologic and economic trends in this how-to-guide. Factually, trends have the power to influence a whole industry, forcing the complete set of competitors into a certain direction with regards to product & business development. Not surprisingly, the technological trend has a big impact on the equipment manufacturers thanks to new Industry 4.0 functionality becoming readily available, and thanks to customers now demanding more digitalisation and automation in products, services, and solutions that are a combination of both products and services. This drives the development of connected ‘smart’ equipment. I n parallel, the economical trend drives manufacturers to develop new business models with focus on outcome-based services that have become available and deliverable with the new technologies they developed as a result of the technological trend. Combining the two strongest trends (blending new technology-driven services with a new service-delivery business model) is currently the juiciest recipe for growth in the Food Processing Equipment Industry. How can your manufacturing business drive growth? What can you do right now to capitalize on these new insights? How can you drive growth? To follow the technological trend, think about starting initiatives around integration of smart sensors in critical parts and equipment; connecting client-site equipment to the internet; and collecting, analysing and enhancing big data from Installed Base to name a few. To follow the economical trend, think about how to adapt or develop your business model so customers pay for a service contract including SLAs (service level agreements on uptime, performance, and outcomes); explore leasing of equipment instead of selling it; and investigate how you could provide valuable data & knowledge to your customer with dashboards showing enhanced data on uptime & performance; applying data mining and algorithms to find and predict patterns on e.g. wear & tear of critical parts; and development of new remote service capabilities and pricing strategies. Of course, changing your organization is never easy and you should prepare for a lot of strategy work and fulfilling prerequisites. Don’t let it stop you! Start to identify your low hanging fruits and go from there.
Service providers are going through a difficult period now that the SARS-2 Corona Virus spreads the earth, wreaking devastating havoc. Never before was remote Service so important. Remote service providers around the world are bracing for a tremendous increase in demand: Customers will use the internet to order goods & services as much as they can, staying away from physical human interaction. How does this affect the manufacturing industry? How can you (the manufacturer) make the best of the situation? A few thoughts. Impact on Service in the manufacturing industry Despite lots of automation, the Service departments in the make industry are run by people, our most valuable resource. Think about Service Planners, Technical Support Engineers and Field Service Engineers who maintain & repair equipment out in the field and assist users with their issues via telephone, e-mail, chat, and VR equipment. Currently, all those people are very limited in their freedom to act due to the world-wide effort to control the virus. They are infected, have sick relatives they need to care for, or are not allowed to travel (in some countries not even out of their homes). The domino effect has turned the stock market into the red sea, which in turn affects the ability of companies to finance themselves and continue with various initiatives and will have more social and economical impact than any other event in the past 50 years. Next on, we may expect rigorous changes where manufacturing companies swiftly adjust to the new reality and shift field work to remote service. Governments will want to ensure that crucial machinery (e.g. in the medical sector, food industry, and power-supply, utilities) continues to run properly and new regulations and legislation may be expected. If you are in manufacturing, now is the time to act! How can you deal with the situation? First task on your to-do list (besides ensuring the safety of your workforce obviously) is to find out where you stand with your organization. How mature is your Customer Support Center and your E-commerce process / system? How quickly can you fit your Installed Base (equipment out in the field) to be ready for full remote service and automated parts ordering? Can you quickly enable field service engineers to handle remote service jobs? What are the costs and benefits? Also, re-evaluate where your competitors stand because the ones that are a little ahead in the game might just be the ones to survive and become market leaders. Secondly, define a short-term and long-term plan. On the short term (next 1 - 3 weeks) focus on your people and their health so they can keep the business running. On the longer term (next 2 -12 months) you should plan to totally transform to a fully automated remote service organisation. How can you scale up your Remote Service? To scale up remote service at the expense of onsite service, your equipment, organizational set-up (infrastructure) and technological processes need to be ready for it. Pick the low-hanging fruits first. Let's be honest - we cannot transform the complete global service organization overnight. But we can define the steps, prioritize them, and start improving. An easy first step could be to extend your internet connections and expand authorizations and licenses so people can work from home. Perhaps your customers want to help you to install those remote connection devices if you sent them. Doing the right things, in the right order, at reasonable speed is the essence here. As a concluding remark: There is always opportunity in chaos. It is up to you to keep calm and make the best of the situation. If you need any help defining your key strategy, feel free to reach out!
In the Manufacturing Industry, Service is King; in fact, Service is the backbone of the manufacturing organization, adding value to the bottom line through high margins on spare parts, service products and contracts. If it isn't, something is wrong and you need to fix it. Let´s start with explaining why Service should be the backbone of your manufacturing business. Customer Relationship First reason is customer relationship: While your Sales Organization initiates the business relationship with a customer only once (closing the deal might take 12-16 months), your Service Organization will continue to grow and foster that relationship after the deal was sealed, for many years to come. If your customer spent 1 million EUR to buy your equipment initially, it is likely that over the next 10-15 years (depending on equipment lifetime) this customer will spend at least 1 million EUR more on maintenance, spare parts, consultancy/training, and break/fix services to keep it running optimally. The cost of sales of selling the Service Products is much lower than the cost of selling equipment initially. In particular if the customer has bought a Service Agreement where they pay a fixed amount for parts and services. Margin Second reason is margin: The average margin on sales of OEM spare parts, according to bench-mark data from McKinsey, is around 25%, while the margin on the initial sale of equipment is much lower (around 10%). So for every euro invoiced by Service, around 50 euro cent adds to the profit. There is a caveat here - this only works if your customers don't buy pirate parts online, or at the hardware store on the corner. It is recommended to offer parts in optimized (modularized) packages, preferably also via a Service Agreement so you can plan ahead in time on manufacturing & delivery. Economic Cycle Third reason is economic cycle: In times of economic upswing, investments in new equipment are high because borrowing money is relatively easy and cheap.This is very good for Service organizations in the manufacturing industry, as they typically source installations of new equipment in factories. In times of economic recession, businesses hold back on major investments, such as buying new equipment. They rather spend money on repairs and maintenance (Service hours and Spare Parts) to get the best performance out of their initial investment. This is also good for the Service organization for the obvious reasons. Conclusion Concluding, whatever the economic situation, there is a steady demand for Service and Spare Parts. If your Service Organization has the correct set-up of processes, people, and systems it will be the backbone of your business, adding considerable profits to the bottom line. If not, there are several actions you can take to fine-tune the above mentioned variables.
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