When it comes to sustaining profitability, “better, faster, cheaper” is no longer sufficient in heavy-asset industries. Simply making and delivering large and heavy products, equipment, or facilities is not enough for the manufacturers to survive and thrive in an unpredictable economy. Even consumers of the assets are open to new ways of doing business.
It is time to step outside of long-held comfort zones and find new ways to drive revenue while optimizing reliability. This is essential to countering the high capital intensity, stiff competition, and cyclical sales, investments, and employment of the sector.
Companies with creative and visionary leadership have begun embracing the concept of servitization. They are incorporating new value-added, after-market services in their portfolios, with the best-in-class adopting pure outcome-based business models where they maintain ownership of the assets and instead make them available as a service.
Opportunity for experimentation
Servitization is represented by strategic services that complement, or replace, product sales. Not only do customers require product and parts replacements, but there is growing interest in field service for break/fix repairs, aftermarket maintenance contracts, guaranteed service level agreements (SLAs), and consultancy based on aggregated global data and experience.
The highest level of servitization has the customer subscribing to a critical machine with an outcome-based SLA – charging for usage, productivity, or risk sharing or revenue sharing with the customer – rather than charging for the product or equipment.
It is what Rolls-Royce’s TotalCare option provides to aircraft engine customers. Rolls-Royce retains the risk of ownership and responsibility for maintenance while charging its customers a fixed rate per flying hour. It is a win for both parties who are equally focused on minimizing operational disruptions.
The industrial internet of things (IIoT) is what turned the buzzword into an achievable goal. Early adopters of connected technologies are today’s digital transformation trailblazers. They are conceiving and developing unconventional and impressive service offerings using the latest IIoT-based enablers, such as:
- Sensors that continually monitor machine conditions, allowing for more precise and timely predictive maintenance
- Mobile solutions that enable on-the-spot data capture and access and support the latest GPS, AR/VR, and advanced video/imaging capabilities
- Centralized and cloud-based Big Data, allowing for advanced analytics, machine learning, pattern recognition, and AI for improved decision making from any location
- Comprehensive enterprise software that facilitates and tracks every interaction with a product before and after the sale
Industry researchers have followed the evolution to more service-oriented business models and expect the trend to continue.
- McKinsey published research in July 2017 that found the average margin for aftermarket services was 25 percent—substantially more than the 10 percent realized on new equipment sales.
- Frost & Sullivan found in April 2018 that in North America and Europe, revenues for the calibration and repair services market alone are expected to reach $3.98 billion by 2022.
- IDC predicted in November 2017 that, by 2019, all digitally transformed organizations will generate at least 45% of their revenue from “Future of Commerce” business models (applying “3rd Platform” technologies and innovation accelerators such as Big Data, IoT, and AR/VR to fundamentally change how commerce is done and deliver outcome-based products and/or services).
Likewise, there is growing awareness among heavy-asset manufacturers and their customers of the sweeping advantages of servitization via digital transformation.
- Manufacturers benefit from:
- More predictable income streams from service contracts as a means to offset product demand variability
- Faster revenue growth and more sustainable business growth due to new service-focused income streams
- Improved profit margins from decreasing reliance on capital-intensive production
- Potential for greater market share by providing more desirable solutions and outcomes
- Ability to move costs from CAPEX to OPEX
- Manufacturer/customer relationships benefit from:
- More customer satisfaction, repeat sales, and upsales due to greater responsiveness to customer needs
- Rapid response times, higher first-time fix (FTF) rates, and longer mean time between failures (MTBF) from better and more timely data capture and analysis
- Avoiding asset failures and unplanned downtime through condition-based predictive and prescriptive maintenance, while lengthening the asset’s life
- Improved knowledge sharing among field service technicians, remote experts, planners and schedulers, operators, managers, and the customer
- Ability to move the customers’ costs from CAPEX to OPEX
- Ongoing ROI is derived from:
- Continuous product improvements from live remote monitoring of equipment in action and applying the lessons learned in R&D and engineering
- Continuing service improvements due to constantly tracking technicians, supplies, vehicles, and spare parts inventory
- Continuous sales improvements from developing deeper insights into how customers actually use the equipment and anticipating their needs