Servitization 101 – What actually is servitization and how can it help your business?
Just like data, automation, Industry 4.0, and the Internet of Things, servitization has become something of a buzzword for manufacturing over the past few years – and for good reason. Servitization and advanced services offer the potential for manufacturing SMEs to significantly transform their business models to deliver even greater value to customers and increase profits. But what do we mean by servitization and what exactly are advanced services?
In this article, we explain everything you need to know.
What is servitization?
Servitization is a term used to describe a transformation journey for manufacturing organisations; specifically, the innovation of an organisation’s capabilities and processes to better create mutual value through a shift from selling products to selling product-service systems. So, at a basic level, instead of manufacturing and selling a machine tool and ending the transactional customer relationship there, a business instead produces and sells the machine tool in addition to delivering a contracted support and maintenance service.
Servitization – a practical SME example
An example of servitization at an SME level is Koolmill, a business that continues to work with the SME Partnership and Aston Business School. Like several manufacturers, Koolmill was set up to produce and sell rice milling machines. However, much of its customer base is in low-income countries such as China and India, where the price tag associated with milling machine ownership is considered prohibitively expensive. To overcome this challenge, the business transitioned to a servitized approach, offering rice-milling-as-a-service.
Essentially, this means Koolmill now provides the milling machines to its customers for free and provides a set number of hours and uptime a month for an agreed fee, instead of selling the product. For Koolmill’s customers, this means they are able to pay for the value the milling machine delivers, rather than the machine itself, at a more affordable price and through on a subscription-based service. For Koolmill, the agreement delivers guaranteed cash flow over a period of time, rather than a single one-off transaction. It also helps build a long-term partnership between the companies that is not always possible when simply paying for one-off services.
Is this the same as advanced services?
Advanced Services is a key enabler of servitization strategies, which are often delivered in the more sophisticated stages of servitization. We use the Servitization Staircase as a model to help business practitioners and executives to understand and gauge the level and positioning of their services: from basic services, to intermediate and more advanced services, delivered as part of a full scale servitized business model. Advanced services therefore typically sit at the top of the staircase.
Advanced services are propositions, where the provider (the manufacturer) engages in an in-depth customer interaction and extensive capability integration, and through a co-creation process delivers functional values to that customer.
The focus with advanced services is on delivering ‘outcomes’ for the customer, rather than services focused that are based around product ownership, condition and performance.
What are the benefits of servitization?
There are several benefits to servitization as part of a progressive, disruptive business model. The first and perhaps most obvious is that a manufacturer is more able to respond to the specific needs and requirements of a customer, beyond merely offering a one-off product. It enables the manufacturer to offer a subscription-based service, benefitting from regular income and cash flow. For the customer, they only pay for the value they receive, and this relationship can result in greater customer loyalty over a period of time.
Servitization also enables manufacturers to gain useful insights into future R&D (Research and Development) processes by analysing the performance of a product sent to a customer and using this information in continuous improvement strategies. For example, a manufacturer may supply a new cutting machine which is fitted with sensor technology and telemetry as part of the agreement. The technology attached to the device sends real time information to the manufacturer about machine performance and uptime, enabling the business to adapt future versions of the machine according to the data they receive.
How do I servitize my business?
If your business is interested in the opportunities presented by servitization, we can help you take the first step on the servitization staircase.
The SME Partnership is currently recruiting its next cohort of manufacturing SMEs from Birmingham, Solihull and the Black Country to take part in a fully funded programme which offers 12 hours funded support in the first phase, with the opportunity for further support for eligible businesses.
This is designed to help your manufacturing SME make the transition from making and selling products to embracing servitization and a move towards advanced services.
For more information, contact The SME Partnership by visiting: