The Hard Truth About Mastering Servitization in Manufacturing and How to Face It

Manufacturers are now challenged to rethink and reinvent their business models to stay competitive. At the centre of this is a servitization strategy: the shift from traditional business models to outcome-based business models. 

But what exactly is servitization in manufacturing and why should OEMs start embracing a servitization strategy in their organization? 

Let’s explore the different components of a servitization strategy for manufacturing to help you get started at your organization. 

• What is servitization in manufacturing?
• Levels of servitization in manufacturing
• Benefits of the servitization business model? 
• Common challenges in servitization of manufacturing?
• Servitization technology: The role of IoT
• Steps towards a successful servitization strategy
• Critical factors for implementing servitization in manufacturing 
• Making servitization work for your business

A servitization strategy in manufacturing companies has a different approach than traditional manufacturing, which is purely transactional. An OEM sells a product or machine and perhaps never deals with them again.

A servitization process focuses on business-customer relationships to generate additional value for the customer, but also recurring revenue streams for the organization. A servitization strategy includes adding services to your product-focused business, to generate new revenue streams and achieve a desired outcome from the product or machine to the customers on an ongoing basis. This shift from traditional business models to servitization business models is fueled by data and smarter solutions such as IoT devices, artificial intelligence, and machine learning.

In other words, servitization in manufacturing is about selling entire value-oriented solutions instead of just products. In the end, service is not about solving or preventing problems, but about creating a positive outcome: higher output, better quality, less downtime, etc. So, the focus for a servitization strategy is outcome-based, and the reward is related to this outcome, as measured by asset performance in terms of operating hours, (energy) efficiency, or output (total number of products or quality in terms of ppm defects).

We can define three main levels of services a manufacturer can provide: 

• Level 1: Selling products and spare parts – Initial sale of products and machines as well as selling replacement components when needed. All manufacturers are currently providing this service, it’s the basics of manufacturing.
• Level 2: Aftersales and reactive services – On-demand maintenance when parts break, repairs, training and support, or reconditioning of entire replacements
• Level 3: Ongoing advanced services – Maintenance contracts, predictive maintenance based on condition monitoring, integrated solutions and support agreements.

The manufacturing sector has become increasingly complex and competitive, and many industrial manufacturers have been forced to reinvent their businesses to remain competitive. They are constantly looking for new ways to innovate their industrial operations focusing on increasing efficiencies, resource planning, product innovation, personnel training, and data analytics. 

There are several benefits to integrating a servitization strategy for manufacturers, which can be achieved with the right processes and technologies in place. Here we present 6 reasons why industrial manufacturers should start integrating a servitization strategy to boost their manufacturing operations.

1. Boost revenue and profitability

The clearest benefit of servitization is that by adding services to your product-focused business,  you can generate new revenue streams since customers are paying for additional valuable services. This leads to additional revenue and when additional services are properly crafted they can be highly profitable for an organization. 

For example through condition monitoring of machines by integrating smart IoT devices, manufacturers can provide ongoing services to their customers, which leads to their revenue streams becoming more secure through predictable insights. 

2. Product innovation 

The shift from traditional manufacturing to a service-oriented business requires organizations to rethink their businesses. This requires product innovation to be able to really create new services that create value for their customers.

3. Better insights over operations through data generation 

The shift to a servitization strategy is fueled by data and insights. With data and new insights engineers and technicians tap into new information that can help provide better customer service, up and cross-sell, as well as make improvements to products and services. 

Implementing new integrated solutions through IoT manufacturers can monitor assets in real-time so engineers can use analytics tools to help them take the best action possible, always right on time. This also helps detect machine failures before they happen and gives field service engineers the optimal response time to schedule asset maintenance and prevent unplanned downtime. By embracing accurate predictive monitoring through IoT solutions, manufacturers can improve both the uptime and lifetime of their assets. 

At Sensorfy we enable servitization and predictive maintenance by making your industrial assets smart through custom-designed IoT sensor systems. With your goals in mind, we engineer industrial IoT services to design custom IoT solutions that enable predictive maintenance. We’re here to talk and discuss any ideas or challenges you might have. Get in touch with us.

4. Better product usage and customer outcomes 

By embracing value-oriented solutions, rather than centring on products, an organization start thinking about customers’ needs and expectations. This shift in focus leads to more agile thinking to adapt products and services to achieve better customer outcomes.

Having additional information about your organization’s operations and the performances of your industrial assets ensures that an organization is getting the most out of its resources and machines. With such additional services, they can also react faster and accordingly to customer requests, issues or challenges leading to better outcomes.

5. Increased customer satisfaction and loyalty 

When your customers can get better performance and utilization of their industrial machines and receive more personalized service, they also experience a stronger relationship with their suppliers. Hence, they are more satisfied, more loyal and less likely to change to other suppliers. It creates win-win situations for both business and their customers. 

6. Higher competitive advantage 

Innovating products and services through a servitization strategy creates a stronger and more established relationship with customers. This gives an organization a competitive advantage and makes it harder for another business to steal market share.

Implementing a servitization strategy towards predictive maintenance doesn’t come without challenges, since it requires a shift in mindset and processes. To succeed in servitization, an organization must establish a robust business architecture to support them in moving from a product focus to a service focus. Here we present the 4 most common challenges when shifting towards servitization.

1. Changing an entire business culture

Every well-established organization has a dominant business culture, and change is hard to imagine. Change can be quite challenging when it involves new technologies and processes. And the transition from a product-centric mindset to a value-centric mindset is massive and requires support from all levels within the organization. Most importantly, it needs to come from top-level management and engage with employees to think about the business in new ways. 

To succeed in servitization, an organization must establish a robust business architecture to support them in moving from a product focus to a service focus. This means giving the right time and priority to map out a vision and roadmap for servitization. This vision and roadmap need to be preached and practised by everyone in the organization. 

A method to approach this challenge includes organizing design thinking workshops and creative problem-solving exercises, to both understand IT systems as well as the problems, needs and expectations of customers from different perspectives.

2. Requires new business capabilities 

Integrating a servitization strategy requires a different skill set. Thinking in terms of services and solutions starts with thinking about your customer’s needs and goals, and not only about the engineering and functionality of industrial machines. Learn more about how IoT and predictive maintenance helps battle the tech talent shortage

A successful servitization strategy in manufacturing starts by defining the business case and redefining the design of processes to make sure they meet customers’ needs and goals. 

OEMs and plant owners need to attract new people with the needed skills to operate the new systems and technologies. Some of the skills needed to implement a servitization strategy include knowledge of algorithmic/statistical/programming skills, predictive modelling, data engineering, and data science among others.

The market is growing rapidly and the pool of people that have the right skill set is growing as well. On the other hand, organizations don’t have to have the knowledge in-house, you can also get external support. Talk to our experts to see how you can get started with implementing a servitization strategy. 

3. Sticking to the silo trap 

Well-established manufacturers which want to digitalize towards servitization have established silos (design, R&D, engineering, production, marketing, etc.) that often operate independently. To make servitization work, an organization needs to come together and synergize to make servitization initiatives work. 

To approach this challenge, organizations can create a cross-functional team to evaluate existing information on the customer’s experience and define new strategies to approach them. 

4. Customer resistance 

Especially in the beginning when integrating a servitization strategy your organization might experience customer resistance. In the beginning, customers are hesitant and often do not see the value of service-embedded products. This is why it’s important to educate your customers about what are the new services, how they work, how to use them and the value it brings to the customer. 

To succeed in integrating a servitization business model industrial companies and original equipment manufacturers must leverage real-time data generated from their machines and processes. They need to be able to analyze how assets are being used to provide valuable insights that improve operational efficiency. 

The growth of new technologies like smart sensors, embedded devices, cloud solutions, wireless connectivity, IoT, AI and machine learning is empowering organizations to implement servitization. In this case, IoT is the key enabler of integrating a servitization business model to make products more connected. Servitization in manufacturing is heavily dependent on data generated from smart connected devices. IoT solutions are needed to generate data, identify trends and enable predictive analytics. 

Integrating smart IoT sensors and advanced analytics enables predictive maintenance to monitor industrial assets in real-time, preventing unplanned downtime. By embracing accurate predictive monitoring through industrial IoT solutions, companies can improve their assets’ uptime and lifetime and their Overall Equipment Effectiveness (OOE). Moreover, it allows them to enhance the productivity of the maintenance department and release them from unnecessary manual labour. It’s a way of achieving more with less by preventing failures before it happens.

Let’s illustrate how this works with a specific example. Say a company wants to monitor the performance of automatic doors. By implementing an IoT solution they can enable predictive maintenance to now get real-time indicators of its performance. As soon as an anomaly warning goes off, they can plan who needs to address the case. In time, because there’s is not an apparent issue just yet. 

Organizing the IoT solution carefully beats a stressful reactive approach in which companies depend on the current situation and its resources. Now, they have time to optimize maintenance routes, allocate scarce maintenance resources to assets that actually need the maintenance, help more clients with the same amount of mechanics, and improve on maintenance planning – all in careful collaboration with your client. Learn more about the IoT solution we build for one of our customers. 

Most organizations recognize the benefits of implementing a servitization strategy, but they struggle with implementing it in their business. To succeed in servitization, an organization must establish a robust business architecture to support them in moving from a product focus to a service focus. A transition towards servitization in manufacturing doesn’t happen overnight. Instead, a step-wise approach is necessary to ensure successful implementation across the organization. Here we define the different steps an organization can take. 

1. Appoint a collaborative team that will carry out the servitization project and define a service-driven culture and mindset across the organization. 
2. Analyze the service needs and requirements after product sales for each customer segment. This can include implementing condition monitoring technologies using IoT solutions to deliver proactive maintenance, but it can also include on-boarding programs, support and training.
3. Define the needs, value drivers and service levels expected by each customer segment, as well as the impact of these services on the end user. 
4. Conduct a feasibility analysis to determine the likelihood of customers purchasing the services directly from the manufacturer. 
5. Identify business models and additional revenue streams to integrate the services. 
6. Map out the supply chain design needed to implement the services to the customer. An organization needs to ensure a properly structured supply chain to support those drivers and deliver customer value. 
7. Define the supply chain network changes needed to drive the desired customer outcome(s). 
8. Determine what information and technologies are needed,  both from a systems perspective as well a reporting perspective. 
9. Create a road map to implement the supply chain changes, systems and technologies. 
10. Implement a service-based marketing communication plan across the organization but also with customers and supply chain partners. 
11. Roll out the servitization strategy and gradually implement supply chain changes, systems and technologies. 
12. Perform ongoing monitoring to refine the services for better success. 

ICT Infrastructure

Leveraging new technologies such as IoT solutions to improve operational efficiency and create new revenue streams through servitization requires a robust IT infrastructure. This will make the adoption of a servitization strategy easier, as technology is seen as a crucial interface between products and services. 

Digitalization technologies

This is where IIoT sensor systems and predictive maintenance solutions come into play. Predictive maintenance gives you the optimal response time to schedule asset maintenance and optimize existing operational challenges. Integrating smart IoT sensors and advanced analytics enables predictive maintenance to monitor your industrial assets in real-time, preventing unplanned downtime.

See for yourself what business advantages predictive maintenance creates in our step-by-step guideline: Predictive maintenance from scratch. Get your copy for free! 

Customer/supplier interface capabilities

Customer/supplier interface capabilities are also a critical factor for implementing servitization since greater involvement is needed from their side. It requires an increased information level exchange as well as stronger cooperation between manufacturers and their supply chain. 

Employees’ expertise

Another important factor is to train staff to work with the new technologies. To get started with servitization it’s not enough to just buy the smart sensors (for OEMs) or the new assets (for end users). On both ends, the production and maintenance process will change as you switch to servitization and therefore the staff will have to be trained to learn how to use the new technologies and use the information to get the desired customer outcomes. 

Service-driven culture and mindset 

Every well-established organization has a dominant business culture, and change is hard to imagine. Change can be quite challenging when it involves new technologies and processes. And the transition from a product-centric mindset to a value-centric mindset is massive and requires support from all levels within the organization. Most importantly, it needs to come from top-level management and engage with employees to think about the business in new ways. 

Whether you are an Original Equipment Manufacturer or a plant owner, making the transition to servitization in manufacturing – though worth it – can seem overwhelming at first. Although servitization comes with challenges and risks, the benefits make it well worthwhile given the business and profitability growth it can bring. Implementing a servitization strategy in manufacturing is a gradual process, where an organization can implement new services step by step. Do you want to get started with servitization and need advice on taking the first steps? Then, get in touch with us! Our experts are happy to help empower your business to provide outstanding customer service through new value-drive services.