Modern businesses are beginning to realize that gaining a competitive advantage is more than just producing quality products. For instance, numerous original equipment makers (OEMs) are suffering from a slowing in sales due to chip shortages, the rise of inflation, and the saturation of markets. The issue isn’t whether manufacturers should abandon an aggressive strategy focused on products but rather how they can shift to a more service-oriented approach fueled by a service-based.
What is Servitization?
Subscription-based models are the norm for mechanical engineers. This is the case when the user only has to pay for the result, output, or actual performance the machine can provide.
For instance, the cleaning rinse in a medical dishwasher or the cubic meters of compressed air used over time.
It allows keeping in touch (usually each month or every quarter) with the customer, rather than just a single sale. In the end, the cash flow is more manageable, and in the same way, the vendor’s intention to ensure that the machine is ready to use is greater, and this means that optimizing service and asset management becomes much more crucial.
But, I often talk to the original equipment manufacturers (OEM), and they all face the problem of maintaining and managing equipment that is an average of 20-25 years old. I even talked to one who has equipment that is near 70-years old. To put that in perspective, take a look around and identify all the objects you see that look similar to your age. I am in our new office in The Circle business complex near Zurich airport. The oldest gadget I’ve seen is my cell phone recently celebrated (barely!) its second birthday!
Integration Value against. cost
The industrial landscape is evolving, and companies are required to modernize and “retrofit” – their legacy equipment to be integrated into the overall ecosystem. This is a significant expenditure and a higher level of knowledge. However, such improvements are at the very heart of the process of servitization. The key to generating value for manufacturers is not the product itself. It’s the information about the product, willingness to accept the risk to keep it running, and the incorporation of intelligent products into the product to create fresh revenue streams.
Integration is dependent on connectivity.
The first step to integrating older equipment is to include electronics. Or, as software companies would like to call it, “Let’s start the Industry 4.0 revolution.” It starts with sensors that collect data, a computer that can keep it in cloud storage to analyze it and share it with the entire ecosystem.
In the beginning, it is difficult to find the proper equilibrium between cost and value is a significant issue since the appropriate sensor kit to support complex equipment has to be constructed or acquired through a third-party supplier.
Enhancing customer relations
In keeping with the previous OEM example, Let’s say that the average longevity of equipment ranges from 20 to 25 years. If a business model was focused on the product, the customers could ask for maintenance, require repairs, or even spare parts. But the relationship with the customer was sporadic. When the focus is on retrofitting equipment and the implementation of Industry 4.0, however, the relationship with customers is changing. The constant stream of information ensures a solid, long-lasting relationship with customers – improving retention and growing market share.
Who is at risk?
Servitization is usually dependent on the client or the user. It is a significant cost investment determined based on an anticipated time of operation. If the equipment fails to achieve the expected runtime, the ROI will be affected. Would it not be a good idea to outsource the risks? In the present trend of “rent” equipment or changing to an outcome-based pricing system, the OEM remains at risk and has a significant interest in ensuring that the equipment is running.
Spare parts to the extent that your eye can see
Access to spare components to repair older equipment is also crucial. So, many OEMs still have a massive storage facility for spare parts.
However, the cost of a warehouse may reduce the profits. It’s no longer required to keep a vast, costly spare parts inventory. Sensors can assist in consolidating the market for spare parts. Real-time monitoring of conditions will automatically demand the production and delivery of the needed light component.
Create a top brand built on service, not product
As the trend shifts to service services, it is now a vital differentiation factor, and the product itself is becoming less significant. In virtually every OEM sector, one company is the industry leader. Having its equipment can be considered to be a mark of distinction. In the past, I remember service technicians taking selfies with such “best-in-the-industry” equipment to show off to friends and coworkers. But that isn’t the case anymore. Prestige has become the realm of products, not services. The service is now the critical factor in creating an image.