From goods to services, what is servicing in the manufacturing industry?

What does it mean to “sell things, not things”? In this article, we will introduce the flow of servicing in the manufacturing industry.

What is servitization?

May 2018. IFS World Conference 2018 , a conference sponsored by IFS, was held in Atlanta, USA. Mark Brewer, Global Industry Director, said:

“Why is service important? That’s because services are eating the world. Services already account for 70% of the world’s economy, and even in the manufacturing industry, where service revenue is only 20%, it will account for 60% of profits. ”

As if to back this up, according to a 2017 survey conducted by Columbus Global, a global IT consulting company that promotes digital transformation, 83% of manufacturers said that service-based business models are effective in increasing sales. It is reported that it does.

You may see phrases such as “Service item!” in the bargain section of a supermarket. For this reason, in Japan there is a tendency to recognize “things/things that can be obtained for free or at a low price” as services. However, servitization is not about making things free or cheap.

All manufacturing industries have sold the products they manufacture as “products.” Introducing servitization into this situation means selling things as “things.”

Let’s take car manufacturers as an example. Consumers pay anywhere from hundreds of thousands of yen to millions of yen, and sometimes tens of millions of yen, to purchase a car. As a result, you will own the vehicle you purchased. However, you are not actually buying a car.

“I have more means of transportation,” “I have a wider range of activities,” “I can use it for my daily commute,” “My daily shopping is easier,” or “I own a favorite car,” or “I own a luxury car.” They are paying for convenience and a sense of self-satisfaction. A car is nothing more than a tool to fulfill that need.

Therefore, a “business model that considers goods and services separately and sells services” gradually became established in the manufacturing industry in overseas countries. Recently, we often see signs for car leasing services with claims such as “You can drive a new car for tens of thousands of yen per month,” and this can also be considered a type of servitization.

Successful examples of servitization overseas

I think there may be some people who don’t understand anything about servitization. Here we will introduce companies that have succeeded in servitization by advanced overseas companies.

This case study is about an aircraft engine manufactured by Rolls Royce in the UK, which Microsoft supported. Rolls-Royce has the image of a luxury car, but we are also a manufacturer of aircraft engines, which is something many people are not familiar with.

Rolls-Royce, a typical manufacturing company that produced and sold luxury cars and aero engines, not only recognized the signs that customer demands were changing from goods to services, but also adapted its business model to suit. I started thinking about approaches to servitization. Specifically, airline companies purchasing Rolls-Royce aircraft engines did not necessarily want Rolls-Royce’s engines, but instead focused on transporting passengers and goods safely to their destinations.

Rolls-Royce attaches sensors to the aircraft engines it manufactures, and uses that data to develop a pay-as-you-go service called “Power By The Hour,” which sells engine output and operating hours. This can be said to be a shift in the business model from selling aircraft engines as products to selling the “thrust” produced by the engines.

The company also did more than just attach sensors to aircraft engines and charge based on the engine’s output and operating time. Airlines maintain their aircraft engines in a timely manner and procure replacement parts as needed. Until now, the company had been providing these maintenance services in a passive manner, using reactive maintenance support. However, using aircraft engine data, it is now possible to proactively perform maintenance at the appropriate time based on operational performance and manage resources such as replacement parts and mechanics. Needless to say, this improves the satisfaction level of airline customers, and maintenance services are now able to earn revenue through high added value. By the way, we perform preventive maintenance of engines using machine learning for remote data integration management through IoT collaboration.

Furthermore, by using this data, we are developing a consulting business regarding the proper way to fly an aircraft (how to use the engine), as well as fuel efficiency, which is a problem for airlines.

In this way, overseas manufacturing industries are drastically reforming their business models while making full use of IT. For example, Thyssenrup Elevator collects data from a center installed in the elevator, predicts failures, and provides appropriate staffing and service by linking with Microsoft Dynamics 365 .

Why servitization is required in the Japanese manufacturing industry

Japan is a global manufacturing powerhouse, and some may think that if they just keep making good products, there is no need to engage in servitization.It is true that Japan brands are popular all over the world. It has received high praise, and there are many consumers who trust it just because it says it is made in Japan.However, it is difficult to survive in the global market just by focusing on quality. is the current situation.

The first major factor is that the needs of consumers (customer companies) are changing. Traditionally, based on the belief that “the higher the performance, the better the product,” there was a tendency for products with higher performance to be valued by consumers and become a hit. However, with the overflow of information, the recognition that “the best product for you (your company) is the best product” has spread. Consumer needs are diversifying and they are no longer demanding only high performance.

There were high expectations that 4K TVs would be a major milestone for Japanese electronics manufacturers. However, in reality, sales have slowed down much more than expected, and demand for 4K TVs remains low even now. To watch on a 4K TV, you need a dedicated tuner, which many consumers find troublesome, and the reason is that there were not many people who wanted that kind of high performance from their TVs in the first place. There is a group of people who are satisfied with normal viewing at a reasonable price, and 4K TVs are over-spec for them.

On the other hand, if you look at electronics manufacturers in overseas countries, you will find that many of them are focusing on “providing high-quality services” as well as working on improving quality. Rather than increasing performance beyond what is necessary, we are investing those resources into expanding services that allow consumers to use our products more comfortably.

Many Japanese manufacturers still believe that if they make good products, they will sell, but this fixed concept may be a major factor in stagnating Japanese manufacturing.

Benefits of servitization

Servitization is a business model that “provides things produced by products as services.” So, what are the benefits of servitization?

1. Lower threshold for product use

No matter what car you buy, a new car requires a budget of several million yen. Many people make a down payment and take out a car loan. Many people don’t like spending a lot of money all of a sudden, and some people find that their favorite product is beyond their budget.

Therefore, if you receive a service that allows you to use a car as an experience instead of purchasing it as an object, you can solve these problems. This is a service that allows you to drive a new car for tens of thousands of yen per month.

By incorporating servitization, you can reach a wider range of consumers by lowering the barrier to product usage. Consumers can start using it at a low cost, so there is no sudden financial pressure.

2. Long-term relationships with consumers (companies)

“Creating repeat customers” is essential for companies to maximize profits. For this reason, we focus on improving not only product quality but also service quality, but this is a more costly task than expected, and it may be difficult to create repeat customers.

On the other hand, servitization generally uses a pay-as-you-go system based on the frequency of use and the products used. In other words, we will inevitably have long-term relationships with consumers (companies). This allows companies to spend more time face-to-face with customers, allowing them to make more accurate decisions. In other words, you can naturally create repeat customers, so you can develop it as a business to maximize profits.

3. You can transform into a highly profitable company by differentiating yourself from other companies.

IT technology is essential for the manufacturing industry to realize servitization. Many companies are using IoT and AI to collect valuable data and monetize it. However, there are currently not many companies with this type of structure. By taking action quickly, you can significantly differentiate yourself from other companies and expect high profits and sustainable growth.

4. Improve employee productivity and reduce costs

Customer needs are shifting from products to outcomes. As mentioned above, high-quality data is required for this purpose, and IT is responsible for this. According to a 2017 study by Aberdeen Group, industry-leading companies report using IoT technology to increase employee productivity by 12%. Furthermore, in maintenance operations in the manufacturing industry, data published by Data Center Journal suggests that predictive maintenance using IT can reduce costs by more than 12%. Many companies that implement servitization in this way can enjoy the associated benefits of improved employee productivity and reduced costs.

Consider servitization

To realize servitization, we need sensors to collect data and AI infrastructure to analyze it, but instead of thinking too big, let’s start with small-scale servitization. What does it mean to sell things rather than things? When you find the answer within your own company, the manufacturing industry will be able to reach a turning point.