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A total solution


Themes: Management science and operations

Professor Andy NeelyWhat do we know about global trends in the servitisation of manufacturing?

Professor Andy Neely, Fellow in Business Performance Measurement & Management at Cambridge Judge Business School, and Director of the Cambridge Service Alliance, who recently wrote the paper Servitization of Manufacturing – Further Evidence, which explores those trends that will make businesses successful, said that in an effort to improve their competitive ability many manufacturing firms were now offering services too. He explained:

“We know that firms can’t just compete just by selling products. They now have to look for new ways of adding value to their customers and one way to innovate is by adding services.

“These may be maintenance and support or ‘through life maintenance services’, so more firms are moving into services as well as manufacturing.”

Professor Neely said the so-called ‘aftermarket’ was a very lucrative one for firms now: “I tend to talk about three reasons for servitisation; these are economic, strategic and environmental. The first point is with global competition: some firms can’t compete on costs so they add services, and when products last for a long time the ‘aftermarket’ becomes a profitable arena. In the train industry for instance, for every new bit of rolling stock sold, there are 22 trains in operation. Those trains last for up to 40 years, so that maintenance contract is worth a lot of money, so there is an economic argument for servitisation.”

The ‘total solution’ package is becoming more attractive to customers, said Professor Neely: “What we see is some organisations focusing on maintenance service and support, and some others focusing on design and development services, particularly ‘solutions’. The big trend is for firms to offer the ‘total solution’ and they are moving towards outcome-based contracts. You have to think, ‘what outcome does the client want’ and then think about how to deliver the solution. For instance in the auto industry you could lease cars, offer taxi services, or car sharing schemes; it does not need to be just about only selling cars. When you think like this it starts to change your business model.”

Professor Neely went on to explain how globalisation was encouraging firms to work in partnership with the big developing economies like China: “The global trends are fascinating. The servitisation of manufacturing has moved on; the most recent study in the paper we have just written “Servitization of Manufacturing – Further Evidence” talks about how 60 per cent of US firms are now offering services and now 20 per cent of Chinese firms are offering services too. Even in those developing economies where they are growing their manufacturing base they realise the importance of offering services. It is undoubtedly one of the challenges and what’s astonishing is the speed at which this is happening, it is an incredibly rapid pace.

“One of the challenges for UK firms is how to compete in that global economy and where and when you collaborate. It may well be some of this is about joint ventures and partnerships with Chinese firms and being clear about what the terms of these partnerships are.

“If you take an organisation like British Aerospace it has products which are being used around the World and the support systems and staff are based in countries like the US and Saudi Arabia too so increasingly UK firms are saying we have to be global players as well.”

However, Professor Neely’s paper the “Servitization of Manufacturing – Further Evidence” does conclude by pointing out that the proportion of revenues that manufacturers receive from services has not shifted significantly in the last few years: “We talk a lot about the shift to services and the importance of this. What we see in many of these firms is that the proportion of their total revenue that has come from services has not grown as a fraction of the total. There are a couple of reasons for that. It may be that their product revenues are growing in sync with their service revenues, but it may also be that some firms are finding it difficult to make this shift and they may have great technology and engineering capability but not the skills to offer the services. Understanding how to make this transition to a service firm is a big question for many manufacturing firms at the moment.”

Professor Neely said that the Cambridge Service Alliance was a formidable partnership bringing together the best academic and practical talent at Cambridge University and around the world too: “The Cambridge Service Alliance brings together some large organisations that are interested in this shift to services, or whose clients are interested in this shift. It involves ourselves, Cambridge University, and within the University, Cambridge Judge Business School, The Institute for Manufacturing, and our founding partners BAE systems and IBM. Together we are trying to help firms successfully innovate their business models so they can deliver services that are of value to their customers tomorrow.”