The Servitization of Manufacturing

The Servitization of Manufacturing
Professor Andy Neely
University of Cambridge and
Cranfield School of Management
Five questions…
1. What do we know about manufacturing in the UK?
2. How is manufacturing changing?
3. Why is manufacturing changing (the driving forces)?
4. Data on the servitization of manufacturing (scale and impact)
5. Observations – what research do we need?
Five questions…
1. What do we know about manufacturing in the UK?
2. How is manufacturing changing?
3. Why is manufacturing changing (the driving forces)?
4. Data on the servitization of manufacturing (scale and impact)
5. Observations – what research do we need?
UK manufacturing output: 1996-2007
Manufacturing Output
(Index 2003=100)
110
105
100
95
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
85
1996
90
Talk of a decline in manufacturing is overstated – in terms of output…
KPIs for Manufacturing, BERR, www.berr.gov.uk/sectors/manufacturing/ukstrategy
UK manufacturing employment: 1996-2007
Manufacturing Employment
(Index 2003=100)
130
120
110
100
90
80
But not overstated in terms of employment!
KPIs for Manufacturing, BERR, www.berr.gov.uk/sectors/manufacturing/ukstrategy
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
60
1996
70
UK manufacturing productivity: 1996-2006
Manufacturing Productivity
(Ouput per hour, Index 2003=100)
120
110
100
90
80
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
60
1996
70
Same output produced by fewer people results in higher productivity
KPIs for Manufacturing, BERR, www.berr.gov.uk/sectors/manufacturing/ukstrategy
UK manufacturing profitability: 1996-2006
Manufacturing Profitability
(% net rate of return)
For private sector non-manufacturing corporations
as a whole, profitability reached 14.5% in 2006.
18%
16%
14%
12%
10%
8%
But not necessarily higher profitability!
KPIs for Manufacturing, BERR, www.berr.gov.uk/sectors/manufacturing/ukstrategy
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
2%
0%
1996
6%
4%
Five questions…
1. What do we know about manufacturing in the UK?
2. How is manufacturing changing?
3. Why is manufacturing changing (the driving forces)?
4. Data on the servitization of manufacturing (scale and impact)
5. Observations – what research do we need?
Declining profitability raises questions about the economic
sustainability of business models…
Sainsbury Review: The Race to the Top (2007)…
“In 1980, less than one-tenth of manufacturing exports came from the
developing world. Today it is almost one-third and in 20 years’ time it is
likely to be one-half”.
• UK manufacturing cannot compete on the basis of cost (Innovation
Review, 2003; Innovation Nation, 2008)…
“The different requirements of manufacturing and services: we need to
build up skills in the management of fragmented manufacturing chains,
and to focus our research efforts and skills development on the complex,
high-value production activities likely to be successful in high-cost
economies”.
• We have to consider complex, high-value and fragmented
production activities (not just technology within the firm, but also coordination of technology across firms and across countries)…
Focusing on high value production (by integrating services)…
Interest in service-based competitive strategies is not new:
Andersen and Narus – Capturing the Value of Supplementary Services, Harvard
Business Review, 1995.
Wise and Baumgartner – Go Downstream: The New Imperative in Manufacturing,
Harvard Business Review, 1999.
But we may be at a technologically enabled tipping point…

Servitization/Servicization…

Product-Service Systems…

Services Sciences…

Remote Product Servicing…

Intelligent Vehicle Health Management…
And the shift to services is not just in aero engines…
The opportunities for services
John Deere iGuide system (2007)
Uses GPS technology to
automatically shift the steering
pattern of the tractor to
compensate for implement drift
Health and Usage
Monitoring Systems
Use sensors on equipment
to detect repair and
overhaul requirements
And the opportunities for services continue…
Yesterday’s Technology…
Thomas Crapper (1836-1910)
Sanitary Pioneer
Footnote for Sir John Harington who is credited with inventing the first flush toilet in 1596!
Today’s toilet technology…
The intelligent toilet…
Neorest toilets…
• Lid opens automatically as you walk up…
• The seat’s heated…
• There’s a catalytic air purifier to remove any “unwanted odours”…
• With a manual power override for those particularly unpleasant visits…
• There’s a warm-water massage spray and a hot air dryer…
• The temperature and intensity of both are controlled using a LCD panel…
• Once you’ve finished and left the “sensor zone” the toilet automatically closes
the lid and starts a three stage “Cyclone” flush; the strength of which depends on
how long you’ve been busy on the toilet and previous patterns of usage.
What about the toilet of tomorrow?
Put simply…
The servitization
of manufacturing
= adding
services to
products…
Five questions…
1. What do we know about manufacturing in the UK?
2. How is manufacturing changing?
3. Why is manufacturing changing (the driving forces)?
4. Data on the servitization of manufacturing (scale and impact)
5. Observations – what research do we need?
Why is manufacturing servitizing?
Economic
rationale
1. Manufacturing firms in developed economies cannot
compete on the basis of cost (technological
developments are enabling them to add innovative
services)…
2. The installed base argument (e.g. for every new car
sold there are already 13 in operation, 15 to 1 for civil
aircraft and 22 to 1 for trains)…
Strategic
rationale
1. Lock in customers (sell the original equipment at cost,
make money on spares & suppliers - razor, printers)…
2. Lock out competitors…
3. Increase the level of differentiation (e.g. equipment
provider offers to take customer’s risk and give
predictable maintenance costs)…
4. Customers demand it (e.g. contracting for capability)…
Environmental
rationale
1. Environmental rationale (change notions of ownership
and resource use – e.g. Mobility cars)…
© Professor Andy Neely, 2008
Five questions…
1. What do we know about manufacturing in the UK?
2. How is manufacturing changing?
3. Why is manufacturing changing (the driving forces)?
4. Data on the servitization of manufacturing (scale and impact)
5. Observations – what research do we need?
So what do we know about the servitization of manufacturing?
•
Empirical and descriptive study…
•
Using data from OSIRIS [44,000 listed companies from
around the world].
•
Initial search - identifying all companies with primary or
secondary US SIC codes in the range 10-39 inclusive
[n=22,952].
•
Secondary search - only companies with over 100
employees were included in the sample [n=12,521].
Coding – identifying which firms have servitized
Coding – using business descriptions to identify
whether firms classified as manufacturing offer:

Pure manufacturing, e.g. PetroChina principally engaged in a broad range of
petroleum and natural gas-related activities.

Some combination of manufacturing and service, e.g. Siemens predominantly electronics and electrical engineering, but provides a wide
variety of consulting, maintenance and other services.

Pure service, e.g. The Brink's Company, conducts business in the security
industry. The services offered by the Company include armoured-car
transportation, automated teller machine (ATM) servicing, currency and
deposit processing, coin sorting and wrapping, and arranging the secure air
transportation of valuables.
Despite having manufacturing SIC codes…
Proportion of manufacturing firms offering services
8000
7438
7000
Number of Firms
6000
5000
4000
3196
3000
2000
1478
1000
193
0
Manufacturing
Servitized
Service
216
Bankrupt
No
Description
But the transition is not straightforward
100
Percentage of Firms
90
80
69.95
70
53.3
60
50
46.7
40
30.05
30
20
10
0
Manufacturing
Sample
Servitized
Bankrupt
Interestingly of those 212 firms that had declared bankruptcy, 113 (53.3%) had servitized,
while 99 (46.7%) were pure manufacturing firms. The sample as a whole consisted of
30.05% servitized firms and 69.95% pure manufacturing firms.
Which services are being offered?
Which services are offered?
% of firms offering
service
Number of firms
offering service
Design and Development Services
21.74%
2,312
Systems and Solutions
15.61%
1,660
Retail and Distribution Services
12.02%
1,278
Maintenance and Support Services
11.81%
1,256
Installation and Implementation Services
5.02%
534
Financial Services
3.75%
399
Property and Real Estate
3.66%
389
Consulting Services
2.63%
280
Outsourcing and Operating Services
1.67%
178
Procurement Services
1.14%
121
Leasing Services
0.99%
105
Transportation and Trucking Services
0.21%
22
In which countries have firms servitized?
60%
% of Firms
50%
40%
30%
20%
10%
0%
% servitized firms
USA
Finland
Singapore
Malaysia
Netherlands
Belgium
Norway
Germany
Bermuda
Switzerland
Sweden
Taiwan
Cayman Islands
Spain
Great Britain
Greece
Australia
Czech Republic
Denmark
Thailand
France
Indonesia
Austria
Japan
China
Which services in which countries?
350%
Transportation and trucking services
300%
Systems and solutions services
Retail and distribution services
250%
Property and real estate services
Procurement services
200%
Outsourcing and operating services
Maintenance and support services
150%
Leasing services
Installation and implementation services
100%
Financial services
50%
Design and development services
Consulting services
0%
USA
Taiwan
Thailand
Singapore
Sweden
Norway
Netherlands
Malaysia
Cayman Islands
Japan
Indonesia
Greece
Great Britain
France
Finland
Spain
Denmark
Germany
Czech Republic
China
Switzerland
Bermuda
Belgium
Australia
Austria
Two points to note:
1. Variation in the average numbers of services offered by firms in different countries - close to
3 different services/firm (US), to less than 1.5 (Czech Republic).
2. Some areas of service offering are universal – e.g. design and development services – while
others appear to be particularly prevalent in specific countries – e.g. systems and solutions
services in Sweden, Finland and Germany.
The larger firms are servitizing
80.00%
70.00%
60.00%
% of firms
50.00%
Pure Manufacturing
Servitized
40.00%
30.00%
20.00%
10.00%
86
6
>2
,
69
0,
86
6
11
1,
01
1,
61
22,
69
0,
2
1,
16
310
9,
20
9
51
9,
20
051
7,
69
7,
70
30
6,
54
630
6,
54
5
8
919
19
3
4,
24
4,
24
12
78
,5
3
412
,5
3
1
278
,8
1
,8
1
47
24
,6
7
447
<2
4
,6
74
0.00%
2004 sales revenue (US$ '000s)
Only in the top decile [measured in terms of sales revenues] is the number of servitized
firms greater than the number of pure manufacturing firms.
While only 32.27% of the sample have servitized, these firms account for 55.46% of 2004
sales revenues.
The financial consequences of servitization
Number of
firms
Total 2004
sales
revenues
(US$ billion)
2004 sales
revenues (%
of sample
total)
Total 2004
net profit
(US$ billion)
2004 net
profit (% of
sample
total)
Total firms
7,836
13,353
764
Pure
manufacturing
5,307
5,948
44.54%
383
50.11%
Servitized
2,529
7,405
55.46%
381
49.89%
Why do servitized firms generate a higher proportion of
sales revenues, but a lower proportion of total new profits?
Factors affecting financial performance
Number of
firms
Means (all
firms)
Means (pure
manufacturing
firms only)
Means
(servitized
firms only)
Total revenues US$000’s
7836
1,704,093
1,120,809
2,928,090
Cost of goods sold US$000’s
7805
1,116,075
711,262
1,967,050
Net profit US$000’s
7836
97,551
72,179
150,794
Cost of employment/operating revenue %
2906
17.40
17.12
17.95
Operating revenue/employee US$000’s
7491
320.42
296.65
369.88
Average cost of employee/year US$000’s
2793
35.49
32.52
41.23
Profit per employee US$000’s
7491
18.61
15.79
24.47
Collection period
7732
68.06
68.75
66.62
Credit period
7410
43.73
46.40
38.12
Working capital per employee US$000’s
7458
63.04
59.81
69.76
Total assets per employee US$000’s
7461
398.06
382.29
430.84
Stock turnover
7556
14.97
13.11
18.97
R&D expenses US$000’s
3315
94,777
63,872
157,435
Statistically which firms make higher net profits as a % of
sales revenues?
Size of firm (deciles of employees)
Extent of servitization (# services offered)
1
2
3
4
5
1
Servitized
Servitized
Servitized
Servitized
Servitized
2
Servitized
Servitized
3
Servitized
4
Servitized
5
Servitized
6
7
Servitized
Servitized
Servitized
Servitized
Servitized
Servitized
Servitized
6
Servitized
Servitized
Servitized
7
Servitized
8
Servitized
Servitized
Servitized
Servitized
9
10
Manuf
Results significant at the 10% level
Manuf
Manuf
Manuf
Manuf
Let’s consider forms of Product-Service System
1. Product oriented PSS – ownership of the tangible
product is transferred to the customer, but additional
services directly related to the product are provided.
2. Use oriented PSS – ownership of the tangible product is
retained by the service provider, who sells the functions
of the product, via modified distribution and payment
systems, such as sharing, pooling, and leasing.
3. Result oriented PSS – the PSS replaces services for
products – e.g. voicemail service replacing answering
machines.
Hockerts, K. and Weaver, N. (2002) - Towards a Theory of Sustainable Product Service
Systems, INSEAD-CMER Research Workshop "Sustainable Product Service Systems.
The empirical data suggest five forms of PSS…
1. Add services by going downstream (vertical integration)…
–
–
–
Could be termed integration oriented PSS – ownership of the tangible
product is transferred to the customer, but the supplier seeks vertical
integration, e.g. by moving into retail and distribution; financial services;
consulting services; and transportation and trucking services
Effectively a product + a range of associated services
Relatively speaking: easy to implement and low risk
2. Add services to the product…
–
–
–
Known as product oriented PSS – ownership of the tangible product is
transferred to the customer, but additional services directly related to the
product are provided, e.g. design and development services; installation
and implementation services; maintenance and support services;
consulting services; outsourcing and operating services; procurement
services
Effectively a product + services integral to the product
Relatively speaking: easy to implement and low risk
© Professor Andy Neely, 2008
The empirical data suggest five forms of PSS…
3.
Integrate services into the product…
–
–
–
–
4.
Shift focus to service (delivered through product)…
–
–
–
–
5.
Could be termed service oriented PSS – ownership of tangible product is transferred to the
customer, but additional services are offered as an integral part of the value offering, e.g.
Health Usage Monitoring Systems and Intelligence Vehicle Health Management
Effectively an integrated product-service system
Changes the nature of the business model, often shifts responsibility and risk
Reliant on technology so can require complex infrastructure
Known as use oriented PSS – ownership of the tangible product is retained by the service
provider, who sells the functions of the product, via modified distribution and payment
systems, such as sharing, pooling, and leasing.
Borrow/lease and return (e.g. Mobility cars, Netflix)
Service-product systems
Major challenge – change conceptions of ownership
Replace product with service…
–
–
Known as result oriented PSS
The PSS replaces services for products – e.g. voicemail service replacing answering
machines
© Professor Andy Neely, 2008
Mapping the 12 services identified…
Form of PSS
Which of the 12 services would be
included?
Integration oriented PSS involve
moving downstream
Consulting services, financial
services, retail and distribution,
transportation and trucking services
and property and real estate services
Product oriented PSS involve offering Design and development services,
additional services that are directly
installation and implementation
related to the product
services, maintenance and support
services, outsourcing and operating,
and procurement services
Service oriented PSS involve offering
systems and solutions
Systems and solutions
Use oriented PSS involve services
such as leasing
Leasing
© Professor Andy Neely, 2008
Statistically which firms make higher net profits as a % of
sales revenues?
Type of Product-Service System
Integrated
PSS
Product
oriented PSS
Service
oriented PSS
Use oriented
PSS
1
Servitized
Servitized
Servitized
Servitized
2
Servitized
Servitized
Servitized
Servitized
Size of firm
(deciles of
employees)
3
Servitized
4
Servitized
Servitized
5
Servitized
Servitized
Servitized
Servitized
Servitized
6
7
Servitized
8
Servitized
9
10
Manufacturing
For the largest decile pure manufacturing firms make higher net profits as a
% of sales revenues than those firms offering product related PSS.
Results significant at the 10% level
Five questions…
1. What do we know about manufacturing in the UK?
2. How is manufacturing changing?
3. Why is manufacturing changing (the driving forces)?
4. Data on the servitization of manufacturing (scale and impact)
5. Observations – what research do we need?
The challenges of servitizing…
Description of the PSS
Scale of the challenge?
Shifting mindsets
Timescale
Business model
and customer
offering
© Professor Andy Neely, 2008
High
Medium
Low
Of marketing – from transactional to relational marketing
High
Medium
Low
Of sales – from selling multi-million dollar products to
selling service contracts and capability
High
Medium
Low
Of customers – from wanting to own the product to be
happy with the service
High
Medium
Low
Managing and delivering multi-year partnerships
High
Medium
Low
Managing and controlling long-term risk and exposure
High
Medium
Low
Modelling and understanding the cost and profitability
implications of long-term partnerships
High
Medium
Low
Understanding what value means to customers and
consumers, not producers and suppliers
High
Medium
Low
Developing the capability to design and deliver services
rather than products
High
Medium
Low
Developing a service culture
High
Medium
Low
Embedding all of the above into a service organisation
High
Medium
Low
The challenges of servitizing…
Description of the PSS
Scale of the challenge?
Shifting mindsets
Timescale
Business model
and customer
offering
© Professor Andy Neely, 2008
High
Medium
Low
Of marketing – from transactional to relational marketing
High
Medium
Low
Of sales – from selling multi-million dollar products to
selling service contracts and capability
High
Medium
Low
Of customers – from wanting to own the product to be
happy with the service
High
Medium
Low
Managing and delivering multi-year partnerships
High
Medium
Low
Managing and controlling long-term risk and exposure
High
Medium
Low
Modelling and understanding the cost and profitability
implications of long-term partnerships
High
Medium
Low
Understanding what value means to customers and
consumers, not producers and suppliers
High
Medium
Low
Developing the capability to design and deliver services
rather than products
High
Medium
Low
Developing a service culture
High
Medium
Low
Embedding all of the above into a service organisation
High
Medium
Low
The challenges of servitizing…
Description of the PSS
Scale of the challenge?
Shifting mindsets
Timescale
Business model
and customer
offering
© Professor Andy Neely, 2008
High
Medium
Low
Of marketing – from transactional to relational marketing
High
Medium
Low
Of sales – from selling multi-million dollar products to
selling service contracts and capability
High
Medium
Low
Of customers – from wanting to own the product to be
happy with the service
High
Medium
Low
Managing and delivering multi-year partnerships
High
Medium
Low
Managing and controlling long-term risk and exposure
High
Medium
Low
Modelling and understanding the cost and profitability
implications of long-term partnerships
High
Medium
Low
Understanding what value means to customers and
consumers, not producers and suppliers
High
Medium
Low
Developing the capability to design and deliver services
rather than products
High
Medium
Low
Developing a service culture
High
Medium
Low
Embedding all of the above into a service organisation
High
Medium
Low
The challenges of servitizing…
Description of the PSS
Scale of the challenge?
Shifting mindsets
Timescale
Business model
and customer
offering
© Professor Andy Neely, 2008
High
Medium
Low
Of marketing – from transactional to relational marketing
High
Medium
Low
Of sales – from selling multi-million dollar products to
selling service contracts and capability
High
Medium
Low
Of customers – from wanting to own the product to be
happy with the service
High
Medium
Low
Managing and delivering multi-year partnerships
High
Medium
Low
Managing and controlling long-term risk and exposure
High
Medium
Low
Modelling and understanding the cost and profitability
implications of long-term partnerships
High
Medium
Low
Understanding what value means to customers and
consumers, not producers and suppliers
High
Medium
Low
Developing the capability to design and deliver services
rather than products
High
Medium
Low
Developing a service culture
High
Medium
Low
Embedding all of the above into a service organisation
High
Medium
Low
The challenges of servitizing…
Description of the PSS
Scale of the challenge?
Shifting mindsets
Timescale
Business model
and customer
offering
© Professor Andy Neely, 2008
High
Medium
Low
Of marketing – from transactional to relational marketing
High
Medium
Low
Of sales – from selling multi-million dollar products to
selling service contracts and capability
High
Medium
Low
Of customers – from wanting to own the product to be
happy with the service
High
Medium
Low
Managing and delivering multi-year partnerships
High
Medium
Low
Managing and controlling long-term risk and exposure
High
Medium
Low
Modelling and understanding the cost and profitability
implications of long-term partnerships
High
Medium
Low
Understanding what value means to customers and
consumers, not producers and suppliers
High
Medium
Low
Developing the capability to design and deliver services
rather than products
High
Medium
Low
Developing a service culture
High
Medium
Low
Embedding all of the above into a service organisation
High
Medium
Low