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At the recent Oracle European Value Chain Summit held here in London, Professor Tim Baines, director at the Aston Centre for Servitization Research and Practice, used his presentation to tell those gathered about the concept of servitization (Ed’s note: spelled with a ’z’, apparently) and how it is revolutionising the manufacturing and technology industry.
Outlining the concept, Baines said that it is one in which businesses within this sector were building new revenue streams out of the products and services they offer. Traditionally such businesses would have sold their product to the customer and that was pretty much the end of the relationship. This soon developed with companies providing maintenance and overhaul services as well as spare parts.
Now however this is developing further with such businesses moving towards what Professor Baines described as advanced services, selling their products’ capabilities and outcomes rather than simply the product.
One example given here comes from engineering giant Rolls-Royce. The company has come up with a concept called ’power-by-the-hour’ where the customer is charged for the power from an engine rather than buying the engine itself while Rolls-Royce provides all the support, including maintenance, to ensure that the engines continue to run efficiently and safely.
These are being based on a long-term contracts, which in some cases these can stretch to around 25 years said Professor Baines.
The reason why such businesses have started down this route is to try and block their competition. Essentially, if you can get your customer onto a long-term contract you effectively lock-out the competition.
But there were other reasons too. A long-term relationship such as this allows a business to get to know their customers in a lot more detail, which opens up more value-adding opportunities through greater collaboration and innovation.
But there are certainly challenges as Professor Baines was at pains to point out.
He talked about the difficulties of determining and driving ownership of services initiatives within the business; demonstrating the value of long-term services contracts to customers as well as trying to changing the culture of a production-based company to one with a customer-centric, service led approach.
Beyond this such companies also have to change the geographic location of their manufacturing sites, moving them closer to customer and in some cases co-locating, adapting performance indicators as well as getting the right people in with the right customer service characteristics to make this a success. Professor Baines said that you need people with a strong customer service background because they are the ones who will be able to successfully manage the relationship.
What lessons does this have for businesses and their procurement functions in other industries?
It suggests that by focusing on the needs of your customers and considering what other services you might be able to offer you could provide a real boost for the business. It is also possible that it could work in the reverse up the supply chain and allow your suppliers to offer you more value-adding services.
This article is a piece of independent writing by a member of Procurement Leaders’ content team.