The pros and cons of the “as a service” business model in manufacturing

While reading, an article in The Manufacturer on Volvo CE, I was struck by just how much the trend to an as a service business model is progressing in the manufacturing industry. It has been around for some time with Rolls-Royce’s “Power by the Hour” approach but has now expanded to a much wider community of adopters including Kaeser Kompressoren’s SIGMA AIR UTILITY “Air on Demand” service.

This trend has risks and benefits to the manufacturer and, of course, the buyer. From the perspective of manufacturers, the service will have value in that it provides a consistent revenue stream but the risk if the service isn’t available now sits with the manufacturer (as service provider) rather than the buyer.

Traditional Model Extended Warranty Total Service
·Equipment Sold ·Equipment sold ·Customer pays to use equipment – OEM is responsible for all service costs
·OEM Focused on maximising spare parts revenue ·Customer incentivised to buy extended warranty ·Lifetime service costs directly impact OEM P&L
·Customer may do own maintenance ·Dealer network may rely on revenue from warranty and servicing ·Downtime = zero revenue for OEM

Moving from a Traditional to Service-based Model

This move to a total service model is made possible by IoT and analytics, which enable the equipment to be part of a broader ecosystem. Data is created that can be analysed to drive predictive and preventative maintenance of the equipment by better understanding how it is being used and helping to form part of a digital supply chain to get the right equipment to the right place at the right time to fulfill the service demand.

For the buyer, there is known cost for a known outcome and no capital outlay. There is a risk around reliance on the service provider and a potential increased focus on planning the usage of the ‘service’. For the service provider, there is a defined revenue stream, potential reduction in spare parts held ‘in stock,’ image protection (only certified spare parts are used) but the capital risk impacts the accounts.

This trend will continue and more and more manufacturers will step into the service provision market to gain new revenue streams or risk competitors or new starts doing so.


Philip Mullis headshotPhil Mullis is DXC’s chief technologist for the manufacturing, construction and services sector in the UK and Ireland. He’s a sought-after advisor to the regional technical and business communities, bringing technology insight to transformative solutions that drive the outcomes that matter to the enterprise.

RELATED LINKS

Automating the way forward just like Henry Ford

Digital transformation: Leveraging DXC’s Automotive Center of Excellence

Comments

  1. The small Industries have need to establish relationships with suppliers and extend their dragnets to parts of the global business world as an innovative expansion procedure. Manufacturing companies in the United States are getting used to operating only within their geographical position which does not encourage business success in a global world.

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