How ‘Product As A Service’ Manufacturing Is Transforming Business Models
Colin Masson, Global Industry Director at Microsoft, spoke to PSFK about the digital transformations giving rise to a customer-centric business model and the servitization of manufacturing
Manufacturing has long prioritized engineering and efficiency at the product and factory level, but a third element is steadily gaining importance: the customer. To differentiate themselves, manufacturers are increasingly offering not just a product, but a ‘product as a service.’ This customer-centric business model, designed to meet specific needs and lend the expertise of skilled workers, signifies a major shift in the industry. It’s enabled by advanced, immediate means of collecting feedback and applying it to the production cycle.
PSFK spoke to Colin Masson, Microsoft’s Global Industry Solutions Director for Manufacturing Solutions For Cloud and Enterprise about how digital solutions are changing business models. As the technology becomes cheaper, manufacturers can leverage the power of data and IoT devices to stay on top of feedback and in tune with the market, achieving a greater understanding of how consumers use their products, what works and what doesn’t.
The excerpt below is a snapshot of the analyses provided in the Future of Manufacturing report. Click here to download the full free report, which includes expert insights, key scenarios and enabling technologies.
First would you mind briefly explaining your position at Microsoft, and any industrial verticals that you operate in?
I’m the Global Industry Solutions Director for Manufacturing Solutions For Cloud and Enterprise. In other words I focus on working with our internal product teams and partner ecosystem, and directly with manufacturing customers on solutions that address manufacturing needs.
Could you explain the global effects of digital transformation or benefits that you’re seeing with digital solutions?
I would say the impact we’re seeing is greater in discrete manufacturing industries like high tech, automotive, industrial equipment and aerospace, than perhaps in chemical or food and beverage. Although even there, when I start to look at the consumer side of the business, there are still things they can do in terms of how they deliver products or get new insights using vending machines and smart coffee machines, and things like that, those kind of proxies for how they can still make use of the digital technologies today.
I think that the real transformation I think we’re seeing, and why manufacturing is perhaps undergoing a greater transformation than some other industries, is that they are not just transforming in terms of their use of technology, but their business models are transforming.
I think the big change that’s going on is really putting the customer experience at the center of what traditionally has been an industry that focused more on engineering than necessarily, are we making the right things, and what is the customer experience in terms of using them?
They’re really making a transformation from selling products to product as a service by delivering smart products to their customers—and they’ve done that for years, arguably, so this isn’t entirely new. We’ve been on a journey to delivering smart products to our customers for a long time, and we’ve had smart factories for a long time. What’s different now is the scale at which we can leverage technology. It’s not necessarily that this is new, it’s the fact that the price point is new.
A lot of the innovation in robotics is coming from accompanying services, or the ability to leverage advanced analytics, typically from the cloud, and combining that with the mechatronics in the robots (sometimes I hear this referred to as cognitive mechatronics). The combination of the evolution of manufacturing technologies (sometimes called operational technology or OT) and IT have converged to the point where we really can talk about a digital transformation.
[Manufacturers are] used to selling products. Now they’re increasingly selling at the basic level: selling add-on service contracts, but many are going well beyond that to do the product as a service model. If you look at Ecolab, they are really selling the efficient use of water. They happen to deliver water treatment facilities, and in their case also cleaning chemicals, et cetera, to go with that. The way they actually sell is delivering that water-saving service.
That’s the real digital transformation that I see in manufacturing. At the basic level, it’s putting the customer first, but what has driven that is the ability now to get that deeper customer insight and to provide service at a scale because of technologies like the Internet of Things, plus the ability to remotely monitor those things.
Manufacturers now have the ability to predict failures and, on top of that, be able to offer that first level of service. They’re starting to think about how do they build a better experience, how do they make sure that the customer is getting value from what they’re delivering, and feeding that back.
Can you elaborate on the effects of servitization in terms of customer service?
Servitization is a key, I think, that almost anyone we talk to is looking at [implementing]. If you look at what manufacturers are experiencing, they’re all still making high-quality products, yet their margins are continuously getting squeezed because it’s increasingly difficult to differentiate at the product level.
So they’re having to find ways to either maintain margin or hopefully increase margin by coming up with these new service models, where the margins are higher and the customer is willing to pay for that service, partly because there is a skills gap in manufacturing—that’s another key theme that I think we tend to forget about. We have a growing skills gap in manufacturing, and in supply chain skills as well, and yet we’re talking about increasingly complex manufacturing needs and supply chain needs.
How we are going to address that is through many of these digital technologies, but that’s also why in many cases, other manufacturers are willing to pay a premium—or obviously if you’re a manufacturer serving a consumer, they’re willing to pay a premium—because of that skills shortage. They know they can’t do it themselves, and if you’re offering a service that basically means you’re going to worry about how to maintain and service that piece of equipment, and you’re going to be able to do that with your expertise, that commands a premium.
Servitization is also a reflection of the skill shortage that we have today in manufacturing and supply chain. Everyone talks about a kind of industry 4.0 and making our factories smarter. That’s all still very valid because we haven’t solved those problems. You do still need more flexible factories because part of this whole servitization also means we are making more configured products, rather than we’ve got one or two products that we make to stock and try to sell, we’re basically introducing more configurations of the product, more options to the customer.
That has to be accommodated back in core manufacturing and supply chain. They still have to be able to switch to as many switchovers that they need to do in manufacturing, and they have to be able to handle the segmentation of that in their supply chain. You still have manufacturing, and you still have a supply chain, plus all of these pressures of servitization in manufacturing, and the fact that you have to differentiate with those services and probably highly configured, tailored products and services to your customer. That still puts huge pressure back on manufacturing.
How can servitization enable one-off, custom products for manufacturers?
At the end of the day, a manufacturer has to deal with that range of configuration options. Think about the number of options you have when you go to buy a car. And extreme cases, if you think about industrial equipment like Caterpillar. Those can be million dollar machines that are configured very precisely to the specific needs of a mine, or if it’s for snow-clearing, you basically configure what kind of tracks it’s going to have, what kind of duty it’s going to serve, what kind of grab hands or shovels it’s going to have on it.
All of those things still tend to drive more of what we call engineered-to-order or configured-to-order products, which are that broader range of things that a manufacturer needs to create to meet that specific customer need. Today, manufacturers have to make a wide variety of configurations or what’s often called SKUs, stock keeping units and they also have to be able to service and maintain them afterwards. The more of those you have, the more parts you have to have.
The supply chain complexity and the impact that goes back to manufacturing as we get more and more focused on delivering highly customer-specific services continues to grow. The pressure on manufacturing is growing as we go through this culture shift to focus on the customer, and it breaks some of the traditional givens in manufacturing. It’s no longer about lean, leaning out your manufacturing or your supply chain to the point where you have no flexibility, because now we need a lot of flexibility. We are making more and more products and having to adapt to a lot of volatility in demand.
In terms of outbound logistics and the delivery stage of the supply chain, how can IoT or tracking technologies enable more agility?
Whether it’s RFID technologies or IoT technologies in our supply chain, we are obviously getting to that point where we can start to get a better end-to-end view of other supply chains. Again, it’s not entirely new. Obviously, we’ve had RFID for a while. What is new, again, is the ability to put cheaper and cheaper sensors onto the assets or containers that are used to move products around, or on the products themselves.
Even more so, the cost of collecting and analyzing IoT or RFID data has gone down. Using things like Azure IoT Suite into the cloud, and then being able to use advanced analytics on top of that to look at and provide insight into anomalies in the supply chain: that’s kind of what’s allowing us to rethink how we manage end-to-end supply chains.
What that lets you do is combine that data—and not be constrained by point of sales data that may come from a retailer. Some of these products are obviously in the B2B market. Some of them go through distributors, but end up at a customer location. Once those are activated and installed, and I am remotely monitoring them, they can tell me how they’re being used, so I can start to do things without necessarily having intermediaries collecting data and perhaps not sharing it with me.
I can start to anticipate areas and usage patterns because I can now bypass all those previous intermediaries and get directly to monitoring the end product. That’s what excites a lot of manufacturers. Traditionally, they’ve had to use distributors, or if they are going to consumers, maybe they’re also having to go through retail, or they’re going through dealers. They weren’t necessarily getting that data, or by the time they got it and analyzed it, it was too late, and they’d already been hit by a spike or an unanticipated drop-off in demand for their products.
Now, manufacturers can get [data] directly. If you’ve got a car, you now know what mileage they’re doing on that car, because they are connecting to you directly. They’re not connecting to the dealer and waiting for the dealer to service that car and order parts. You can actually start to get a picture of how your cars are performing, their wear and tear rates, any failures that are starting to happen and any patterns in that failure. You can get all of that, and that can feed back into your supply chain in terms of parts management, if that’s what makes sense to you.
The 30+ page report includes:
- Insights into the evolving manufacturing landscape and how to prepare for increased supply chain pressure
- 5 forward thinking scenarios illustrating the digital landscape
- 10 trends shaping connected manufacturing
- Four industry disruptors influencing makers
- Actionable takeaways for business and information technology decision makers
In partnership with Microsoft, PSFK presents the Future Of Manufacturing report, an opportunity playbook that explores a new era of supply chain management and the technologies that enable faster, more agile manufacturing operations. Tune into psfk.com for a 10-week in-depth look at expert insights, key findings and detailed scenarios, or download the full report here.