Transcript Slide 1

Servicization: Managing Mission Critical Products As
Services That Generate Customer Value
Morris A. Cohen
The Wharton School, University of Pennsylvania
Vinayak Deshpande
Purdue University
Geert-Jan van Houtum
Eindhoven University of Technology
SCTL, Costa Rica
July 2009
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Theme:
Products as Services
and
Services as Products
Servicization
=
converting a tangible product into a service
associated with the value generated by the
customer through product utilization throughout
the after sales period
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Supporting the customer’s after sales experience
provides an opportunity for sustainable competitive
advantage
80% of cost
determined in
design
Customer
Value Creation
Design
Post Sales (Support)
Produce/Fulfill
Satisfaction
determined post
sales through
product use
Product Life Cycle
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After-sales service market
• Industries: Aircraft, semiconductor, automobile, defense,
medical devices, oil and gas,...
After-sales services represents: 26% of total revenue, 46% of
total profits (Sources: AMR Research, Aberdeen Group - 2002, Deloitte - 2007)
• Commercial & military aircraft:
Customers: airlines, military, other institutions
CONTRACTS
Prime
Repair and
maintenance
Supplier 1
Avionic
system
Supplier 2
Engine
Supplier 3
Mechanical
Supplier ...
Supplier n
Landing gear
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Yet, the potential to capture additional service
business is enormous
After-sales
service market
After-sales
spare parts market
40% Served
60% of installed base not
being served
70% Served
30% of installed base not
being served
And, the “non-captive” market represents a much larger opportunity
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Servicization Benefits
• Higher profitability due to higher margins
• Lower risk revenue stream over the entire product lifecycle (captive consumers)
• Source of differentiation from competition
• Deeper understanding of customer’s technologies,
processes and plans – knowledge that rivals can’t easily
aquire
• Alignment of incentives for sustainability and
environmental impact (e.g. painting automobiles)
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Servicization in Practice
• Extensively used in the chemical industry, emergence of
Chemical Management Services
• Performance Based Logistics (PBL) contracts used in the
military
• IBM redefining itself as a one-stop provider of services
such as systems integration, hardware and software
expertise, etc.
• Xerox positioning itself as “The Document Company” by
selling “document management services”
• CAT logistics offers its capabilities in service parts
management and logistics to other customers
• Airproducts and Chemicals delivers gas to INTEL fabs
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Main Issue 1:
How should “servicization” of
products be managed?
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Issue: How should service
contracts/relationships be structured?
Examples:
-“Power by the hour” contracts pay engine
manufacturers based on flight hours flown
- “Product availability” contracts used in the
aerospace and semi-conductor industries
- “Downtime” penalty contracts used by Intel
with its equipment manufacturers
- Flight “On-time” performance used as a popular
metric of service in the airline industry
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T&M vs Performance-Based Support
Time & material
Conflicting Incentives
Performance-based
Aligned Incentives
Buyer
Supplier
Service
Provider
Material
Products
Wants to
increase
Buyer
Value of Services
through Products
Wants to
decrease
TIME & MATERIAL CONTRACTS:
Payment based on resources
consumed in the service
Wants to
increase
Wants to
increase
PERFORMANCE-BASED
CONTRACTS:
Payment based on flying hours
generated by the service
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Main challenges:
•
Management of resources
–
–
•
Optimization of service supply chain (parts, repair, support)
Outsourcing and asset ownership
Design value (performance) based customersupplier relationships
–
–
–
–
–
Measures of performance
Allocation of risk and risk premium
Rationing over mutliple customer segments
Pricing (product vs. support service)
Contract terms
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Main Issue 2:
Delivery of Services
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Issue: Customer differentiation
“80-20 Service rule: 80% of profits come from 20% of customers”
“ At a utility company, the top 300 customers are served by six
reps while the bottom 30,000 are handled by one rep”
“First Union codes its customers as green or red. Green customers
are profitable while reds are the money losers”
“Starwood Sheraton provides their best service to platinum
customers”
Armed with data, companies are learning that it makes
financial sense to segment customers.
Question: How should the service network be structured
when customers have differing service level requirements
and different willingness to pay for service?
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Classical Examples of Service Differentiation
Example 1: Yield management in the airline industry
-Common inventory of seats sold under
multiple fare classes
Example 2: Hotels and car rental companies
- Multiple customer classes based on the
price/service preferences
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Supply Chain Example:
Third Party Logistics
3PL Provider
…………..
Customer 1
Customer 2
Customer n
95% Fillrate
90% Fillrate
98% Fillrate
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Resource Strategies for multiple customer
classes
95%
95% and 85%
95%
85%
K
1. Separate
Resources
2. Completely
pooled
resources
3. Pooled resources
with differentiation
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Question
Should the resources for serving different
classes of customers be pooled or separated, or
should hybrid strategies like rationing be used to
manage differentiated service requirements?
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Main issue 3:
Impact of Service on
the Design of Manufactured Products
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Vanderlande Industries
•
•
•
–
–
–
–
Main office: Netherlands
Yearly revenues: 600 M€
Products:
Baggage handling systems (London
Heathrow T5, Amsterdam, Hong Kong,
Paris, Munich, …)
Parcel and Postal (UPS, DHL Leipzig, …)
Automated solutions for warehouses
Services: from basic services to full
service, generates 15% of the revenues
and grows with 20% per year
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Total Cost of Ownership (TCO)
Acquisition
Costs
TCO
Maintenance
Costs
Project Costs
Proj. Man.
Costs
Sales
Charges
Engineering
Costs
Init. Spare
Parts Costs
Equipment
Costs
Costs of
Capital
Site Works
Labour Costs
Direct
Labour Costs
RMR Costs
Operating
Costs
Downtime
Costs
Helpdesk
Costs
Indirect
Labour Costs
Spare Parts
Costs
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TCO calculations for one specific
system
Acquisition
Costs
23%
Downtime
Costs
48%
Maintenance
Costs
27%
Operating
Costs
2%
 Used life span: 20
years
 Downtime Costs =
50% of TCO !
 Looking at TCO is very
relevant!
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Major issue
Possibilities to decrease TCO:
More reliable components, use of remote
monitoring and diagnostics, building in redundancy,
modular design, more preventive maintenance, …
Main questions:
• How is a product’s design affected by its TCO?
–
•
Important factor: Presence/absence of service contracts
Should firms build different products for customers
with different service and cost requirements?
–
OEM’s have to serve innovative and conservative customers
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Thought Experiment & Questions for discussion
Think of a product that is sold primarily as a material
product, not a service. Identify the value provided by
the product and question whether it can be sold as a
service. Brainstorm the following questions for the
“servicization” of this product.
1. How should the service contract/relationship be
structured to align incentives?
2. How should the service supply chain be structured
for managing differentiated service requirements?
3. How is the product design affected by “servicization”
and TCO?
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