For Long-Term Success, Manufacturing Strategy Must Embrace Moving Downstream

Car mechanic working under the hood of a vehicle

As industry continues to shift and evolve, manufacturing executives across all types of industries are facing a lengthy list of challenges. Below are just a few of the most pressing obstacles.

  • Agility
  • Big Data fatigue
  • Complex systems
  • Competition
  • Cost pressures
  • Improving quality
  • Increasing throughput
  • Innovation
  • Regulation and compliance
  • Skills shortage
  • Tariffs

However, if you take a step back and think about what is really putting pressure on these professionals, it is revenue growth, cost reduction, and risk mitigation. This much shorter list has not changed in ages. What has changed are the solutions. And the solution with the greatest opportunity for success? Moving downstream.

What Does It Mean to Move Downstream?

The idea behind moving downstream is to look at why your customers buy what you are selling and determine what else you can sell them — or their customers — that is adjacent to your current products. And, of course, you must do this profitably.

Here is a compelling example. In 2018, there were more than 6 million new cars sold in the U.S. There were also about 121 million cars on the road. Would you rather be in the new car manufacturing business or the business of servicing and supporting all cars? The downstream businesses for automobiles involve providing gas, washing the vehicles, repairing them, supplying repair parts, selling insurance, repairing damages, crushing scrapped cars, training drivers, and providing data-based “mobility services.”

However, for most businesses, the thought of moving into a totally new business with totally new customers is off-putting. It involves a great deal of risk because of the new people you must hire, the new capital you raise and spend, and the uncertainty of acquiring and retaining new customers. It changes the risk from your current business into risk from an unknown, new business. Not very enticing!

Exploring the Possibilities of Servitization

But if other businesses or consumers use your products, then you have a viable alternative — servitization. According to Professor Andy Neely at the University of Cambridge, “Servitization is the innovation of organization’s capabilities and processes to better create mutual value through a shift from selling product to selling product-service systems.”

It is important to note that servitization is not a simple repackaging of current business practice; it is a totally new business model. It goes along with the change in the way buyers look at value. Their focus has migrated from value in ownership to value in use. And the longer they can use what they purchased, the more value they perceive they have received.

Here are a few examples of manufacturing companies adopting the servitization model. Consider Xerox. The company is succeeding in selling large copier systems by emphasizing how the copier and associated Xerox services will reduce expenses for labor, archiving, and retrieval, thereby lowering customers’ document-management costs. And Xerox, of course, provides the service and high-end consulting to help their buyers achieve the promised value. As a result, Xerox is building tighter relationships that lead to greater product sales. A wonderful cycle that keeps repeating.

The classic example lies in the area of jet engines. First Rolls-Royce and then GE Aviation introduced solutions including aircraft engines, extra sensors, data collection software, communications software, and analytical software that allowed the manufacturer to charge a “small” upfront price at the sale, and then a fixed price for each hour the engine is either available or actually powering an airplane. The manufacturers maintain their engines and only perform maintenance when data indicates that a failure is imminent. This reduces maintenance costs and unavailable aircraft time while eliminating the hassles of schedule changes and other related inconveniences.

Finally, think of an Apple store. You buy your iPhone, the employees set it up, migrate all your data from your older phone, teach you the tricks about how to get the most from your purchase, repair it, handle recalls, download software updates, and then take it back when you upgrade to the newest model.

Making the Change

While the benefits of servitization can be manifold, the implementation is hard work, and will involve all areas of your business.

Some of your team will resist the change, your executive committee may need lots of education and coaching, and there will be times when you ask yourself, “What did I get myself into?” But most companies feel that the startup issues were well worth the effort.

Image Credit: Standret / Shutterstock.com

Warehouse Space at Lowest Levels Since 2000Next Story »

Related