Manufacturers could learn a few tricks from sectors like banking and healthcare to boost their competitiveness. That means offering solutions and services that give their products extra value. By Ben Sampson
The traditional way of making money from manufacturing is straightforward. Make the stuff people want and sell it to them.
Things changed when the big bad global economy arrived. Many UK manufacturers were unable to compete with cheaper set-ups in developing countries. The mainstream response was to adopt methodologies like lean manufacturing and Six Sigma. Waste had to be cut from flabby western processes, defects minimised.
But what if that isn’t enough? What if you’ve cut and cut, made all the improvements, but still need more? What if, as Martin Spring, senior lecturer in operations management at Lancaster University, puts it, you’re tired of the “diminishing returns” and “scrapping over the last few percentage points of savings”?
Spring has an alternative, a way of capitalising on the latent manufacturing expertise in your firm to make more money. His current research focus is on how manufacturing firms can borrow ideas from service-orientated sectors, like healthcare or banking, to create new revenue streams. The idea is sometimes called product service integration, or business model innovation.
Spring admits that the notion that manufacturing firms should become service companies is one that upsets “dyed-in-the-wool manufacturers”. But in sink-or-swim modern times there are not many manufacturing firms that can survive on dye, or wool, alone.
He starts by identifying the way manufacturers determine prices for their products. Cost-based pricing and market-based pricing of products, the norm, are both subject to change from external factors, such as cheap labour. Value-based pricing of a solution, he says, is a more controllable way of making money.
Traditionally, value-based pricing means building in-field maintenance and servicing into a price. Rolls-Royce’s aeroengines are the classic example of this, achieved through sophisticated condition monitoring and predictive maintenance. These extra services add value to a product by utilising a company’s skills and knowledge in a very transparent way.
But adding value needn’t just be after-sales maintenance and warranties. It can also shape a product at the front end, Spring suggests. Some firms, he believes, do engineering design and product customisation for free, but make the mistake of basing prices on cost or market terms. “Making money from selling things is often the only revenue a company has because it can be very hard to work out how to charge for the clever stuff,” he says.
“Lots of companies think of themselves as a manufacturing firm with a few engineers on the side. Instead, maybe they should think of themselves as an engineering firm which happens to have some production facilities.”
A good example is a paint company Spring knows that was looking to supply to the shipbuilding sector. The company couldn’t win on cost terms. Instead it looked at the customer’s requirements – which are to increase fuel efficiency and reduce carbon emissions. The firm developed a paint that uses nanotechnology to reduce the drag on ships’ hulls as they travel through water. By examining the customer’s needs, the firm soon won its first contract. “They were able to charge twice the amount per litre,” adds Spring.
Adding value at the front end can also be about a company’s place in the supply chain. Networks of firms can collaborate to produce highly complex products quickly. For example, Spring describes an aerospace firm able to produce short runs of complex components very fast. It achieved this by leveraging its understanding of the processes used to design and engineer the components, and through its contacts in the supply chain with computer-aided design and forging companies. He says: “Many firms offer services as an afterthought. But making a part or product should be almost incidental to developing a solution for the customer.”
Another way of capitalising on your operational capabilities is to sell your professional reputation. A company can hold regular face-to-face meetings, provide video diaries of manufacturing processes, or provide models, to instil confidence in the client. “All the good engineering practice needs to be packaged up and sold as an asset. It’s difficult for a jobbing shop on the other side of the world to compete on those terms,” he says.
“These are particular ideas, not some woolly service mindset. It’s supply networks, working out pricing based on value, understanding the customer’s processes and problems. Adding value to your product.”
The remaining practical question, though, he says, is who does the business innovation in your firm. “The R&D department develops new technology. The engineering design department – OK. But who does the business model development? It’s not a manufacturing or a marketing issue. It involves people across the whole organisation.”
Is there room for a business model manager in your office?
© PE Publishing, 10 March 2010
