Manufacturing and Services - Part 5

In an earlier posting, I mentioned how manufacturing companies, such as Deere, more and more see themselves as providing "integrated customer solutions" rather than building products. I recently came across a study by Deloitte on The Service Revolution: Manufacturing's Missing Crown Jewel that explores this trend. Their findings "point to a large untapped market for the manufacturers that can master the elements of superior service."

Services are already a major part of many larger manufacturers. As the report notes, "Across the manufacturing companies that we studied, service revenues average more than a quarter of total revenues but deliver 46 percent of the profits." They cite a number of examples, including the the now classic example of Rolls-Royce jet engines.

One of the example used is that of Siemens:

Leading providers such as Siemens AG Medical Solutions make service central to their corporate strategy, designing the service business around customer requirements in order to create customer satisfaction, loyalty, and business performance.
Siemens' customers increasingly expect to pay for equipment uptime. To achieve this, Siemens harnesses sophisticated technology and advanced processes and workflows, combining online, real-time repair information, inventory management, pricing and invoicing with advanced logistics systems to give service technicians the right information and parts when and where they need them. For example, the company is using simple lockboxes to store parts near customers, reducing the travel time for high-cost and highly valued service technicians. The best way to assure high efficiency of field service engineers, they have learned, is to synchronize closely the arrival of a part at the drop-off point with the scheduled service job of the engineer at the client site.

Another is Caterpillar:

Caterpillar Inc . is a master of the service game, with an inventory of more than half a million spare part numbers and a huge worldwide installed base of earthmovers, engines, excavators, and other equipment that in some cases needs service for 40 years or more. Yet Cat can ship its customers exactly what they want within 24 hours, 99.7 percent of the time.
Cat has done so well on the service front that it has extended its capabilities in service parts management and logistics to external customers. Forming Cat Logistics in 1987, the company set out to build a global growth business and to capture more of the available market for service parts management. Today, Cat Logistics counts among its customers blue-chip companies such as Ford, Saab, Toshiba and Honeywell. It employs more than 9,000 logistics professionals across 25 countries and six continents, managing more than 18 million stock-keeping units (SKUs) and shipping more than 160 million orders and 16 billion pounds of freight each year.

But both of these are examples of after sales services and subsidiary operations. Neither are about the elusive "integrated customer solution."

A better (and also now classic) example is the iPod where a product (a MP3 player) was married to a service (easy downloading of music via iTunes) to provide a seamless customer experience.

Unfortunately, the report leaves unstated (and unanswered) one of the biggest question of all: why manufacture at all. After all, in the case of subsidiary services, such as the example of Cat Logistics, there is no connection between the service and the manufacturing. In the case of the iPod, Apple does not feel the need to actually make the iPods themselves but rather have suppliers make the product.

The reason to still make things is found in the after sales service support model, such as Rolls and Siemens. The report mentioned a number of companies who thrive in the after market of service and parts where there a direct linkage between service and manufacturing. This is a variation of the old "give away the razor and sell the blades" approach.

However, too many manufacturers apparently still don't get this. According to the report, "only a few companies effectively include service management issues when making decisions about product innovation and product life cycle management." Companies seem still fixed in the industrial age mentality of turning out a large volume of a commoditized product. Reducing cost is everything -- which leads to the never ending hunt for the lowest cost production location, even if it ends up costing more in terms of supply chain management, quality and other factors.

Here is a case where government policy can help. We need more research on the service-manufacturing linkage. That would be an excellent part of the "services sciences" agenda. We also need to instill this notion of the fusion of manufacturing and services into the Manufacturing Extension Partnerships. The MEPs were on the front lines helping small and medium size companies during the quality revolution. They need to be on the front lines of the innovation and "customer solution" revolution.

The bottom line is that there is no reason why manufacturing can't flourish in the United States. But it has to be a manufacturing sector that is different from the past. a few companies have understood and exploited the linkage between manufacturing and services. Our public policy needs to be geared to helping more make that transformation.