Wednesday, February 5, 2014

Integrating Manufacturing and Service Revenue Development

Manufacturing is often seen as selling a product but the competitive market indicates they must be more. As global competition increases, product innovation cycles become faster, and imitators copy products companies should seek to create beyond the product. Research by Ivanka Kastalli, Bart Van Looy and Andy Neely from the University of California Berkeley discussed how the concepts of service adoption and service coverage add value and competitiveness.  They analyzed a large international company with growing sales and significant revenue from manufacturing and service functions.

Manufacturing is not simply the building of products but also the raising of value and public interest. A service mentality helps executives understand where their value lays and what customers need in both current and future products to continue sales. The market must continue to drive the options, design, and utility of products.  

To create greater service oriented manufacturing paradigms requires the ability to develop stronger service measures that help influence the product design and development. Even though different metrics are used for manufacturing and service enhancement they have not been well integrated together. This creates two different mindsets when it comes to production and follow up that can damage long-term business. 

The concept of service adoption and service coverage can be seen as breadth and depth. Service adoption entails a quantitative understanding of the amount of customers buy services. Service coverage can be seen as qualitatively understanding the perceived benefits of the service to their customers. 

When customers purchase services they naturally raise value beyond the production of the unit. When that customer buys more services and is satisfied with that service they are engaging in a qualitative assessment with real financial consequences. If companies can encourage more customers to purchase services and higher levels of these services the organization has increased their earning potential beyond the product. 

Open innovation can encourage service development and effectiveness. It affords an opportunity for the customer to provide input on the product and service as well as be a co-creator. When this occurs, business has a better perspective on the overall needs of the customer in a way that is tangible and revenue producing. 

The researchers used Atlas Copco as their case study. The company is in 100 countries, has over 14,000 employees, annual revenues over $4 billion, 40% of revenue from service with rising sales. The first shift in thinking must entail the movement from thinking about service as a support function to an actual revenue generating investment. The second is that conflicting performance measures between product and service need to be bridged to give a better perspective of total organizational development. The customer and their needs should be the driver of the business and understanding what makes them motivated to purchase and willing to return is half the business battle. 

Kastalli, I. et. al. (2013). Steering Manufacturing Firms Towards Service Business Model Innovation. University of California, Berkeley, 56 (1).

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