Value, not Price: The Future of Manufacturing
Image source: https://en.wikipedia.org/wiki/Technology_in_Star_Wars#/media/File:Brain-Controlled_Prosthetic_Arm.jpg
Manufacturing and Engineering Magazine #472
By Christina Diaconu
The UK manufacturing industry is facing a new trend. Companies that for decades have traded on product design now need a new tactic to differentiate themselves from increasingly powerful global competition.
In the digital age, the way to gain customer stickiness and new orders is not just being innovative with your products – it’s how you bring them to market. It’s how you serve your customers. It’s how you help them generate value.
The best manufacturing business models are now all about customer value. Companies need to be more than just a part of the supply chain, or even a partner in their customers’ business. No – they need to be a friend. They need to develop an emotional attachment with their customers, to understand what motivates them, what they require from a business relationship, what they value.
Manufacturing – as with all industries in the digital age – is no longer just about products. Apple iPhones aren’t that much better than Android devices in terms of hardware, but they’re stickier because Apple knows how to sell a valuable experience and a lifestyle. You buy Apple because it serves up more than a phone. Outcomes, not products, are the arbiters of success in today’s market.
Building outcomes, not products
But how do you pivot to focus on those kinds of outcomes? In essence, they’re based on what the customer perceives as value – so that’s what you need to know.
Let’s look at a worked example. One of the largest industrial manufacturers in the world used to sell discrete products – customers purchased a product and a service contract and that was that. But that age-old arrangement caused inherent issues for the customer.
One of its flagship products was gas turbines. Companies that bought these turbines had to own the asset, dispose of the asset and handle the downtime when it came time to pay for servicing. It’s an expensive business owning one of these machines. It got in the way of the outcome and the value.
The company recognised all of this and rather than changing the product, changed its go-to-market strategy. Now, instead of selling turbines, it sells a lease of a turbine. It takes ownership of the natural challenges that come with hardware and adds new benefits for the customer on top.
For example, because it owns the lease, when it comes to service the turbine, rather than incurring 45 days of downtime, it simply takes the old one away for a re-fit and provides another new one to be used straight away while the old one’s being fixed. The specific unit no longer matters – what matters is the outcome for the customer.
This leasing model is being seen right across the manufacturing industry. Boeing doesn’t own the engines on its planes’ wings, but Rolls Royce (which does) has access to real-time data on the jets which enables it to provide the best possible maintenance regime. This sharing of risk and project outcomes by customers and manufacturers can be a win-win when it’s done right – the customer has fewer costs and the manufacturer has a much stickier relationship with them.
That model might sound promising but it’s easier to say you are customer-centric than it is to be customer-centric. Unless you’ve got a way of quantifying what you’re giving customers, how do you know that you’re adding value? Measurement is key to a successful customer-centric business model.
What we’re seeing as a result is that manufacturers are starting to implement lots of specific KPIs – from the CEO’s shareholder return targets right down to the shop floor’s hours and output. All of these are then linked back to what the customer needs so that the company can demonstrate how it’s realising that customer value.
It’s important to make sure that you’re tracking the right KPIs, though. Cloud-based ERP software allows companies to capture all of their interactions with customers to generate insights on everything from gross profit per shipment and ROI to time to fulfil an order and the number of customer rejects. Capturing all that information in a unified ERP platform means that you can measure it and decide where the focus of your efforts should be.
Pushing for change
There are some practical issues to be addressed when transitioning to a customer-centric manufacturing model. Leasing big products like gas turbines can be challenging in terms of cash flow – the manufacturer incurs costs in making the products, and then recoups those costs over a much longer time than it would with direct sales.
It’s the same leap of faith that software providers have had to go through when moving from license sales to SaaS subscriptions – you go through a period of cost when you’ve got a lot more flesh in the game than you had previously. Take Zipcar as a non-manufacturing example: it had to buy thousands of cars before it could recoup costs, which is happening over a very long time.
If you’re asking yourself at this point why a leasing model is so great after all – there’s plenty of good news. If you look at it from a customer position, leasing eases their cashflow because they don’t need to find a huge amount of money to buy the product.
But that’s also a benefit for the seller, who can onboard new customers with much greater ease. Not only that, but once the new model is up and running, cashflow becomes a lot less peaky. Investors like subscription models. What’s not to love about controlled recurring revenue? If you have a portfolio of five-year leases, for example, you know exactly what cash is coming in and when.
The most successful manufacturers are not selling on price – they’re selling on value. Focusing on customer value is the only way that UK manufacturers can differentiate themselves from low-cost rivals worldwide. The technology is available to make it work – all that’s required now is a little vision and action.