What are the Three Levels of Servitization? (2024)

This article will discuss:

• The three levels of servitization and what they consist of
• The different parties associated with servitization and the responsibilities it places on its stakeholders
• The system required to deliver servitization of the machine and the service-delivery processes associated with the three levels

The manufacturing industry has continually embraced concepts that increased its ability to innovate and meet its customers' changing needs or requirements. Adopting digital transformation- solutions to implement Industrie 4.0 business models is one example of the importance manufacturers place on optimizing traditional processes to improve productivity. Likewise, servitization of the machine offers manufacturers a pathway to generate a constant revenue stream over decades.

Introducing the three levels of servitization

Servitization refers to offering services alongside produced items. Relatively speaking, servitization is not a new process; manufacturers have commonly utilized one or a couple of servitization processes to improve revenue streams. For example, a manufacturer that provides equipment spare parts to customers to ease repair and maintenance activities offers the first level of servitization, which is the basic level.

The other levels of servitization include intermediate and advanced servitization. Basic, intermediate, and advanced servitization require a manufacturer to provide some form of service alongside its produced goods. For basic servitization, the service provider offers traditional services such as repair kits, spare parts, and tools at a cost alongside the produced goods. Manufacturers interested in offering intermediate services require the provision of continuous after-sales services such as maintenance packages or remote monitoring services that can run for extended durations.

Advanced servitization is the third level, and its actualization is relatively new compared to the other two levels. Advanced services are defined by contractual agreements – a product-service system is developed by the service provider for the customer’s use. Unlike basic and intermediate services, for which production systems are the most integral aspect of the services provided, advanced servitization requires a product-service system. Here, production systems refer to the shop-floor environment and how it is designed to support the manufacturing of original equipment or goods.

The product-service system involves developing an optimized service capability alongside existing production system. This merger is completely equal; neither is expected to trump the other or function outside the other. Developing optimized product-service systems was the major challenge manufacturing enterprises struggled with decades ago. Today, technological advancements make it possible for manufacturers to develop optimized product-service systems that effectively support the customer using the designed system.

The responsibilities associated with servitization of the machine

Successfully offering servitization of the machine requires the different parties involved in the service agreement to understand the roles they play within the contracted arrangement. In most cases, only two parties are involved with a servitization agreement – the service provider and the customer taking advantage of servitized solutions.

For basic servitization in manufacturing, customers generally purchase and own the equipment that services are provided for. The customer is saddled with the responsibility of ownership which includes maintenance, repairs, and any extended configurations. The services the manufacturer offers revolves around ensuring spare parts and tools can be purchased and used to manage purchased equipment.

Intermediate servitization also transfers equipment ownership to a purchaser of produced equipment. Depending on the servitization agreement, a good portion of the equipment management process can be servitized. The OEM’s responsibilities for intermediate services could include maintaining the equipment and providing information required to optimize its use.

Advanced servitization takes a different approach due to its reliance on a product-service system. Firstly, ownership of the servitized good isn’t transferred to the customer. Secondly, multiple parties can be involved in an advanced servitization contract. For example, a third-party financer can purchase the equipment and work with the OEM to develop a functional product-service system. Within this system, the responsibility of maintaining the equipment to ensure it functions optimally belongs to the service provider. The customer’s responsibility involves hiring the best hands to make the most of the servitized environment. The responsibilities of the servitization partners are generally codified within contractual agreements, and stiff penalties may apply to OEMs when servitized environments don’t meet with specified agreements.

The benefits of servitization of the machine

When considering basic servitization, the benefits revolve around developing multiple avenues to generate revenue. The spare parts, tooling, and other components associated with basic services are sold to the consumer with minimal follow-up concerning their use. The revenue-generation formula for basic servitization is intermittent and unreliable because customers can choose the option of purchasing spare parts elsewhere.

The monetary benefits associated with intermediate services are also intermittent but other benefits apply. In scenarios in which the manufacturer handles maintenance and data-capture activities for equipment users, the insight obtained from the use of equipment on the shop floor is used in different ways. The OEM relies on the gained insight to develop innovative products and solutions to meet the needs of its customer base.

Generally, advanced servitization contracts are extended and may run for decades. The extended contract may run for decades, providing OEMs with a more regular source of income compared to basic and intermediate servitization. OEMs offering advanced services also gain insight from shop-floor data captured through the use of servitized goods to optimize their innovative capacities and to develop optimized user schedules for prospective customers.

Conclusion

For the average manufacturer, basic, intermediate, and advanced servitization offers a pathway to generate revenue and improve customer relationships. The average manufacturer may already offer basic or intermediate services but must develop the product-system capabilities required to deliver advanced servitization. You can learn more about leveraging servitization of the machine to improve your business outcomes and revenue-generation strategies by downloading this whitepaper – The Introduction of Servitization and Product-Service Systems.