By Judy Cubiss, Director and Global Marketing Lead for Industrial Manufacturing, SAP
Midsize manufacturers may have benefitted from highs in overall demand after the pandemic. But a steady rush of supply chain disruptions, economic turbulence, rising inflation rates, and labor and other resource shortages is creating considerable pressure on future demand and the revenue margins of each item they produce.
To drive future growth and differentiation in this environment, 52% of midsize manufacturers view service-based business models as an "important" or "very important" strategy, as revealed by IDC research commissioned by SAP. Respondents shared with IDC the variety of models they're supporting, such as installation, maintenance, field service support, operational support, predictive or preventative maintenance, and usage-based and anything-as-a-service (XaaS) offerings.
However, more striking is how organizations are planning to or currently offering all these different types of services – and expect to continue doing so in the near future. They are achieving this level of business model diversity by increasing their operational effectiveness and having the right digital tools and capabilities in place. According to IDC, surveyed organizations recognize that they need to close gaps in supply chain visibility and resiliency so they can see market and organizational shifts in time to react efficiently and support new business models.
Creating dynamic, sustainable revenue streams
Looking at current economic indicators, margins on new equipment will continue to be anemic for the foreseeable future. In fact, customers are withholding investments in new industrial equipment to focus more on preserving cash, lowering capital spending, and meeting sustainability goals to protect their short- and medium-term interests.
This means customers place more value on services that maintain and extend the value of the equipment they purchase – possibly even more than the product itself. Continuous delivery of a proactive and immersive service enables manufacturers to replace one-time transactions with monthly transactions monetized by usage, throughput, uptime, or utilization.
Releasing new equipment and products with embedded sensors can help create a connected, data-driven ecosystem that supports a service subscription offering. This approach allows manufacturers to deliver more value to their customers by enhancing their outcomes, increasing their output, and minimizing their environmental impact and expand their margins while generating a steady revenue stream.
Innovating services based on their equipment and generated data that are equally valuable to their business and customers, manufacturers go beyond just delivering products. They open new sources of revenue and improve margins, sharing more risk and making sustainability a differentiator and fending off the risk of commoditization. More important, this experience inspires the kind of customer trust and loyalty that wins over new clients.
Finding service inspiration in the cloud
When done well, service-based business models can integrate all aspects of the customer experience – including the initial purchase, sales, installation, warranty, ticketing, in-house and in-the-field repairs, billing, and finance. And most midsize manufacturers are already on a digital transformation path that can help turn this opportunity into a reality from the production floor to the back office.
But one thing is sure: digital transformation is an ever-evolving journey. IDC reports that midsize manufacturers are particularly focused on four critical technology areas: scalable analytics, cloud solutions, business networks, and AI and machine learning.
For many manufacturers, adopting cloud ERP creates an environment where these new and updated technologies can be leveraged together. This effort helps ensure every step in the customer experience flows smoothly to the next without requiring additional resources and while lowering costs dramatically.
AGG Power Technology (Fuzhou) Co. Ltd. (AGG) is a prime example of a midsize manufacturer seizing this digital opportunity to future-proof its service model. The power supply equipment manufacturer and solution provider has operations spanning five continents and disparate information systems across multiple sites, challenging its 200-person workforce's ability to gain insights into its global operations and implement new solutions.
To address this, AGG revitalized its ERP infrastructure by migrating to the cloud to introduce a uniform digital platform. This approach significantly increased the company's capacity to efficiently operate, innovate, and compete in the dynamic global marketplace. Service improvements were also aided by enhanced customer visibility and collaboration from sales teams to dealers – leading to 50% higher sales management efficiency and a 98% customer satisfaction rate.
Growing revenue with inspired customer loyalty
The move toward more service-based business models is genuinely part of the overall digital transformation journey for midsize manufacturers. While it's a slow transition, this trend will gradually comprise more of the overall revenue generated by the industry – creating a spectrum of offerings that make new equipment and product sales more valuable to customers.
Through cloud ERP and cloud-based capabilities, manufacturers can leverage the latest technologies and best practices to continuously deliver the best customer experience. Doing so opens up more options that not only work best with their customers' budgets, but also clear a new path to ongoing growth for their business.