In today’s world of subscription models – streaming videos and music services, household essentials, food preparation – why not apply that concept to industrial machinery? Especially during a manufacturing slowdown when uncertainty is stalling capital investment, the concept – known as equipment as a service — could be a solution for new projects or could support ongoing or experimental projects.
The concept isn’t new. Rolls-Royce, for example, has long offered its expensive aircraft engines on what became known as a power-by-the-hour basis. But the idea is now gaining traction as the internet of things quickly comes to industrial equipment and the manufacturing sector.
The concept of equipment as a service is simple: Manufacturers pay a comprehensive fee for machinery uptime based on consumption or outcomes instead of making an outright purchase. This is different from traditional lease arrangements where although ownership of the asset is not transferred, the monthly payment is not based on the extent of use and is tied to a particular asset.
Since the user – a manufacturing company – does not own the equipment, the supplier is responsible for servicing, spare parts and repairs for the duration of the contract, which is generally long term. The customer is responsible for one consumption-based payment encompassing maintenance, spare parts, SLAs and other costs based on time used, throughput or some other quantifiable outcomes. It generally comes with a minimum commitment.
The growing focus on equipment as a service is primarily owed to the opportunities made possible by digital technologies. Internet-enabled smart machines, or legacy machines retrofitted for these capabilities, have allowed suppliers to remotely monitor the equipment on a real-time basis for performance, impending breakdowns, usage and billing data. It also helps suppliers Predictive maintenance capabilities allow suppliers to manage repair costs by addressing concerns early on before the machine completely breaks down, and manage servicing costs through preventive maintenance rather than maintenance on a predetermined service schedule.
In the end, both the supplier and the user benefit in several ways:
- Cost. It is a simpler financial model where the user can avoid high initial investment and convert capital expenditures to operating expenditures, bringing along with it financial, tax and accounting advantages. Surveys also suggest that the initial purchase costs (as high as that may be) are actually significantly lower than the total repair and maintenance costs incurred during the life of the equipment. With preventive and predictive maintenance capabilities that accompany the equipment as a service model, these costs are significantly lowered, making it cost effective to both the user and supplier. On the supplier end, although there will be a drop in revenues because of a shift to services from sales (and increase in labor and technology costs), it is temporary as they ramp up revenues from subscriptions and additional services (and decrease in material and labor costs).
- Operations. Benefits to the customer include increased uptime, more efficient maintenance, and less time spent servicing equipment. The customer can also access higher-quality equipment since initial investment costs are eliminated. Predictive maintenance capabilities result in guaranteed uptime to the user which, in turn, results in a longer life of the equipment – benefiting the supplier.
- Customer experience. The supplier has opportunities to deepen customer engagement compared to a one-time traditional equipment sale where the supplier does not have much skin in the game. Equipment data insights would help the supplier improve design and make machinery more robust and better performing – meeting customer expectations.
- Growth. While the equipment-as-a-service model can guarantee uptime and reduce service costs, the real kicker benefit is that remote data capture capabilities and sensors for critical data can be customized to fit the unique needs of each customer. With the supplier now being able to access constant real-time insights on machine performance, usage and environments, they can unlock new revenue opportunities and differentiate themselves in the market. These insights also help the user to better monitor their manufacturing processes and increase efficiencies.
None of this is automatic. Success of the equipment-as-a-service model for suppliers depends on several factors:
- Culture shift. Organizing and educating operations and sales teams to manage services instead of selling equipment is not only a change in the business model but is also a shift in the mind-set.
- Retraining workers. Investing in Industry 4.0 technologies also entails retraining personnel with new skills to handle the new tasks.
- Educating stakeholders. There is a transformation period before profitability.
While the industry is trending toward a subscription and service-based model for its manufacturing needs, the supplier can at least initially consider equipment as a complementary or alternative model.
The recent slowdown in manufacturing is a perfect opportunity for suppliers to reinvigorate asset profitability, explore new revenue opportunities and increase customer engagement. And for customers, the potential to cost-effectively manage manufacturing capacity and be more agile in these uncertain times is worth exploring.