We all know that Britain has a proud heritage of innovative engineering. But in an age when financial pressures mean that only the fittest companies survive there has been a wave of innovation in the way companies do business too.
Engineering companies at the cutting edge of research are reaching out to their counterparts in academia to help bring products to market faster. And in manufacturing, businesses are offering their customers extra services to support the products they make.
US researchers have found that there can be more profit made from providing services than product. The profit margin in sales of original rail equipment at 3-6%, for instance, compares to a profit margin of 8-10% in related services. And the civil aerospace division of Rolls-Royce now makes more money from servicing its Trent engines than it does from selling them (see box on page 50).
Professor Tim Baines at Aston Business School has been studying the concept of “servitisation” in manufacturing. He explains: “Quite simply, the manufacturer is taking over a bigger and bigger slice of the customer’s operations, and if they sell it to the customer sensibly their revenue will increase.”
He adds that to some extent all manufacturers provide services. At a basic level they provide spare parts for their products. Others may go a step further and offer maintenance, repair and overhaul. But Baines says: “What is really interesting and exciting is when we talk about the plant services. These are the risk and revenue sharing contracts where the manufacturer takes over a key element of their customer’s business processes.”
“Servitisation” has been a part of the business plan for some manufacturers for some time. Baines says that the notion really took off during the late 1990s and early 2000s.
One manufacturer that has taken servitisation right to the heart of its business is Alstom. The company designed and built the Virgin Pendolino trains that run on the west coast main line. Alstom has contracts for full service provision and maintenance. This means that Virgin puts the label on the train, promotes rail travel, collect the fares and puts the driver in the cab, but Alstom does everything else.
The types of tasks that companies such as Alstom take on when they enter into these sorts of contract include monitoring the use of a product, upgrading it and disposing of it at the end of its life.
Baines explains that, for support contracts, Alstom can beat pure services companies, such as those involved in supply chain management. This is because during train services and maintenance they can identify problems with parts and have the expertise to re-engineer them so that they do not wear out or break for a second time. A supply chain management company can only deliver the part.
Alstom has six service depots across the west coast main line area. Within these depots, the company has previously re-engineered the pantographs and created production facilities for coffee machines, says Baines. “They have to have all that in place because, if the coffee machine doesn’t work on the Pendolino, Alstom get fined.”
But Baines warns that if manufacturers do not or cannot provide the service capabilities outlined in the contract they face stringent penalties. He says: “What is key to it is the manufacturer billing themselves as a service provider. It’s not about going from products to services, it’s about the whole mindset of the organisation.” Companies need to shift from a production-centric view of the world to a technologies-led services one.
A shift in mindset is something that has occurred at defence company BAE Systems. Customers wanting the Typhoon fighter jet, which is produced by a consortium including BAE Systems, can now buy availability of the jet rather than the aircraft itself. Under the availability service contract, the company provides maintenance, logistic and technical support, and aircrew and ground crew training.
James Baker, managing director of BAE Systems’ Advanced Technology Centre, says: “The customer doesn’t want to buy an aircraft and spares. He wants an aircraft that is available to fly when he wants to fly it.” It’s a trend that Baker sees continuing in the years ahead. He adds: “Whether this is the F35 fighter jet, an unmanned autonomous vehicle, or the Type 26 frigate, customers are going to talk about availability.”
At the Advanced Technology Centre there have also been changes to the business model. Staff numbers have fallen from a peak of 5,000 to 300-400 today, and this has meant finding new ways of working. Staff now work on projects more collaboratively with scientists and engineers in other companies and academics under the banner of “open innovation”. Baker explains: “We have got to now embrace the mindset and the brainpower from the global supply chain. Open innovation captures that – it’s a culture and mindset that says, while we have certain people in our organisation, there are clever people outside of our organisation.”
He adds: “Some of the challenges that we face in defence are similar to the challenges that we have in healthcare, automotive and intelligent transport.”
An example of these research collaborations is a partnership that BAE Systems has signed up to with the Engineering and Physical Sciences Research Council to create new coating technologies. The company is working on the chemistry with Dyson and Procter and Gamble. Baker explains: “Procter and Gamble want shampoo that sticks to your hair, BAE Systems want paint that sticks to your submarine. It’s brains coming together in that joined-up way that can bring a broader perspective to solve that problem.”
But he admits that the nature of defence research means that any open innovation needs to be done appropriately so that any information about potential weaknesses does not fall into the wrong hands.
Several brains from the company, small firms and academia are also working on a new material that functions as a power source. The material could be used to make soldiers’ combat suits that could be charged up every night to get rid of the need for heavy battery packs in the field. It could also make unmanned aerial vehicles lighter and more efficient as using the material in the wings would eliminate the need for an engine and fuel.
For the time being the material is confined to the lab. A demonstrator torch has been made that continues to function even when the batteries are taken out.
Baker says: “Traditionally, we would look to take it forwards. But it would take quite a long time, the business models are not that attractive, and unless you can invest in that for defence you are probably going to do that quite slowly.”
TotalCare takes off
Rolls-Royce has been offering service options to its civil aerospace customers for years. The company introduced its TotalCare product in the 1990s when Trent aeroengines were first entering service. Rolls-Royce charges customers on a fixed price per flying hour basis and takes care of the maintenance, repair and overhaul of the engines and the associated logistics.
Rolls-Royce says that planes with engines managed by the company spend 25% more time on the wing than those managed by the airline or a third party. The concept now covers 90% of Trent engines, and services have come to play a big part in the company’s civil aerospace business. Mark Kerr, head of services customer marketing, says: “The 2011 results showed £3.3 billion in services revenues, against a total of £5.7 billion – in other words just under 60%.”
To meet the requirements of the scheme, the company has set up a global support network that includes 17 engine and component repair shops. Kerr says: “By linking services and product performance we have achieved a 30% reduction in disruptive events to our customers.”
The entire fleet of engines are monitored, which generates 500 million reports a year. The data is analysed using engine health management systems to help flag up potential faults.