Servitization data sharing: benefits of a service model with industrial machinery data sharing
A manufacturing company typically buys a machine to produce goods. This involves an initial outlay of cash, either its own money or from a credit line.
The manufacturing company buys the machinery because it believes that the associated costs – initial negative cash flow, budgeted costs, estimated production risks – will be more than offset by the sale of the goods produced and possibly the sale of the machinery.
Thus, the value of the machinery for the company lays in the service it provides, not in the ownership. If the manufacturing company could benefit from the use of the machinery by paying an appropriate rental fee, it would have more working capital. This would allow even companies of modest size and/or with little liquidity or difficulty in accessing credit to produce goods and generate revenue. Other benefits are the absence of maintenance charges as the user of the machinery is not the owner.
The rental of the machinery – an alternative to purchase – is an interesting option for the manufacturing company – the user of the machinery – when the monthly revenues generated by the sale of the products are significantly higher than the monthly fee paid for using the machinery.
This is not obvious, in fact the sum of the fees due for the use of the machine must be much higher than its purchase price because the owner of the machine must take into account not only a cashflow diluted over time (fees vs. sales), but also additional charges including ordinary and extraordinary maintenance of the machine, the risks of downtime (during which the user is not willing to pay rental fees), the financial charges due to the lack of initial cashflow and the opportunity cost of being able to use it for other purposes.
If the owner of the machinery were able to efficiently manage the risk related to the use of the machinery and the charges related to ordinary and extraordinary maintenance, downtime would be minor. This would allow to reduce the rental fee and/or increase the owner’s margin, efficiently manage the rental of the machine to several users and increase its useful life and expected returns as a consequence.
By equipping the various parts and components of the machinery with IoT (Internet of Things) sensors that detect critical operating parameters, it is possible to constantly monitor the status of the machinery and take preventive action in order to keep it efficient over time, drastically reducing downtime and other issues – such as environmental risks and those related to work safety.
The state of the machinery is constantly monitored and the owner would be able to offer lease contracts with a deferred starting date as he can predict reasonably well the state of the machinery at future times.
We have been working with professionals who, using Servitization data sharing, have developed an algorithm that monitors a range of data collected by IoT sensors applied to industrial machines. The algorithms analyze the set of constantly collected data and provide real-time indications on the status of the machinery and key components through parameters such as production efficiency, energy consumption and reliability. The algorithms form a model for managing the risk and performance of industrial assets – production machinery – and summarize their level of risk into scoring parameters.
The model has been used in a number of documented case studies that demonstrate – with quantitative assessments – the tangible benefits of the service model – based on rental, not sales – for both the manufacturers/owners of the equipment and the user companies. The model is patented.
Benefits for stakeholders
Both machine manufacturers and users benefit from applying Servitization data sharing to their business.
Benefits for machine manufacturers/owners:
- Higher economic returns from renting out machinery rather than from the sale;
Drastic reduction of risks associated with machinery due to constant monitoring and continuous real-time risk analysis based on up-to-date data collection.
Benefits for users of the equipment:
Payment of a rental fee instead of the cost of purchasing the equipment;
Increase in working capital and consequent opportunity to devote financial resources to different projects – e.g. investing in innovation – and at the same time be able to run the machinery to produce goods whose sale generates turnover;
- Stabilisation del cashflow.
Some large enterprises partly operate this service model, but small and medium-sized enterprises lack the capital, organization and mindset to implement it. Our servitization solution suits SMEs and allow them to make the transition from a traditional model – make&sell – to a service model – make&servitize
Thus, servitization data sharing is not a simple rental, but a provision of services that enable the user to produce goods efficiently, and keep the production equipment efficient at all times.
Our dedicated team is able to fully support companies willing to apply this service model to their industrial assets in a transition to servitization. The transition can be gradual and both models – make&sell and make & servitize – can coexist at the same time at any company.
Making industrial assets liquid
Operating according to a service model makes it possible to make liquid industrial assets – today mostly illiquid. In fact, the rental fees paid by the user of the production machinery generate cash flows comparable to the coupons of a bond. When several bonds are issued they can be traded as the fundamental parameters for this to happen are known: the expected return of each bond and their level of risk at any given point in time in the future, the risk scoring generated by the algorithm analyzing the characteristics of the machinery and related components that determines their “state of efficiency”.
Bonds are asset-backed securities, financial products with the machinery as the underlying asset. Asset-backed securities are a new source of self-financing for the owner of the machinery, where the input data analyzed to determine the level of risk of the underlying asset are particularly relevant to determine the value of the financial product.
Corporate social responsibility
In addition to creating a win-win ecosystem, the use of servitization data sharing in the industrial sector is also aimed at Corporate Social Responsibility (CSR) through more efficient management of machinery – in terms of energy consumption, reduced maintenance and extended life – in a Circular Economy perspective.
The service model is very useful to the Italian entrepreneurial and industrial landscape, and of particular help in overcoming the current difficult times. However, it is necessary that entrepreneurs be courageous in making a change and the determined to improve their business model.
To learn more about Servitization data sharing, contact one of our experts or book a call.
The CleverAdvice Team