Why the 'Service Revolution' is Manufacturing's Natural Evolution
Manufacturers and distributors across the country, and across the globe, are increasingly finding themselves at a crossroads. It is one marked by the reality of evolving economics on one hand and, on the other, enticing growth opportunity that harnessing modern technologies affords what, in many ways, can best be described as “pre-Internet companies.”
For decades, the business model in the Rust Belt economy was fairly straightforward: produce and distribute more widgets to a growing customer base domestically and internationally. But for many, that growth model slowed, or worse, plateaued. Some came to find that growth opportunities were finite, as the customer base became finite. In other words, once you’ve built the customer base that needs your widgets, your growth is either fueled by, or limited by, the extent to which that customer base needs more widgets.
That was then. The now is a picture painted far differently, and it has some traditional manufacturers veritably bullish about what lies ahead for the manufacturing sector.
Manufacturing: The New Service Sector?
It will take a mental shift for some, and for most, a strategic shift. But many manufacturers have already discovered that it needn’t take a seismic shift.
The trend is clear: If manufacturers and distributors want to thrive in the modern service-sector economy, they must be active participants in the service-sector economy. This means providing more than just manufacturing and distributing proverbial widgets, however complex the component, system or technology may be. It means reorganizing strategies, systems, technology and teams around what makes service as a business model so profitable and limitless.
According to a recent study conducted and published by consulting firm Deloitte entitled “The Service Revolution in Global Manufacturing Industries,” the shift is already on, and just beginning to take form. The pioneers are already reaping the benefits, while those looking to join the herd need to quickly embrace the paradigm shift and make the necessary adaptations to keep pace.
Among the findings in the published report is this stark data point:
“The average profitability of the service businesses benchmarked is more than 75 percent higher than overall business unit profitability, and accounts for an estimated 46 percent of total profits generated today."
– “The Service Revolution in Global Manufacturing Industries,” Deloitte
As Hamlet might have said, "The service play is the thing!"
From Bearing Distributor to the Amazon of the Rust Belt?
One reseller of other manufacturers that serves as an illustrative proof of concept, but is certainly not alone, is Cleveland, Ohio-headquartered Bearing Distributors, Inc. (BDI). Established in 1935, BDI has grown from a small Midwestern domestic distributor of bearings to become a global supplier of industrial goods, services and solutions. According to the company’s website, “This growth has occurred through acquisitions and organic growth, but most importantly, through customer service excellence, technical expertise and manufacturer support.”
In 2007, BDI recognized the opportunity that lie before them as a service-oriented business and began to explore how technology could help them better manage their vendor inventory and fulfill orders. What began as a project to infuse efficiency would ultimately become a platform that positions the company in the manufacturing sector the way many of us think of Amazon.com.
By 2007, BDI had partnered with Detroit-based GRID, a progressive solutions provider and technology consultant, to design, develop and deploy “SmartSUPPLY,” the company’s proprietary vendor managed inventory system, known in the technology space as a “VMI.”
The VMI system was implemented to streamline and inject more intelligence and efficiency into BDI’s traditional processes for tracking and managing inventory at BDI’s suppliers. Whereas traditional systems and methodologies can be cumbersome, difficult to manage, potentially fraught with human error, and simply lacking in the ability to report actionable business intelligence, this new system would rely on automated technology, scan-able codes, cloud technologies and business intelligence software to drive greater performance throughout the supply chain.
Naturally, vendors embraced the platform. It translated to immediate, tangible cost savings, resulted in visibly and significantly reduced errors and inefficiencies, and opened their own eyes to the possibilities of technology and what Deloitte’s report refers to as “The Service Revolution.”
Eventually, BDI approached GRID with a proposition: If this works so well as a VMI for us as a bearing distributor, why couldn’t we offer this same system to vendors for other materials, components and parts?
And that’s exactly what they did. BDI worked with GRID to “white label” the system, so that all of BDI’s clients could potentially implement the platform to other vendors. In doing so, BDI is in the position to track, manage and fulfill inventory up and down the supply chain, beyond its traditional core bearings business. For the first time, BDI didn’t need to make the component to sell it; it simply needed to fulfill it at the best price and on the most attractive terms. The shift was on, and it opened limitless opportunity that could have never otherwise existed for a traditional manufacturing company in middle America.
“If you think about the business model that Amazon pioneered,” says Paul Tibbert, co-founder of GRID, “there is money to be made simply by providing the service of fulfillment, tracking and reporting. Or take, for example, Zappos, who is in the business of ‘delivering happiness,” as it’s been aptly coined. These companies ‘make’ nothing, as we have historically regarded the concept. But by managing and delivering inventory, they have each become ‘category killers’ in their own spaces by leveraging innovative technologies in the modern service-based economy.
“The same opportunities are available in the manufacturing sector, and that’s why Deloitte has studied and reported on this trend. It’s an exciting turning point for a whole sector of our national economy that has struggled to reinvent itself since the 1990s” Tibbert adds.
"We have always realized that it was necessary to embrace technology at BDI, but we were mostly focused on product fulfillment technologies, and not necessarily on supporting and accelerating our services. It is easy to be afraid of change, especially in an industry as mature as ours,” says John Newman, Vice President Sales-Americas. “Instead of being paralyzed by fear, we were invigorated by opportunity and decided that it was time to capitalize on it. There is definitely a shift happening in our industry, one that is calling on businesses to evolve to stay relevant in a 21st-century service-based economy. BDI wants to lead change, not react to it."
The Will to Embrace Change
Tibbert points out that, while this evolution may not be natural and intuitive for many of the Rust Belt’s longstanding stalwarts, the shift needn’t be disruptive nor daunting. He regards it as “more of an evolution than a revolution.”
“The key is understanding your profit generators, knowing what challenges a particular market is endeavoring to overcome, and exploring how technology and systems can, not only solve those problems, but deliver greater, actionable business intelligence in the process,” says Tibbert.
"We're really excited about the potential impact of this system on BDI's clients," Tibbert continues, "The early data is demonstrating that SmartSUPPLY is dramatically improving their overall supply chain efficiency. In many cases that corresponds to very relevant amounts of money saved for these companies."
As Deloitte reports, companies across the globe are already not only embracing this sea change, but riding the wave to significant growth and financial performance. These are large companies, as well as smaller organizations summoning a newly emergent entrepreneurial spirit, such as BDI.
The next “Amazon of Manufacturing” could very well be coming to a manufacturer near you.