IIIEE Reports 2001:6
Introducing and developing a Product-Service System (PSS) concept in Sweden
Oksana Mont
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Preface This report is the result of a research project “Introducing and developing a Product-Service System (PSS) concept in Sweden”, financed by the Swedish National Board for Industrial and Technical Development (NUTEK). This research project elaborates the concept of the product-service system at a company level and considers existing cases and the prerequisites for shifting corporate focus towards functional thinking. This study analyses opportunities, drivers and barriers in companies for introducing and developing innovative and marketable product-service systems. The project was carried out during the period April to December 2000 by the International Institute for Industrial Environmental Economics (IIIEE) at Lund University. This report presents the results of the study. The project is the result of the collaborative effort of the author and Dr. Peter Kisch, whom I would like to thank for constant support and assistance during the entire project—for our interesting visits to companies; lively discussions with companies representatives, which would have been less stimulating without Peter’s expertise; for interesting ideas contributed to this project and for valuable comments on the report drafts. I wish to thank Dr. Thomas Lindhqvist for always quickly finding the most efficient solutions to any problem, and for providing helpful feedback. I wish to extend my thanks to Professor Chris Ryan for sharing his time and expertise to enrich this study. Many thanks are due to the all interviewed companies’ representatives, who generously provided their time, data and valuable comments to this research project.
Lund, December 2000 Oksana Mont
Förord Denna rapport är ett resultat av forskningsprojektet ”Introduktion och utveckling av konceptet produkt-servicesystem (PSS) i Sverige”, finansierat av verket för näringslivsutveckling, NUTEK. Forskningsprojektet utvecklar konceptet produkt-servicesystem på företagsnivå och analyserar existerande tillämpningar inom industrin samt diskuterar förutsättningarna för att flytta företags fokus mot ett funktionstänkande. Studien analyserar möjligheter, drivkrafter och hinder i företag för introduktion och utveckling av innovativa och säljbara produktservicesystem. Projektet genomfördes under perioden april till december 2000 av Internationella institutet för industriell miljöekonomi (IIIEE) vid Lunds universitet. Denna rapport presenterar studiens resultat. Projektet är resultatet av ett samarbete mellan författaren och Tekn.Dr. Peter Kisch, som jag vill tacka för hans ständiga stöd och hjälp under hela projektet – för våra intressanta företagsbesök; livliga diskussioner med företagsrepresentanter, som skulle varit mindre stimulerande utan Peters kunskap; för bidraget med intressanta idéer om projektet och för värdefulla kommentarer till rapportutkasten. Jag vill tacka Tekn.Dr. Thomas Lindhqvist för att han alltid snabbt hittar den mest effektiva lösningen på alla problem och för den värdefulla feedback han tillhandahållit. Jag vill också tacka professor Chris Ryan för att han berikat studien genom att dela med sig av sin tid och sitt kunnande. Stort tack går också till alla de intervjuade företagsrepresentanterna, vilka generöst erbjöd sin tid, sina data och värdefulla kommentarer till det här forskningsprojektet. Lund, december 2000 Oksana Mont
Executive summary Business challenges today are becoming more numerous, and more urgent. Many companies are expanding beyond their traditional product and market boundaries, while others are forming new alliances or outsourcing supporting functions to other producers. The concept of product-service system (PSS), analysed in this study, has the potential to improve companies’ competitiveness and provide new business opportunities. It gives the possibility to find new profit centres for companies, to establish closer and longer relationships with customers, to organise feedback from the sale and use phase back to the design phase, to apply a systems approach that widens the scope from one company to a chain of companies collaborating on providing a function to the customer, and to incorporate environmental considerations into the system design. This feasibility study presented the PSS concept to a range of Swedish companies from different industry branches and engaged them in discussions about the pros and cons of the concept and about the potential benefits and foreseeable problems with the introduction of the concept to business. The main finding of this feasibility study is the acceptance of the PSS concept (functional thinking) by companies. The main conclusion is that the product-service system concept seems to be a feasible business strategy, which could be adopted in several industry sectors. The study indicated that the PSS concept requires a new way of strategic business thinking, but also that it could utilise some of the existing practices in companies as a starting point. The study revealed three groups of companies, which are familiar with the functional sales idea and who also have the potential for improvement in this area. •
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The functionality idea has been explored mostly by utility companies in business to business interactions, driven by low margins in a deregulated and highly competitive market. Companies, producing chemicals of different sorts, are also familiar with selling functionality of chemicals and chemical management services to i
other businesses. Provision of chemical services is driven by strict regulations and high costs of chemical management for clients. •
Companies, producing durable consumer goods, have somewhat varying familiarity with the concept, but can envision the possibilities of the concept application to their products.
Three models for introducing the PSS concept to these groups of companies were developed. The study showed that it is difficult to create general, widely applicable PSSs. Usually product-service systems are very much specialised, depending on the product characteristics, organisational structure, chain actors, network support and infrastructure in place. Besides, product-service systems would be likely to differ considerably depending on the type of customers they are provided to: business to business, business to tradesman, or business to customers. Most of existing examples confirmed that the functionality-based arrangements are introduced exclusively as a possibility to find new business opportunities. The potential environmental improvements associated with the PSS concept do not serve as a key driver for companies, partially due to the few attempts made to evaluate economic and environmental effects of selling functions. What is clear is that services are not environmentally superior to products per se, thus, it is important to ensure in the future that existing functional arrangements and newly developed product-service systems are more environmentally apt than corresponding products. Analysing the way companies market themselves, it could be concluded that functionality, customer relations and added value through additional services has become almost a fashion. There is, however, a difference between how companies represent themselves and how far they have proceeded in practice. While quite a few examples of functional sales were found in business to business relations, very few attempts can be named in business to customer interactions. Existing attempts show that it is more difficult to develop functional alternatives for consumer products, and therefore, special attention is needed in this domain. The largest challenge seems to be to make the value of the function provision more attractive to customers as ii
opposed to owning products. Instruments and practices are needed that would allocate higher status to buying services than owning products. There is an urgent need to develop a methodology for the practical introduction and development of PSSs in companies based on real cases. Demonstration projects can stimulate introduction of the concept and help companies to find networks and partners. Authorities may assist in investigating possibilities of developing economic incentives facilitating the shift away from selling products and towards providing service. They may present functional thinking at the policy level and encourage the retention of ownership of durable goods by producers or sellers in order to support the PSS concept.
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Sammanfattning Utmaningarna för dagens företag blir allt fler och av allt mer brådskande natur. Många företag expanderar bortom sina traditionella produkt- och marknadsgränser, medan andra formar nya allianser eller lägger ut funktioner på entreprenad till andra tillverkare. Begreppet produktservicesystem (PSS) som analyseras i denna studie kan förbättra företags konkurrenskraft och erbjuda nya affärsmöjligheter. Det ger företagen möjlighet att finna nya vinstmöjligheter, att etablera närmare och mer varaktiga kontakter med kunder, att organisera återkoppling från försäljnings- och användarfasen tillbaka till designfasen, att tillämpa en systemsyn som omfattar inte bara ett företag utan en kedja av företag som samverkar för att erbjuda kunden en funktion och att ta miljöhänsyn i utformningen av systemen. Denna studie presenterade begreppet produkt-servicesystem för ett antal svenska företag från olika industrigrenar med målet att engagera dem i diskussioner om för- och nackdelar med konceptet och om konceptets möjliga konsekvenser för deras verksamhet. Diskussioner hölls med företagsrepresentanter om vilka möjligheter, hinder och andra faktorer som kan bidra till misslyckande eller framgång vid införandet av PSS-konceptet. Tre modeller utvecklades för att införa PSS-konceptet i företag, och analyser genomfördes av olika karakteristiska drag hos PSS för att ge en initial vägledning om vilka frågor som är viktiga att ta hänsyn till när PSS utvecklas i ett företag eller i produktkedjan. Det viktigaste resultatet av denna studie är att företag accepterar PSSkonceptet (funktionstänkandet). Slutsatsen är att produkt-servicesystem tycks vara en genomförbar affärsstrategi, som skulle kunna användas inom flera industrisektorer. Studien visade också att PSS-konceptets delar och det praktiska förverkligandet av idéer om funktionsförsäljning kan variera mellan branscher och mellan olika produktkategorier. Studien antydde att PSS-konceptet kräver ett nytt strategiskt affärstänkande, men också att en del redan existerande företagsrutiner kan användas som utgångspunkt, till exempel återvinningssystem och system för uppgradering av uttjänta varor. Studien visade att funktionstänkande redan används i många kontakter mellan företag. Den starkaste drivkraften för att skapa den sortens kontakter är möjligheten att etablera en långvarig kundrelation och att skapa nya v
vinstmöjligheter. För tillfället är mycket lite känt om de ekonomiska och i synnerhet de miljömässiga fördelarna med PSS, eftersom få försök gjorts att utvärdera dem.1 Ingen jämförande miljöanalys har gjorts av traditionella sätt kontra funktionssätt att bedriva affärsverksamhet. Vid en analysen av hur företag presenterar sig själva i rapporter och marknadsföringsmaterial kan man dra slutsatsen att funktion, kundrelationer och mervärde genom ökad service närmast har blivit på modet och ofta används som konkurrensargument. Det finns dock en skillnad mellan hur företag marknadsför sig själva och hur långt de har kommit i praktiken. Medan man finner åtskilliga exempel på funktionsförsäljning företag emellan, kan mycket få försök identifieras mellan företag och konsumenter. De försök som gjorts visar att det är mycket svårare att utveckla funktionsalternativ för konsumtionsvaror, och därför bör särskild uppmärksamhet riktas mot det området. För tillfället är Electrolux det enda företag som bekräftat att funktionsbaserade arrangemang införts som ett sätt att minska verksamhetens miljöpåverkan. Slutsatsen blir därför att den förbättrade miljöpotentialen med ett produkt-servicesystem inte är en bärande drivkraft för introduktionen av PSS-konceptet i företag. Tjänster är inte nödvändigtvis miljömässigt överlägsna produkter, alltså är det viktigt att i framtiden säkerställa att funktionsarrangemang och nyutvecklade produkt-servicesystem åtminstone inte är miljömässigt underlägsna motsvarande varor. Utvecklingen av nya produkt-servicesystem bör genomföras med miljöhänsyn integrerade från starten – ända från designfasen. Den största utmaningen verkar vara att göra funktionstjänsten mer attraktiv för kunden än ägandet av varorna är. Det behövs styrmedel och åtgärder som ger högre status åt att köpa tjänster än att äga varor.
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Agri, Jan, Elisabeth Andersson, Alena Ashkin och John Söderström; Selling Functions. A Study of Environmental and Economic Effects of Selling Functions. 1999, Göteborg: Chalmers Tekniska Högskola
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Funktionstänkandet presenterades för olika företag och diskussioner hölls om möjligheten att använda idéerna på företagens produkter. Studien visade att företag från flera sektorer redan har använt konceptet en tid, medan andra är mindre bekanta med funktionsförsäljning. Studien pekade på tre grupper av företag som är förtrogna med idén om funktionsförsäljning och som också har utvecklingspotential inom området. •
Funktionsidén har främst testats i samarbete mellan företag inom samhällsservicesektorn, d.v.s. produktion av energi, vatten, värme o.s.v. De arbetar typiskt med små marginaler på en avreglerad och konkurrensutsatt marknad.
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Företag som tillverkar kemiska produkter av olika slag har också erfarenhet av att sälja kemikalier i form av deras funktion, inkluderat slutliga omhändertagandet, till andra företag. Att erbjuda tjänster inom kemisektorn innebär strikta regler och höga kostnader för kemikaliehantering.
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Andra företag i studien tillverkar kapitalvaror. I denna kategori finns huvudsakligen konsumtionsvaror vilka sammansätts av moduler och komponenter, och de utmärks ibland genom resursförbrukningen under användningsfasen. Dessa företag var antingen bekanta med funktionsförsäljning, eller också kunde de omedelbart se hur konceptet kunde användas inom deras produktområde. PSS-konceptet är mindre utvecklat för den här sortens produkter och begränsar sig ofta till separata delar av ett produkt-servicesystem, som exempelvis system för uppgradering av uttjänta varor. Även utvecklingen av sådana PSS-delar kräver externa drivkrafter. Till exempel har det visats att återtagningslagar kan driva på utvecklingen av system för återanvändning och uppgradering av uttjänta varor. Hittills är det i denna grupp bara för elektrisk och elektronisk utrustning som återtagningslagstiftning utvecklats. För andra produkter, som exempelvis möbler, finns det knappast någon extern drivkraft som kan underlätta införandet av funktionstänkande.
Studien visade att det är mycket svårt att skapa en generell modell för PSS med bred tillämpning. Vanligen är produkt-servicesystem mycket specialiserade baserat på produktegenskaper, organisationsstruktur, aktörer och relationer i produktkedjan, nätverksuppbyggnad och existerande vii
infrastruktur. Eftersom ett nära samarbete med kunderna är nödvändigt kan dessutom kulturell bakgrund sannolikt påverka framgången för olika produktanvändningsalternativ. Utöver sektor- och produktspecificitet kommer produkt-servicesystem sannolikt att uppvisa avsevärda skillnader beroende på vilket slags kunder de erbjuds till: emellan företag, från företag till handeln (återförsäljare, mellanhänder) eller från företag till privata kunder. Olika kundgrupper har olika skäl för sitt köpbeteende. Möjligheterna att påverka dem är också olika, och skilda logistiksystem behöver utvecklas för att stödja insamling och återtagning av varorna. Denna studie visar på ett akut behov av att utveckla en metod, baserad på verkliga företagsexempel, för att praktiskt införa och utveckla produktservicesystem i företag. Det behövs dels en utveckling av metoder för företag som redan är inblandade i sådana aktiviteter, dels för dem som behöver hjälp med att utveckla nya PSS-idéer och nya affärsmöjligheter. För de företag som redan breddar sina erbjudanden på marknaden genom funktionsförsäljning, behöver metoder utvecklas som säkrar att systemen och de nya funktioner och tjänster som erbjuds inte bidrar mer till miljöproblemen än traditionella affärsmodeller. För att funktionstänkandet ska införas i industrin behöver innovationer stimuleras, till exempel genom att utforskandet av nya affärsmöjligheter och nya vinstområden underlättas. Vidare finns ett behov av att knyta samman existerande strukturer, funktioner och aktiviteter i företag genom ett nytt tankesätt – ett produkt-servicesystem som bygger på och är integrerat i företagets organisation och styrning. Möjligheten att förbättra produkters miljöprofil genom PSS-konceptet har hittills inte varit en reell drivkraft för företag. Det är affärsmöjligheterna, nya marknader och nära kundrelationer som lett till funktionstänkande i relationer företag emellan. Miljöpotentialen och tänkbara följdeffekter hos utvecklade eller nyintroducerade produkt-servicesystem är fortfarande outforskade. Studien visade att företagen bara i begränsad utsträckning förstår PSSkonceptets vokabulär. En gemensam förståelse är viktig när man försöker kommunicera konceptet till en bred grupp aktieägare. Ordens betydelse viii
måste klargöras och översättas till företagens fackspråk. Den terminologi som en snäv krets av experter använder i dag hindrar effektiv kommunikation med företagen. När denna studie genomfördes användes mestadels termen ”funktionsförsäljning” i diskussionerna med företagen. Företag och branschorganisationer spelar den viktigaste rollen i införandet, utvecklingen och spridningen av PSS-konceptet i det svenska samhället. Nedan presenteras de mest väsentliga rekommendationerna för företag inför övergången till funktionstänkande. Företag kan finna nya vinstmöjligheter genom att utgå från kundernas behov, genom att ställa frågan hur dessa behov kan tillfredsställas på det mest ekonomiskt fördelaktiga och miljöanpassade sättet. De kan använda livscykelperspektivet för att finna möjligheter till systemoptimering utanför företagets väggar. Företag kan använda brainstorming för att stimulera verkligt innovativa idéer och använda potentialen hos funktionsförsäljning för att bygga nya kundrelationer. Företag kan utveckla nya produktanvändningsalternativ för att bredda sitt utbud av tjänster och funktionstjänster på marknaden, och därigenom vidga målgruppen och vinna tid till utvecklingen av innovativa produkter. De kan utveckla produkt-servicesystem som erbjuder ett alternativ till traditionellt ägande av produkter. Dessa alternativ kan användas så att produktanvändningens miljöpåverkan minimeras, och detta kan användas som ett marknadsföringsargument för att vinna kunder och konkurrensfördelar. Företag kan organisera allianser och nätverk för att attrahera kunder genom att erbjuda det bästa utbudet till de bästa priserna. Företag kan utveckla nära relationer med företag och dotterbolag i återförsäljnings- och distributionssektorerna och utbilda dem i att på olika sätt presentera funktionstänkandet för kunder. De kan använda sina kundrelationer till att hålla sig informerade om de senaste förändringarna i kundernas preferenser och profilering. Försäljare kan tränas i att hjälpa kunderna att göra ett välinformerat val. Vid försäljningstillfället kan företaget inte bara sälja produkter utan produktfunktioner, och erbjuda ekonomiska analyser som jämför olika produktanvändningsalternativ.
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Företag bör överväga möjligheten att effektivisera sin produktion genom att använda funktionstänkandet i den interna verksamheten. Närmare relationer med leverantörer kan exempelvis utvecklas och funktionstänkandet kan införas i relationerna företag emellan. En ekonomisk analys kan genomföras som mäter resultatet av att ersätta funktioner inom företaget med leverantörers funktionstjänster och identifierar möjligheter att minska kostnader, säkra kvalitet och optimal hantering av olika stadier i livscykeln. NUTEK kan stödja utvecklingen och införandet av PSS-konceptet på olika nivåer: i företag och branschorganisationer, på myndighetsnivå och genom sin egen policy. NUTEK kan spela en nyckelroll genom att göra speciella ansträngningar för att synliggöra PSS på företagsnivå genom demonstrationsprojekt, som kan informera och motivera andra företag. Särskild uppmärksamhet bör riktas mot företag för vilkas varor producentansvarslagstiftning redan har utvecklats och införts. Externa krav kan starta utvecklingen av produktservicesystem. NUTEK kan bidra till utvecklingen av en verktygslåda med nya och redan existerande verktyg, som företag kan använda för att införa PSS-konceptet. Exempelvis kan NUTEK i nära samarbete med företag hjälpa till med att undersöka möjligheterna till att utveckla ekonomiska incitament som kan underlätta övergången från produktförsäljning till tillhandahållandet av en tjänst, exempelvis genom att gynna leasing som alternativ till försäljning. NUTEK kan underlätta spridningen av funktionstänkandet genom informationscentra och presentationer av bra arbetsmetoder och fallstudier. Internet kommer att kunna spela en väsentlig roll i detta arbete. NUTEK kan underlätta införandet av PSS genom att hjälpa till att forma nya allianser och finna nätverk för företag som söker partners på ett område som är nytt för dem. NUTEK har möjligheten att särskilt uppmärksamma små och medelstora företag i skapandet av sådana PSS-stödjande nätverk. NUTEK kan starta och stödja forskning om funktionstänkande och PSSkonceptet. Det finns ett tydligt behov av att utveckla metoder för analys och utvärdering av miljöprofiler och att beräkna ekonomiska vinster av existerande och nyutvecklade produkttjänster och produktbaserade tjänster för att kunna beräkna miljöpotentialen och affärsmöjligheterna hos produktservicesystemen. x
NUTEK kan presentera funktionstänkandet på politisk nivå och uppmuntra att äganderätten till kapitalvaror förblir hos tillverkarna och försäljarna för att stödja PSS-konceptet. NUTEK kan föregå med gott exempel på funktionstänkande genom att införa kriterier för miljövänlighet och användareffektivitet i leverantörskrav, egna köp och annan intern verksamhet. Följande framtida forskningsinriktningar kan rekommenderas grundat på den analys av situationen som gjorts i denna studie. Metoder måste utvecklas för införandet av PSS-konceptet i företag i olika industrigrenar och produktkategorier. Det finns ett behov av att undersöka hur marknaden reagerar på miljökraven genom att söka nya vinstmöjligheter och studera hur design, marknadsförings- och servicestrategier kan användas för att bidra till en hållbar produktion och konsumtion. Designmetoden kommer sannolikt bygga på nuvarande metoder för miljöanpassad produktutveckling och design av hållbara produkter, men vidgade så att de inkluderar systemtänkande och tjänster. Serviceföretagen har erfarenhet av att utveckla servicekoncept. Det är möjligt att deras expertis kan komma till användning i PSS-utvecklingen. Det finns ett akut behov av en utvidgad analys av existerande fall och utveckling av nya detaljerade fallstudier av produkt-servicesystem, baserade på kriterier för affärsmöjligheter, ekonomiska vinster och kontinuerlig miljöförbättring.
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Table of content List of Figures List of Tables List of Appendices 1
INTRODUCTION.................................................................................1 1.1 1.2 1.3 1.4
BACKGROUND ...................................................................................................... 1 PURPOSE ................................................................................................................ 3 METHODOLOGY................................................................................................... 4 REPORT OUTLINE................................................................................................. 6
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INTRODUCING THE PSS CONCEPT...............................................9
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POTENTIAL ROLE OF PSS IN INCREASING COMPETITIVENESS OF THE SWEDISH INDUSTRY.................. 17 3.1
DRIVERS............................................................................................................... 17 3.1.1 Increasing environmental awareness............................................................... 17 3.1.2 Market-based regulatory instruments ............................................................ 18 3.1.3 Market drivers ............................................................................................. 18 3.1.4 System-based approaches............................................................................... 19 3.1.5 Increasing time of product development .......................................................... 19 3.2 BENEFITS ............................................................................................................. 20 3.2.1 Competitiveness and new ways of profit generation......................................... 20 3.2.2 Customer Relationship Management (CRM) ............................................... 21 3.2.3 Compliance to existing and coming legislation ............................................... 22 3.2.4 Ensured inputs............................................................................................. 22 3.2.5 System design................................................................................................ 23 3.2.6 Environmental benefits ................................................................................. 23 3.3 BARRIERS ............................................................................................................. 25 3.3.1 Company-related barriers.............................................................................. 25 3.3.2 Market-related barriers................................................................................. 27 3.3.3 Concept-related barriers ................................................................................ 27
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COMPANIES’ ACTIVITIES OF INTEREST WITHIN THE PSS FRAMEWORK..............................................................................29 4.1 4.2
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OVERVIEW OF COMPANIES’ ACTIVITIES ........................................................ 29 EVALUATION OF COMPANIES POTENTIAL FOR INTRODUCING A PSS ..... 39
ANALYSIS............................................................................................43 I
5.1
UNDERSTANDING THE PRODUCT WITHIN THE PSS CONCEPT ................. 43 5.1.1 “Functional products” vs. “emotional products”............................................ 43 5.1.2 Traditional products vs. new, innovation products ......................................... 44 5.1.3 Life expectancy of products vs. life expectancy of their components.................. 44 5.1.4 Durable vs. non-durable products.................................................................. 46 5.2 UNDERSTANDING THE FUNCTION WITHIN THE PSS CONCEPT................ 47 5.3 PRODUCT CHAIN CHARACTERISTICS AND ACTORS ...................................... 47 5.3.1 Suppliers ...................................................................................................... 48 5.3.2 Producers...................................................................................................... 50 5.3.3 Retailers ....................................................................................................... 53 5.3.4 Customers and consumers ............................................................................. 53 5.4 TYPE AND SIZE OF THE COMPANY SELLING FUNCTION ............................. 55 5.5 POSSIBLE REDUCTIONS IN ENVIRONMENTAL IMPACTS .............................. 59
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MODELS AND METHODOLOGY FOR A PSS DEVELOPMENT ................................................................................61 6.1
SUGGESTED MODELS FOR PSS DEVELOPMENT ........................................... 61 6.1.1 PSS model for utilities.................................................................................. 62 6.1.2 PSS model for companies producing and/or managing chemicals................... 64 6.1.3 PSS model for durable customer products...................................................... 66 6.2 METHODOLOGY FOR WORKING WITH COMPANIES ON DEVELOPING A PRODUCT-SERVICE SYSTEM ........................................................................... 69 6.2.1 Introducing the PSS concept to companies ..................................................... 69 6.2.2 Anticipated influence on companies............................................................... 72
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CONCLUSIONS.................................................................................. 77 7.1 7.2 7.3
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GENERAL CONCLUSIONS FROM THE FEASIBILITY STUDY .......................... 77 CONCLUSIONS BY PRODUCT AND CHAIN TYPOLOGY.................................. 79 CONCLUSIONS CONCERNING THE PSS CONCEPT........................................ 80
RECOMMENDATIONS .................................................................... 83 8.1 8.2 8.3
RECOMMENDATIONS TO COMPANIES ............................................................ 83 RECOMMENDATIONS TO NUTEK ................................................................. 84 RECOMMENDATIONS FOR FUTURE RESEARCH DIRECTIONS...................... 85
BIBLIOGRAPHY......................................................................................... 87 APPENDICES ..............................................................................................91
II
List of Figures Figure 1 Methodology for conducting this study............................................................. 6 Figure 2 Schematic representation of the main PSS elements at the company level ............................................................................................................... 10 Figure 3 Schematic representation of the product-service system.............................. 11 Figure 4 A product life cycle with remanufacturing activities ..................................... 40 Figure 5 Borders of interests of the different actors along the chain......................... 45 Figure 6 Supplier position in the chain............................................................................ 48 Figure 7 Producer position in the chain .......................................................................... 50 Figure 8 Current responsibility allocation along the product chain............................ 51 Figure 9 Responsibility allocation along the product chain in the PSS...................... 51 Figure 10 Retailer position in the chain........................................................................... 53 Figure 11 Customers’ position in the chain .................................................................... 53 Figure 12 Possible changes in the chain with function and service provision.......... 57 Figure 13 PSS model for utilities....................................................................................... 63 Figure 14 PSS model for durable customer products ................................................... 67 Figure 15 A remanufacturing process .............................................................................. 68 Figure 17 A proposal for a PSS cycle in a company...................................................... 71 Figure 18 Stakeholders in the PSS design........................................................................ 74 Figure 19 Factors contributing to the development of a PSS...................................... 80 Figure 20 Marketing system of European Nursery Group .......................................... 95 Figure 21 Alfa Laval’s marketing system ......................................................................... 98 Figure 22 Selling function of a washing machine ........................................................101 Figure 23 Marketing structure of Decorative Coatings AB .......................................105 Figure 24 Thorn Lighting marketing organisation.......................................................106 Figure 25 Marketing organisation for an ASP ..............................................................108 Figure 26 Stakeholders involved in a building design process...................................111 III
Figure 27 Marketing organisation of Volvo Penta....................................................... 114 Figure 28 Marketing structure of THORN................................................................... 119
IV
List of Tables Table 1 A and B companies analysed in this feasibility study.........................................4 Table 2 Overview of the companies’ activities that are of interest for the concept of product-service systems.........................................................30 Table 3 Current and potential business areas of companies mapped on a life cycle with remanufacturing activities .......................................................41
V
List of Appendices APPENDIX A. A METHODOLOGICAL FRAMEWORK FOR THIS STUDY..................................................................................................91 APPENDIX B SUMMARY OF ACTIVITIES OF SWEDISH COMPANIES (NOTES)...................................................................... 93 APPENDIX B-1 ENERSEARCH, SYDKRAFT – ENERGY PROVISION ....................... 93 APPENDIX B-2 EUROPEAN NURSERY GROUP (ENG)............................................ 95 APPENDIX B-3 ALFA LAVAL - HEAT EXCHANGERS ................................................ 97 APPENDIX B-4 ELECTROLUX ...................................................................................... 99 APPENDIX B-5 GAMBRO ............................................................................................ 102 APPENDIX B-6 AKZO NOBEL DECORATIVE COATINGS AB............................... 103 APPENDIX B-7 THORN LIGHTING............................................................................ 106 APPENDIX B-8 ALFASKOP .......................................................................................... 107 APPENDIX B-9 TVÄTTMAN (BERENDSEN) - TEXTILE SERVICE .......................... 109 APPENDIX B-10 WIHLBORGS FASTIGHETER AB ................................................... 110 APPENDIX B-11 BILPOOL I LUND............................................................................. 113 APPENDIX B-12 VOLVO PENTA - TRUCK ENGINES .............................................. 114 APPENDIX B-13 TIBRO FÖRENADE MÖBELFABRIKER AB .................................. 116 APPENDIX B-14 VOLVO CARS CORPORATION ....................................................... 116 APPENDIX B-15 THORN........................................................................................... 118 APPENDIX B-16 VOLVO BUSSES ............................................................................... 120 APPENDIX C FRAMEWORK FOR THE FUTURE PROJECT.............. 121 APPENDIX D TERMINOLOGY AND DEFINITIONS .........................123
VI
List of Abbreviations ABB ASP
Asea Brown Boveri AB Application Service Provider
B2B B2T
Business to Business Business to Tradesman (Retailer, Middleman)
B2C BAT
Business to Customers Best Available Technology
CIP
Cleaning In Place
CMS CRM
Chemical Management Services Customer Relationship Management
DfE DSM
Design for Environment Demand Side Management
EEEs EMS
Electrical and Electronic Equipment Environmental Management System
ENG EPR
European Nursery Group Extended Producer Responsibility
GCE ICM
Green Concurrent Engineering Integrated Chain Management
ISV IT
Independent Software Vendor Information Technology
JIT
Just In Time
LCA LCC
Life Cycle Assessments Life Cycle Costing
LCP NUTEK
Least Cost Planning The Swedish National Board for Industrial and Technical Development
OEM PSS
Original Equipment Manufacturer Product Service System
TFM VCC
Tibro Förenade Möbelfabriker AB Volvo Car Corporation
VII
VIII
1 Introduction This chapter provides a general background to the concept of the productservice system, presents the purpose of this report, shortly describes the methodology used in the project, lists limitations of the study and provides an outline of the document.
1.1 Background Business challenges today are becoming more numerous, and more urgent. Whether they come in the form of global competition, internet-driven upheaval, or growing environmental pressure, it is imperative that firms respond. Many organisations are expanding beyond their traditional product and market boundaries, while others are making large-scale acquisitions, forming new alliances, or outsourcing supporting functions to other producers. Unfortunately, these responses frequently fail to achieve the desired results. The problems usually arise because the responses are not integrated into a cohesive strategy. They do not take into account how the organisation’s direction, product market focus, and execution capabilities fit together and with the interests of other actors in the business system. Indeed, in an age when capabilities are generally accepted to be the backbone of sustainable competitive advantage, integration and system thinking are the key capabilities that remain under-explored. This could also be illustrated by the pattern of development within the environmental domain. Considerable efforts have already been undertaken by businesses and authorities to achieve more sustainable patterns of production. However, recent studies highlighted the need to investigate possibilities and find new opportunities for environmental improvement provided by targeting entire product-service systems. Such a system-based approach should be based on influencing the decisions that are taken along the life cycle of a particular 1
good or service by industry, the government, and citizens. The goal should be that environmental damage of this particular product-service is progressively reduced, and also that it does not adversely influence the overall system. The approach presented and analysed in this study is a concept of productservice system, which envisions a system where shareholder value and income increase, while production costs are decreasing; where market capitalisation increases even if production does not. The business focus is on life cycle integration to reach, win and satisfy the final customer, while minimising environmental impacts of the entire product-service system. The concept of PSS is seen as a possible step forward on the way to sustainability. There is, however, a consensus among experts, who emphasise that further development is needed in order to increase the environmental potential of PSS. The PSS concept or the idea of functional sales (as it is often called in companies) has already attracted attention and is being practised by some companies driven by the business opportunity it may provide and the possibility to create added value for customers.2 Recent studies indicated that the PSS concept is usually incorporated in business to business relations.3 Very few examples exist representing the concept application in the business to private customer relations. Quite a few examples from Swedish companies can be considered as a starting point for the introduction and further dissemination of the PSS concept in the Swedish industry. A more focused and concerted effort is required to evaluate the environmental and economic potential of the new ways of generating profit and competing in international markets. Part of this effort of introducing the PSS concept to Swedish industry and exploring opportunities and barriers for its implementation is this study “Introducing and developing a Product-Service System (PSS) concept in Sweden”, funded by NUTEK.
2
Goedkoop, Mark J., Cees J.G. van Halen, Harry R.M. te Riele, and Peter J.M. Rommens. (1999) Product Service Systems, Ecological and Economic Basis.: PricewaterhouseCoopers N.V. / Pi!MC, Storrm C.S., Pre consultants.
3
White, Allen L. , Ph.D, Mark Stoughton, and Linda Feng. (1999) Servicizing: The Quiet Transition to Extended Product Responsibility. Boston: Tellus Institute.
2
First of all, this study investigates whether the principles of the productservice system concept are familiar to Swedish companies. Secondly, it discusses potential benefits and problems with the introduction of the concept to business. The report first presents the PSS concept and recent developments in this field. The document then examines the major drivers, opportunities and barriers of introducing and exploring the concept of product-service system based on the literature review and on empirical work with companies. The report presents the results of company activities, along with examples of existing practices and projects in Swedish companies, found in literature. The analysis of the data is then conducted, and some generalisations and overall conclusions are made about sector-specificity and company features that make the PSS concept a viable strategy. The main targeted audience for this report is Swedish industry, and industrysupporting authorities are addressed. It is shown that •
•
for companies, product-service systems may provide new business opportunities and new profit centres, increase competitiveness and lead to closer relationships with customers. for authorities, understanding the PSS concept could ultimately lead to new less environmentally damaging practices and to the development of new instruments towards a more sustainable society. The PSS concept could potentially reinforce existing policies and provide a different perspective to future plans.
1.2 Purpose The goals of this feasibility study are to: •
•
•
Introduce the concept of product-service systems to industry representatives. Initiate discussion about foreseeable barriers and benefits of this approach or to gain insight into the factors contributing to the failure or success of the actual implementation of PSS. Develop possible PSS models for different types of products and 3
different industry sectors.
1.3 Methodology The feasibility study started off based on the background information collected and presented in the report to the Swedish Waste Research Council at Swedish EPA on “Product-Service Systems”.4 The actual implementation included communication with representatives of the Swedish companies from different industry sectors. After a concise literature study and discussions with selected experts, a methodological framework for the assessment and description of companies’ practices relevant for the PSS approach was developed (see Appendix 1). The participating companies can be divided into three groups (Table 1). Acompanies are the companies, with which meetings and discussions were arranged. B-companies provided information through telephone interviews, as there was enough information about the company activities from other sources. The B-companies vary in size and sector and were chosen in order to provide the possibility to widen the scope of companies to whom the PSS concept is presented and to get wider feedback on barriers and existing drivers, or on general appreciation and potential of the concept. The goal is not to discuss how the concept could be applied to particular companies, but to discuss general applicability and possibilities for concept realisation within a particular sector. C-companies served to provide a broader picture and a response for the background of the PSS concept and to the analysis. They are presented together with A and B companies in Table 2. Table 1 A and B companies analysed in this feasibility study N
Sector
Company
Group
1.
Energy provision
Sydkraft
A
2.
Chemicals
Akzo Nobel Decorative Coatings AB
A
4
4
Mont, Oksana. (2000) Product-Service Systems. Stockholm: Swedish EPA, AFR-report 288.
3.
Children products
European Nursery Group
A
4.
Light fittings
Thorn Lighting
A
5.
IT sector, Alfaskop Application Service Provider
B
6.
Heat exchangers
Alfa Laval
A
7.
White goods
Electrolux
B
8.
Cleaning and Flooring
Tvättman (Berendsen)
A
9.
Building
Wihlborgs Fastigheter AB
A
10. Car sharing
Bilpool i Lund
A
11. Engines manufacturing
Volvo Penta
A
12. Car manufacturing
Volvo Cars Corporation
B
13. Car manufacturing
Volvo Busses
B
14. Medical technology Gambro and healthcare
A
15. Furniture production
B
Tibro Förenade Möbelfabriker AB
Several meetings were arranged with companies’ representatives and possible models of PSS, which suit current practices of companies, were developed. In the cases when a PSS concept seemed not to be applicable or outside the companies’ interest, ideas about PSS elements were tested and barriers and opportunities of these were discussed.
5
Meetings with A-companies Telephone interviews with B-companies Materials from previous work with and background information about Ccompanies
Background material
State of the art at A-companies
Interest in further project at A-companies
PSS methodology development
Contribution to the development of the PSS methodology
Proposed PSS models
Analysis of the PSS introduction to different sectors
Figure 1 Methodology for conducting this study The results of these activities are described in this report in a merely qualitative manner.
1.4 Report outline Chapter 2 provides a background to the concept of product-service systems, overview of recent research developments in the filed and latest activities in the areas connected to it. Chapter 3 presents a list of drivers, expected and experienced benefits and barriers to the introduction and implementation of the product-service system ideas into companies activities and business strategy based on the communication with companies’ representatives.
6
Chapter 4 provides an overview of companies’ activities that represent mostly elements of PSS, or can be of interest for introduction of the PSS to business, or for discussion of barriers and drivers. Chapter 5 analyses the companies’ and products’ characteristics that might be of importance for the PSS introduction, considers the importance of the company place in a product chain and discusses possible reductions of environmental impacts after a PSS is developed. Chapter 6 suggests models for introducing and developing a product-service system at a company level. It also discusses new functions within companies and personnel skills that might be needed in order to facilitate the PSS development and ensure its success. In chapter 7 conclusions are made about the main contributing factors for the success of the PSS development. Chapter 8 provides recommendations to companies and NUTEK on the introduction and development of the PSS concept at a company level.
7
8
2 Introducing the PSS concept The goal of the PSS concept is to provide a system of products and services that would be able to fulfil customer needs as efficiently as possible from both an economic and environmental point of view. The idea behind the PSS is the assumption that customers need the product’s function, not products per se, and thus a function provider may generate profit not from selling as many material products as possible, but from providing a function of the product. Some authors define a product-service system as “a marketable set of products and services capable of jointly fulfilling a user’s need. The PS system is provided either by a single company or by an alliance of companies. It can enclose products (or just one) plus additional services. It can enclose a service plus an additional product. And product and service can be equally important for the function fulfilment”.5 In this study a productservice system is defined as a system of products, services, supporting networks and infrastructure that is designed to be: competitive, satisfy customer needs and have a lower environmental impact than traditional business models. The main elements of the PSS concept, at the company level, are represented schematically in Figure 2.
5
Goedkoop, Mark J., Cees J.G. van Halen, Harry R.M. te Riele, and Peter J.M. Rommens. (1999) Product Service Systems, Ecological and Economic Basis.: PricewaterhouseCoopers N.V. / Pi!MC, Storrm C.S., Pre consultants. p. 18
9
Communication Sales techniques Sales contracts Alternative services
Design of products and services Resource extraction
Design
Manufacturing
Alternatives of product use Use phase management
Sale/Use contract
Use Consumer feedback
Servicing and repair Refurbishment Remanufacture
End of current use management
End of current product use Buy back or Take back systems
Technological and design upgrading Recycling
Figure 2 Schematic representation of the main PSS elements at the company level In order to make the system function successfully, both economically and environmentally, a concerted effort from companies and society is required. This part of the system is referred to in the definition as the infrastructure and networks. The infrastructure represents existing structures and systems within society, such as, (recycling) technologies, waste collection points and incineration plants, the existence and suitability of which should be considered when a product and services are developed. In order to make use of these infrastructures or find new alternatives for efficiently utilising products, their components or materials, networks or alliances of companies need to be created in order to support products on the market and to ensure that they are effectively reused, refurbished and remanufactured or safely disposed of.
10
Communication consultants
Consumer research
Design agencies
Advertising
Service companies
Networks
Communication Sales techniques Sales contracts Alternative services
Design of products and services Resource extraction
Design
Manufacturing
Alternatives of product use Use phase management
Sale/Use contract
Use Consumer feedback
Servicing and repair Refurbishment Remanufacture
Environmental consultancy
End of current use management
End of current product use Buy back or Take back systems
Recycling stations
Technological and design upgrading Recycling
Shradders Collection points
Incinerators Technologies
Take back systems
Infrastructure
Figure 3 Schematic representation of the product-service system The ideas of eco-efficient services6,7 and product-service mixes8 provided a basis for the PSS concept. The underlying assumption of these concepts is the idea that the customer value of a product lies in utilisation and benefits to the customer it provides.9 It means that the provider may get paid per
6
Sprotte, Karsten. (1997) A Strategic Fit for Tomorrow's Eco-Efficient Service Economy. Strathclyde Graduate Business School, M.Sc. Thesis.
7
“An eco-efficient producer service is a service, which improves the eco-efficiency of customer activities. This can be done directly (by replacing an alternative product-service mix) or indirectly (by influencing customer activities to become more eco-efficient).” Zaring, Olof. (2000)Creating Eco-efficient Producer Services. Paper presented at the seminar "Funktionsförsäljning" - Product-Service Systems. May 8, Stockholm, Rosenbads Konferenscenter.
8
Rocchi, Simona. (1997) Towards a New Product-Services Mix - Corporations in the Perspective of Sustainability. Lund University, IIIEE, M.Sc. Thesis.
9
Stahel, Walter R. (1994) The Utilization-Focused Service Economy: Resource Efficiency and ProductLife Extension. In The Greening of Industrial Ecosystems, edited by Braden R. Allenby.
11
unit of function delivered, not per unit of product sold. In these circumstances customers become more interested in having a stable fulfilment of their needs rather than in owning the product, which is supposed to provide the function. Furthermore, the provider, together with keeping the ownership of the product, keeps the responsibility for maintaining, repairing or remanufacturing the product, because the goal is to provide the function by any existing means (either by newly produced products, old products or re-used/refurbished products). The concept of eco-efficient services studies existing examples of services created after the product has been produced usually by any third party or the producer. Lack of feedback from the established eco-efficient service to the producer is a weak point of the approach, which is otherwise definitely viable and interesting. The product-service mix idea recognises the need to create a mix of products and services, but does not assign a significant role to customers in shaping the environmental profile of a product-service system. The PSS concept, on the contrary, specifically highlights the necessity to develop feedback loops and product use alternatives, and provide information to customers about them and their economic and environmental profile. It is envisioned that these approaches could help confront rebound effects that appear in the consumption stage and undermine producers’ effort to improve environmental performance of their products and services. Customers are considered as partners in the common task of satisfying needs of present and future generations. Within the PSS concept, customers pay as long as they have a need for the function. In this case, companies have an incentive to optimise the function and to reduce associated costs of delivering the function, i.e. costs of consumables, labour, maintenance and disposal/refurbishment. There is a need, however, to incorporate continuous improvement element into current attempts to apply this functional thinking. For example, currently, companies often sign a contract with the customers to ensure that the function is used and paid for for a certain period of time, for example, subscriptions to mobile services for 12-24 month. By doing this, companies ensure that customers stay for the agreed period with the company, which might discourage the company from constantly improving services and
Washington, DC: National Academy of Engineering, National Academy Press. p. 178190.
12
functions. This example highlights the need for a thorough design of such product-service systems, which would contribute to an improved service for customers and an improved environmental profile of these services. The novelty of the concept is the possibility to find new profit centres for companies, to establish closer and longer relationships with customers, to organise feedback from the sale and use phase back to the design phase, to apply system approach that widens the scope from one company to a chain of companies collaborating on providing a function to the customer, and to incorporate environmental considerations into the system design. The PSS perspective encloses both the production and consumption sides of a product-service chain.10 The name of the concept highlights its systemic nature. In businesses the same framework of actions is often referred to as functional sales. However, functional sales are often confused with operational leasing. There is a considerable difference between operational leasing and functional sales. Operational leasing does not imply any sufficient product reuse, while functional sales, directed towards ensuring the function provision, may stimulate the reuse of old products and second-hand components in order to reduce the overall cost to the function provider. Many companies are already working on introducing and developing various aspects and elements of PSSs. There are companies that, for instance, conduct LCAs, apply eco-design and concurrent engineering, or outsource supporting functions to other companies. As a system-based approach, the PSS concept aims to improve overall system efficiency, along with improving efficiency of each system element. In order to successfully address competitive challenges, companies must master not just a few, but all of the key elements of the system and constantly improve the most important to the company strategy elements. They must carefully align these
10
More on background information of the product-service system concept see White, Allen L. , Ph.D, Mark Stoughton, and Linda Feng. (1999) Servicizing: The Quiet Transition to Extended Product Responsibility. Boston: Tellus Institute.; Mont, Oksana. (2000) Reaching Sustainable Consumption through the Concept of a Product-Service System (PSS). . Stockholm: Nordic Council of Ministers, to be published; Heiskanen, Eva and Mikko Jalas. (2000) Dematerialization Through Services - A Review and Evaluation of the Debate. Helsinki: Ministry of Environment.
13
elements to maximise their complementarity with one another and with the environment. According to Collins and Porras, the truly outstanding companies do not “put into place any random set of mechanisms or processes. They put into place pieces that reinforce each other, clustered together to deliver a combined punch. They search for synergy and linkages.11 At the company level, the PSS concept tries to optimise existing resources for extracting as much value to the customers as possible and to improve environmental profile of company products and activities. At a higher level, a systematic approach opens up new business opportunities through exploiting overall system innovation. New solutions and optimisation opportunities may be found when companies concentrate on their core activities and create partnerships with other businesses, together delivering the function. This strategy is named as one of the reasons for the growth of business services in recent years.12 It allows companies to reduce costs, increase quality and to specialise. Cost reductions are mostly expected from the improved organisation of the service part of the PSS as, historically, design efforts were directed towards product and production, leading to an increased productivity and corresponding decrease of production costs. The cost of services, associated with the product provision to the customer remained high and, thus, in order to minimise the total cost of the product-service, producers need to improve productivity of services. Services that are included into a PSS comprise all services of delivering the solution to the customer, i.e. transportation, marketing, sales, and existing or created remanufacturing schemes, which aim at extending product-service functional life. The shift towards the provision of function to the customer entails, together with business opportunities, considerable changes in companies’ philosophies and structures. For example, product design for reuse and renewal adds a new dimension to the existing design efforts. Financial and accounting functions might need to be re-organised to manage different 11
Collins, J.C., and J.I. Porras. (1994) Built to Last. New York, NY: Harper Business.
12
Mogensen, Johnny, and Nikolaus Thumm. (2000) Outsourcing of Business Services. The IPTS Report November, no. 49: p. 32-39.
14
cash-flow requirements. Marketing may also be affected, and there might be a need to reconfigure pricing mechanisms and distribution channels. For some product categories, product support services and systems for monitoring products’ condition at customer sites need to be installed. The reuse and renewal of products requires the establishment of collection and recovery systems. The idea of applying experiences from improving production and production equipment to consumer goods might lead to the situation, where consumer goods are considered as productive assets. This shift in the perception might stimulate the appreciation of material products not for their price per unit, but rather for the units of function they might deliver over their lifetime. Thus, an incentive may be created for producers to improve the efficiency of this value generating system. In these circumstances, customers play a role of co-producers of value, as they extract the product function in the use phase13 and considerably shape the environmental profile of the entire system. By establishing long-term relations with customers, PSS providers secure the market share. The direct feedback from customers to producers ensures continuous improvement of the product-service system. To be successful and applicable practically, the concept of product-service system requires further development at both theoretical and practical levels, along with establishment of effective incentives that reward functional thinking, accessible facilities and networks of companies, and cultural norms that support the shift towards more sustainable production and consumption practices.
13
For example, customers now have the possibility to pre-select new music releases. Music production companies use communication systems to download CD releases to computers in retail outlets. A blank CD is taken, the recording is made, the promotional package jacket is printed in colour, and the CD is assembled for sale. Logistics costs drop sharply as flexible manufacturing costs are increased. The customer becomes a part of the production process instead of being a totally separated entity.
15
16
3 Potential role of PSS in increasing competitiveness of the Swedish industry This chapter tries to find an answer to the question: if the intensification of product use and the prolonging of product life cycles have economic and environmental advantages, why do some companies adopt these concepts as strategic measures and some enterprises do not. What are the forces that trigger their course of action? What factors favour these concepts? Thus, this chapter provides an overview of drivers, expected and experienced benefits, and barriers to the introduction and development of a productservice system in companies from different industrial sectors.
3.1 Drivers 3.1.1 Increasing environmental awareness Increasing environmental awareness of the general public and society resulted in more stringent regulation, a change in its focus from process to product orientation and in increasing the number of stakeholders that are concerned with the environment and putting their demands on producers.14 All this leads towards increasing pressure on companies to improve the environmental performance of their operational activities, products and services.
14
Meima, Ralph. (1997) Environmetrics. Measures of Corporate Environmental Performance.
17
3.1.2 Market-based regulatory instruments The increased environmental knowledge of the general public has also resulted in a change in the nature of the regulatory instruments. New market-based instruments, such as extended producer responsibility (EPR), eco-labelling, etc. provide incentives to companies to find the most innovative and cost efficient ways of fulfilling the regulatory requirements. The life cycle basis of many instruments and approaches implies the minimisation of the environmental impact through the entire life cycle, including the use phase. These drivers, however, are only implicit on the drive towards the shift to functional thinking.
3.1.3 Market drivers •
•
•
18
Development and standardisation of technology lead to increasing difficulties with product differentiation on the market, which leads to fierce price competition, resulting eventually in low profit margins in many industry branches. Many companies mentioned this as one of the most important drivers. A clear example of this point is the electricity producing industry in Sweden. Due to this situation, companies can no longer only provide their traditional products or services. The challenge for companies is to become more innovative in a short time (see next points). Some companies have tried to find ways to diversify their product offers and deliver unique functions or services to customers. Chapter 4 provides a short overview of existing and potential activities of Swedish companies aimed at finding new ways of profit generation. Deregulation and globalisation lead to an increasing number of new players on the market and fiercer competition. According to the companies, it is not enough to compete based on product quality and the increasing efficiency of the operational and production processes. Companies are competing for the customer—they are building direct customer relations, intensifying contacts or increasing contact frequency with the customer, all with the purpose of creating added value for customers. The need to protect the market share via discouraging newcomers by increasing the quality level throughout the supply chain was also mentioned as a possible driver for companies to find new opportunities for improvement of the quality of their offers.
3.1.4 System-based approaches Ad hoc or one-time actions and projects proved to be insufficient to ensure the environmental sustainability of companies. Therefore, one could witness the development of systematic approaches for integrating environmental issues into the current practices of companies, starting with Cleaner Production and Pollution Prevention. The most widely spread approach to systematically managing environmental impacts of companies is an environmental management system (EMS), for which an international series of standards has been developed. Green Concurrent Engineering (GCE) was introduced as an approach that incorporates design for environment (DfE) into system-based EMS. Further development towards system-based approaches lead to the incorporation of life cycle thinking into design approaches and into management practices of companies in the form of integrated chain management (ICM). Instruments such as life cycle assessments (LCA) and life cycle costing (LCC) are becoming more and more widespread. The development of the standards for environmental management and environmental life cycle assessment lead to the broadening of the scope of companies’ efforts, stimulating them to find solutions outside the company gates (to put pressure on their suppliers) and along the product life cycle (chain management). The PSS concept calls for the supplying of a function through a total offer, including products and services, such as insurance, guarantees, maintenance and product upgrading, repair, take-back, refurbishing, etc. The product chain is extended into a product-service system, which includes networks of companies supporting the provision of the function.
3.1.5 Increasing time of product development Shorter product life cycles and increasing time for product development lead to the situation where companies need to come up with new offers on the market all the time, meaning that there is a lack of time for designing and developing really innovative products that are competitive. The companies proposed some solutions for reducing the time to market: •
Customisation of product design and development of new products in parallel. This is likely to increase the cost of product development and the company might be forced to buy other companies in the future in 19
order to spread the costs over a larger production volume to stay competitive. •
Diversification of the product offer on the market by the provision of value added services, which might require less time to develop. However, as was clearly indicated by companies, special attention should be paid to estimating or evaluating the time needed for the development of new services to clearly prove that the time to market will be less in the case of product-service systems.
It is expected that slowing product lifecycles might provide an opportunity to improve existing products and to gain time in order to improve quality and to design truly innovative products.
3.2 Benefits This section provides an overview of expected and experienced benefits of the shift towards selling a function instead of selling products. The expected benefits mean those, which are generally found in the literature on this subject and which other authors mention. The experienced benefits refer to the benefits, which were discussed with and encountered in practice by companies.
3.2.1 Competitiveness and new ways of profit generation Producers are currently competing based on the product price, which should be low enough to be accepted by customers. They are always searching for a balance between two extremes: low quality-low price products and high quality-high price products. It could be said that they are tied by the necessity to balance between these two alternatives. In the case of function selling, the competition of product prices is shifting towards competition of functions, which means that product price, and thus raw materials price, does not play such as decisive a role. In these circumstances the pressure for finding “the golden middle” between quality and price is shifted towards price of function and it becomes an incentive for the producer to manufacture durable and high quality products that ensure function provision to the customer. 20
In addition, functional sales demonstrate that the economic profit and environmental benefits might not necessarily be greatest within the company. Close collaboration with partners within a product-service system allows sharing economic benefits found outside the company. Some companies mentioned that clearer cost structure within the functional sales arrangements is an important benefit for them, allowing the development of more long-term planning.
3.2.2 Customer Relationship Management (CRM) Many companies indicated that establishing longer relations with the customer is a very appealing feature of the PSS concept. Signing a contract provides the producer with an idea about the period of time that the customer will be in touch with the company. The upgrading or maintenance service provides an opportunity to contact the customer and to provide updated information about the company’s offers. Even more important for some companies is the possibility to expand services into customer’s facilities, with the possibility of providing a valueadded service such as chemical management. By doing this, suppliers and producers build up knowledge about the needs of the customer. By building closer relations with customers, the company may be able to replace existing brands with their products or decrease the defection rate among its customers, and/or prevent them from moving to another provider.15 Moreover, the company gets a direct feedback from the customers about whether they is satisfied with the service, and what can be improved. Producers can even develop new products with their customers. Besides, there is also a possibility to not only meet, but even to create new customer demands for function provision, which may give a competitive advantage. Companies highlighted the fact that providing a diversified range of offers can facilitate the process of attracting new customers, which might be of great importance in especially mature industries and markets. Moreover, they stressed that the opportunity to avoid the initial investment of buying a
15
Buttle, F. (ed.). (1996) Relationship Marketing. UK: Chapman.
21
product and instead pay per use over time might be an important argument in winning over the customers. For companies such an alternative is also beneficial, because they can better predict future financial flows that are vital for the planning of business activities.
3.2.3 Compliance to existing and coming legislation Functional sales provide producers with an opportunity to turn existing or forthcoming legislation into a competitive advantage.16 First of all, environmental improvements could be found if the starting point for the company is function of the product, not the product per se—the company might be able to find solutions to environmental problems outside the current shaping of the product and production processes associated with it. Secondly, legislation based on the extended producer responsibility might trigger a responsible company to improve the environmental profile of the product outside the company’s gates by setting certain demands on suppliers, by streamlining logistics and by rearranging relationships with retailers and customers. Of special importance is the EPR-based take back regulation that, for certain industries, might serve as a starting point for environmental improvements. It is expected that the need to take back old or impaired products will direct companies to recycling and eco-design activities. Companies might chose to comply with existing and future legislation, while finding new sources of profit generation and improving their overall image.
3.2.4 Ensured inputs Closing product cycles allows companies to have a constant flow of “raw materials”, which, after a certain treatment, can be used for further production. Having a secondary source of raw materials directly from the market can be especially profitable when there are strong fluctuations in raw material prices. Besides, there are also environmental benefits. Companies
16
22
Hart, Stuart L. (1997) Beyond Greening: Strategies for a Sustainable World. Harvard Business Review 75, January-February: p. 67-76.
re-use components from products that were used on the market instead of consuming valuable primary raw materials.
3.2.5 System design It is envisioned that retained ownership might boost the freedom and innovation level of product design due to broadened scope of design application—from product design towards system design, which includes products, services, infrastructures and networks. This point is illustrated by the fact that remanufacturing and take back schemes arranged as elements of a PSS, can reduce life cycle costs and improve environmental performance of both suppliers and customers. Thus, improved efficiency of one element contributes to the improved efficiency of the system, if interrelations between system elements are in the focus of the PSS design. Take back obligations, if implemented alone, might be associated with an enormous amount of effort and use of resources in a company, even if company acclaims the potential cost reduction from remanufacturing and recycling. Linking these obligations with an opportunity to create added value for customers, establish longer relationships with them, and diversify product offers on the market—provide system solution to customers, can turn out to be a more fruitful strategy. “Taking a system view, and seeking to optimise outcomes across a range of stakeholder interests does not require a retreat from traditions of self-interest, free markets, free institutions, or private property. On the contrary, it suggests a deeper understanding and embrace of those concepts, at a higher level of synthesis”.17
3.2.6 Environmental benefits The PSS concept is expected to have a number of environmental benefits. •
17
The main potential benefit is that it creates economic incentives for the reuse of used products and components in order to minimise the cost of
Shireman , William K. (1999) Business Strategies for Sustainable Profits: Systems Thinking in Practice. Systems Research and Behavioral Science. vol. 16, no. 5, p. 461.
23
function provision to the customer. As the provider owns and maintains the product during the use phase, and thus controls maintenance and repair, this facilitates the reuse and refurbishment (remanufacturing) of the products. Remanufacturing can also reduce the need to manufacture new products, thereby reducing raw material and energy consumption, as in most of the cases, the inputs into remanufacturing are smaller than the inputs into manufacturing. For example, manufacturing automotive starters and alternators requires over seven times more raw material and energy than remanufacturing.18 •
•
•
•
18
24
The time of taking back products due to their wearing out can be identified more precisely and in a preventative manner, to ensure that function is provided at any time. The same holds true for the production equipment. This prevents increased product and production equipment turnover and the resulting premature waste. Increased reuse of products and their elements decreases turnover of products and their elements through the production cycles and increases the lifetime of each element or a product. This leads to decreased use of virgin materials in production. A disputable question concerns the possibility of increased transportation flow of products and their elements for reuse or recycling (see section 3.3.3). However, the distribution channels used for delivering products to the market are often used for bringing back old or impaired products from the market to the customer. The PSS concept provides an incentive to the PSS provider to educate customers on how they should use the products so that they extract maximum utility of the product with the least environmental impact possible. The absence of ownership transfer to the customer at the point of sale facilitates the use of more advanced technology both in production and in products, as producers are not tied by the product price to the same extent, as in the case of selling products. There is a possibility that the
Steinhilper Rolf. (1998) Remanufacturing: The Ultimate Form of Recycling. Fraunhofer IRB Verlag, Stuttgart, Germany, p. 98.
new technology will be more environmentally benign. The same is true for the materials used in products—they might be more expensive and environmentally friendly, but still accepted by customers, as they are paying per function unit, not per product unit. There will, of course, be a correlation between the product price and the price of functional unit. However, the idea of selling functions is to make more high quality products (and also more environmentally adopted, less environmentally damaging or demanding) that could provide more functional units to the customer, thus reducing the price of each functional unit.
3.3 Barriers 3.3.1 Company-related barriers System innovation is a big step for a company. Change is required in the internal and external organisation, the company’s mission, and in its way of thinking. Some of the reasons for companies to reject a product-service approach are: •
•
•
Technical knowledge and product quality control are the core businesses of the company, along with producing products. Therefore, companies might want to keep control over these core functions. The functional sales might make companies vulnerable due to a deficit of knowledge and expertise if they outsource supporting functions. On the other hand, with products becoming more and more complex, companies cannot be experts in all emerging areas. To stay competitive they need to find areas where they are the best and outsource supporting functions to others to keep the quality of produced products and provided services at the highest level. The company is not large enough—selling service and providing a stable function often requires personnel involvement into function provision and maintenance, or investment in information technology. Information technology increases the possibility for small companies to employ the PSS concept. On the other hand, many markets are undergoing dramatic changes due to the development of electronic commerce. This development often leads to a significant decrease of reseller margins and 25
sometimes, even entire links in the supply chain are becoming completely superfluous. There is a potential danger for small companies to become such a redundant link. •
•
•
•
•
26
The PSS concept is quite new and challenging, as it requires a substantial change in the way companies see themselves and their businesses. It might involve risks, and can cost money in the initial stages for establishing contacts, education of personnel and chain actors, informing stakeholders, etc. It is often mentioned by companies that the concept can create an internal competition between new sales and functional sales, new sales and after-sales, or sale of volume vs. efficiency sales. Existing internal company functions may act as PSS implementation barriers. For example, many internal accounting systems are based on a number of product units or volume of product sold. Financial functions might need to be restructured to cope with different cash-flow requirements if the function of products is sold. Due to this, there may be also barriers with regards to external methods for accounting and reporting. The introduction of the PSS concept is often associated with a different marketing organisation, which might reconfigure pricing and distribution channels. It not only includes logistics systems downwards in the product chain, but also the organisation of a back tracking system, i.e. the collection and physical recovery systems for managing the return of impaired and old products; operational processes for renewal of products to re-create value of impaired or old assets, re-entry operational processes to utilise renewed assets. For certain product categories, the function provider needs to develop product support services and systems for monitoring products’ condition to manage producer-owned products at customer sites. This means entering customers’ facilities and processes, and getting access to the information about some of the performance parameters of the customers’ processes. This might be a sensitive issue for customers and a strong sense of trust should be present in such relations, which might be costly to establish.
•
•
There might be a risk of increased time-to-market due to increased information requirements for designing a product-service system. As with anything new, the first trials will be the most time consuming. With time, special databases about existing schemes for taking back end-oflife products could be created to facilitate the process. There might be a possible increase in transportation of service experts, who monitor and maintain products at the customer sites. The information technology is to play an important role in minimising servicing-related transportation by providing opportunities of distance monitoring, distance testing, and network support.
3.3.2 Market-related barriers •
•
•
•
Several companies mentioned lack of regulatory driver as the main barrier for introduction of functional thinking into business activities. Some companies also named absence of market demand and lack of competition driver as a barrier to investing into pursuing really innovative ideas. An important barrier for the dissemination of the PSS concept in companies is the fact that those companies, which utilise the concept, are not very eager to share experiences with other companies, because this concept may present new business opportunities and provide competitive advantage. Infrastructure for change may be lacking, for example, absence of collection points for particular products; or absence of technology for closing material cycles. Or on the contrary, the presence of an infrastructure might impede the development of functional thinking, as in the case of washing machines and washing services (section A 2-4).
3.3.3 Concept-related barriers There are mainly two concept-related barriers. The first barrier is a lack of information about environmental features of product-service systems. Hard data are lacking that would show that PSSs are environmentally superior to 27
selling products. An example can be remanufacturing activities, which may not be environmentally beneficial if they prolong the life of an inefficient product. It may be preferable to replace rather than remanufacture products that have a high environmental impact during use, such as electrical and electronic goods.19 The environmental costs of manufacturing a new, more efficient product are less than the costs of merely extending the product’s life through remanufacturing, unless remanufacturing incorporates product upgrading. The second barrier is a risk of PSSs generating rebound effects. As functional sales do not tie customers money into the initial stage of buying a product, this money could be spend on more environmentally damaging activities.
19
28
Kimura, Fumihiko. (1999) Life Cycle Design for Inverse Manufacturing. Proceedings of the IEEE International Symposium on Environmentally Conscious Design and Inverse Manufacturing, IEEE, February, p. 997.
4 Companies’ activities of interest within the PSS framework 4.1 Overview of companies’ activities The following chapter presents the overview of the activities of companies that are of interest for the concept of product-service systems or functional sales (the name which is more often used in businesses). This overview is a result of personal communications and telephone interviews with companies of A and B groups (Table 1). More detailed notes of issues discussed with the companies can be found in Appendix 2. Beside communication with these companies, a literature research was conducted to find more examples of Swedish companies shifting towards selling functions, providing services and presenting elements of product-service systems. These companies comprise the group of C-companies (Figure 1). The collected cases are presented in Table 2, which classifies the examples found into several categories below: •
Service integration / addition
•
Product extension/repair / Servicing the products
•
Leasing
•
Renting
•
Pooling/sharing
•
Product substitution 29
•
Production on demand
•
DSM
•
Least cost planning
•
Remanufacturing activities
•
Extending design phase into use phase / outsourcing
•
Providing information about products’ environmental profile
•
Selling system solutions Distance monitoring of product performance / Remote action /Application feedback / Network expertise
•
Financial services
•
Table 2 Overview of the companies’ activities that are of interest for the concept of productservice systems Sector
Company
Project
Service integration / addition Appliances
Electrolux Professional appliances
Mobility
Wascator - Upgrading old launderettes to new, additional services, such as ironing and delivery Ordering and paying for tickets for public transport via Internet
Mobility & IT
Volvo Car Corporation
Furniture
Tibro The future profit is envisioned to come not Förenade from selling furniture, but from provision of Möbelfabriker furniture and interior decoration services. Future scenarios may even include free of charge furniture, while profit centres might be found in the payment for service.
30
Volvo, Sweden integrated GSM telephone with built-in GPS unit for satellite navigation, linked directly to a Volvo “On Call Centre”, which provides a constant assistance to the driver.
Food supermarket
Matomera
Web-based supermarket provides a weekly menu and special menus. This way of selling products eliminates the need for fancy supermarkets as the company owns only storage area.
TV-HiFi-Music Thorn
Provides 3 options of using the product function: rent, financial schemes and buy. These possibilities are explained on the web. However, no environmental information is provided.
Textile
Tvättman
Co-operation of carpet producers to offer better service through customised solutions
Mobility
Volvo Busses
Besides leasing busses, the company also supplies driver training to its customers. This service showed to have large environmental as well as economic gains. Results showed that after the training, fuel consumption could be reduced by 16%.
Carpet
Reny Tvätt AB
Leasing of carpets and cleaning and repair services
Product extension/repair / Servicing the products Furniture
Tibro Refurbishment of the second-hand furniture is Förenade foreseen as a business opportunity for Möbelfabriker provision of the furniture function to the market—furniture is renovated, some details of external design are upgraded.
Mobility
ASG
Provides repair services Leasing
Appliances
Euroclean Electrolux
Service Company, specialised on repair of machines and appliances
Furniture
ENG
On-going project leasing of furniture for kids e.g. Cradles, child’s chairs etc.
Mobility Textile
Aquarium
Internet based Leasing Service for cars Berendsen Textil Service AB
Carpet leasing
AkvarieLeasing AB
Leasing of aquariums
Leasing of working clothes
31
Aquarium
Akvariehajen
Leasing of aquariums
Mobility
Volvo Busses
Leasing of busses to small and medium companies in UK. The company has a leasing arrangement where the customers are charged per km driven.
Aquarium
Levande Interior
Leasing of aquariums
Aquarium
Akvarievärlde Leasing of aquariums n Stockholm AB
Video-DVD
Thorn
Leasing of Video-DVD products
Plants
Hässelby Blommor
Leasing of plants Renting
Mobility
ASG
Rents out vehicles
Housing
Private cottages
Renting out cottages to several people throughout a year
Housing
Hotels
Time-sharing principle is applied to the hotel sharing programmes with the difference in that people are buying shares of the hotel
Carpeting
Björkmans Entremattor AB
Renting out carpets and their take back at the end of the contract.
Carpeting
Formec AB
Renting out carpets and their take back at the end of the contract.
Housing
Private individuals
Apartment renting is a common practice Pooling/sharing
Mobility
Lund bilpool
Mobility
Lund Car sharing University car sharing
Mobility
Majornas Bilkooperativ
32
Car sharing
Car sharing in Göteborg
Textile
IT
A number of professional organisations that organise sharing of costumes, evening gowns and suits. Alfaskop
Sharing of computer memory
Appliances/Wa Community shing machines washing rooms
Washing rooms and centres are widely used in many communities instead of individual washing machines installed in each apartment
Product substitution IT/mobile
Telia
Virtual answering machine
IT/mobile
Telia
Environmental statement of accounts is presented only on Internet
Mobility
SJ
Combination of road and rail for transport
Packaging
Tetra Pak
Videoconferences By substituting business travel and personal meetings with videoconferences Tetra Pak minimised costs for travel with 15 million SEK, corresponding to app. 10% of all company costs for travels, ordered within Sweden.
Mobility
Scania
Sells transportation services in United Kingdom instead of selling trucks. Production on demand
Textiles
Pelote.com
Every PELOTE shirt is sewed in accordance with each customer individual measurements. It is non-ironing textile – savings of electricity for ironing, internet-based sales, lower prices for customers. Additional advice on the site about washing conditions.
Demand Side Management Appliances
Electrolux
Pay per Wash - Professional leasing of washing machines to private households
Utility
Sydkraft
Contracting concept to save energy Companies offer their employees cheap tickets for public transport to avoid car traffic
Books-ondemand
20
Books-ondemand
Ordering, paying for books over the web20
http://www.books-on-demand.com 33
Video-ondemand
Comhem
Provides opportunity to order movies, matches, etc. over the Internet directly to the TV. Least cost planning
Chemical
Chemical Management Services
Provide the efficiency of the function rather than sale volumes: they provide the same function fulfilled by their chemicals but promise resources reduction and cost reduction for their customers
Remanufacturing activities IT
Alfaskop
Provides a service of recycling of used IT hardware
Appliances
Electrolux
Motala plant for refurbishment and reuse of second-hand parts in new products. More than 4 000 damaged or used appliances that otherwise would have been scrapped have today been refurbished and sold back to the market, since the start of the refurbishment project in Motala, Sweden in 1999. This way of going beyond recycling to reusing the products instead of the material offers customers the choice of more inexpensive appliances while making material use more efficient and still generating profits.
IT/mobile
Ericsson
The company participated in the European project on recycling of mobile phones called Returtelefoni. Co-operation with other companies or outsourcing the transportation function may become crucial factors for success of the entire recycling system. In the case of Ericsson, transportation is performed by vehicles of ASG and Bilspedition, which transport back collected mobile phones during their usual trips. If compared to the parallel pilot project in UK, where such co-operation with transport companies did not exist, the Ericsson’s system is 60 times more efficient in terms of environmental impact.
34
Insulation
Isover Gullfibers
Isover Gullfibers glass wool consist of up to 70% of recycled glass. If Isover Gullfiber did not take the glass, every third glass bottle in Sweden returned by households for recycling 30.000 ton of glass annually would be dumped. Besides energy consumption is lower in this case than in case of new raw materials. This scheme is working in co-operation with Svensk Glaså tervinning.
Flooring
Svenska Sika AB
The company recycles Pet-bottles and makes new sort of flooring, marketed as Sikafloor PET tech.
Furniture
HÅG
Develops and produces office chairs, has started to change newly produced polypropylene for the recycled material from lids of PET bottles. Lids are used for production of chair seats and backsides for the model HÅG Scio. Using the recycled material provides environmental and economic benefits due to the decrease of energy consumption and minimised air emissions. The project is collaboration between Dynoplast and HÅG
Extending design phase into use phase / outsourcing Cleaning
ISS Sverige AB
Right dosage and effective cleaning methods; training of a personnel in environmental issues.
Providing information about products’ environmental profile Mobilty
ASG
Miljöreklam på hjul – new technology is tested in co-operation with customer. Despite more expensive technology, which customer is rarely prepared to pay for, ASG want s to create a demand for above all tests of alternative fuel or technology. Customers are provided with an opportunity to market, together with ASG, their environmental message of a unique vehicle. Some customers liked the idea and can thus create a market demand for more expensive but considerably more environmentally friendly solutions.
35
Utility: energy
Vattenfal
Developed an EPD, which comprises presentation of the company and offers, information about LCA studies, declaration of products’ content and recycling declaration and information from a certification body. Selling system solutions
Appliances
Electrolux Professional appliances
Besides equipment, system solutions include installation, training, suggested layout of equipment location, support with environmental permits, market surveys, contracts for maintenance and repair, guarantees, and financial schemes.
Appliances & IT
Electrolux and Ericsson
A jointly owned company for development and marketing of products and services for the Networked Home. The company will define a complete user-friendly “Plug and Use” infrastructure, making household appliances networked and connected to external providers of information and services over the Internet.
Appliances
Electrolux The Concept Design Team
The project “Essential Range” on designing a group of free standing appliances for the first time buyer, with a stylish unique design incorporating simple functions. The criteria are aesthetics, innovation and recyclability. The Essential Range Washing machine is placed above the toilet, thereby saving space. It is ergonomic, back saving, and has a water tank that reserves the last rinse for the next wash or to flush the toilet.
Appliances
Electrolux The Concept Design Team
The Kitchen Sink Dishwasher is a combination of a sink and a dishwasher in one. The dishwasher is placed below the detachable sink. While using the dishwasher, the transparent sink part is turned and used as a lid to the machine. The Kitchen Sink Dishwasher saves space, which gives customers with small kitchens the opportunity to have a dishwasher, as well as saves materials, as it is one unit in stead of two.
36
Mobility
Volvo Mobility Systems
Volvo’s new business unit, Volvo Mobility Systems, uses all available technology in applications such as the development of traffic systems in major cities. Volvo Mobility Systems will, in addition to offering custom-designed vehicles, assist urban and regional authorities with the development and financing of facilities such as fuel distribution systems.
Mobility
ASG
Provides entire logistics systems, including renting out vehicles and providing repair services
Utility: Light
Stockholm MFO
Stockholm MFO provides opportunity to buy lighting service: lease the light. The “Lisa lyset” includes everything from planning, contact with purchasing lighting fitting company, tender procedure, contract writing and installation of electricity until the financial arrangements are made.
Mobility
Volvo Busses
Provides complete transport system solutions to cities.
Medical technology and healthcare
Gambro
Gambro is continuing its policy of owning entire dialysis clinics, providing system solutions, if needed, to its customers. Clinics may be leased to the staff. In several countries the trend in the medical care sector is towards dialysis treatment in cost-effective, privately owned units. It means that Gambro’s equipment might be quite expensive for such units. For such cases the company developed a strategy that is called “price per treatment”— doctors are paying per treatment, not for the unit of equipment bought, avoiding initial investments into the equipment.
Utility: Energy & IT
Vattenfall & Sensel
Intelligent services – Sensel-box, which will be able to provide information to customers about performance of their home appliances. An internet homepage is also provided so, that customers will be able to activate, regulate and control all services they will by from the companies.
37
Utility: Energy
Vattenfall
Overall solution for the outsourcing of energy facilities. The concept is based on the principle of assuming the responsibility for the operation, maintenance and investment in different types of facilities, for example heating and climate, cooling and compressed air, electricity installations and energy systems. The customer gains the benefits of greater operational reliability and more efficient energy consumption as well as access to released capital, time and personnel, and can use more resources for the purpose of the its core business.
Distance monitoring of product performance / Remote action /Application feedback / Network expertise Appliances & IT
Electrolux and Ericsson
The new company will act as a catalyst for a variety of electronic household services through the establishment of partnerships between the traditional Electrolux retail channels, service providers and network operators. For example, when selling a new freezer the retail channel will also be able to bundle on-line supervision of temperature and preventive maintenance in the offering.
Mobility
Volvo Mobility Systems
In case of a severe accident the “On Call Centre” of Volvo Mobility Systems is alerted automatically, and if the operator fails to get into contact with the driver, she/he sends the assistance. The operator can also provide guidance over the telephone and help in obtaining information about the traffic situation along a given route or the area.
Heat exchangers
38
Alfa Laval
Provides function of thermal pumps—the performance and effectiveness of the equipment are monitored by sensors and the information about any changes is transmitted to the function provider, who can test the equipment, run simulations and take decisions on distance, involving if needed expertise of expert network.
Chemicals
Akzo Nobel
Conducts inventory control at customer’s end from a distance by using telemetric
Mobility
Volvo Truck
Dynafleet programme that aims to improve the efficiency of the transport. It is developed together with the customers and shall provide a linkage between the vehicle and the controlcentre to increase the utility of the vehicle through better fleet management. There are three basic aims with Dynafleet, improved fleet management, information for improved accessibility and improved communication between driver and the transport company. Dynafleet also allows storing information about the speed of the vehicle, the weight, fuel efficiency, etc. This information can then be used at the service workshops that provide a foundation for the range of maintenance needed.21
Appliances
Electrolux
A project on Gotland, where the performance of washing machines is monitored from a distance. Financial services
Insurance
Länsförsäkrin gar Miljö AB
Provides services for insuring of recycling management
4.2 Evaluation of companies potential for introducing a PSS This section provides an overview of the theoretically estimated potential for introducing a PSS to the companies of A and B groups that represent 14 different industry branches (see Table 1). Not all of them served as background for the further PSS model development in Chapter 6, because some of them are not involved in the product design phase, and thus, cannot contribute to the shaping of the entire product-service system. However, they contributed to the deeper understanding of how some elements of a PSS could be developed.
21
Volvo Lastvagnar. (1997) Eco Mobility. Dynafleet information systems.
39
The wide scope of the companies included in the study is justified by the necessity to find as many current activities and elements of functional thinking on the market as possible, in order to develop a PSS model based on real data and cases. Below, Figure 4 illustrates stages of a product life cycle with remanufacturing activities. This figure further serves as a reference point for the description of current practices in companies and for an illustration of the life cycle stages, in which there is a theoretical potential for the PSS concept development. Reuse* 12
Resource extraction 1
Design 2
Manufacturing 3
Sale/Use contract 4
Use 5
End of current product use
Servicing and repair 6 Refurbishment 8
Buy back or Take back systems 7
Remanufacture 9 Technological and design upgrading 10 Recycling 11
Figure 4 A product life cycle with remanufacturing activities The identified potential (showed in Table 3 by letter P) is not based on the thorough analysis of economic or environmental data; this should be done if a company is considering continuing in a pilot project on PSS development and implementation. Table 3 provides an overview of the companies’ current and potential business areas in product life stages as depicted in Figure 4. The evaluation shows that the companies that produce material products usually have the potential to establish the remanufacturing system, i.e. ENG, Alfa Laval, Gambro, etc. In some cases, there is the potential of gaining control over the second-hand market, i.e. ENG. It is clear that a lot needs to be done in the area of developing products in a way which would facilitate product disassembly and refurbishment.
40
Volvo Busses
THORN
VCC
TFM AB
Volvo Penta
Bilpool I
Wihlborgs
Berendsen
Alfaskop
Thorn
Akzo Nobel
Gambro
Electrolux
Alfa Laval
ENG
Sydkraft
Table 3 Current and potential business areas of companies mapped on a life cycle with remanufacturing activities
Resource extraction Design Manufacturing Sale/use contract
P P P
Use
P P
Services and repair
P
P P
?
P
Buy back or take back systems
P
Refurbishment
P P P P P P P
P P
P
Technological and design upgrading
P
P
P
Recycling
P P
P P P
P P
Remanufactur e
Reuse (not by the producer) Potential feedback provider to the manufacturer
P P P
P P
P P P P
?
?
P
P P
P
P
This shadow shows companies current activities
P
This pattern shows identified potential for companies
41
In almost all cases, there is huge potential to be utilised in the area of establishing long-term relationships with customers. This would facilitate customers involvement into the process of designing products and productservice systems either through providing feedback or in the case when the final assembly of the product or of a product-service package is shifted until after the customer’s preferences are known. It is proved to be difficult to evaluate the PSS potential of the companies that are not involved in the manufacturing of material products, but whose entire business idea starts at the distribution phase of products—service providers. This is probably due to the fact that the PSS concept in our interpretation is being developed for manufacturing companies. The main idea of the PSS concept is to predesign the entire system of providing function to the customers to ensure that it is economically feasible and beneficial for companies and environmentally less damaging, if compared to current ways of designing products and developing market strategies. There is also the possibility to improve the performance of service providers as well—to make sure that the service system they provide is optimised from an environmental point of view. Another potential area is in providing valuable feedback to product manufacturers about customers’ preferences, suggestions, etc. An analysis of the factors contributing to the development and proper functioning of a PSS is conducted in Chapter 5.
42
5 Analysis This chapter analyses the information and data collected and evaluated in Chapters 3 and 4.
5.1 Understanding the product within the PSS concept 5.1.1 “Functional products” vs. “emotional products” The possibility to replace products with services, usually in the form of switching from owning a product to leasing-renting-sharing, depends, to a large extent, on the type of a product to be replaced with a service, and how customers feel about owning the product. Thus, a distinction between socalled functional and emotional products has to be made. Functional products are the products that only provide a function to customers. Customers are only interested in the function delivered and are not emotionally attached to these products. For example, utility companies provide “functional products”, with which customers do not have emotional attachment., i.e. energy, water, etc. Emotional products not only provide function, but also create image, provide a certain status to customers and make customers feel emotionally attached to these products. Therefore, a somewhat different incentive structure for customers needs to be developed if emotional products to be substituted with services. It is not so easy, as many studies showed, to replace car ownership with mobility services provided by car sharing and pooling schemes. Purely financial incentives, which work better in the case of functional products, need to be substantiated by image-making and/or status-building incentives in the case of emotional products. 43
5.1.2 Traditional products vs. new, innovation products For traditional industries and products the PSS concept might mean total reorientation of the company profile—searching for an answer about what function a product really fulfils might provide answers that are outside the traditional line of business of the company. This might be seen as a business opportunity or even a survival strategy for the company in a traditional sector as it might have been working with the same product for several decades. Innovation outside the traditional product and within the function might provide greater choice of alternatives or options. New products correspond in this context to the products with newly found or developed functions, such as computers or mobile phones. It is usually justifiable to say that these products have not yet exhausted their innovation potential—the way the product fulfils the function, which it was created to satisfy. It is, however, also true that product life cycles have been getting shorter than ever, particularly for high-technology products,22,23 resulting in the time between additions of functions to these products is becoming shorter and shorter. But producers need time to develop new functions, and therefore, for such products, diversification of offers on the market with additional services might gain some time needed for development of innovative products.
5.1.3 Life expectancy of products vs. life expectancy of their components One of the characteristics of many products on the market is the potential conflict between life expectancy of products and life expectancy of their components. For example, some electronics components have a time to failure of 200 000 hours, energy saving lamps—60 000 hours, etc. Despite this long lifetime, they become a part of short life products. This can result from the lack of communication between final producer and component supplier. But most probably it is a result of different interests of various
22
Rosenau, Mickey. (1988) Speeding Your Next Product to Market. Journal of Consumer Marketing, Spring: p. 23-36.
23
Stalk, G. (1988) Time: The Next Source of Competitive Advantage. Harvard Business Review, July-August: p. 41-51.
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actors in the chain and at which stage these interests are satisfied. For example, component suppliers are in the business of selling components to producers of final products. They are paid for the number and quality of components provided. Thus, they ensure the highest quality of their products. On the other hand, final producers generate profit from selling as many products as possible and are thus not interested in making products extremely long-lived. In fact they are interested to make products with shorter life to increase the product turnover. Thus, a conflict might be created.
Supplier
Producer
Retailer
Consumer
Figure 5 Borders of interests of the different actors along the chain Looking at the entire system, what would be required is to provide an efficient system and the needed function to consumers in the least costly manner. Instead of the common goal for the chain, there are now a number of goals, corresponding to the number of actors in the chain, leading to such sub-optimisations in the form of over-quality. Function provision with an organised system of remanufacturing could ideally provide an incentive to jointly discuss what function it is to be provided by this chain, how the entire system could be optimised and financial benefits shared between different actors, who each bare their share of the responsibility. However, transaction costs for organising the system need to be calculated and compared to benefits to be gained. The issue of component over-quality can be solved even if components are made by the same company, which produces the final product. In this case, brand image of the company might lead to over-quality of product components. Solution that is often found by customers themselves is the second-hand market for products, which are worn out externally, but still provide desired function. ENG, the producer of baby prams, can illustrate the point. A baby pram is designed to serve for at least 4 years, while each customer needs the product for a maximum of 12 months. The entire second-hand market is an open business opportunity for the company, who might find it economically feasible to take over the second-hand market by 45
providing collecting points for baby prams, upgrading them and selling again, maybe for a lower price.
5.1.4 Durable vs. non-durable products In order to develop appropriate services and system solutions, distinction can be made between different types of products regarding their lifetime . •
•
•
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Production equipment Production equipment is witnessing an accelerated obsolescence due to fast technology development and information technology. Appropriate solutions need to be found for reuse and refurbishment of production equipment. Maintenance and upgrading services might play an important role in prolonging the lifetime of production equipment. Functional thinking may stimulate these activities as customers would pay per number of functional units delivered, rather than for a piece of equipment. Consumer durables in constant use, i.e. refrigerators and freezers. Durable consumer goods have an increasingly shorter lifetime. Partial explanation comes from the fact that profitability of the industry depends on the increasing consumption of these goods. The result is the increasing volume of wastes and growing consumption of natural resources. Finding new profit centres for companies could heal the situation in favour of long-lived, durable goods. Modular design of such products for upgrading possibility is still in the initial stage and only some product components are reused. In best cases component reuse constitutes insufficient percentage from the number of totally produced new products. Citizens are developing their own second-hand markets where products, as well as components, are reused and re-sold for lower prices. There is a potential for companies to take over these secondhand markets and organise entire new remanufacturing function within their production facilities if the right incentives are in place . Discretely used customer durables, i.e. washing machines, provide an opportunity for some companies to organise schemes for collective use of these products. A number of examples of eco-efficient services exist now that aim at developing such added value services for high-price products, which are only used for a short period of time by customers.
5.2 Understanding the function within the PSS concept There is a need to understand what types of functions are sold as part of a PSS. Two groups of functions can be distinguished. First of all, in many cases an increased product utility value is sold. This utility value of a product can be improved through different design efforts towards product multifunctionality, through the application of information technologies, which allow better function extraction by customers and wider range of service associated with the product, through monitoring of the product performance through remote monitoring devices, etc. Another type of function sold are all additional services that are not directly associated with a product, but can still add value to customers. For example, energy efficiency services are not directly linked to energy selling. If a reasonable range of such value adding services is provided, many companies talk about the provision of system solutions. For example, energy producing and selling companies take on the task of energy and electricity management at the customer site, and get paid for entire package of energy management.
5.3 Product chain characteristics and actors Introduction and development of functional thinking and the PSS concept will probably have a considerable impact on the chain structure. It is envisaged that new actors will play a role in the existing product chains, providing services that add value to products or that close the product cycle. There may be a need to consider not only the product chain in the design phase, but also networks of companies. The number of parties involved in the delivering of a function is a crucial question. The more actors are involved in the function delivery, the higher the transaction cost, and the more difficult it is to ensure the quality and the content of associated services. Less parties involved means shorter times to reach a consensus and less points of a possible faulty practices or mistakes, etc. On the other hand, the number of parties involved should be relevant for function provision to ensure that all function components are delivered by experts. Also of utmost importance is the question of shared responsibility and of shared gains. 47
5.3.1 Suppliers Every organisation and company needs suppliers to provide products, components, and/or services. The word supplier is often referred to business to business professional services, which have seen high growth for over a decade.24 Professional suppliers of products and service act as experts for their customers, which in this case are often called clients.25 Clients are the producing and manufacturing companies or organisations. The role of professional suppliers is to assist clients in solving problems and making decisions, whether this is because clients do not have the necessary expertise and skills for making an effective decision, want to save time, or reduce costs.26 They specialise in providing certain products/functions/services and enjoy economy of scale. Suppliers provide the necessary input, which facilitates or adds value to the clients’ products or solutions. Outsourcing
Supplier Supporting function
Component supplier
Products & Expertise
Producer-client
Retailer
Consumer
Figure 6 Supplier position in the chain The number and variety of firms offering professional services have increased dramatically. The companies rate from one-person companies, such as public relation firms and specialised corporate lawyers, to
24
Brentani, U. and E. Ragot. (1996) Developing New Business-to-Business Professional Services: What Factors Impact Performance? Industrial Marketing Management 25: p. 517-530.
25
Dawes, P., Dowling, G. and P. Patterson. (1992) Criteria Used to Select Management Consultants. Industrial Marketing Management 21: p. 187-193.
26
Maister, D.H., and C.H. Lovelock. (1982) Managing Facilitator Services. Sloan Management Review 23: p. 19-31.
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multinational companies such as component suppliers and advertising and marketing research agencies.27 To prosper, suppliers must depend not only on their specialised technical and advisory skills. They must also undertake planned programmes for creating and actively marketing their services to clients. Durable relationships with producers and other customers is equally important, as they, in terms of several performance criteria, evaluate their performance periodically to determine the retaining of their services. Buying different kinds of services, or outsourcing, becomes a matter of competitive advantage if a company is able to outsource some supporting or additional activities to others in order to provide additional function to customers. The outsourcing idea rests upon the notion that there is a possibility to produce some products/functions at a lower cost (scale production) or of a higher quality (based on higher expertise) if a company can outsource non-core activities.28 Companies that are selling functions can benefit from outsourcing arrangements as these add function to their offers. Considering the possibility of the PSS concept to be initiated by a supplier, two cases need to be considered separately. In the case of suppliers providing technological expertise, there is an incentive for producers to outsource the function to the suppliers, if they do not have the expertise themselves. The position of the component supplier also provides a possibility to add value to their components by the provision of, for example, installation services. The position of a component supplier makes it difficult to communicate with final customers and to keep control over the product throughout its lifetime. Therefore, a co-operation and communication of component suppliers with the clients is needed. This cooperation could ensure that the information that is valuable for the use performance of the products or separate components is transferred to the end-user. This becomes an important point especially if the client (main producer) is responsible for taking back products. Components could be
27
Dawes, P., Dowling, G. and P. Patterson. (1992) Criteria Used to Select Management Consultants. Industrial Marketing Management 21: p. 187-193.
28
Slack, N., Chambers, S., Harland, C. and R. Johnston. (1998) Operations Management. UK: Pitman Publishing.
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taken back as well further up the chain. Improved information flow could help to ensure that customers know how to use products in the most efficient way, including the efficient use of different parts and components of the product.
5.3.2 Producers Producers are the main players in the product life cycle. They design products and may design an entire product-service system. Most of the current activities of producers comprise upstream outsourcing, product distribution through retailers and sale of products to the end-users—private or corporate customers. Outsourcing activities are mainly concerned supporting functions such as chemical management or canteen services, industrial cleaning and security services. Other frequently outsourced areas are transport, goods warehousing and storage, personnel training and health care, promotional activities, and IT services. Outsourcing
Supplier
PSS
Producer
Retailer
Consumer
Figure 7 Producer position in the chain Producers are the most suitable actors in the chain for introducing the functional thinking idea and for the development of a PSS, because product is usually developed at their sites, although it might also be outsourced in some industries. Producers also have the knowledge about all legal requirements to their products, they have all necessary marketing data and also have most of the necessary functions in place. They are often the most powerful actors in the chain and those who, according to regulation, bare the responsibility for the products. Thus, producers often have an incentive to find new ways of satisfying customers with least cost. There are some possibilities for how producers could introduce the functional thinking into their business strategy and into their products. The 50
main premise of functional thinking is the changed ownership structure for the product, based on the assumption that type of ownership influences the volume and speed of the material flow in the economy (Figure 8). Whose responsibility? waste
Producer responsibility
Resource extraction
Design
Manufacturing
Sale
Use
End of current use
Figure 8 Current responsibility allocation along the product chain If responsibility is retained by producers over the use phase and the end of the current product life, there is an incentive for producers to better utilise products, design them in a way that eases disassembly and reuse at least of some parts, and use them again on the market. This new situation is illustrated in Figure 9. Producer responsibility
Producer responsibility
Resource extraction
Design
Manufacturing
Sale
Use
End of current use
Figure 9 Responsibility allocation along the product chain in the PSS The new model requires closer collaboration of producers with retailers and final customers, who become involved in the process of function extraction from products or directly buy results of the product use. Customers need to 51
be provided with a range of different opportunities that are supported by financial analyses and environmental profiles of different alternative ways of products use. They need to be made aware of the entire chain of actors, involved in delivering the function to them, and also need to be taught what is required to most efficiently extract the function, thus reducing the cost for them. It is also important, and is in the power of producers, to provide information about systems of remanufacturing and encourage customers to support them by collecting old or impaired products in certain locations. Of course, producers need to think about financial incentives for customer and functional sales provide good example of how these can be created— charging customers per unit of function provided, not per product sold. Selling functions can be quite a challenging task at the beginning. Changes in functions within companies might create some internal and external competition. Internal competition might arise between the sales department, whose main goal is to maximise sales, and the functional sales function, whose goal is not to sell, but lease or rent out, keeping the ownership for the product. This internal competition shifts into the competition for customers outside the company. The most obvious solution to this situation is to provide all necessary information about different alternatives and let the customers chose the way they want to extract the function. Another type of competition can be anticipated between the sales of new products and sales of second-hand, reused, refurbished or remanufactured products. It is probably too early to go deep into this issue, as there still not many companies who have recognised the opportunity of benefiting from the remanufacturing activities and making profits from re-products. Most often second-hand markets are initiated by private people. The very existence of such markets shows the customers’ wish to extract maximum utility for a reasonable price. It can also serve as an argument against those, who say that people want everything new and their interest for function is negligible in comparison to their desire to own and build their status through products they own. If a company takes over the second-hand market, it can discover and gain completely new market sectors with different types of needs and wants.
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5.3.3 Retailers Supplier
Producer
Retailer
Consumer
Figure 10 Retailer position in the chain The PSS concept requires a particular education of retailers and sales personal. They need to know what systems and services exist for different products of different producers. In the initial stage this can play an important role in competing with other companies, if one company provides take back opportunity and functional sales. The success of such schemes, to a large extent, depend on the quality of this information and the way it is provided to the customer and thus, on the skills of retailers or/and sales personnel. It means that producer needs to establish closer contact with them, in order to educate them (content-wise) and to show how this information should be presented (style-wise). In this closer co-operation, the retailer plays an important role for the producer as a source of information about final customers, their preferences, interests and demands. An attentive producer or service designer should pay attention or even make efforts to obtain this information from the retailer. More information on the new skills that might be required from sales personnel is provided in section 0.
5.3.4 Customers and consumers Customer Supplier
Producer
Retailer Consumer
Figure 11 Customers’ position in the chain Despite the increase of consumer power in recent years, many companies indicate that there is still a lack of demand from consumers, especially private, with regard to products’ functions and environmental characteristics of products. So far, companies have only tried to affect the buying behaviour of private customers, by addressing such product characteristics as low costs, higher quality, unique functions, faster availability, best service, 53
image, fashionable design, etc. The possibility to affect the use behaviour of private consumers was left aside. A somewhat different situation is found in the business to business relations, where the combination of strategies for selling products or equipment, addressing both buying and use behaviour, can be seen. The use behaviour becomes an important component, involving different aspects of care, maintenance, ease of operating, transparent overview of worn out components, desired form of disposal, etc. By influencing the use behaviour of private customers, increased products turnover might be prevented. There are some attempts made to affect the use behaviour through leasing or functional contracts. These contracts are often time binding for customers, who perceive this as a negative side of the provided service. The reason for this reaction is that customers see this only as a way for producers to ensure constant flow of money for a certain period of time. What customers do not see is that it is also a way to stabilise the product turnover over a period of time, which might lead to a decreased environmental impact. If this time binding arrangements are not introduced, there is a tendency that customers see the function provision as an unlimited asset for them—a possibility for constantly changing products, even with the same function. In the case of Interface Inc., a carpet leasing company with subsidiaries in Sweden, customers started to demand a change of carpet modules quite often, which lead to an increased transportation and additional carpet production. The company had to introduce binding leasing contracts to stabilise the product flow. Companies can support such decisions with environmental facts and in this way also “educate” customers and provide them with a sense of “right doing”, rather than just the sense of having to follow the rules based on companies economic interests. On the other hand, such binding contracts provide a sense of security to companies, who might “forget” to strive for the betterment of services and functions, as customers are bound by agreements and the company does not risk loosing them. Numerous examples of successful business to business relations are difficult to translate into business to customer relations. One important point to consider is the lack of time needed to explain to the private customers why they should adopt a new type of a programme, such as functional sales. “The producer usually has five seconds or one line written on a paper to get the customers’ attention to a particular product-service characteristic, 54
otherwise the purchasing will be made according to their traditional criteria and preferences, in which price is most important.” 29 Therefore, further research and practical work is needed in order to develop appropriate techniques of introducing the functional thinking to private customers and incentives stimulating the shift into this direction.
5.4 Type and size of the company selling function Any kinds of company can take part in a PSS. What might differ is the number and types of PSS elements that will comprise the PSS for this particular company. This is true for large companies and small businesses, for companies working with private customers and for business to business companies. In each company a PSS will be unique, responding to unique circumstances each company works in and to unique organisational structures and cultures. However, larger companies might have more opportunities to initiate or introduce functional thinking to the product chain due to the traditional reason—they have more resources. Big companies might have wider and diversified knowledge needed for the development of a PSS; more financial resources at their disposal to buy external expertise or invite stakeholders to the design process; and they are, in general, less vulnerable than small companies. However, some barriers also might be mentioned pertaining to the introduction of the concept in a big company. The functional thinking requires certain flexibility within the company, which big companies might lack. They may have the size to introduce, support or enforce the change in the chain, but not the flexibility to internally initiate the change in the company. Big companies have the power to introduce these ideas both upstream and downstream—they might buy the chain, set demands, or push for alliances. Upstream influence may be exercised through EMS-related demands, where
29
Pettersson, Pelle. (2000) What happens within Electrolux AB? Paper presented at the seminar "Funktionsförsäljning" - Product-Service Systems. May 8, Stockholm, Rosenbads Konferenscenter.
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big companies set requirements on the environmental performance of their suppliers. In the same fashion, requirements may be set—demand is created—concerning the functionality of the products and services. Downstream influence can also be exercised by using all traditional means plus additional networks that might need to be created. Even in the organisation of the take back system, big companies have an advantage as they have resources and a significant flow of old or impaired products, and an established logistics system. To organise such a system, small companies might need to co-operate with each other or with bigger companies. The introduction of the PSS concept to the chain of small and mediumsized enterprises (SMEs) can meet specific problems. The introduction of PSSs by SMEs may cause problems due to a lack of power in the decisionmaking process in the chain and/or lack of human and financial resources. In most cases, primary processes of SMEs still demands most of their attention. Selling a service and providing a stable function to customers requires personnel involvement into the function provision and the maintenance or investment into information technology. A small company might not have sufficient human resources. On the other hand, their organisation structures are less complex and the lines of communication are generally shorter, which helps to provide immediate feedback from customers and quickly take decisions. Even if SMEs sell functions, they need to persuade customers about the benefits of the new system. The types of products produced by companies play a decisive role in whether a company can successfully introduce the PSS concept. If a company produces final products (has a direct communication even through retailers to customers), there is a bigger chance that it will be able to gain economically from improving its offers and creating a system for communicating different product use alternatives to the customers. Final producers are often big companies, who have more resources to introduce the PSS concept into their business strategy. Small companies often produce parts, elements or secondary products such as packaging, which they sell to
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big companies. Producing components instead of final products could be a limiting factor even for big companies, as was shown by some studies.30 The different roles of big and small companies can be envisioned to illustrate the diversity of possible solutions for a PSS development. Some of them might show a certain possibility for counter-interest between big and small enterprises (see Figure 12). There might be a possibility that big companies would be interested in eliminating the retailer to make sure that products and functions are sold in the appropriate way, to shorten the flows of information to and from the customers, and to keep the revenues in one hands.
Producer
Big company producer
Retailer
?
Big company producer
Retailer -?
SME retailer
Consumer
Consumer
Consumer
SME producer
SME retailer
Consumer
Figure 12 Possible changes in the chain with function and service provision Below, the different roles of SMEs in a product-service system are analysed. •
30
Big companies can outsource the servicing part to SMEs. Small
Lissinger, Johanna. (2000) Product-Based Services, a Strategy Towards Environmental Offers? A Case Study of Volvo Penta. Lund University, IIIEE, M.Sc. Thesis.
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companies take the position of a middleman, who organises the service for products according to the design the big company has envisaged. SMEs provide periodical checks of product performance at the customers’ site or from a distance through distance monitoring devices, in which case SMEs just keep a record of products’ performance and in case of big problems report to the manufacturer. They also collect information from customers, sort it and transfer to the corresponding departments of the producer. •
•
Another role of SMEs might be envisaged—sale of use. In this case, SMEs purchase a fleet of products, but no longer sell them. They either sell products’ use, or rent them out to the actual user. Their aim is to make better use of the product through joint or shared use by several customers (intensification of use), without shortening the lifetime of the product. In some cases, renting or leasing is also favoured by the fact that tasks are transferred from the customer to the supplier, who may grow into a system supplier. Customers expect the system supplier to provide “the solution to thier problem”. Thus, the trend towards outsourcing and the development of system suppliers can foster the realisation of the PSS concept. It is in the SMEs’ interests to ensure that the products last as long as possible so as to keep their costs down, or so that they can re re-sell or remanufacture the products. SMEs can also take a role in the remanufacturing part, when they act as “remanufacturers”, taking back used products from the market, disassembling them into individual modules and parts. The modules and parts are cleaned, repaired, and re-assembled into a new product. Impaired parts are replaced by new ones and, if relevant, technical innovations are also incorporated. These remanufactured products are then sold either to the previous customer, or to new customers.
Before introducing a PSS in a company or to the chain, it is important to make sure that the proposed system has a chance of being accepted by customers and clients, and that it is supported by infrastructure and networks.
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5.5 Possible reductions in environmental impacts The reduction of the environmental impact may be expected at the system and company levels. At the system level, reductions of environmental impacts may primarily come from the introduction of preventative thinking. The philosophy of existing approaches to pollution prevention can serve as background for working with product-service systems, which embrace a least several actors and, most often, a network of actors. As an example, the preventative approach may be applied to the issue of optimal quality of delivered products in the system. Providing maximum quality of at each life cycle stage might be unnecessary, looking from the system perspective and from the customer point of view, who pays for this. Increased quality is often associated with extensive resource use. If this can be avoided, some resources could be saved. On the other hand, the optimisation of logistic systems for delivering and bringing back products may be continuously improved. There are several interesting articles written on how to design and optimise the system for remanufacturing and recycling.31 If producers only assume financial responsibility for collecting their products, but still remanufacture them at their sites, an optimisation of co-operation between different companies and logistics is needed. Improved logistics leads to less air emissions, less fuel consumed and more optimised use of vehicles. Another opportunity at the system level comes from the possibility to lower the throughput of resources. The PSS concept drives a more rapid turnover of products through an increased intensity of product use. This leads to the faster introduction of new, more environmentally apt technologies, and less efficient products are kept out of the market. At the company level there are also several possibilities for improving the environmental performance of companies and product-service systems. In the PSS concept, the responsibility for the product performance in the use phase and costs of the use phase are internalised by producers. Therefore, an initiative is created to improve product design to reduce these costs and
31
See for example Hansen, U. (2000) Reverse Logistics is the Key for Remanufacturing and a Sustainable Development. Proceedings of the 2000 IEEE International Symposium on Electronics and the Environment. p. 238-242.
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to minimise the environmental issues, such as consumption of consumables during the use phase and environmental impacts. For example, a producer leases freezers and is paid a fixed monthly fee. There is an incentive for the manufacturer to produce a more efficient unit and to use the efficiency argument in the marketing campaign. Furthermore, producers can influence the optimal operation of products, which depends on the customer. They might provide information and training about how their products could be used, so that environmental impacts and resource consumption are minimised. Another example is when a provider of total mobility solutions absorbs the costs of vehicle breakdown, consumable supplies, and human error, which provides an incentive to train the drivers in more optimal driving patterns and environmentally aware behaviour. The so-called soft issues play an increasingly important role in the minimisation of the environmental impacts and in improving business activities. Companies expect that the shift towards functional thinking would be able to improve general awareness of companies’ personnel, chain actors, including customer, about environmental impacts associated with current patterns of production and consumption. Some companies expect improvements in the information flow about environmental issues within companies, which may facilitate the general integration of environmental issues into all functions of companies.
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6 Models and methodology for a PSS development 6.1 Suggested models for PSS development The basis for the suggested service models is a change in the traditional relationship between producers or suppliers and their customers: instead of selling products, producers/suppliers provide the function of the products, or sell functions. That is a major shift from the current practice with major implications. With the right incentives these models are also expected to bring considerable environmental improvements. The models are compatible with many emerging business management trends, such as strengthening a company’s core business, outsourcing support functions, and building strong alliances with suppliers and customers. In traditional producer-customer or supplier-customer relationships, suppliers and producers are interested in increasing the profitability of business, which comes from the volume or number of products sold. The buyer, in turn, is interested in reducing the cost of each unit or product sold, or in reducing the number of products purchased, which deliver a desired result. Thus, incentives of producer and suppliers, on the one side, are opposite to those of customers. In the PSS models, producers and suppliers find new profit centres in delivering the function the customer wants and are paid for providing a solution to a customer’s problem. This shift in the source of profit makes it possible to unite the interests of the producers/suppliers and customers, who all become interested in the best performance. Competition is based not on selling more products for a cheaper price, but on providing the best solutions for a lower price. Environmental improvements are also expected, 61
as the performance of products and product disposal are managed by professional producers or suppliers, and the cost structure provides an incentive to minimise material intensity of function fulfilment. The following models could be used as a starting point for the introduction and/or further elaboration of the PSS concept to three industry groups, for which functional ideas are proved to be more easily applicable or for which a substantive evidence of practical applicability was found from the field work. This division has implications for the shaping of the models, number and importance of elements included, system scope, collaboration with parties involved, customer relationships and environmental profile.
6.1.1 PSS model for utilities The utility industries provide electricity, heating, cooling and water through an established infrastructure in the society. The use of these products is regulated by customers, but constant availability is secured by producers and providers. No transportation or retail system is required in order to deliver the product to the customer. The customer pays per number of units of product delivered. The environmental impact comes from The building of the infrastructure, from production (energy plants of different type) and the volume of products sold. The functionality idea has been explored by utility companies mostly in business to business interactions, driven by low margins in a deregulated and highly competitive market. The utility model comprises activities that are aimed at reducing overall energy consumption in the society. Several alternatives can be envisioned that could contribute to the reduced consumption of these goods: improved efficiency of end-use devices, taking over the consumption management from customers—to provide function of the goods through supplying a system solution to the customer, educating customers so that they consume less or encouraging customers to modify their levels and patterns of electricity consumption.
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Utility industries Current situation
Suggested situation
Profit centre volume sold
Profit centre function delivered
Fierce competition
Less goods - more efficiency
Low margins
Educate customers
System solution
Planning Implementing Monitoring
Increased efficiency of end-use devices High-efficiency equipment Building design
Figure 13 PSS model for utilities This scheme provides an opportunity to achieve cost effectiveness for both utilities and customers. The profit centre is not in the amount of electricity sold, but in the provision of a constant input of products and in the reduction of this flow. So the customer pays for efficiency. Another suggestion could be to shift the profit centre towards the function provided, whether it is “keeping temperature in the house at 20 degrees during the day”, or something else. The provider than has an incentive to widen the scope of the service to check whether the house is insulated, etc. or to involve a third party, who could provide this kind of service. In this case the service would be provided to the supplier, as she/he is interested in providing the function of 200 C with as little resources as possible. The environmental impacts of such schemes could be reduced as they conserve fossil-fuel energy sources and reduce air emissions. This model is essentially based on current energy-efficiency services, such as demand-side management (DSM) and least-cost planning (LCP). These services have been used by energy utility companies and are successfully working mostly in business to business operations.
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The alternative consideration of function as, for instance, provision of a constant temperature triggers utilities to widen the scope of solutions and may even be to co-operate with other companies that could provide elements of the system solution. The proposed scheme requires a specific marketing organisation that implies close collaboration between providers and users, a considerable degree of trust to the providers as they get access to the users facilities and processes. This level of trust might serve as a barrier for the introduction of such schemes. On the other hand, outsourcing utility management to a professional supplier might be very appealing to both business and private customers.
6.1.2 PSS model for companies producing and/or managing chemicals The second group includes industries that produce and/or provide consumables, such as paints, oils, chemicals, etc. Transportation is required in order to deliver them to customers, as well as the entire system of retailing. Businesses use these products constantly, while private customers use these products mostly occasionally. Customers pay per volume of products or for the number of packaged products (paint cans, etc.) bought. Storage space is required if there is no JIT system at the customer site. Environmental impacts come from production, use, and disposal of the product per se and of its packaging. Companies, producing chemicals of different sorts, are quite used to selling functionality and chemical management services to other businesses. Other companies are driven to buy expertise of managing chemicals by strict regulations and high costs of chemical management. The starting point in this model is also the potential to decouple the volume of products sold from profitability. This model is based on existing schemes of chemical management services (CMS), which are employed primarily in business to business operations. Companies that purchase chemicals are usually interested in the function of chemicals, e.g., cleaning, coating, lubricating. The CMS model transforms chemical suppliers into service providers, and creates mutual incentives to reduce costs, chemical use, and waste generation while improving overall resource efficiency. The reason for this CMS is that products in this category are usually classified as hazardous, 64
which has implications for compliance and waste disposal issues. Another reason is that many businesses use products of this category at their production sites, but these products are not in the core business area of many producers. Moreover, costs of managing products of this category are usually not very transparent. In the case of chemicals, for instance, the costs may include all or some activities connected to managing them, such as purchasing and delivering chemicals, maintaining inventory, improving process efficiency, and waste collection and disposal. In this model, a CMS provider assumes the responsibility for managing chemicals over some or all stages of the material cycle. The model rests on three premises: •
•
•
The service provider has the necessary expertise and skills to reduce the absolute use of chemicals and the inefficiencies associated with their management. The service provider will pursue such improvements if the proper incentives are in place. The clients are ready to provide the access for service provider to their facilities and processes and share necessary information with them.
Usually, it is quite a challenging task, as many suppliers of such goods are not prepared for such an expansion of their strategies. One thing is to sell paints and another thing is to manage parts of the customer process where paints are used. This is supported by the case of VCC and ABB Flexible Automation (Appendix 2 section A 2-14). The system would look differently, if these products are sold to private customers. In this case it is quite difficult to collect packaging of the products, it is contaminated with products leftovers, and there is also little incentive for private customers to bring packaging back. Usually, leftovers of these products cannot be reused or recycled. These issues were discussed with a paint producing company; notes from this discussion are provided in Appendix 2 section A 2-6. The models for utilities and for chemical-related businesses are mostly directed towards business to business relations. Particular problems arise if 65
these models are applied to private customers. The difference would be in the complexity of the marketing system, as well as systems for managing the use phase and/or reverse logistics.
6.1.3 PSS model for durable customer products The third group of products includes products that consist of several elements or modules. The products in this group are relatively long-lived products with comparatively high value at the end of product life. This group may be subdivided into products, that require input of consumables over its use phase, such as electrical and electronic equipment (EEEs), and those, which do not require any input, such as furniture. Retail system and transportation is required in order to deliver these products to customers. Customers pay per number of products delivered. Environmental impacts come from production, use, and disposal of the products and their packaging. The goal of the PSS model for this group would be to minimise the environmental impact of products in the consumption stage by: •
•
•
•
improving its efficiency through less resource consumption, i.e. energy and water, (only for the first subgroup), less consumption of maintenance consumables (also for the second subgroup) such as furniture polish, etc. by improving the efficiency of the function extraction by educating customers on how to use the products in the most efficient, and yet less environmentally damaging way, by minimising material throughput by increasing intensity of products use through shared ownership for the product, and by slowing down material throughput by increasing product lifetime.
In order to fulfil the goal, several instruments and approaches need to be employed by companies and by different functions in companies, representing different PSS elements. For example, design for disassembly and for long life, special marketing techniques that would provide the necessary information to customers, a system of reverse logistics would 66
need to be developed to provide product flow for remanufacturing activities. In order to ensure functional sales, different schemes of payment (per unit of function extracted from the products) need to be developed. So far, no suggestions or analyses have been found in the literature that would optimise interrelations between different PSS elements, with the goal of improving the economic and environmental efficiency of the entire product-service system. Below, the PSS elements are listed with regard to the company function, which might be responsible for their development. Further research is needed in order to evaluate interrelations between the elements and how they affect each other and the system. Durable customer products
Current situation
Suggested situation
Profit centre number of products sold
Profit centre function delivered
Fierce competition
Modular product design
Low margins
Standardised components
Selling of results
Product use alternatives
Financial schemes
Take back schemes
Pay per use
Remanufac -turing
Sale techniques
Triability Upgradable long-life goods
Leasing, renting Testability
A fee for product collection
Sharing, pooling Customisation Educate customers
Figure 14 PSS model for durable customer products Many attempts were made that analysed different elements of the model. Take back and remanufacturing activities can be considered as the most elaborate. Products, which go back from the user to the manufacturer, must first be checked to see whether they (or their individual components) can still be used or remanufactured. The resources necessary for reconditioning have to be assessed. The expense has to be lower than that of the initial manufacturing. Returned products that are not required at that time should 67
be stored. The products are then disassembled, cleaned and reconditioned. Defective components are replaced by new ones. Figure 15 A remanufacturing process32 Start of product’s life
Life of new product
Life of remanufactured product or core
2. Product assembly 3. Product purchase or lease
1. Production of cores
4. Servicing and repair 5. The product is returned to a remanufacturer
6. Remanufacturing
Dissassembly of the product into core
Cleaning of all parts Inspection and sorting of cores, generally into 3 classes: Reusable without reconditioning Reusable with reconditioning • Not reusable •
•
Sale or lease
Reconditioning or repair of cores Remanufactured products
Sale on less developed markets Potential flow
Product reassembly
Additional cores
Waste Material and energy recovery
Disposal of waste, which is not reusable or recyclable
Use as spare parts Use in new products
Sale for alternative use
These replacement parts must be manufactured as needed or kept available in a spare parts store. The remanufactured products are then re-assembled.
32
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Kerr, Wendy. (1999) Remanufacturing and Eco-efficiency. A Case Study of Photocopier Remanufacturing at Fuji Xerox Australia. Lund University, IIIEE Communications 2000:5, p. 25.
Remanufactured modules are incorporated into the new products. Quality assurance must safeguard that the remanufactured products comply with the same quality standards as manufactured ones. Figure 15 presents the model of the remanufacturing process. The same level of elaboration is desired for all elements of the productservice system. Only then would it be possible to find inefficiencies in the different elements and between them, and to propose optimisation solutions for the system. The PSS model for this category of products needs the most elaboration.
6.2 Methodology for working with companies on developing a product-service system Introducing functional thinking to a company can be a daunting task, because of the many changes that need to be made within the established management and manufacturing systems such as design, procurement, production engineering, distribution systems, and waste management. And, as with any change process, implementing a product-service system is subject to individual and organisational resistance, inertia and risk aversion, especially when potential gains do not directly accrue to the parties essential for implementation. The PSSs are based on increased long-term relations and continuous interactions between parties involved. This also creates increased interdependency between providers and customer that requires high levels of confidence and trust.
6.2.1 Introducing the PSS concept to companies The PSS concept may be introduced in a step-by-step fashion and can be based on the Deming cycle. The model suggested here is an initial attempt and needs to be further developed to be used in practice. First, the company should make an initial review for identifying existing practices and activities within the company, which might suit or be used as a starting point or background for the PSS introduction. Division should be made between the development of a new PSS (while still at the design phase of a product) and the adoption of existing company activities to PSS-like practices. It is clear, that the shift towards product-service systems cannot 69
only happen within a product design team, but should embrace the entire organisation. Therefore, the company might employ an iterative process of developing ideas for the PSS, starting from developing a PSS for a product, while, at the same time, developing the necessary expertise and functions within the company, infrastructure and networks outside the company. The second step would be a marketing analysis of customers’ needs, which should be done in order to develop a system with maximum satisfaction for them. This analysis might provide ideas about possible adding value services or new functions to the producer. The third step would be to choose the most feasible steps for the PSS introduction, which might include some of the following: financing, training, systems design, service contracts, guaranteed back-up, take back service, and second-hand market coverage. Each of the elements should be deployed only after a thorough analysis is done estimating the costs and benefits, and there is the possibility to choose the most efficient ones in terms of consumed resources and obtained results. The implementation phase would include developing and testing products and services on the limited market, correction and improvement of the elements, refinement of the PSS system or its elements. Finally, the addition of new elements of the PSS in the company, according to criteria of economical, environmental and social sustainability, can be done continuously. Critical success factors for the PSS concept introduction and development were named by several companies. The first factor is the need that the function provider is perceived as a trustworthy expert. The constant feedback about the functioning of the system, changing customer needs and necessary changes in the system are also important. Agri, et. al. states that it is critically important for the supplier to have enough knowledge about customers’ total cost for the function.33 Knowing the total cost for customers in advance and
33
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Agri, Jan, Elisabeth Andersson, Alena Ashkin, and John Söderström. (1999) Selling Functions. A Study of Environmental and Economic Effects of Selling Functions. Göteborg: Chalmers Tekniska Högskola, p. 32.
using it as an argument in the marketing campaign can become a competitive advantage, especially as the economic argument is a strong rationale for both business and private customers. C o n ti n u o u s s y s te m d e v e lo p m e n t
Im p le m e n t a t io n •
d e v e lo p in g a n d te s ti n g p r o d u c ts a n d s e rv ic e s o n a li m it e d m a r k e t ,
•
c o r r e c t io n a n d im p r o v e m e n t o f t h e e l e m e n ts ,
•
r e f in e m e n t o f t h e P S S s y s te m
A d d iti o n o f n e w e le m e n ts o f t h e P S S a c c o r d in g t o c r i te r ia o f e c o n o m ic a l, e n v ir o n m e n t a l a n d s o c ia l s u s t a in a b ilit y
D a t a c o l l e c ti o n f o r e s ta b li s h in g a b a s e l in e to b e u s e d fo r m o n ito r in g p ro g r e s s
B r a i n s to r m i n g a b o u t w h a t th e P S S c o n c e p t m e a n s fo r th e c o m p a n y a n d p ro d u c t s
F e a s ib ilit y a n a ly s is o f e a c h c h os e n ele m e nt : • • •
E c o n o m ic E n v ir o n m e n t a l S o c ia l
In it ia l re v ie w o f a c ti v itie s a n d p r a c t ic e s
I d e n t if y in g t h e o r e t ic a lly f e a s ib le e le m e n t s fo r t h e P S S in t r o d u c t io n , i . e . f in a n c i n g , t r a in i n g , s y s t e m s d e s ig n , s e r v ic e c o n t r a c t s , g u a ra n t e e d b a c k - u p , ta k e b a c k s e r v ic e , a n d s e c o n d h a n d m a rk e t d e v e lo p m e n t
M a r k e ti n g s u r v e y o f c o ns u m e r n e ed s a n d w a n ts , te s tin g th e r e su l ts o f t h e b r a in s t o m in g e x e r c is e
Figure 16 A proposal for a PSS cycle in a company Another success factor is the establishment of a long-term relationship with the customer, including ways of sharing cost savings and risks, and the development of incentives to optimise the system performance from an environmental and economic point of view.
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6.2.2 Anticipated influence on companies Impacts on current production and product systems The PSS concept might change production requirements for the manufacturer of the products or existing production structures. Not all elements of the PSS concept have the same influence on manufacturing and on the organisation parameters described here. Possible effects from the three elements—sale of use, life cycle extension and remanufacturing—are discussed below. These elements are oriented towards intensifying the use or prolonging the period of useful product life, which might imply a reduction or slowing down of the material flows. Sale of function may reduce requirements for production capacity due to a greater intensity of product use. On the other hand, producers are interested in producing products of higher quality to sustain more intensive use, while retaining a useful life as long as possible. Life cycle extension through the provision of maintenance and repair services may also reduce requirements for production capacity and increase the demand for higher quality of products, as use costs are internalised by the service provider. Life cycle extension services may require special equipment and qualified employees to be available for repairs, if these activities are not outsourced to other actors in the system network. There is also a need to keep replacement parts available and easily identifiable, which places another requirement to develop a labelling or marking system for spare parts. In most industries, these systems are already developed for handling impaired products that are returned during the guarantee period. Remanufacturing may also have some reduction of capacity requirements due to the use of used products, modules, and components. Consequently, capacity requirements in equipment and human resources for initial manufacturing might decrease. During the transition phase, the economic implications may be that capacities are no longer fully used and possible advantages of scale are no longer attained. On the other hand, equivalent capacities for repair and remanufacturing have to be installed—the so-called back-track factories. In technical terms, for instance, this implies the acquisition of disassembly plants, specific testing equipment for quality control both before and after the remanufacturing process, and cleaning 72
facilities. Remanufacturing sets the requirements for an efficient system of product collection and delivery to the remanufacturing facilities. Special equipment and qualified employees need to be available to perform disassembly, cleaning, refurbishment, etc. Particular competence is necessary in the initial quality control of returned used products. The used products are generally returned haphazardly by users, i.e. the flow is unpredictable (functional sales may change this situation, see explanation below). Since not all returned products are needed at once, they have to be put into temporary storage, and adequate storage capacities for this purpose need to be planned. Some expansion of the production of replacement parts may also be expected. Probably, special quality standards need to be developed to make sure that the remanufactured products provide function to the customer as good as new products. Guarantees need to be provided to support these products on the market. It is most likely that companies will need to develop rather different marketing schemes with completely new goals of selling function rather than products. And of course sales personnel will need to be educated (more discussion on the role of sales personnel see in section 0 ). The return flow of products is unknown only in the case when the producer does not remain the owner of the products during the use phase. Functional sales provide an opportunity for a producer to still own products in the use phase and thus, better predict the return flow of old and impaired products. The success of the functional sales depends on the sale strategy selected by the company, which would ensure that products are used appropriately and returned to special collected points. The provision of information and incentives to customers may facilitate the success. Several measures can be proposed: provision of information about collection point for products, establishment of a refundable deposit systems, buy-back offers, or offering products in exchange. Anticipated new functions and skills required Extensive changes might be expected in almost all company functions, including design, purchasing, accounting, management, marketing, etc. Organisational changes required by the concept will depend on the initial status of the company. A special study is needed in order to investigate what functions might be affected, to what extent, how can companies ease the 73
transition and what new skills are required for that shift and for making the product-service system competitive. Initial thoughts about new functions and skills that companies might need to develop are briefly outlined here. •
Design team or R&D function within a company needs to acquire special skills of working closely with product-service providers, customers, managers of remanufacturing activities, and suppliers. Stakeholders that need to be involved already at the design phase are presented in Figure 17. For more ideas about different stakeholders, which might be involved into a product-service system, see Figure 3.
R e ta i le r /
A d v e r ti s i n g
S a le s c o m p a n y
co m p any
P ro d u c e r
S e r v ic e u n it
C o m p a n ie s o f r e c l a m a ti o n / r e f u r b is h e m e n t / r e c y c li n g
Figure 17 Stakeholders in the PSS design •
•
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Marketing function is changing radically as it becomes responsible for selling products functions, for establishing contacts not only with customers, but also with all actors involved in the function provision. Financial and accounting functions need to shift their practices to adopt for new profit centres, which might be in selling additional functions or upgrading services, in leasing or renting out products, and might come from remanufacturing activities. The point of reference of the accounting might need to be redefined from, for instance, one product sold to one unit of function provided, which might include a leased material product, revenue from the customer training, revenue from service contracts minus cost of spare parts and transportation, revenue and cost of the end of life stage and of the remanufacturing activities.
•
•
New managerial skills are required for the introduction and development of the PSS concept in the company. Managers will need to acquire the ability to negotiate and co-operate with actors across company boundaries. They will need technical expertise and enough mediation skills and energy to encourage people to work together who have never before thought of each other as partners. Strategic thinking is a vital skill required from managers that need to not only think about their own company, but embrace the entire system or network of actors and find ways of optimally delivering functions to customers. They should be able to broker deals in two directions simultaneously—upstream and downstream, ensuring that all actors act in harmony towards the common goal—a satisfied customer. A new skill required from managers is also to oversee the relationship proactively, to ensure service quality and financial benefit for all parties involved. The success of the PSS concept, to a large extent, depends on the establishment of long-term relationships with customers, who do not only create a demand for certain products, but can also contribute with relevant information to be used in the product-service design. Therefore, one of the main sources of customer information is companies’ sales personnel. The empowerment of sales personnel can be considered as one of the main factors contributing to the shaping of a product-service system. Industrial sales personnel spend a significant amount of time with customers and, therefore, are in a unique position to serve as a primary source of information regarding marketplace problems and customer requirements.34 There are, however, some problems associated with empowering personnel to present functional thinking and to collect customers’ response. To begin with, sales departments are not normally staffed with people trained to obtain information on potential new product needs, ideas, and or prototype solutions.35 Further, no information is presented yet with regard to functional sales and about different alternatives of product use, i.e. owning, leasing, renting, sharing, different financial schemes, etc. The
34
Chonko, L.B., J.F. Jr Tanner, and E.R. Smith. (1991) The Salesforce's Role in International Marketing Research and Marketing Information System. Journal of Personal Selling &Sales Management 11, Winter: p. 69-79.
35
von Hippel, E. (1988) The Sources of Innovation. New York, NY.: Oxford University Press.
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entire system of commissions and incentive structures tend to only reward sales of products. Thus, changes are needed that would help create incentives or motivation for the sales personnel to work with functional sales. Companies’ structures should be adapted to the most prompt, meaningful, and accurate method of information exchange between the salesperson and the relevant managers. There is a need for fast communication of sale personnel with the producer concerning the range of opportunities for the contract to be adjustable to customers’ needs. Reporting routes must be altered to also include marketing/product development entities as the primary receivers. It is important that the sales personnel are taught to take the lead in presenting the functional thinking to the customer and in engaging the customer in a discussion in order to obtain customers comments. Proper financial incentives should be provided to the sales personnel to encourage their active involvement in introducing functional thinking and product-services system concept to customers and selling functions of products. The sales personnel needs direction with respect to what information in available and how is to be provided to the customers and what the best means are to collect feedback from them. Formal training programmes might need to be established to educate sales personnel.
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7 Conclusions This feasibility study presents the concept of the product-service system concept to a range of Swedish companies from different industry branches with the goal of engaging them in discussions about the pros and cons of the concept and about the potential implications of this concept to their businesses. Discussions were initiated with company representatives about foreseeable benefits, barriers and factors contributing to the failure or success of the actual implementation of the PSS concept. Three models for introducing the PSS concept to the companies are developed, and the analysis of different PSS characteristic features is conducted in order to provide an initial guidance of important issues to be considered when developing a PSS in a company or in the product chain.
7.1 General conclusions from the feasibility study The main finding of this feasibility study is the acceptance of the PSS concept (functional thinking) by all companies. The main conclusion is that the product-service system concept seems to be a feasible business strategy, which could be adopted in several industry sectors. The study also showed that the elements of the PSS concept and practical realisation of ideas of functional sales might vary between branches and between different product categories. The study indicated that the PSS concept requires a new way of strategic business thinking, but also that it could utilise some of existing practices in companies as a starting point, i.e. take back and remanufacturing systems. The study revealed that functional thinking is already applied in many business to business interactions. The main driver for initiating these types of relations is the possibility to establish a long-term contact with customers and to find new profit centres. So far, very little is known about the economic and especially the environmental benefits of PSSs, because of the few attempts being made to evaluate the economic and environmental
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effects of selling functions.36 No comparative environmental analysis of the traditional versus functional way of running business was conducted. Analysing the way companies present themselves in their reports and marketing materials, it could be concluded that functionality, customer relations and added value through additional services became almost a fashion and are widely used as an argument in competition. There is, however, a difference between how companies market themselves and how far they have proceeded in practice. While quite a few examples of functional sales were found in business to business relations, very few attempts can be named in business to customer interactions. Existing attempts show that it is more difficult to develop functional alternatives for consumer products, and therefore, special attention is needed in this domain. Currently, except for Electrolux, no other company confirmed that the functionality-based arrangements were introduced as a possibility to reduce their environmental impact. Therefore, the conclusion is that the improved environmental potential of a product-service system does not serve as a key driver for introducing the PSS concept to companies. Services are not necessarily environmentally superior to products, thus, it is important to ensure in the future that existing functional arrangements and newly developed product-service systems are, at least, not environmentally inferior than products. The development of new product-service systems should be conducted with the environmental parameters incorporated upfront—from the design phase. The largest challenge seems to be to make the value of the function provision more attractive to customers as opposed to owning products. Instruments and practices are needed that would allocate a higher status to buying services than owning products.
36
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Agri, Jan, Elisabeth Andersson, Alena Ashkin, and John Söderström. (1999) Selling Functions. A Study of Environmental and Economic Effects of Selling Functions. Göteborg: Chalmers Tekniska Högskola.
7.2 Conclusions by product and chain typology The functionality thinking was presented to different companies and discussions were held about the applicability of the idea to the companies’ products. The study showed that companies from several sectors have utilised the concept already for some time, while others are less familiar with functional sales. The study revealed three groups of companies, who are familiar with the functional sales idea and who also have a potential for improvement in this area. •
•
•
The functionality idea has been explored mostly by utility companies, that produce and provide energy, water, heat, etc., in business to business interactions, driven by low margins in a deregulated and highly competitive market. Companies, producing chemicals of different sorts, are also familiar with selling functionality and chemical management services to other businesses. Providing chemical services is driven by strict regulations and high costs of chemical management. Other companies in the study produce durable consumer goods producers. Products in this category are mostly consumer products, designed from modules or components, and sometimes consume resources during the use phase. These companies either had an idea about the functional sales, or could immediately see the possibilities of how the concept could be applied to their product chains. The PSS concept is generally less developed for these products, and is often limited to separate elements of a product-service system, as for example, remanufacturing activities. The development of even separate PSS elements requires external drivers. For instance, it is shown that take back legislation might trigger the development of remanufacturing activities. So far, in this group the take back legislation is being developed only for electrical and electronic equipment (EEE). For other products, such as furniture, there is almost no external demand that could facilitate the introduction of functional thinking.
The study showed that it is very difficult to create general, widely applicable PSSs. Usually product-service systems are very much specialised, depending 79
on the product characteristics, organisational structure, chain actors and interrelations, network support and infrastructure in place. Furthermore, due to the need to closely co-operate with customers, cultural backgrounds may probably greatly affect the success of particular product use alternatives. Product characteristics
Organisational Infrastructure
structure PSS Chain
Network
actors Cultural background
Figure 18 Factors contributing to the development of a PSS. Besides sector and product specificity, product-service systems would be likely to differ considerably depending on the type of customers they are provided to: business to business (B2B), business to tradesman (retailer, middleman)—B2T, or business to customers (private customers)—B2C. Different customer groups have varying rationale for their purchasing behaviour; the possibility to influence them also differs; as well as different logistics systems need to be developed to support product collection and take back.
7.3 Conclusions concerning the PSS concept There is an urgent need to develop a methodology for the practical introduction and development of product-service systems in companies based on real company cases. There is a need for the complementary development of methodological approaches for companies, who are already 80
involved in similar activities, and for those who need assistance in developing new PSS ideas and new business opportunities. For the companies that are already diversifying their offers on the market through selling functions, approaches need to be developed to ensure that the systems and new functions or services provided do not contribute to environmental problems more than traditional business models. In order to introduce functional thinking to industry, there is a need to provide a basis for innovation stimulation, etc. to facilitate the exploration of new business opportunities and new profit centres. Furthermore, there is a need to tie existing structures, functions and activities in companies with a new way of thinking—a product-service system is built on and is embedded into companies’ organisation and management. The potential possibility to improve environmental profile of products through the PSS concept has not yet been a driver for companies. Business opportunities, new markets, and close relations with customers trigger the shift to functional thinking in many business to business interactions. The environmental potential and possible rebound effects of developed or newly introduced PSSs are still unexplored. The study showed that vocabulary of the PSS concept is of limited understanding to companies. A common understanding is important when trying to communicate the concept to the broader stakeholder community. The terminology needs to be clarified and translated into corporate language. Presently the terminology used among a narrow circle of experts prevents from effective communication with companies. In this study the term “functional sales” was mostly used in discussions with companies.
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8 Recommendations Companies and industry associations play the most important role in the introduction, development and dissemination of the PSS concept in Swedish society. Below, major recommendations for the transition towards functional thinking are provided.
8.1 Recommendations to companies •
•
•
Find new business opportunities by starting from customers’ needs, by posing a question of how these needs can be fulfilled in the most economically beneficial and environmentally adapted way. Use the life cycle perspective to find opportunities for system optimisation outside companies’ gates. Use brainstorming techniques to stimulate the process of generating truly innovative ideas. Utilise the potential of functional sales for building new relations with customers. Develop product use alternatives to diversify your product portfolio with services and product-services in order to gain time for the development of cutting-edge products, and to broaden the range of target customers. Develop such PSSs that would provide an alternative way of utilising products and extracting the function to traditional ownership opportunities. Utilise these alternatives so that environmental impacts of products in the use phase are minimised, and use this as a marketing argument to win customers and competitive advantage. Organise alliances and networks to attract customers by providing them with the best range of offers at the best price. Develop close relationships with companies or subsidiaries in the retail and distribution sectors and train them in ways of introducing functional thinking to customers. Utilise their close position to the customer to keep yourself updated on the latest changes in customers’ preference and profiles. Train salesforce to help customers make educated choice. At the point 83
of sale, don’t sell products—sell functions of products, providing comparative financial analyses of different product use alternatives. •
Consider the possibilities of streamlining your processes through applying functional thinking to in-house activities. For example, develop close relationships with suppliers and introduce functional thinking into business to business relations. Evaluate your own production and conduct financial analysis of substituting supporting functions within the company with functional services from suppliers, to decrease cost and ensure quality and optimal management of various life cycle stages.
8.2 Recommendations to NUTEK NUTEK could support the development and introduction of the PSS concept at different levels: in companies, industry and branch associations, at the level of authorities and through its own policies. NUTEK can play a key role in giving special attention to PSS visibility at the company level through demonstration projects, which can provide information and motivate other companies. Special attention could be given to the companies, for which EPR legislation has already been developed and enforced. The existence of the external demand may trigger the development of product-service systems. NUTEK can contribute to the development of a toolbox of new and existing tools, which companies can use to implement the PSS concept. For example, in close cooperation with companies, NUTEK may assist in investigating the possibilities of developing economic incentives that would facilitate the shift away from selling products and towards providing a service by, for instance, putting a premium on leasing, not purchasing. NUTEK can facilitate dissemination of the functional thinking through information centres and presentation of good practices and case studies. The Internet is to play a vital role in this. NUTEK can facilitate the introduction of the PSS by assisting in the creation of new alliances and in finding networks for companies, who are looking for partners in areas new for them. In this area, NUTEK can pay special attention to the involvement of small and medium size enterprises into creation of such PSS-supporting networks. 84
NUTEK may initiate and support research on functional thinking and the PSS concept. There is a clear need to develop methodologies for analysing and evaluating environmental profiles and economic gains of existing and newly developed product-services and product-based services in order to anticipate the environmental potential and business opportunity of the product-service systems. NUTEK may present functional thinking at the policy level and encourage retention of ownership of durable goods by producers or sellers in order to support the PSS concept. NUTEK can set an example of functional thinking by integrating environmental and use efficiency criteria and targets into supplier requirements and own purchasing and other in-house policies.
8.3 Recommendations for future research directions The following research directions can be recommended based on the analysis of the situation conducted in this feasibility study: •
•
Methodologies for the PSS concept introduction to companies of different industry branches need to be developed. There is a need to investigate how business translates environmental pressure into business opportunities and how design, marketing and service strategies can be used to contribute to sustainable production and consumption. The methodology will most probably be based on the current methodologies of design for environment and of sustainable product design, but widened to include the system thinking and service part. There might be a possibility of utilising the expertise of the service concept development process of service companies in the PSS development. There is an urgent need for an extended analysis of existing cases and for the development of new detailed case studies of product-service systems, based on the criteria of business opportunity, economic profitability and continuous environmental improvement. The framework for the development of extended case studies in companies is suggested in Appendix 3. 85
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Bibliography Agri, Jan, Elisabeth Andersson, Alena Ashkin, and John Söderström. (1999) Selling Functions. A Study of Environmental and Economic Effects of Selling Functions. Göteborg: Chalmers Tekniska Högskola. Brentani, U. and E. Ragot. (1996) Developing New Business-to-Business Professional Services: What Factors Impact Performance? Industrial Marketing Management , vol 25 p. 517-530.. Buttle, F. (ed.). (1996) Relationship Marketing. UK: Chapman. Chonko, L.B., J.F. Jr Tanner, and E.R. Smith. (1991) The Salesforce's Role in International Marketing Research and Marketing Information System. Journal of Personal Selling &Sales Management 11, Winter: p. 69-79. Collins, J.C., and J.I. Porras. (1994) Built to Last. New York, NY: Harper Business. Dawes, P., Dowling, G. and P. Patterson. (1992) Criteria Used to Select Management Consultants. Industrial Marketing Management 21: p. 187-193. Electrolux. (2000) Electrolux homepage. [cited 2000-10-20]. Available from http://www.electrolux.se Goedkoop, Mark J., Cees J.G. van Halen, Harry R.M. te Riele, and Peter J.M. Rommens. (1999) Product Service Systems, Ecological and Economic Basis.: PricewaterhouseCoopers N.V. / Pi!MC, Storrm C.S., Pre consultants. Hansen, U. (2000) Reverse Logistics is the Key for Remanufacturing and a Sustainable Development. Proceedings of the 2000 IEEE International Symposium on Electronics and the Environment. p. 238-242. Hart, Stuart L. (1997) Beyond Greening: Strategies for a Sustainable World. Harvard Business Review 75, January-February: p. 67-76. Heiskanen, Eva and Mikko Jalas. (2000) Dematerialization Through Services - A Review and Evaluation of the Debate. Helsinki: Ministry of Environment. Jackobsson, Nickolas. (2000) Emerging Product Strategies. Selling Services of Remanufactured Products. Lund University, IIIEE, Licentiate Dissertation. 87
Kerr, Wendy. (1999) Remanufacturing and Eco-efficiency. A Case Study of Photocopier Remanufacturing at Fuji Xerox Australia. Lund University, IIIEE Communications 2000:5, p. 25. Kimura, Fumihiko. (1999) Life Cycle Design for Inverse Manufacturing. Proceedings of the IEEE International Symposium on Environmentally Conscious Design and Inverse Manufacturing, IEEE, February, p. 997. Lissinger, Johanna. (2000) Product-Based Services, a Strategy Towards Environmental Offers? A Case Study of Volvo Penta. Lund University, IIIEE, M.Sc. Thesis. Maister, D.H., and C.H. Lovelock. (1982) Managing Facilitator Services. Sloan Management Review 23: p. 19-31. Mattsson, L-G. (1995) Relationships and Networks. In Encyclopaedia of Marketing, edited by M.J. Baker. London: Routledge. Meima, Ralph. (1997) Environmetrics. Measures of Corporate Environmental Performance. . Miljövå rdsberedningen. (1999) Projekt för att främja miljöarbete i små företag. Stockholm: Miljövå rdsberedningen. Mogensen, Johnny, and Nikolaus Thumm. (2000) Outsourcing of Business Services. The IPTS Report November, no. 49: p. 32-39. Mont, Oksana. (2000) Product-Service Systems. Stockholm: Swedish EPA, AFR-report 288. Mont, Oksana. (2000) Reaching Sustainable Consumption through the Concept of a ProductService System (PSS). . Stockholm: Nordic Council of Ministers, to be published Pettersson, Pelle. (2000) What happens within Electrolux AB? Paper presented at the seminar "Funktionsförsäljning" - Product-Service Systems. May 8, Stockholm, Rosenbads Konferenscenter. Plepys, Andrius (2000) Product-Service Systems in Information Technology and Communication Sector - Application Service Provider. IIIEE. In preparation. Rocchi, Simona. (1997) Towards a New Product-Services Mix - Corporations in the Perspective of Sustainability. Lund University, IIIEE, M.Sc. Thesis. Rosenau, Mickey. (1988) Speeding Your Next Product to Market. Journal of Consumer Marketing, Spring: p. 23-36. Shireman , William K. (1999) Business Strategies for Sustainable Profits: Systems Thinking in Practice. Systems Research and Behavioral Science, vol. 16, no. 5, p. 461. Slack, N., Chambers, S., Harland, C. and R. Johnston. (1998) Operations Management. UK: Pitman Publishing. 88
Sprotte, Karsten. (1997) A Strategic Fit for Tomorrow's Eco-Efficient Service Economy. Strathclyde Graduate Business School, M.Sc. Thesis. Stahel, Walter R. (1994) The Utilization-Focused Service Economy: Resource Efficiency and Product-Life Extension. In The Greening of Industrial Ecosystems, edited by Braden R. Allenby. Washington, DC: National Academy of Engineering, National Academy Press. p. 178-190. Stahel, Walter R., and et. al. (2000) Multi-Client Study on The Shift from Manufacturing to a Service Economy 1998 to 2010. In From Manufacturing Industry to a Service Economy, from Selling Products to Selling the Performance of Products, 180. Geneva: Geneva Association, 2000. Stalk, G. (1988) Time: The Next Source of Competitive Advantage. Harward Business Review, July-August: p. 41-51. Steinhilper Rolf. (1998) Remanufacturing: The Ultimate Form of Recycling. Fraunhofer IRB Verlag, Stuttgart, Germany, p. 98. THORN (2000) THORN Homepage. [cited 2000-10-14]. Available from http://www.Thorn.se Tibro Förenade Möbelfabriker AB. (2000) Tibro Förenade Möbelfabriker AB Homepage. [cited 2000-11-20]. Available from http://www.tfm.se/english/folder.html White, Allen L. , Ph.D, Mark Stoughton, and Linda Feng. (1999) Servicizing: The Quiet Transition to Extended Product Responsibility. Boston: Tellus Institute. Volvo Lastvagnar. (1997) Eco Mobility. Dynafleet information systems. von Hippel, E. (1988) The Sources of Innovation. New York, NY.: Oxford University Press. Zaring, Olof. (2000)Creating Eco-efficient Producer Services. Paper presented at the seminar "Funktionsförsäljning" - Product-Service Systems. May 8, Stockholm, Rosenbads Konferenscenter.
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Personal communication Anders Maxe Angelique Bjorklund
Akzo Nobel Decorative Coatings AB, marketing manager Thorn Lighting, environmental manager
Anna-Maj Wandt Bo Tillberg
Bilpool i Lund, manager Tvättman (Berendsen), environmental manager
Claes-Göran Wigstrand Cristina Salmhofer
Thorn Lighting AB, Technical Manager
Daniel Eriksson Fredrik Bertilsson
Pelote.com Alfa Laval
Gunilla Andersson Hans Ottosson
Gambro Renal Products, Marketing manager EnerSearch, CEO
Henrik Sundström
Electrolux, environmental manager
Jennifer DuBose Jorgen Lundberg
Interface Research Corporation, EcoSense Program Manager Alfaskop, business manager
Magnus Beijer Magnus Källrot
Alfa Laval Alfa Laval, visionary in the functional sales field
Magnus Rickard Mary Ann Ruiz
Gambro Lundia AB, Product Manager Volvo Cars Corporation
Michael Rå berg Olle Esser
European Nursery Group, President & CEO Gambro Renal Products, Global Product Manager
Pelle Pettersson Per Enocson
Electrolux, environmental manager Electrolux, environmental manager
Per-Olof Nilsson
Thorn Lighting AB, Managing Director
Peter Runesson Rolf Henriksson
Tibro Förenade Möbelfabriker AB Sydkraft, environmental controller
Rolf Nilsson Susanne Ljunggren
Thorn Lighting AB, Development Manager Gambro Renal Products, Global Product Manager
Thomas Parker Ulf Lindahl
Lunds Energi Gambro, sales manager
Ulrika Bergström
Sydkraft, environmental manager
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Wihlborgs Fastigheter AB, environmental manager
Appendices Appendix A. A methodological framework for this study A methodological framework for the description and assessment of the companies’ practices relevant for the PSS concept. Main information areas
Subjects
Company background and structure PSS elements associated with different life cycle stages
What are the main elements of a PSS or prerequisites for the introduction of the concept?
Extraction of resources/Production of components
Is there potential for improvement through , for instance, introducing functional thinking into supply flow?
Product/product design
What is the product? What is the function of the product? Concept development process Product characteristics of importance Direction of design improvements Product design process Longitude of product design process
Product-service design
Differentiation /diversity of offers Reasons for diversifying offers
Production/organisation
Is there potential for improvement through , for instance, outsourcing of support function?
Organisation / management
Management organisation characteristics
Environment management
EMS, ICM 91
Tools that can be used for the introducion or evaluation of the econoic and environmental profile of a product-service system Financial structure
Current profit centre Potential source of profit
Logistics
Is there potential for improvement through , for instance, outsourcing of transportation?
Sale/purchasing phase
Chain organisation Wholesaler-Retailer relationships CRM Competitiveness
After-sale activity
Servicing Guarantee Additional products/services
Logistics
Is there potential for improvement through , for instance, outsourcing of transportation and/or organisation of reverse logistics?
End of current product cycle
Is there potential for improvement (to prolong products current use) through, for instance, organisation of reuse, refurbishment or remanufacturing of old and impaired products?
Barriers for provider to introduce the PSS concept
External Internal
Barriers for customer to accept the PSS concept Drivers for customer to accept the PSS concept What is needed for implementation?
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Appendix B Summary of activities of Swedish companies (notes) Where possible, the following general pattern for estimating the possibility of introducing and developing functional sales in companies includes the following parameters: •
•
•
•
Company’s reaction to or acquaintance with the concept of the productservice systems (functional sales). Practical steps or elements for the implementation of the idea. What does a product-service system mean for a company or a product? How might a product-service system look like for the company or a particular product? Marketing structure, management and internal organisational barriers and external drivers. If the PSS concept was perceived as viable by the company, the potential for the company to be involved in the follow-up activities was evaluated.
Appendix B-1 EnerSearch, Sydkraft – Energy provision Sydkraft is a utility company working in a very competitive and recently deregulated market, and therefore, margins from selling energy are very low. Approaches that focus on customers and market issues and that diversify offers by services are considered as a survival strategy for the company. New applications and products are being developed that provide significant opportunities for utilities to reposition themselves as energy service companies. The company shows that the appropriate promotion of energy efficient products and services can result in lower energy costs and reduced environmental emissions, while at the same time may provide a new business opportunity. The company indicated that the prices of energy will 93
be no longer determined by the costs of production, but market prices will put a limit on the costs that can realistically be passed to the customers. Therefore in future the balance between market prices and a company’s cost situation determines the business and market opportunities for utilities. Competition starts not only at the beginning of the value chain, but also at the end of the value chain in the marketing business. For a number of years already the company has been engaged in a number of projects, which aim at providing system solutions to customers. Part of these efforts included energy efficiency services, such as well-known demand-side management (DSM) and least-cost planning (LCP). These approaches focus on reducing customers’ overall energy requirements. Energy efficiency means using better equipment, building practices, and energy management practices in ways that reduce the total cost of energy services over time. With energy efficiency, the overall level of utility sales and revenues is likely to be lower than would otherwise be the case. The company mentioned that there is, indeed, a hidden conflict between departments selling energy and those selling energy efficiency. Besides DSM and LCP projects, Sydkraft is developing fast towards broad IT applications for optimising and monitoring energy consumption and energy-related systems. With the new IT applications the company no longer sells energy, but sells an intelligent network for the customer. Sydkraft diversifies the offers by also providing enabling technologies supporting energy related services and products. The company is involved in several projects investigating the customer side of energy saving activities. The biggest challenge for the company will be to develop approaches for introducing energy efficiency services and other value adding energy services to private customers. The company also has the potential for further improvements in providing energy services to industrial customers by shifting from provision of just energy efficiency services to selling system solutions.
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Appendix B-2 European Nursery Group (ENG) Brio Prams is a subsidiary of the European Nursery Group, which has major brands Brio and Simo. The product under scrutiny is a baby pram. Product characteristics of importance are quality, functionality and product lifetime. Prams are relatively mature products with established design cycles. Direction of design improvements and diversification of offers include variety of colours and textiles (influenced by fashion), but also a timeless design (navy blue and neutral patterns). Other directions are modularity (the chassis have longer design cycles), attempts to standardise the chassis designs in order to generate higher production volumes of each model, use of aluminium chassis, which implies a move towards non-welded joins at many points in the chassis. Prams are not perceived as environmentally hazardous, and there are no regulatory requirements developed for the use phase. There are, however, some regulations for the use of chromium in production phase. Producer ENG
Retailer ENG
Private consumers
Figure 19 Marketing system of European Nursery Group ENG has an established system of approximately 200 retailers throughout Sweden. Each retailer is continuously updated and informed about ENG’s activities through regular newsletters and personal contacts. All prams come with a two-year guarantee, which is also administrated through the retailers. Currently, only minor flaws are repaired by the retailers, but ENG aims to intensify their relationship with the retailers so that more complex repairs can be carried out on-site in order to avoid the transport back to ENG. Retailers are often encouraged to replace defective prams. Retailers also carry out a service check three months after purchase, partly to adjust the pram, but also to attract customers back to make additional purchases from the store. Close customer contacts are seen as an important argument in the marketing activities. 95
Currently, there is a big second-hand market developed by private users. This market today dominates the total market for prams—it is estimated to represent 65-75% of total sales in Sweden. ENG products have a very high quality, durability and a significant recovery value, after the first user. Based on that, in order to utilise quality of products more efficiently and reduce environmental impacts of the ENG production and products, the company could gain control over the secondhand market. The product-service system in this case could include organisation of the reverse logistics system with different levels of refurbishment and remanufacturing of prams. The goal of such a system would be to re-introduce second-hand products in the “like new” condition for the customers. It is envisaged that remanufacturing might not require any complex processes or high levels of inputs of new materials. Most effort might need to be done in organising the system of reverse logistics, in which retailers might play an important role. The environmental benefits would come from prolonging each pram lifetime, possible feedback from customers on pram design and incorporation of the remanufacturing possibility as criteria in a product design. Some barriers for the system were identified.37 The biggest is the fact that the company competes on quality and a known and established brand name. Association with second-hand products might possibly damage the company’s image. Economic reasoning and gaining additional second-hand market shares could be drivers for ENG to start a pilot project. Economic estimations and environmental potential of the PSS system could be investigated. In an ideal case the pilot project could include organising the entire system of reverse logistics for a certain number of prams.
37
96
Jackobsson, Nickolas. (2000) Emerging Product Strategies. Selling Services of Remanufactured Products. Lund University, IIIEE, Licentiate Dissertation.
Appendix B-3 Alfa Laval - Heat exchangers The company's product is a plate heat exchanger that consists of carbon steel frame, thin corrugated metal sheets and rubber gaskets. The product lifetime is 4-30 years for the plates, depending of application, and gaskets— up to 10 years, also depending on application. The function of the product is the provision of heat exchange between two media. Design strategy aims at decreasing volume and weight of the product, efficient utilisation of the surface,38 efficient utilisation of all raw materials, modular design, design for easier access, possibility to expend the units, reconditioning possibility and increasing serviceability. Diversification of offers on the market is accomplished by providing different units for fluids and for gases, product composition out of single plates (modularity), semi- vs. totally welded units, and additional innovations. The idea of the product-service system or functional sales was not perceived by the company as totally new. Possible future directions for product and service development were identified at the conceptual level. Ability to control and maintain the product in the use phase was identified as a possible starting point for realisation of the PSS concept. It was discussed that technical solutions are needed in order to accomplish that. The company named remote monitoring device as a solution that could provide the company with the information on how the product is used at the customer site. Add-on innovations, such as an intelligent heat exchanger with remote monitoring device, are expected to provide broader opportunities, closer relations with customer and economic benefits. Installation of the intelligent heat exchanger may allow the control of the product performance at the customer site and to prevent from fouling and scaling. It can provide full control of heat transfer, including indication of product performance, gasket life and indication of thermal fatigue throughout the entire use phase. This function might potentially be important because customers usually don’t know how to use products efficiently, and besides, products are getting more and more sophisticated. 38
The efficient utilisation of the surface aims at minimising surface of holes that are cut out. The cut out material is a lost material, which goes to smelter. Alfa Laval gets paid for the material, but a very small amount.
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Current marketing structure provides the possibility to closely co-operate with its customers.
Producer AL
Retailer AL
Business customer
Figure 20 Alfa Laval’s marketing system The company has a big after-sales department that provides service to customers, including cleaning in place (CIP). In case of leakage, Alfa Laval can substitute several plates or take the whole unit back to the market office or, if needed, send the unit to the production site where it is repaired. Often, it is Alfa Laval who bears the costs of reparation. There is a possibility that some products are not used properly by customers, but there are no means to control that. With the intelligent heat exchanger, the company will be able to define how the product was used, for which types of fluids, and thus, identify whether the product was used properly. Depending on the result, the cost for reparation could be allocated accordingly. This system would trigger the company to provide the information more thoroughly to the customer on how the product should be used. On the other hand, customers will be more interested in learning more about the product they buy if they will know that they might cover the cost of reparation. Moreover, the intelligent heat exchanger might provide a possibility to the company to monitor, control and even provide remote support or servicing The company management structure and support of the top management were named as crucial factors for the success of any innovation. With respect to the functional sales, top management support becomes a greater challenge as it questions the entire business idea of the company. So far, it is difficult to present the functional sales concept to the top management, but several enthusiastic people have been already discussing the idea. Lack of demand from the market, lack of regulatory drivers and no information showing that competitors are looking into this direction can be named as barriers for testing and developing the PSS model for the company. It is also perceived that functional sales might create an internal competition between new sales and after-sales, as well as between sale of volume versus sale of efficiency, in case the company will charge per unit of heat delivered. 98
Currently, the profit centre is in selling heat exchanger units. With the functional sales, the company might find it more competitive and profitable to profit from a unit of heat provided to customers. The company also foresees that the system will require greater access to customers’ operations and to performance parameters, which might be a barrier due to secrecy in industries. On the other hand, benefits for customers might include absence of initial capital costs involved, as in the PSS case the function of heat exchange is provided. The company has the potential to introduce the concept of PSS and to change the source of profit generation from just selling heat exchangers towards also providing service and monitoring product performance at the site. The intelligent heat exchanger is also expected to benefit the environment. In the case of remote monitoring, preventative actions could be taken before, for instance, a leakage appears. The system could also provide the possibility for remote action, constant application feedback and, if needed, a network expertise. This system will improve product performance, which will reduce transportation of “to be repaired” or repaired units, will prolong product life, reduce leakage, and minimise maintenance costs for both the producer and customers. Support from NUTEK through a project is perceived as an essential first step that would ease the justification of the pilot project at the top management level. Management support for the pilot project, which would conduct financial estimations, environmental potential and implementation models, is essential. One of the important questions to be answered during the pilot project is the estimation of the degree of customer involvement and acceptance of the new business model.
Appendix B-4 Electrolux The main driver for Electrolux to come up with innovative ideas and new business models is the fact that, even in electrical appliances market,
99
margins are eroding.39 The increase in the number of retailers also contributes to the problem of margins, as well as price competition. In November 1999, Electrolux introduced a pilot project called Pay-perWash, on the island of Gotland in Sweden. To make this work smoothly from the start, the preparations began in 1999 before launching. Telephone interviews were made to determine the interest of buying this kind of service, six focus groups all around Sweden were set up to discuss the most efficient way of providing the service, and in-depth interviews were carried out to determine the appropriate price levels. The island was chosen because it had Internet-connected electrical meters installed in 7 000 households, which allow remote reading of electricity consumption in households. The idea of the project is the following: households are provided a new washing machine for free, paying 495 SEK for installation. During the installation, the washer is connected via an “intelligent” electrical meter and the Internet to a central computer that keeps track of consumption. The customer pays for the use of the washing machine, 10 SEK per washing cycle, which is charged to the electricity bill. The machine is owned and serviced by Electrolux. When the machine has served its duty, it is taken back and can be scrapped, remanufactured or used as a source of spare parts. This project is the first of its kind to turn the focus from selling products to selling services, so called functional sales. The customers only pay for the machine use, and all servicing-related costs are borne by Electrolux. The pay-per-wash project was set up in collaboration with utility company Vattenfall, which owns the “intelligent” electrical meters and electricitydistributing infrastructure and takes care of the invoicing. In December 2000 the company is shifting the project to another location. The project encountered difficulties with getting the critical mass of households willing to try out new concepts. This can have two reasons. First reason may be the general inertia of customers to changes, especially when changes are so drastic.
39
Pettersson, Pelle. (2000) What happens within Electrolux AB? Paper presented at the seminar "Funktionsförsäljning" - Product-Service Systems. May 8, Stockholm, Rosenbads Konferenscenter.
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Customer buys a washing machine
Electrolux provides a laundry function with
Customer gets clean clothes
A machine at home Electricity Service Upgrading Product recycling
Figure 21 Selling function of a washing machine40 The second reason is linked to the question of existing infrastructure—each household on the island owns a washing machine. There is no reason for them to try something new if they are satisfied with the function presently delivered by their washing machines. Besides these reasons, there might also be price issues involved. This point was not commented on by the company and is based on simple calculations of the author. Assuming that a household washes 3 cycles per week, the new scheme becomes more expensive than ownership alternative after 3-4 years. According to the company, the concept is feasible technically, economically and environmentally. Further research is required to determine mechanism of presenting these new ideas to customers and finding the right mechanisms to attract them.
40
Electrolux.
(2000)
Electrolux
homepage.
[cited
2000-10-20].
Available
from
http://www.electrolux.se 101
Appendix B-5 Gambro The company dealt with in this study is Gambro Lundia, a subsidiary to Gambro Group, which is a global medical technology and healthcare company. Sweden. Gambro has 99 percent of its revenues outside Sweden. The company is active in the Gambro Healthcare, Gambro Renal Products and Gambro Blood Component Technology business areas. The company is undergoing re-structurisation and streamlining of its activities via the merger of the Gambro Group’s three brand names, Gambro, Hospal and COBE, into a joint global organisation comprising sales, marketing, production and product development. The company is in the stage of reevaluating its business areas, and non-core activities are going to be outsourced to subcontractors. In the product design, Gambro plans to introduce a modular and platform concept for the development of new products. The new products will be based on common platforms in such areas as electronics, software, hydraulics and other system modules. The company does not only sell products, but also provides care services. This strategy is reflected in product development and sales activities. Besides developing and producing products, Gambro is continuing its policy of owning entire dialysis clinics, providing system solutions, if needed, to its customers. Clinics may be leased to the staff. In several countries the trend in the medical care sector is towards dialysis treatment in cost-effective, privately owned units. It means that Gambro’s equipment might be quite expensive for such units. For such cases the company developed a strategy that is called “price per treatment”—doctors are paying per treatment, not for the unit of equipment bought, avoiding initial investments into the equipment. The functional sales concept was easily understood by the company representatives as company’s “price per treatment” strategy is quite an established approach. Modular product design can be a prerequisite for the remanufacturing system. And the fact that the company sells products and care systems, can serve as a prerequisite for close communication with the customers. The company is in a unique position, because it can provide all necessary information regarding environmental profile and efficient product use. There are, however, some barriers to introducing the remanufacturing 102
system, and one of them is the fact that the products from the health and care sector are strictly regulated and have high sanitary standards. This means that the possibility to reuse or remanufacture these products depends on whether they might be contaminated and what are the standards for their sterility. Despite that, the company was very interested in further exploring the area of product-service systems and foresees a potential for such schemes to work for different products.
Appendix B-6 Akzo Nobel Decorative Coatings AB The company, Akzo Nobel Decorative Coatings AB, produces 30 million litre of paint at the site. The main products are paints for carpentry, floor, filler, walls, and ceiling; rust protection, transparent lacquer, paints in transparent colour, outdoors paints, paints with special effects—customeroriented products. Paint quality is the main feature of their products. Design improvements aim at the efficient utilisation of raw materials, reduced toxicity,41 diversifying the offer with different colours, water-based paintings and packaging improvements. The idea of functional sales is familiar to the company, because the other daughter company, that operates in business to business area, utilises the concept. In that case painting shops, architects and colour retailers are offered, besides pure technical competence, professional colouring services through the Esthetical Centre. It assists with information about trends, development of new colour maps, provides education and participates in product development process. During the discussions with the Akzo Nobel Decorative Coatings AB, it was not clear how a PSS would look like for company products. However, several elements of a product-service system for finding alternative sources of profit generation and for improving overall environmental performance were suggested.
41
Reduced toxicity might lead to shortening of the lifetime of paint, there is a potential conflict.
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One problem that was discussed is the transportation of paints and the possibility to reduce this transportation. Currently, the paint consists of 20% of painting powder and 80% of water. Final preparation of the paint is done the producer’s site, meaning that 80% of transportation is used for moving water. The idea of shifting the mixing procedure to the retailers’ site was discussed. The company supplies some dry paints to business customers or paint shops. Mixing at the paint shops may considerably reduce transportation and logistics costs for the company. On the other hand, quality of the paint is of outmost importance to the company. Shifting the process to another actor can potentially jeopardise the product quality and company image. The company could provide necessary training to retailers and employees of paint shops on how paints need to be mixed. This process could possibly be postponed until after a customer asks for a particular paint. The shift of the final production process to the sale phase may reduce storage place at both producer and retailer sites. Customised solutions could minimise the amount of leftovers in the use phase, as the customers would buy the amount they need. There is, however, a technical limitation to selling the amount of paint customer wants— low precision of mixing machines, which cannot mix less than 1 litre of paint. Selling dry paint directly to private customers is difficult, as there will be a need to educate customers on how to mix the paint, and again it will be difficult for the producer to ensure the quality of the product Another possibility would be to analyse the alternative when a function of paint would be sold. In this case the company would be paid per square meter of surface painted, not for the amount of packaged paint sold. This strategy could potentially work with professional painters, to whom Akzo Nobel Decorative Coatings AB directly sells more than half of all produced paint. This system would provide a constant communication and feedback from business customers about product quality—something, which has a big improvement potential, compared to the present situation. Currently there is a one-way information flow—the company provides brochures, process description, and even presents possible results to customers. The only feedback the company gets from customers is in case of complaints. The company felt that it was difficult to involve private customers into this type of functional sales.
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Retailer
Consumers
Producer 60%
Business customer Professional painters
Figure 22 Marketing structure of Decorative Coatings AB The third possibility for introducing some of the PSS concept elements is the collection of packaging from private customers and reuse/recycle of paint that is left over in the packaging. It is considered difficult to collect the packaging from private customers because this might increase transportation, and besides, collection is connected to the personal behaviour of private customers and their change in behaviour. The costs of collection system are not known, but are expected to be high, which could possibly increase the product price. Besides these considerations, there is no demand from customers for collecting left over paints and packaging. The question of reusing or recycling paint that is left over in the packaging is closely connected to issues of technical possibility versus economical feasibility and product quality. It is currently technically not possible to reuse or recycle most of the paint leftovers. The company would need to develop a totally reusable or recyclable paint. Currently most of paints can only be burned. There are, however, recyclable paints (powder or aerosols), which cost approximately 700 SEK per litre. In order to make the recycling system economically feasible, bulk volumes of paints need to be collected. Current customer paints are relatively cheap, so the cost of organising recycling system would most probably override the benefits of recycling paints. Besides, customer paints are usually sold in relatively small quantities and are geographically spread, which makes their collection even more problematic. However, the organisation of a collection system could be linked to an already existing system of communal waste collection. For this, though, an external regulation for extended producer responsibility is needed. So far, most of external pressures and market demands focus on issues of toxicity, health and safety—process oriented issues, whether paint production process or painting (paint use) process. Wider improvements 105
comprising logistics and customer involvement have not yet been seen as a priority issue. Akzo Nobel Decorative Coatings AB expressed the need for an evaluation analysis to be conducted, in which estimations of financial and environmental gains could be made. It was also noted that introduction of brainstorming techniques would stimulate innovation potential within the company. It was expressed that the evaluation analysis could improve information flows within the company and would also bring together representatives of different departments into one team for solving a common problem. The possibility to participate in a project was perceived as a good opportunity to learn from others and to develop their own business.
Appendix B-7 Thorn Lighting Thorn Lighting is one of the biggest company in Sweden in light fittings. It sells electrical installations for use inside (ex. schools) and outside to organisations and businesses, who install them. The lifetime of products is usually 15-20 years. Product design takes approximately 5-12 month and aims at energy efficiency and low toxicity of used materials. The company faces coming take back regulation to be in place from 1 July 2001. It is preparing to assume economic responsibility for the take back system. Physical responsibility is assumed by communities. The marketing organisation of the chain is presented below. The company does not have a direct contact with customers. It sells to a wholesaler with whom it has a long-term contract. The wholesaler in its turn sells to owners of real estate, to contractors or to final consumers.
Producer
Wholesaler
Consumer
Real estate owner Contractor
Figure 23 Thorn Lighting marketing organisation 106
The organisation of the PSS system is not yet perceived by the company as a viable solution due to lack of a contact with the final customer and an existing lack of incentives for different actors to be involved in a system. Difficulty to divide the profit among all the actors involved in the case of function provision is also a barrier for functional sales. Moreover, owners of real estate are not always interested in selling function to the final customers, which would allow the improving efficiency of their estate, because they are not paying for electricity, but customers do. Provision of function to customers would also require collaboration with the energy provider, which may complicate the marketing structure even more. With the present chain organisation, it is difficult to predict the potential for introducing the functional sales concept to Thorn Lighting business. Discussion with the company on the possibility to evaluate the environmental potential of a possible product-service system identified a possible barrier—absence of reference data for comparison with a future PSS. A lack of information on how efficiently their products are used was also named as a possible barrier to accurately measure and compare current and future systems.
Appendix B-8 Alfaskop Alfaskop is an IT-service company with ca 500 employees in 17 cities in Sweden. It is a so-called application service provider. An application service provider is any third party whose main business is to provide a softwarebased service to multiple customers over a wide area network in return for payment. The company provides computer power and applications over the Internet—the product is the constant computer accessibility. Consumers can work everywhere with the same efficiency as at their ordinary office. The company makes sure that software works and is constantly updated, customers always have capacity to spare and that there is enough memory. Alfaskop makes back-ups and is responsible for security routines. Diversification of offers on the market is, thus, based on: •
Different memory capacity
•
Different speed and power 107
Different set of software programmes
•
Design improvements are always customer oriented and tailor-made (customised solution). License software Independent Software Vendor (ISV)
Rental payment
Clients
Software ASP
Software Software Rental revenue sharing
Data center, infrastructure, centralized servers, ongoing support, etc.
Figure 24 Marketing organisation for an ASP42 The collection of the software and supporting programmes is selected in response to the expressed consumer needs, if information about them is available. The company can expand an offer at any time, if software or applications are available in reality and costs are agreed upon. The time to market differs in accordance to what consumers are asking for. The “traditional” set of software can be provided immediately, while more sophisticated programmes might need to be ordered specifically, while others need yet to be developed (long time). Profit comes from a service provided to customers (flat rate per month, per time, per software). Customer acceptance of the service is high, because the final set of software and services depends on customer preferences. Customer is in a sense involved in the final assembly phase of a service/software package. There is also a high possibility to get feedback from customers during sales and use phase. Servicing during the use phase is also included into the service and the network expertise can be asked for in needed.
42
Plepys, Andrius (2000) Product-Service Systems in Information Technology and Communication Sector - Application Service Provider. IIIEE. In preparation.
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Computers need to be taken care of at the end of their life cycles. This is the ASP’s responsibility as consumers do not even know what computer they are using from a distance. Computers and servers become “production equipment” and thus provides should take care for them. The ASP seems to be an environmentally beneficial model as the material assets stay with the function/service provider. There are, however, some barriers for customers to be involved in such systems. First of all, the provider gets access to customer information. Therefore, these applications are currently mostly developed in non-critical areas from the data security point of view. On the other hand, there are several benefits for customers to buy this service, such as reduced total cost of application ownership, reduced longevity of technology, lower management costs, and reduced capital investment. Design of such services can be applicable and utilised in the development of product-service systems.
Appendix B-9 Tvättman (Berendsen) - Textile service Tvättman (Berendsen) provides system solutions within textile rental, laundry and maintenance aimed at the industry, the service sector, hotels, restaurants, hospitals, nursing homes and public institutions. Textile Service’s business concept is to develop system solutions within rental, laundry and maintenance of textiles. Each solution is specially designed for individual customers. The aim is to give the customers a positive image and the effect that goes with it, less environmental impact and a better overall financial position. Berendsen has developed several logistics systems and products that make handling textiles easier, faster and more efficient for Berendsen and the customer. The company signs a contract with customers about providing them with a constant supply of clean clothes. To provide this service, the company rents out clothes to customers and takes them back for cleaning and repairing. Another company’s activity of interest for the product-service system is leasing out carpets. During the leasing period cleaning services are also provided to the customers. As in the case of many typical service companies, Berendsen does not provide any feedback to carpet 109
manufacturers. The leasing idea is developed without any participation of the carpets’ producer. The company’s expertise in developing service ideas and attracting the customers can be utilised in the development of a methodology for the product-service system design. Also, the company’s expertise in marketing can be used. The company markets itself as a provider of textile service and system solutions, which include rental, laundry, maintenance and logistics.
Appendix B-10 Wihlborgs Fastigheter AB Wihlborgs Fastigheter AB is a real estate company. The product of the company is a house with the right functions, which are shelter provision, prevention from outside pollution, right temperature, moisture, prevention from outside noise, waste management (often requirements for waste separation). Design and construction of a building is a very complicated matter due to constantly developing parameters specifying the aforementioned functions, which depend on scientific data about all inputs that are or might be involved in the construction of new buildings. A house is a complicated product with a long lifetime. Houses have traditionally a life span of up to 80 years. Lately, design aims at constructing not so long lasting buildings to allow for more frequent and drastic upgrades, etc. The house itself is not a very flexible product, which could be adapted to different customers’ preferences. There are a lot of parameters that shape the house due to its potential influence on health and safety of lodgers. The direction of design improvements include efficient utilisation of all raw materials, low toxicity; design for easier access and upgrading, flexibility, reconditioning, and increasing serviceability. Disassembly is not really a concern at the design phase, due to the long product life. The design process for a new building is also a very complicated process, involving many actors with varying interests.
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Ex. Eriksson (tenant)
Wihlborgs owns the ground • orders the building •
Lodgers (people)
Consultants Architects
Building design
Ground owner
Construction company (ex. Skanska, PEAB, NCC) • Could be responsible for entire design, or • Could hire subcontractors for each area, i.e. water, electricity, heat, etc.
Figure 25 Stakeholders involved in a building design process The diversity of offers on the market comes from the renting out or selling of new and old buildings, and from providing different levels of various standards (environmental included) with the goal of keeping or attracting the customers. Currently profit comes from buying old buildings, renovating (through contractors) and selling them at a higher price or from building new buildings and selling them. Wihlborg’s position in the chain is not clear, as the company orders the “production” of a building, pays for it, sells, maintains, administers, buys, and renovates. Wihlborgs can partially be a product designer, a retailer (in case it rents separate flats to private people), a business customer and a wholesaler: The possibility of involving the customer into the design process depends on whether it is a private or business customer. If the customer is a big company that buys the building, it can be involved in the design process or express their requirements for the old building. The environmental impact of a building in the use phase is considerable, taking into account its long lifetime. To a large extent the environmental profile is shaped by the customers’ performance during the use phase. As private customers pay for the electricity and water and heat, this could be a 111
driver for them to improve their practices to minimise environmental impacts, mainly resource consumption. Barriers for a provider of a housing function are the following: External •
•
•
•
•
Lack of regulatory driver to provide a housing function rather than sell flats or houses. When renting, customers want some functions that cannot be provided due to initial design. Renting contracts are getting shorter, from 10 years before down to 2 years now. People are moving and it is difficult to adopt to frequent changes in demands. Investments a monitoring system (remote monitoring devices) are difficult to justify for customers who stay with the provider for a short period. Payment structure for functions, such as the provision of a constant temperature to the house, may be quite difficult for people to understand.
Internal •
•
Internal-external expertise competition between Wihlborgs employees, who order the building and participate in the design process, and outside consultants-subcontractors. If Wihlborgs orders certain performance parameters, the outside consultants are held responsible for the function provision/performance. This usually ends up in installed over-capacity, because outside consultants decide what is needed to ensure the function and Wihlborgs pays for construction. Functional sales imply considerable changes in financial structure in relations with customers.
What is needed for the implementation of a functional sales project? 112
•
Financial estimations
•
Environmental gain estimations
•
Estimation of customer involvement and acceptance
•
Evaluating the possibility for image enhancement
Appendix B-11 Bilpool i Lund There are two car sharing systems in Lund. The car sharing case was taken into the study, because it can serve as an example of a successful cooperation between several companies with the common goal of providing customers with the function they need. In these two cases, the schemes are very similar in structure and in costs. They both own one car, which is leased from OK. The mobility service is primarily provided to the people, living in HSB’s houses, and HSB is involved in both schemes. Service provider, OK, assumes responsibility for maintaining the car in the proper condition. From the society point of view, car sharing schemes present a potential substitution to owning a car. However, a car does not only provide function to the customer, but also builds a certain image and status. There are many studies done in different countries on how car sharing schemes change customers’ behaviour. Even in countries with well-known car sharing schemes, their acceptance had only a relative success. On the other hand, car sharing schemes are always initiated by enthusiasts, and not by the producers. There are almost no, or very few, examples of car producers interested in developing such schemes. For the car manufacturer, selling cars and spare parts constitutes the major source of income, and it is difficult to envision a competitive alternative to owning a car. The car sharing schemes can serve as an example of product use alternatives, but have little value for the concept of product-service systems per se due to the missing link to the design phase of a car.
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Appendix B-12 Volvo Penta - Truck engines Volvo Penta is part of the Volvo group. It develops and manufactures complete drive systems for marine and industrial use. Volvo Penta produces industrial engines that are sold to different truck manufacturers. Volvo Penta is positioned within the chain as a supplier of components that are used in other products. (Error! Reference source not found.). Due to this position, the company does not have almost any relations with the final customer.
Volvo Penta
Dealer
OEM customer
End user
Figure 26 Marketing organisation of Volvo Penta Volvo Penta is traditionally a production company. The profit centre is in selling engines. There are no specific take back regulations, but emission levels in the product’s use phase are strictly regulated. Volvo Penta offer their customer such services as extended warranties, operational cost calculation, special parts supply, stocking arrangements. A special training is provided to the end user technicians. The product is also supported by the installation service provided by application engineers. The application engineers may potentially serve as a source of information for Volvo Penta. Currently, though, they do not provide any feedback to the management or the sales personal. Their role is perceived as being more at the level of technical know-how and solutions , rather than management and so-called “soft issues”. These services are not yet seen as a potential profit centre, but rather as a means of attracting the customer. The company employees perceive that a considerable effort is needed to make current separate services a marketable set of value adding services.
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The company made an attempt to extend service offers and market Volvo Penta as a system supplier working with system solutions some years ago. A package called “The Volvo Penta end user protection plan” was designed in order to provide customer with highest possible standards and cost efficiency. Although the program still theoretically exist, it not actively communicated to the customers. The research conducted by the IIIEE at Volvo Penta provided several suggestions of product-service system elements that might facilitate the shift towards functional thinking. •
•
•
•
•
Design of customer specific maintenance programme based on the working environment and the external conditions. Profit centre is in servicing and maintenance. The programme may reduce risk for unexpected breakdowns and thereby reduce cost for customer. A preventive service programme with possibilities to monitor product performance from a distance and conduct technical analyses of operating characteristic. An extended warranty for customers, who fulfil certain criteria for, for example, optimal fuel efficiency. This could reduce fuel consumption and emissions and can also lead to increased awareness among customers. Can serve as an incentive to extend products lifetime. Training programmes. Should create a pull effect through educational marketing. Can also cover driver training. Could lead the decreased fuel consumption, decreased emission levels and increased awareness of handling of waste and chemicals. A programme for spare parts. Just in time delivery, and/or customised part kits. Could include upgrading to higher emission standards, extended product lifetime and reduced storage time. Might lead to a increase in transport.
The position of the component supplier might be a barrier for the introduction of functional thinking. However, functional thinking can be introduced into relations with OEMs. A potential conflict might be 115
envisioned between necessity to prolong the engine lifetime and possibility to earn from repair and maintenance programmes.
Appendix B-13 Tibro Förenade Möbelfabriker AB Tibro Förenade Möbelfabriker AB43 is a joint-stock company and is owned by 54 furniture companies in the district, which supplies a wide spectrum of furniture. It is an industry organisation that assists more than 70 furniture factories in such issues as purchasing, training, development projects, and various kinds of co-operative projects. TFM’s shareholder companies employ approximately 1400 people. Of the 54 shareholder companies 18 are family businesses. Most of the companies are SMEs. The future profit is envisioned to come not from selling furniture, but from the provision of furniture and interior decoration services. Future alternatives may even include free of charge furniture, while profit centres might be found in the payment for service. Customised solutions are also recognised as a competitive advantage and a possibility for further sector development. The refurbishment of the second-hand furniture is foreseen as a business opportunity for the provision of the furniture function to the market—furniture can be renovated, some details of external design might be upgraded. The role of the company can be illustrative for other SMEs. Industry associations may initiate the shift towards functional thinking, by providing the ideas and examples of existing cases, preparing financial estimations, customer surveys and other data to support the shift.
Appendix B-14 Volvo Cars Corporation The object of this study is a painting box sold by ABB Flexible Automation to VCC, 44 in which the interior of the car bodies is painted. The study
43
Tibro Förenade Möbelfabriker AB. (2000) Tibro Förenade Möbelfabriker AB Homepage. [cited 2000-11-20]. Available from http://www.tfm.se/english/folder.html
44
Agri, Jan, Elisabeth Andersson, Alena Ashkin, and John Söderström. (1999) Selling Functions. A Study of Environmental and Economic Effects of Selling Functions. Göteborg: Chalmers Tekniska Högskola.
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examined whether it would be economically and environmentally beneficial to sell the painting function instead of the painting box to both parties. VCC’s expertise is in painting vehicles, while ABB Flexible Automation is an expert in painting equipment. In the traditional case of selling the painting box, VCC gets the knowledge for the optimisation of the painting box in the start-up phase and the “best performance” for a given price at the time. However, in order to improve the painting function constantly, VCC with time will need to buy another piece of equipment This process is always associated with costs of gathering information about existing options, decision making process and installation. The concept of functional sales provides an idea of ABB Flexible Automation selling painting function to VCC. This would integrate the supplier into the development process, which could decrease lead times and speed up upgrading and implementation of new technologies. At the end of the contract, equipment, being all the time owned by ABB Flexible Automation, could be used somewhere else, prolonging its lifetime. VCC could save the time it spends on purchasing new equipment, as ABB Flexible Automation takes care of purchasing and upgrading function. Cost reduction for both parties might be expected due to a more efficient and fast improvement in the equipment. The question might arise as to how VCC should control that painting efficiency is constantly improving and is improving by best available measures and techniques in technical and economic terms. There is an obstacle to the idea of selling function as the company (in this case VCC) is tied to one supplier and might potentially lose if she/he will not deliver the best function. One way to make the supplier interested in constantly upgrading the equipment and delivering the best function is to share the costs and profits of improved efficiency. On the other hand, decreasing the number of suppliers saves time for negotiations and decreases transaction costs. The same is true if contracts are signed for longer period. In this case, however, there is a threat that producer is not choosing the BAT on the market, but the best of what one supplier may offer. Closer relations between parties, leading to the sharing of risks, costs and profits, may help to ensure that parties’ interests are in line with each other. Closer relations require, however, larger openness concerning costs and profits between the parties. A new perception about profit and changes in financial and accounting systems of companies would be needed.
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In the case of VCC and ABB Flexible Automation, the idea of functional sales did not gain necessary support. The reasons for this are the following. The painting process for VCC is the core business. VCC is an expert in painting process, and the company did not want other actors to intrude into their core process. Moreover, the quality of painting is visible and is judged by customers, and, therefore, is of outmost importance to VCC. On the other hand, ABB Flexible Automation cannot provide the painting function and guarantee the quality as they specialise in the equipment production, not in the process.
Appendix B-15 THORN The company leases out tele- and video products, and white goods.45 The company markets its services as an opportunity to avoid initial capital investment and also get the most function out of products when uncertainty associated with new technologies, standards and prices is great. A standard leasing contract is signed for 12 months, but both longer and shorter arrangements are possible. The company states the following benefits of hiring: Free service of products during the contract period.
•
Free right to change rented product for another model. For white goods, there is a restriction of the change possibility—one can change the product after 24 month.
•
•
Free delivery of a rented product to the customer’s home.
•
Free installation. Discount in case the customer wants to buy a product after it has been rented out. After one year the discount is 30%, 2 years—50%, and 70% after 3 years.
•
45
THORN
(2000)
THORN
http://www.Thorn.se 118
Homepage.
[cited
2000-10-14].
Available
from
The company is positioned as a retailer in a product chain. It does not cooperate with producers, although it has a close contact with customers. Producer 1 Private consumers
Producer 2 THORN
Producer 3
Business consumers
Producer 4
Figure 27 Marketing structure of THORN This makes the company on its own not very suitable for the initiation of a product-service system. However, its retailer position and close communication with customers, along with already developed service part, can present a certain interest for producers of sound and video products and white goods. THORN profits from renting out products, which means that it is a lost opportunity for the producers of products. In case producers would initiate the organisation of such a system, they would divide the profit between themselves and such company as THORN. Organising such a system may involve considerable costs for producers. Financial analysis is needed to compare the costs of organising a service system with the profit it might deliver. It might be risky to develop such a system of function provision to customers through a company, who also leases products of other producers. In this case, the competitive advantage of providing such a possibility to customer is lost. In the cases where no company provides such option, this could serve as a competitive advantage for the first-mover. Otherwise, in sectors where some companies have picked up this business opportunity, the service part of a system could be outsourced to them, while producers might choose to focus on their core competencies.
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Appendix B-16 Volvo Busses A system that is of interest from the functional sales point of view is to be implemented in the UK.46 Volvo Busses does not sell busses to customers. The company has a leasing arrangement where the customers are charged per km driven. Small and medium sized companies are the customers of this type of service due to high initial investment involved in buying a buss. This type of leasing arrangement is expected to result in a new way of thinking at the design phase, i.e. priority is given to a more fuel-efficient design of the vehicle. Volvo Busses also supplies driver education to its customers. This service showed to have large environmental as well as economic gains. Results showed that after the training, fuel consumption could be reduced by 16%. Noteworthy here is that to reach the same result with technical improvements would have been more expensive and more time-consuming.
46
This section is based on the information collected and presented in Lissinger, Johanna. (2000) Product-Based Services, a Strategy Towards Environmental Offers? A Case Study of Volvo Penta. Lund University, IIIEE, M.Sc. Thesis.
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Appendix C Framework for the future project A need for a longer-term project, which would elaborate in more details the concept of the product-service system at the company level, was confirmed by the feasibility study. This section provides an overview of a tentative project framework for developing product-service systems in companies. The overall aim of the long-term project is to increase industry, government and research institutions’ understanding of the potential for factor 4-10 reductions in life-cycle environmental impacts of current product-systems through a shift from selling products to providing product utility through product-service system development or product substitution with services. The main prerequisite of a project is a close co-operation of research institutions with companies. The overall aim will be achieved through the multi-disciplinary analysis of issues generated by a set of “future concepts” or “conceptual case studies” of products-service systems and their practical testing in companies. These case studies will be developed through a “streamlined ecodesign process” bringing the expertise in ecodesign and sustainable consumption of the research group together with key business, design, marketing and technical personnel from collaborating companies. From the case studies, recommendations will be made pertaining to questions of managerial nature, i.e. how to introduce the product-service concept to the company, how to ensure its continuous improvement, etc. Data will need to be collected before, during and after the course of the project. Therefore, the part of the project, in which collaboration with the companies will take place, will comprise several steps: •
Reference situation and performance of the company before the project. During this stage, a background information about the company will need to be collected. The information could include: general company description, organisational structure, basic economic and management data, experience with environmental management, including existence of an EMS, environmental and social reporting, marketing tools and instruments used. This information should be sufficient to serve as a point of reference for evaluation of the project success. 121
•
•
•
•
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Development of a product-service by research institutions and companies, including entire project wheel, starting from the generation of possible ideas, evaluation of their feasibility, and the identification of potential users (businesses, retailers or private customers). Background information on a product-service need to be collected, including information about existing commitments, motivation to run the project, possibilities of involving other parties, expectations of different parties involved, etc. For evaluation of the project progress success criteria and indicators need to be developed. Implementation of a product-service in companies. Which functions need to be involved, what existing tools and instruments can be used, how co-operation with stakeholders is to be carried out, how marketing of a project needs to be done. Project results should be evaluated and compared to the initial situation, but also include expected vs. unexpected results. Problems and barriers, as well as unexpected opportunities and benefits need to be documented. Evaluation of economic, marketing and environmental parameters of the new systems need to be conducted. What kind of networks and partnerships were created or found during the project. Project outcomes will include a report and a manual for introducing the PSS concept to companies and applying system-based approach to business strategy and environmental performance.
Appendix D Terminology and definitions Back-track factory The backtrack factory model assumes (as a guiding policy-framework) a future where all production will in some way be linked to eco-efficient “de-production” or remanufacturing. Product-service system—A pre-designed marketable system of products, services, supporting infrastructure and necessary pre-arranged networks that can fulfil customer needs and, at the same time, minimise environmental impact. Profit centre—product, service or any activity that generates profit for the producer or provider. Recycling—a process of recovering the value of materials. Refurbishment may involve cleaning products and replacing any defective or worn parts. Remanufacturing—Remanufacturing is the process of restoring used products to an “as new” condition through refurbishment and/or partial rebuilding. A remanufactured product has the same performance and expected life span as the original product. Through remanufacturing, it is possible to extend the life of a product and its components, and to preserve the value added during design and manufacture. Reverse logistics—an approach that develops logistics and operations related to the reuse of products and materials, comprising all logistic activities to collect, disassemble and process used products, product parts, and/or materials in order to ensure a more environmentally and economically rational recovery. Revalorisation management—an approach that manages the operations designed by reverse logistics and is concerned with the care for products and materials after they have been used. Reuse—a process of recovering the value of products or product components. 123
Upgrading is the process of improving products to make them more efficient or modern.
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