Product-as-a-Service business models require supply chain commercial innovation

Commercial innovation is a novel way to grow the top line by developing new and different offerings focused on commercial growth rather than cost-cutting innovations. Digital business models are new offerings with a different value propositions and commercial arrangements and often require the supply chain to provide new or enhanced capabilities.

One example of a digital business offering is what some call a digital product or more commonly described as “product-as-a-service” (PaaS). 

Regardless of the name, the supply chain needs new capabilities and competencies to support the service-centric business model. Importantly, they need to shift from focusing exclusively on cost-cutting.

Digital business revenues are on the rise

The percentage of companies revenues in supply chain-related industries are shifting away from traditional products. Gartner’s digital business impact on supply chain survey data shows the percentage of revenue driven by traditional products and services from 41 percent in 2019 to 33 percent in 2022.

Examining the data, it shows that companies participating in the survey indicated that one-third of their total revenues were driven by digital as-a-service offerings.

What is product-as-a-service?

In a nutshell it is an offering that includes a physical product and associated technologies that enable brand owners to deliver relevant content and experiences beyond delivery to the customer.

There are two types of product-as-a-service offerings with corresponding business models:

Outcome-based model: An outcome-based model involves charging customers based on achieving an outcome, such as a fertilizer manufacturer charging a customer based on how many bushels are harvested. The technology will increase yields with sensors installed in equipment to monitor soil, guide planting and direct when fertilizer and pesticides are applied.

Consumption-based model: A consumption-based model involves charging customers based on how much is used. For example, the manufacturer of fertilizer charges the customer based on how much fertilizer is used.

Sensors installed in the tanks by the fertilizer manufacturer monitor inventory and consumption. That information is used to drive replenishment to the tanks and for invoicing the customer.

How does the supply chain need to change?

Depending on the type of offering, the scope and impact on supply chain varies but in all instances the role of supply chain extends beyond the delivery of a physical product to a customer.

On one end of the spectrum that relationship might involve a new ordering and invoicing process and modification or expansion of post-delivery activities.

For example, the order-to-cash process changes because the customer pays based upon a service level agreement — be it a time-based subscription, consumption or usage fee or performance. On the other end of the spectrum, the changes expand upstream into distribution, manufacturing and potentially product development.

For example, a customer-specific physical configuration and unique software might be applied in distribution or manufacturing. Or additional technology might be integrated into the product to track usage or monitor performance.

Segmenting the supply chain operating model is the key to success

The number one challenge to overcome for supply chain organisations to maximise contribution to commercial innovation in the next three to five years is difficulty operating segmented or differentiated supply chain experiences.

PaaS delivers a different experience or outcome to customers than more traditional physical or software products within a company’s portfolio. Delivering the outcome required for the service-centric business model while also supporting existing products and customer expectations requires a segmented supply chain operating model. A segmented supply chain provides different operational responses based on customer buying and experience preferences, and the attributes and value proposition of products.

For example, to support existing products, the supply chain might need to be focused on providing an efficient low-cost output. Meanwhile, the value proposition and customer experience expectations for PaaS might require a highly flexible supply chain response.

Next steps

Meet with commercial and product-development teams. Gather details about product and service-offering plans, including specifications, launch dates and expected production and distribution volumes.

Identify what capabilities the supply chain organisation will need to support the offerings by drafting or updating process flows based on the customer experiences defined by PaaS offering. Be sure to include the activities that connect to the supply chain-controlled process flows and review the overall process flow with the functions that feed, or are fed by, the supply chain processes.

Design the supply chain-operating model based on outcomes by segmenting products, service requirements and customers with regard to PaaS as well as traditional products.

Set supply chain segment-specific objectives and incentives by defining performance targets for as-a-products in addition to the traditional products.

Communicate what will happen, when and how it will impact each part of the supply chain. This seems obvious. But too often, we see supply chain organisations struggling to make changes even more basic than those that will likely be required to support PaaS business models.

This article was republished with permission from the Gartner Blog Network.