Manufacturing services offer revenue stream

Small and medium manufacturers that add services to their product offerings can enjoy higher profit margins and other benefits, says a Conference Board of Canada report.

March 26, 2012

MONTREAL: Small and medium-sized manufacturing firms that add services to their product offerings can enjoy higher profit margins, more stable revenues and greater competitive advantage, says a Conference Board of Canada and McGill University report.

“Canada’s manufacturing value-added has been declining over the past decade. Small and medium enterprises (SME), who represent half of Canada’s manufacturing employment, can improve this picture by adding new services to their product portfolios, thereby greatly increasing value added,” said Vince Thomson, Werner Graupe Professor of Manufacturing Automation at McGill University in Montreal.

The report offers the following reasons product manufacturers should integrate services into their core offerings:

• Services have higher profit margins than products.

• Services provide a more stable source of revenue, because they are more resistant to economic cycles that affect investment and equipment purchases.

• Services enable substantial revenue to be generated from an installed base of products with a long life cycle.

• Services add value and strengthen the supplier-customer relationship.

SME Manufacturers in Quebec: Adding Services to Boost Competitiveness and the Bottom Line, is based on case studies, literature review and an online survey of 113 Quebec. It shows 95% of SMEs who offer services gain revenue. Of these, about one-quarter of obtain between 21% and 60% of their revenue from service offering. A further 67% get between 1% and 20% of their revenue from selling services.

But there’s an added bonus: services help SMEs sell more manufactured products, and yields customer feedback that improves product offerings.

There are challenges, though. The chief one identified by 45% of respondents is the need to employ highly skilled personnel. Other challenges were accessing client needs (12%) and identifying what specific services to provide (12%). In-house expertise and knowledge of their products, knowledge of foreign languages and regulations, knowledge of clients’ needs and providing timely solutions were key to successfully delivering services.

Another approach that Quebec SMEs can adopt to compete globally is to integrate with the production networks of multinational corporations (MNCs). Another report, Integrating Quebec SMEs Into Production Networks: A Spur to Competitiveness, identifies several factors behind successful networks:

• The presence of world-class MNCs to provide access to large markets and knowledge.

• Close lateral relations among SMEs to share information about markets and technology.

• Forums for communication between and among MNCs and SMEs.

• Forums for collaboration between and among industry and academic institutions.

• SMEs willing to foster innovation by hiring highly trained people.

• Government cooperation to ensure, for example, appropriate transportation, communications and financial infrastructure.

Click here for both reports.