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Some of the most profitable firms during the 1990s were companies that used their position as a manufacturer to offer high-margin services that leverage product-related skills and competencies.¹ These firms have moved downstream into services that closely relate to their products. For example, Boeing provides parts replacement contracts that supply customers - airlines - needed parts at desired locations. A number of airlines contract with Boeing for parts provision at the same airports. These airlines save money because they reduce their cost of maintaining repair parts, and Boeing is able to charge a high margin on this service. General Electric not only sells locomotives, but provides financing and maintenance services. Finally, automotive companies have rediscovered that the sale of an automobile is not a one-time event, but an opportunity for the initiation of a long series of relationships. Whether a lease or sale, tremendous opportunities exist in financing, maintenance services, extended warranties and replacement parts.

Wise and Baumgartner estimate the purchase price of a product to be from 1/5 to 1/20 of the total product-related expenditures for many large purchases. Few firms pursue the potential multiplier effect that services can have on sales and overall profit, however. In many cases a firm may reluctantly move into the provision of a service at the request of a customer.² For example, Caterpillar³ initially did not want to enter into remanufacturing. Over time, however, remanufacturing operations have been recognized as an important and profitable part of its business.

Even if product volumes and margins were not on the decline in many traditional manufacturing businesses, the sales and profit multiplying potential of related services are exceedingly attractive. It may seem that moving downstream or integrating product-related services to the sale of products is not widely pursued because the concept is new. But in fact the utility of services were forgotten for a while and have recently been rediscovered. Many successful firms in the past have approached their products from a service perspective. Years ago AT&T did not sell telephones. Telephones were provided for a monthly fee. Similarly Xerox charged firms for the service of having a photocopier.⁴ And IBM has a long history of providing equipment for a monthly fee. Equipment that provided a higher level of service, for example a punch card reader with a higher processing rate, was provided at a higher fee. These business models with a high level of service tend to offer greater revenue, and also a higher profit margin on the revenue. There is, of course, a pattern between these three examples: AT&T, IBM and Xerox were all in a monopoly position at the time that they managed the sale of their manufactured goods from a service perspective.⁵ In an environment that prevented free market forces and competition, firms were in a position to charge higher prices. It would be a mistake, however, to suggest that the provision of services is related to firms with monopoly powers and that product purchase is related to firms operating in either free or competitive markets.

Services often produce superior value for customers. This creates the opportunity for greater profitability. Supplying services to customers facilitates a better understanding of a physical product's value proposition to an individual customer. By gaining a better understanding of the differences in relative value and the basis of the value of a product for each customer, the manufacturer can customize a goods and services package and price it in such a way that both the customer and seller obtain great value. Not only is there a tendency for higher profits for the manufacturer, but customer loyalty increases since the manufacturer provides a customer with what they want.

The tremendous potential of value-added services for the manufacturer is effectively a call for:

Examples of value-added services that can add to the bottom line include:

Training. It is unlikely that any organization has greater knowledge and expertise than the OEM. Consequently, the OEM is in a superior position to offer this high margin service. Plus, the OEM already has an existing relationship with all the purchasers of the equipment.

Financing. In some cases a customer may prefer to pay for a product at the time of purchase. But many customers must finance the purchase of a product and prefer suppliers to manage financing. Financing can also be exceedingly profitable as shown by GE Capital and GMAC - the financial services business units of GE and GM, respectively.

Replacement parts. Replacement parts are typically sold at a high margin. In some cases, the product is sold at cost or at a loss⁷ with the intent of profit being obtained from the sale of consumable or replacement parts.

Maintenance. An OEM's expertise with equipment can be combined with advanced sensors and remote communications to offer a variety of maintenance services including predictive, preventative and unscheduled repair. Many organizations are prepared not only to draw on the expertise of the OEM, but the opportunity to reduce the need for keeping specialized repair and maintenance skills in-house.

Operations management. A variety of specialized skills may be required for the operation of the product. Some users prefer to outsource product operations to the OEM or a third party.

Product lifecycle management. Various services can be offered that address other aspects of the product life cycle. For example, offering extended warranty coverage is increasingly commonplace. Other examples: trade-in arrangement, end-of-life product take back and upgrade of products.

Leasing product. May be a preferred way to finance the product. Alternatively, it might involve providing the product for a specific period of time with the expectation of the ownership of the product reverting to the OEM at the end of the contract. In some cases it is not clear at the initiation of the lease whether the lease contract will end with the permanent ownership resting with the supplier or the customer.

Leasing use. Involves the provision of the product to a customer with ownership being retained by the supplier. However, instead of charging the customer a rate based on the amount of time the product is being leased, the customer is charged on a use basis. Technological advances in sensing, data collection, remote communication and electronic billing increase the viability of this option.

Parts maintenance. Involves the supply of spare parts to the customer. With parts maintenance agreements, the supplier guarantees that a group of desired parts will be available within a given period of time. In some cases the guarantee involves the storage of parts on or near the customer's site. It may also involve delivery of parts to the customer within a set period of time - for example, parts must arrive at the customer site within 48 hours from the time of request notification by the customer to the supplier.