Companies must continuously improve their productivity and increase their competitiveness in the domestic, Nordic and global markets. Customer satisfaction and market share are being improved in many different ways and with new solutions, without forgetting the resources and competitiveness of SME companies. Nowadays, some of the SMEs, which manufacture products, have shifted their business model to service-producing businesses. The service that can be sold to large companies can be related to example part of the process, machines, devices or maintenance. The advanced services are entirely selling of services, in which case the product itself is not sold, but the commodity it generates in the certain time unit or usage hours of electric motors and amount of liquid flows through the pumps.
In the joint Nordic Process SME project on the Finnish side we have conducted 31 SME interviews and seven large industry enterprise interviews during the spring and autumn of 2017. The biggest challenges for SMEs were knowledge, marketing, sales, and financing. These results were published in the 12th of September, 2017 in the Process SME blog: SME interviews in Northern Finland. Large companies have a potential to increase advanced service business. Interviews highlighted the opportunities and challenges of advanced services, which are presented in the following paragraphs.
Opportunities and benefits of advanced services in the large industry enterprises
At large industry interviews we inquired about the causes and benefits of procuring services. Especially what are the opportunities and benefits of advanced services? At large companies see that to improve competitiveness, the cost-effectiveness of the production process needs to be improved. An SME can free up resources of the large industry enterprise to their core businesses. In addition, the supplier company can do the job more cost-effectively than the large industry enterprises can with their own workforce. In the large industry enterprises it has been noted that the service processes need to be developed together with the supplier company.
When switching to the purchase of advanced services, there is a need for more resources on both sides. This is easier if the supplier company has productized an advanced service process. Large companies see in advanced services as a benefit from the change in fixed costs to variable costs. For example, a supplier company doesn’t sell a device to a large company, but a service related to a device, whereby the device remains in the supplier's balance sheet. The industry interviews revealed a problem, which is financial difficulties of the SMEs. This is because the working capital must be buffered to manufacture the equipment. The income from the sale of the services of an SME can be divided over several years. This issue should be taken into account from the beginning in the pricing of the service.
As a decisive purchase requirement, large companies see the achieved of production availability. If the specified availability is not achieved, the result is certain sanctions. In some cases there may be a bonus for exceeding the process availability. Examples of the benefits of advanced services and the mutual benefits of the supplier-customer relationship include:
- From the basic level of output efficiency, the profit is divided into a win-win principle and some chemicals are paid € / produced net paper ton.
- Purchasing the level of cleanliness of the final product so that the product is suitable for food use. Payment criterion is € / produced carton tons.
- There are delivery contracts for the entities in where to the supplier is paid according to production, i.e. the EUR per ton produced. The policy is in use with major supplier companies.
- An external SME carries out the transfer of goods, raw materials or intermediates and receives compensation on a ton basis (EUR per ton).
Overall, an SME entrepreneur needs to understand the overall picture of the client company, the company's business and the fluctuations in production. In large companies, it was hoped that the SME’s would change its practices according to the client, and not the other way around.
Challenges of the advanced services
Several challenges were identified in an interview. A major challenge might be finding a committed supplier. Even the knowledge or ability of SME’s to take over larger entities can be challenging. In addition, it is good for SME’s to have special expertise that has deepened in a particular field. Interviews also highlighted the fact that SME risk factors often include resource issues, their quantity and quality. Capacity of resources may have been sold out for a long time, so there is a lack of human resources. A regular supplier may have to quickly recruit people to the job, so the supplier might come in to the situation that the level of the human resources knowledge can be poor. Additionally, there is a risk of illness in a key person or the death of an entrepreneur.
The supplier has to do his job well so that stoppages don’t go overtime and the company gets their work invoiced. Sometimes there have been situations where the work hasn’t been done as agreed. Losses have been made to the large industry enterprise and the work has to be done again. There have also been problems with the maintenance of advanced services, and the responsibilities of the parties to the agreements haven’t been clear. In addition, there has been an event where the subcontractor's subcontractor expertise hasn’t been high enough. In such cases, the responsible party or responsible parties will make the responsibility and ensuring the competence of the human resources.
In the interviews was found that advanced services and, in particular, the outsourcing of services start from a need. If a large company has its own resources that are tight and employees don’t have the time to do all the required tasks, they will be in a situation where additional resources are needed. The mental image of outsourcing work is much more positive in that case, since the advanced services need is based on the need for employees own experience.
Summary
The opportunities and benefits of advanced services in the large industry enterprises include the desire to improve the cost efficiency and availability of the production process in order to maintain and even improve the competitiveness of the company. Services are produced cost-efficiently and large business resources are released into the core business. In advanced services, machines or equipment do not burden the big company's balance sheet.
Large companies must reach certain production availability requirements so that supplier companies also benefit and receive a bonus on good production. The supplier companies will mainly benefit tonne-based, i.e. € / produced product tonne.
As a result of the interview, several challenges were identified with advanced services. Challenges are e.g. finding and commitment of a supplier, the knowledge of the SME or the ability to take over larger entities, the resources of SMEs and their quantity and quality. It has been noted that service outsourcing and, above all, outsourcing of certain jobs are based on the needs of employees. This is simply because of the large industry enterprise people don’t have the time to do all the work.
The supplier must do his/her job well and in the way that is agreed on. The responsibilities of the parties must be clear in the agreement. SMEs also need to understand the overall picture of the customer's business and changes of the fluctuation in production. In addition, account must be taken to the client's business practices and act according to that.
Leena Parkkila
Project Engineer | (M.Eng.)
Operation and Maintenance research
Lapland University of Applied Sciences
Industry and Natural Resources, RDI
Compus, Tietokatu 1, FI-94600, Kemi
Tel +358 (0)50 461 7213
Pohjoista tekoa – The Northern Factor
