From CapEx to OpEx: Moving from Machines to Services
The mechanical engineering sector is stepping into a new era as more and more manufacturers move away from the traditional approach of selling products over to offering customers packages of machine services. This is transforming the way customers spend their money and seeing one-off investments (CapEx) being replaced by regular, ongoing operational expenses (OpEx). Read on to learn about the advantages this offers and the role that digital service processes are playing in this change.
For many years, winning the sale was the big focus for companies in certain sectors. Once a product was out the door, customer support became more of a chore—and even providing spare parts was just another obligation. Other companies, however, quickly realized that maintenance and spare parts sales are an opportunity to generate revenue. One example is the automotive industry, where contract workshops have long been the standard. In the digital world, service forms the basis for new business models, and this is causing a shift in how companies spend their money—from CapEx over to OpEx. But let’s start by talking about exactly what these terms mean.
CapEx vs. OpEx
CapEx stands for “capital expenditure” and refers to money that a company spends on investments in long-term acquisitions such as machines, which are depreciated over an extended period of time.
OpEx is short for “operational expenditure” and refers to ongoing expenses for day-to-day operations, which are immediately recorded as expenses and directly reduce profit. This might include outlays for rent, cloud software, or service contracts, for example.
From CapEx to OpEx: a new era in machine manufacturing
Many manufacturers today are continuing to sell their machines, just as they always have. Their customers often have their own service and maintenance departments, which are able to get faulty machinery up and running again.
Outsourcing services to the manufacturer moves customers a step in the direction of OpEx—in this case, they still purchase the machine but allocate maintenance and spare parts management to the manufacturer. This reduces the capital that is tied up in spare parts in the warehouse, for example. What’s more, the customer doesn’t need as much storage space and can plan their operating expenses more accurately.
But some companies have also made a complete switch from CapEx to OpEx. One example is Rolls-Royce, which moved away from selling its jet engines some time ago and made it standard practice to charge airlines installing its engines by the number of operating hours or miles flown instead. Under this business model, customers now purchase flying time rather than an engine.
Compressor manufacturer Kaeser, which works under the name Sigma Air Utility, takes a similar tack by providing its customers with compressed air. The customer provides the space for the compressor, Kaeser analyzes their compressed air requirement and then provides a constant supply of the quantities agreed. This way, the customer doesn’t need to buy their own compressed air system.
Business models of this type are known as operator models. Originating in the infrastructure segment, this term refers to the contracting out of public services, such as outsourcing municipal waste disposal to franchisees.
In the machine manufacturing context, an operating model means that a manufacturer no longer sells machines, plants, and equipment to customers, but rather their output. In other words, producers are now investing in what a machine produces rather than the machine itself. Going back to our example with Kaeser and air compressors, the output customers purchase would be quantities of compressed air.
From CapEx to OpEx: the advantages for manufacturers
More potential customers
The manufacturer can tap into new customer groups. Many projects fail due to the high initial investment involved in purchasing machinery, especially with start-ups and new companies.
Competitive edge
Companies working under an OpEx business model can give themselves an edge over competitors who don’t offer this type of service.
Steady flow of revenue and longstanding customer relationships
The manufacturer moves from a sales model in which the sale of products results in sporadic peaks in turnover, to a steady flow of sales with regular incoming payments for the service. These sales can be planned both for the customer purchasing them and for the provider, who fulfills long-term supply contracts. This forms the basis for a longstanding relationship between the customer and the manufacturer.
Predictable costs
The cost side of things can also be designed to be as predictable as possible, by providing machinery at the customer’s site that works reliably and provides ongoing updates as to its condition. As such, the costs incurred due to service and maintenance are almost always predictable. And improvements to machines that reduce costs are of direct benefit to the provider.
Data acquisition
As the operator, machine manufacturers obtain large volumes of data on how their products are used. These data can be used to enhance their products and develop additional services which, in turn, benefit customers.
From CapEx to OpEx: the advantages for customers
Regular operating expenses instead of one-off investments
From the customer perspective, the advantage of the operator model is that they can forgo an expensive purchase and avoid tying up their capital in a machine. Instead, they can now think in terms of fixed costs that can be easily predicted by the month or year. In other words, they make the move from CapEx to OpEx.
Less reliance on skilled workers
When the manufacturer takes responsibility for machines working correctly, the customer no longer needs to employ their own qualified personnel to carry out maintenance and repairs—or think about spare parts management.
Flexibility and scalability
Customers have greater flexibility to adapt the way they use machines in line with current requirements than they would if they bought the machine or plant itself.
Operator model: reliability is the manufacturer’s responsibility
With this shift from selling a product to selling a service, manufacturers find themselves in a new position, as responsibility for their product rests with them and they have to guarantee that the services are continually available.
The customer goes from being the operator of the product to the recipient of a service with a contractually guaranteed scope and availability. The manufacturer has to maintain their own systems and ensure the reliable running of those systems. Where service used to be a customer loyalty measure or an additional source of revenue, it is now the basis of the entire business model.
Another factor is that, although the systems are located on the customer’s premises, they are not maintained by the customer. This therefore requires the machinery to be so intelligent that it can notify the user automatically when interventions are necessary. Predictive maintenance is no longer a smart approach but an absolute necessity—especially as any downtime has to be discussed with the customer.
Guaranteed reliability thanks to spare parts management and documentation
Manufacturers who want to offer reliable services need to take an efficient approach to planning and carrying out service calls. This means they have to draw on their full range of experience with different customer machines—and collecting and analyzing data is the best way to do this. These data lay the groundwork for preventive and predictive maintenance. By taking the right maintenance strategy, necessary maintenance can be scheduled with enough flexibility to avoid disruptions to the customer’s operations wherever possible and prevent expenses for repairs.
Technicians need to be on site with the right spare parts, tools, and manuals at the right time in order to carry out a service call efficiently. It all comes down to comprehensive documentation—ideally in digital form, and including 3D models. A digital information twin brings together all the existing information available on the machine.
A case in point is Quanos InfoTwin, which offers the following advantages:
- Spare parts management and technical documentation are available directly in the cloud, 24/7
- Sets the stage for predictive maintenance, so service can be planned and carried out efficiently
- Reduces incorrect spare parts orders via intelligent identification
- Provides the basis for smart services
If your company is ready for new business models, the experts at Quanos look forward to putting their years of experience to work for you. A free online demo is a great way to answer the key questions that companies typically have in relation to Quanos InfoTwin. Check out the advantages a digital twin can offer you today!
