Machine-as-a-Service: What Is It, and What are the Pros and Cons?

Over the years, I’ve written and presented extensively on change—and I’m not talking about nickels, dimes and quarters. Innovation is the foundation of business change, which is a primary driver of competitiveness. In other words, companies that remain committed to current technology, processes and products are likely to soon be passed by others in the marketplace.

If you’ve read my IndustryWeek articles on change, you’ll know that I believe step-function-type changes are needed to gain a significant, sustainable competitive edge in the marketplace. My use of this term was recently questioned by a colleague who posited that there are probably a lot of people that don’t understand what is meant by the term “step-function.” I considered this comment and came to the conclusion he might be right!  What do I mean by this?

My educational background is in mechanical engineering. Calculus is a fundamental part of that curriculum, and this is where I first learned of the concept. And I’ve seldom heard it used in other venues. That doesn’t mean that I won’t continue to use it in my writing—after all, at this point, I’m personally linked to that term. For instance, I use it extensively in my upcoming book. What my colleague’s comment does mean is that I’ll need to ensure that when I do use it, I include enough explanation so that people understand what I mean. To that point, I use the term “step-function” to signify dramatic positive change that occurs in a relatively short period of time.

Anyway, whatever you name it, I am always looking for types of change that are both innovative and have the potential to significantly influence competitiveness. I recently came across a concept that could meet this criteria. But first I will give some background that I’ll use to describe it.

Manufacturer’s Reps

The term “manufacturer’s rep” is—or at least was—well-understood in the purchasing community.  Basically, it is where a supplier/manufacturer without in-house marketing and/or sales hires an outside firm or individual as a representative agent. In their pricing, then, these firms have to account for the agent’s commission, which is typically a percentage of the overall sale; i.e., commonly in the 2 to 5% range.  Of course, the customer ends up indirectly paying for this commission in the part’s piece price.

At the time I got my first management position in purchasing—the mid 1990s—this type of approach was well-understood and -accepted. On the other hand, I felt that some supplier/manufacturers had gotten to the point that they might be taking advantage of this “agent” situation.  And I came to understand that resolving one of these situations was now my responsibility.

Specifically, one sales representative our factory worked with had positioned himself as an agent for companies supplying parts in six of our high-usage product categories. With a little digging, I came to understand that this agent was generating well over $100,000 in annual commissions on sales based on our buys from firms he represented. This might not seem like a lot but at the time there was no-one in my department—including me—that earned anything near that in annual salary. More like a half of that figure, or less.  Remember, it was the 1990s.

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I met with the agent and told him that based on the overall amount of commissions he was receiving from our business with his clients, he had one of three choices, specifically;

·      He could regularly man a desk in our department as an expert resource for our engineers and purchasing personnel for the commodities he represented.

·       He could reduce his commission, so that I didn’t feel like he was making windfall commissions on sales to our factory.

·       I would start the process to resource from the suppliers he represented.

He chose option one, and it worked out well for both parties. Our engineering function was able to take significant cost out of part designs in multiple commodities; the agent maintained his sales commission, and he was able to increase the percentage of business the companies he represented had of our overall purchases in those product categories.

I could be wrong, but the business change I’ll describe below is a bit like the experience described above. In other words, it could lead to a win-win type arrangement that could significantly increase a company’s market competitiveness.

A New Approach to Selling

I recently learned of a new—at least to me—business arrangement between companies that manufacture machinery and companies that purchased their equipment to manufacture their own products.

The purchase of expensive manufacturing equipment is typically done in one of three ways.  First, the equipment can be purchased outright, although in my experience companies seldom pay cash for expensive manufacturing equipment. For equipment purchased in this way, it often takes years for a company to recover their initial investment costs.

Second, they could get a loan to purchase the equipment.

Third, the manufacturer could lease the equipment from the equipment manufacturer.

Manufacturers pursuing either of the latter two options implies having a constant—usually monthly—payment, regardless of the demand for their products; i.e. end-user demand can go down, as we’ve certainly seen over the last year. Here, these manufacturers assume all of the market-based risk.

The new-to-me approach (which I learned about from a rep for a company called SteamChain, which provides such a service), is called Machine as a Service and entails a customer buying equipment with weekly or monthly payments based on how much actual market demand exists. In other words, the equipment manufacturer would receive weekly or monthly checks based on the number of units that were produced on the equipment the previous period. 

 You may ask “what’s the catch?” Here, the equipment manufacturer is assuming additional risk above and beyond any warranty on their product. In addition to the finance charges, which are accepted as a reasonable expectation, the equipment purchaser is also paying for a type of market-demand insurance.  This approach may not make sense to all equipment manufacturers, but there will likely be some who see it as a way to upgrade to technology that they otherwise would not have access to due to financial risk. From my perspective, this is an issue for many small- and medium-sized manufacturers in this country.

I see this as similar to the experience I had with the manufacturer’s rep.  I was willing to pay a price that would support his normal sales commissions only if I could felt I was getting value above and beyond the RFQ process. For those looking to purchase manufacturing equipment, there may be value add that you similarly would be willing to pay for.