Integrated Product and Service Offerings Creates Logistical Challanges - The Problem and the Choice of Research Design

Yesterday’s sole hardware product is becoming more and more rare. Today, the original products are increasingly surrounded by value adding services, software or control systems, all bundled together to a “total offer”. Christopher (1998) states that it is the totality of the offer which delivers customer value, and that adding value through differentiation and/or service is a powerful means of achieving a defensible advantage in the market. Norrmann & Ramírez (1994) takes this even further by stating that it is no longer possible to draw a distinct border between products and services, as all products includes services vital for their value. The ability to satisfy the customer, especially in business-to- business relations, is much depending on the ability to tailor-make a unique total offer that suites the particular customer. The important differentiation will no longer be about the hardware, but rather through a unique total offer including both tangible and intangible assets, such as knowledge, financial offers, service deals, etc. (Nordström & Ridderstråle, 1999). This is further supported by for instance Brännström et al (2001), who in a study on large Swedish companies operating in business-to-business relations on an international basis, found that the original product is becoming more the combination of different value adding activities rather than a physical “thing”. The overall impression from the study is that the companies, which ranged from large hardware manufacturers to 154 consultant companies, are all struggling to be unique in their traditional business by bundling service and/or product components into offers that are unique. The importance of logistics in the new market situation is indisputable. As the complexity of the total offer; the integrated product and service offer, increases, the demands on logistics management increases accordingly. Christopher (1998) argues that behind every enduring example of differentiation through service excellence is an example of a well thought through strategy for managing the logistics of service delivery. Further, since the logistics become part of the total offer, it is given an even more important role. This marketing of total offers is sometimes described as selling functions, where the focus is moved from the products and services to the actual function performed. This is a different view on the “total offer”, that enables the customer to use the physical products functionality without having to maintain, repair or, in its most extreme form, even own it. Examples on this is the selling of solutions for materials handling instead of trucks (BT Europe), selling of printouts instead of printers (Xerox), selling of washing of clothes instead of washing machines (Electrolux). All the above examples include a product (truck, printer, washing machine), and value adding services (maintenance, updating, support etc), but the actual offer is a function (printing, materials handling, washing). Another example is the selling of maintenance of aircraft engines. Airline operators are today often paying a fixed amount per engine flight hour for the maintenance, instead of paying for the traditional “time and material”. Hence the function is thrust or an available engine on the wing, the product is an aircraft engine and spare parts and the value adding service is the maintenance, the scheduling of maintenance and the support etc. The selling of this total offer to a fixed price as in this case, intensifies the importance of logistics. The fixed price means that a large part of the business risk is transferred from the customer to the seller, as the function (an available engine on the wing) is guaranteed regardless the actual cost for the maintenance activities. The challenge is thus to minimize and control the risks that causes the cost to exceed the income generated by the fixed price. Hedberg at al. (2000) mentions the difficulties associated with risk allocation in fixed price agreements and Norrman & Ramirez (1995) argues that the redistribution of activities in business relations in order to add value through for instance sharing or transferring of risks is increasing. This reasoning, that the logistic complexity and the importance of logistics increases with total offers, and that a great part of the business risk can be related to the 155 logistic operations, is the basis for this research project. The research is performed in close connection with the Swedish aerospace company Volvo Aero, a situation that allows deep insight into the company’s processes and business.