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Procedia Manufacturing 4 (2015) 224 – 230

Industrial Engineering and Service Science 2015, IESS 2015

Innovative costing system framework in industrial product-service

system environment
Americo Azevedoa*, Mar’atus Sholihabb
a
Faculty of Engineering, University of Porto, Rua Roberto Frias, 4200-465 Porto, Portugal
b
Department of Industrial Engineering, Institut Teknoogi Sepuluh Nopember, Kampus Sukolilo 60111 Surabaya, Indonesia

Abstract

Product-service system (PSS) or particularly industrial product-service system (IPS2) is started to gain more attention as innovative
strategy to face the competitive global market. Service aspect from IPS 2 offering is believed could provide more values for customer
than the standalone physical product. This new concept is not fully developed yet. There are some particular areas around IPS 2
concept which are needed to be more explored and one of them is the cost dimension aspect. Cost is obviously important for
company as basic information to support decision making process. Traditional costing system is no longer able to facilitate the
company’s transformation. The following work will present the analysis of current costing systems and a new assessment
framework proposed to address the needs of IPS2 environment, particularly for IPS2 function-oriented business model. The
proposed framework is developed based on the literature findings. Considering the specific characteristics of IPS 2 business model,
lean accounting is the best choice from current costing systems to be adjusted into the proposed framework. Lean accounting with
its value stream costing (VSC) is able to provide comprehensive cost information to support company’s long transformation journey
towards a fully and successful IPS2 company.

©©2015
2015TheTheAuthors.
Authors. Published
Published by Elsevier
by Elsevier B.V. B.V.
This is an open access article under the CC BY-NC-ND license
Peer-review under responsibility of the organizing committee of the Industrial Engineering and Service Science 2015 (IESS
(http://creativecommons.org/licenses/by-nc-nd/4.0/).
Peer review under responsibility of the organizing committee of the Industrial Engineering and Service Science 2015 (IESS 2015)
2015).

Keywords: Costing system; industrial product-service system (IPS2); lean accounting

* Corresponding author. Tel.: +0-000-000-0000 ; fax: +0-000-000-0000 .

E-mail address: [email protected]

2351-9789 © 2015 The Authors. Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license
(http://creativecommons.org/licenses/by-nc-nd/4.0/).
Peer review under responsibility of the organizing committee of the Industrial Engineering and Service Science 2015 (IESS 2015)
doi:10.1016/j.promfg.2015.11.035
 Americo Azevedo and Mar’atus Sholihab / Procedia Manufacturing 4 (2015) 224 – 230 225

1. Introduction to the problem

Global market has entered to the new level of competition. Emerging industries particularly in developing
countries, where production and labor cost are significantly lower, have changed today’s competition to be more
customer-based than product-based. Selling product is no longer an economic basis to determine company’s success
to compete with those emerging industries. In order to stay competitive companies have to change their mind-set from
only selling products to selling integrated products and services [1]. Industries are very eager to involve services in
their offering not only as a separate offering from their products, but more as an integrated or bundle of offering. This
concept so-called Product-Service System (PSS) [2]. The transformation process from manufacturing company to be
a PSS company is called servitization. PSS is expected to be a solution to face today’s market by giving more values
to customer and at the end giving the increased revenue and profit.
Industrial Product-Service System (IPS2) is a particular case in PSS. The distinguish nature between PSS and IPS2
is their customer. IPS2 is a case of mutual and integrated planning, developing and using of product-service share in
business-to-business (B2B) application, when other industries are their customer. While the original PSS is dealing
with business-to-customer (B2C) application, when the end users are their customer [3].
IPS2 is believed could bring some benefits which encourage manufacturing companies to adopt this concept. Some
of those benefits are company could increase the sales of its physical products; strengthen the partnership both with
customers and suppliers; bring a new opportunities in very competitive market; deal with economic cycles effect using
divergent cash-flows and meet the customers’ demands of overall solution [4, 5]. But in other hand, this new strategy
will bring some challenges. To be an IPS2 company, it is required a long and tough internal transformation such as
company’s mind-set, strategic and operational strategy, organization structure, supply chain management and
obviously their cost dimension assessment.
Cost assessment is important issue for company since it is one of the core competitiveness in today’s market (beside
quality, responsiveness and flexibility). Cost assessment becomes more challenge in IPS2 companies considering
limited research and practical example in this area. Furthermore, in real practice companies remain to use traditional
costing which by nature gives emphasize for products and disregard costing of their services [6]. Studies show that
manufacturing companies are in consistent journey to be more service or integrated offering provider, but in the same
time there is no sufficient researches in their costing methodologies [7]. In line with this fact, it seems relevant to
explore the cost assessment of IPS2 companies.
The purpose of this research is to analyse and explore how to calculate cost in IPS2 environment. In order to fulfil
the purpose of the research, the research question intend to be answer is “considering the available costing system in
literature, can it be employed for IPS2 companies?”
This research will be specifically focus on function-oriented business model from IPS2 continuum proposed by [8].
The research scope is intended to address the machine-builder manufacturing companies as the practical case of IPS2
function-oriented. The research approach will be applied to answer the research question is a combination of literature
review and case study analysis. At the first stage, review the related literatures is conducted to obtain theoretical
understanding regarding the present cost assessment in IPS2 companies. Based on this findings, it will be developed
new proposed framework to calculate the cost in IPS2 function-oriented. This same approach has been used by many
researcher to build a research agenda or framework in accounting area [9]. Furthermore, a case study analysis will be
used since the research question is an exploratory nature and deal with operational aspect, then a case study is
recommended methodology [10].
2. Literature review

2.1.Industrial Product-Service System (IPS2)

IPS2 is a bundle of offering consists of products and services which provides more values in use rather than
ownership that apply in B2B application [2]. In this concept, there are four parties involved i.e. the IPS2 provider or
usually called as the Original Equipment Manufacturer (OEM), customers, suppliers and external society such as
competitors and government [3].
Base on its business model, IPS2 can be divided into three major types which are function-oriented, availability-
oriented and result-oriented [8]. The first stage of IPS2 continuum is IPS2 function-oriented. In this business model,
226 Americo Azevedo and Mar’atus Sholihab / Procedia Manufacturing 4 (2015) 224 – 230

the main focus stay in product but company provides technical services aim to ensure the product’s functionality. In
availability-oriented, the range and variety of services are increasing. Its main performance indicator is the availability
of product use by customer. And in result-oriented, IPS2 provider will be the main responsible for customer production
process. All the risks and uncertainties in product usage are shifted to IPS2 provider [3].
The most common practice in IPS2 area is machine builder manufacturing companies or high value machine
producer. Their journey towards IPS2 is started by providing technical services such as maintenance, spare part or user
training. Function-oriented is good initiation to be more service provider. Even PSS and IPS2 is not a new concept in
academic literature and practice but particular topic around PSS and IPS2 have not explored yet including their cost
assessment dimension since this topic is very complex and remain evolving.

2.2. Existing Costing System

There is very limited researches conducted so far which discuss particular costing system (cost structures, cost
assessment framework and model) in IPS2 environment even costing system is a mature topic in academic life. Table
1 shows the most popular current costing system that has been adopted by many organization for so long time. But
there is no specific researches which discuss whether they can be applied in IPS2 companies or not. The most recent
and comprehensive research about costing system in IPS2 environment is done by [7]. They create cost modelling
techniques for IPS2 availability-oriented use model. They propose the combination of cost estimation techniques
available in literature both for product and service, which vary based on life-cycle stages and availability of data.
With respect to the current costing systems, some interesting questions then arise. Can those systems encourage
company to undertake continuous improvement towards the long journey of IPS2? Can those systems provide high
value to company? It is clear that market environments are rapidly changing and in order to stay competitive company
should be doing continuous improvement whilst traditional costing system or ABC cannot provide the sufficient
information to support it [11]. The flexibility to adapt in new environment is no doubt a crucial key to keep survive in
today’s market.
IPS2 companies need a costing system which answer some critical requirements. It has to be straightforward in
terms of time, cost and effort needed to build, implement and maintain without ignoring the complexity of company’s
activities. It has to consider product and service aspect in whole life cycle in balance way. This point is important
because company is providing a bundle and integrated solution which ensure the functionality of product during its
life cycle. Furthermore, IPS2 companies require a cost management methodology, which is easily updated and adjusted
to meet continuous changes due to the customer’s variety demands to get more customized and overall solution. It has
to consider risks and uncertainties as well as able to encourage company doing continuous improvement [12].

Table 1. Summary of existing cost estimation with its advantages and limitations (source: [7, 13-16])
Costing System Advantages Limitations
Activity-based costing Based on the real and detail usage of Needs a lot of time to be executed
resources Expensive to be executed
Give sufficient relevancy and accuracy Difficult to implement as a standalone
Provide very details cost driver costing system
Indicate clear potential profit for company Very complicated in overhead allocation
Time-Driven Activity-Based Company could report their costs on an It will work properly only in high
Costing (TD-ABC) ongoing basis for the time spent for that repetitive job where profit margin is small
activities and cost of their business activities Could not give information why this cost
Flexible to be updated based on events can be occurred and how the behavior of
Give degree of accuracy as good as ABC particular cost object
Process-Based Costing (PBC) Could give fair result even with limited data Doesn't really fit to calculate services
Built based on process flow which visualized since this method could not accommodate
by flowchart. Flowchart is a tool in quality indirect cost
improvement

Based on those criteria, lean accounting with its value steam costing is a good candidate to be adjusted and
implemented for IPS2 environment, particularly for function-oriented use model. This method considers all the cost
 Americo Azevedo and Mar’atus Sholihab / Procedia Manufacturing 4 (2015) 224 – 230 227

within value stream (life cycle) in how companies provide its products and services. Furthermore, the implementation
of lean thinking in costing system could encourage company to increase their efficiency and effectiveness in IPS2
design, development, management and delivery toward the full servitized company [9].

3. New costing system framework for IPS2 Environment

3.1. New costing system requirements

A function-oriented use model is the first continuum in IPS2. Product is remain the main focus but IPS2 provider
includes services to guarantee product’s functionality, it can be provided as the annual service contract or separate
service offering. In the contract, there are detailed information about what services being performed and specific time
for each service to be performed. Condition based maintenance (CBM) is mainly applied in this type of contract which
actual condition of the product is the major consideration to plan and execute the maintenance strategy. Maintenance
will be performed if there are relevance indicators show that product’s functionality is decreasing. With regard to this
condition, IPS2 provider will be able to calculate the cost and determine the price of total offering. At the end, customer
will pay a fixed amount for the service offering every year.
Based on that business model, information and knowledge exchanges between IPS2 provider and customer play
really important role. High degree of products utilization can be achieved if the product works well. To ensure the
products functionality, maintenance should be planned and performed in appropriate way and time. Since maintenance
will be accomplished based on the actual condition, customer have to provide actual and reliable information about
the products condition to IPS2 provider.
Further characteristics of IPS2 function-oriented use model are explained by [17]. They define comprehensive
operational characters of product-oriented PSS based on some unit analyses i.e. characteristics of operations-structural
and characteristics of operations-infrastructural. This characteristics seem relevant with IPS2 function-oriented where
the main focus of integrated offering is product whilst service is proponent aspect to create more values to customer.
Product-oriented PSS company deal with the end customer while IPS2 function-oriented deal with another company
as customer. Moreover, Meier, H., et al. [3] identify specification of IPS2 function-oriented use model as shown in
Table 2.
Considering those characteristics, in general IPS2 function-oriented provider has relatively similar business model
as pure manufacturing company since product is remain its main focus. But, services provision during the period of
time which ensure the product functionality brings some different characters due to uncertainties and risk sharing.

Table 2. Specification of IPS2 function-oriented use model [2]

Specification IPS2 function-oriented use model
Production responsibility Customer
Supply of operating personnel Customer
Service initiative Customer
Ownership Customer
Supply of maintenance personnel Customer/ Supplier
Service turn over model Pay per service order

At the end, based on [18] it can be summarized that the specific characters of an IPS2 function-oriented
company are:
x Company focus on building the good knowledge sharing with the good information flow among all the supply
chain parties
x The knowledge sharing and information flow will facilitate company to build the strong partnership among
supplier, IPS2 provider and customer
x Because of the service provision to maintain product functionality (particularly for maintenance agreement),
there are risks and uncertainties sharing between IPS2 provider and its customer
x Company is doing a long and tough internal transformation to be an IPS2 provider
x One of the most important main goals of the company is to be flexible to the competitive market
228 Americo Azevedo and Mar’atus Sholihab / Procedia Manufacturing 4 (2015) 224 – 230

x To support the transformation process, company need simple but comprehensive costing system rather than
a complex costing system. The costing system should be able to be one of supporting tools to reach the
servitization journey

All those characters will be consider to determine the appropriate costing system to IPS2 environment particularly
IPS2 function-oriented.

3.2. Proposed costing system framework for IPS2 function-oriented companies

It is understandable that servitization journey toward full application of IPS2 business environment is long and
tough. IPS2 providers not only face internal challenges as mentioned earlier but also external challenges because of
global competition. It is clear that market environments are rapidly changing. In order to stay competitive companies
should do continuous improvement whilst traditional costing system or even ABC cannot provide the sufficient
information to support it [11]. The ability to adapt is no doubt a vital key to keep survives in today’s market.
Considering this condition, continuous improvement become another important point to be considered into proposed
costing system for IPS2 function-oriented business model.
The proposed costing system for IPS2 function-oriented is based on the proposed cost estimation technique for IPS2
availability-oriented from [7] which combined with lean accounting and its value stream costing (VSC) explored by
[19]. Figure 1 is the proposed costing framework for IPS2 function-oriented companies [18]. Since cost is the result
of company’s actions to provide the values to customer, the company’s offerings would be the first necessary
information. In order to assess the company’s cost, it is required to know what company’s value creation architecture
which drive IPS2 delivery and use. Afterwards, the sequence steps of lean accounting could be applied to assess the
cost with the detailed explanation as follows:
1. Collecting the numerical data of the processes which are relevant both for production and service provision
2. Mapping value stream for both production of products and preparation and provision of services. The value
stream map (VSM) is created to address what and how products and services are produced and provided to
the customer under the agreement
3. Costing the value stream. Integrate VSM and VSC can be used to measure operational and financial
improvements. In Figure 1 it is shown the types of cost structures relevant in IPS2 function-oriented
companies
4. Cost of IPS2 offering is accumulation of product cost and service cost
Based on the execution of IPS2 delivery and use, customer could give the feedback and sharing knowledge. This
information could be valuable basis to do the manufacturing and service redesign to identify, plan and execute
improvement in operations.
 EXTERNAL DRIVERS COMPANY’S VALUE CREATION ARCHITECTURE
x Global competition
x Technology
development
IPS2 DELIVERY AND USE
x Environmental
sustainability issue
PRODUCTION AND DELIVERY OF PHYSICAL PRODUCTS PREPARATION AND PROVISION OF SERVICES

Americo Azevedo and Mar’atus Sholihab / Procedia Manufacturing 4 (2015) 224 – 230
x Customer affordability

Production value stream Service value stream

Data Collection Data Collection
INTERNAL CAPABILITIES mapping
pp g (VSM)
( ) mapping
pp g (VSM)
( )
Seven tools for VSM: x Historical data Service value stream x Historical data
x Process activity mapping x Numerical data of the mapping using service x Numerical data of the
x Informatics x Supply chain response processes including standard icon (Bonaccorsi, processes including
x Socio-technical system matrix method study as well as Carmignani et al., 2011) method study as well as
x Organizational structure x Production variety funnel work measurement work measurement
x Quality filter mapping
x Service network x Demand amplification
x Co-creation value mapping
x innovation x Decision point analysis
x Physical structure Customer
mapping
feedback and
sharing
knowledge
Products Value stream Services Value stream from IPS2
costing (VSC) costing (VSC)
Manufacturing and
delivery and
use
service redesign to
Value stream Production Machine and Value stream Physical identify, plan and
labour costs material cost equipment cost labour cost material cost execute
improvement in
Value Stream (VS) Value Stream (VS) operations

Outside Facilities and All other VS Related All other VS

processes cost maintenance cost costs Equipment cost costs

Cost of value streams Cost of value streams

Cost of individual physical

Cost of single service
product

Cost of IPS 2 offering

Continuous improvement processes

Change management

Figure 1. The proposed costing system framework for IPS2 function-oriented companies

229
230 Americo Azevedo and Mar’atus Sholihab / Procedia Manufacturing 4 (2015) 224 – 230

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