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MaaS-Pearson-featured-web.jpg Photo supplied by Pearson Packaging Systems
Pearson Packaging Systems sells automated case erectors, sealers, cartoners, and robotic palletizers. This photo, like MaaS, shows that the focus is on outcome, not just the asset.

Tell your CFO: Packaging Machinery-as-a-Service Beats the Capex Budget Blues

With Machine-as-a-Service (MaaS), suppliers and brand owners share a financial stake in uptime and profits. It also makes packaging automation immediately scalable for fast-moving consumer goods and healthcare products.

Imagine you’re an engineer or a plant manager at a major consumer goods company and you’ve done all the research to find that a new case packer will offer significant productivity gains and cost savings. But you just can’t get the attention of your purchasing or financial departments. Or maybe you’ve gotten some buy-in, but capital expenditure (capex) budgets are in lockdown due to the uncertain pandemic/post-pandemic economy.

Now, imagine a machine builder called and offered that case packer for zero up-front dollars, and promised to…

• Build, install, test, and commission the equipment in your plant.

• Train your operators, and kick-in maintenance services.

• Provide remote monitoring, reporting and maintenance services beyond your usual preventive maintenance (PM) routines, including spare parts for the life of the machine.

• Charge a fair, negotiated price per-case packed — with no monthly minimum required.

• Require no minimum contract period for the machine.

• Remove it at any time.

• Remove it at any time.

These are terms Pearson Packaging Systems offers today for some of its automated case erectors, case sealers, cartoners, and robotic palletizers. And it’s a prime example of outcome-based pricing — also known as usage-based pricing or Machine-as-a-Service (MaaS).

“We’re trying to provide an alternative to companies who, when determining their capex budgets, don’t have funding for whatever reason — it might be future uncertainty with COVID-19 or in terms of a recession,” says Pearson CEO, Michael Senske. “We can still provide a solution.”

An alternative from the traditional asset sales model, MaaS transfers debt, risk, and operational uncertainty from capex projects to the operational or opex budget. This pure service play tucks the cost of the asset and its maintenance into a line item for the brand’s facility, or brand management spreadsheet, alongside labor, parts, utilities, and other direct and indirect costs.

In such cases, machine builders can be at risk since they carry the financial risk of paying for the machine, labor, and other overhead expenses. They mitigate that risk by offering the service to companies they deem low risk, such as Fortune 500 food/beverage, personal care, and other high-volume packagers. Additionally, contract terms vary, and can be case by case.

For instance, BEX, a robotic integrator and builder of end-of line robotic palletizers, mobile robotic pallet movers, and labelers, offers usage-based pricing as one option of its FLEXX program. “Terms can be different every time,” says Craig Francisco, vice president of strategy. “We work with the customer and figure out what works best. Some might want to pay a portion up front, and others don’t want to pay anything. Based on that, we establish the outcome to be measured and a price per outcome.”

Similarly, ProBrew can-filling systems offers flexible MaaS terms for a unitized can fill/seal system in the speed range popular with craft brewers (90 to 300 cans per minute). Each case is different, the company says, but there’s typically a commissioning charge and a partial capital investment up front, followed by monthly usage-based payments.

A minimum monthly payment could be another contract option, as it was for a food/beverage industry cartoning machine installation that Will Humsi, partner with consulting firm Simon-Kucher & Partners, had a hand in. “The arrangement was similar to an outsourcing agreement,” he says, noting similarities to other operational service agreements, such as vendor-managed inventory. For this unnamed vendor and unnamed food brand, the user made monthly payments for cartons filled, with a minimum monthly payment to protect the vendor’s capital outlay.

Photo supplied by Simon-KucherMaaS-Simon-Kucher-web.jpg

Companies across many industries have bought and sold via outcome-based pricing, sometimes driven by tight capital/economies, according to Simon-Kucher.

 

The tech making packaging MaaS possible.

It’s only recently that packaging machine builders have offered outcome-based pricing. But the business model is well established in other industries:

• In 1962, Rolls-Royce introduced its Power by the Hour program, which gave airlines the option to pay for the use of jet engines per flying hour — and changed pricing across the aviation industry. More recently, the company reported this strategy quadrupled sales.

In 2018, Heidelberger Druckmaschinen claimed a 70% increase via its printers-as-a-service offering.

Michelin offers vehicle fleets the option to pay for tires by the mile (as cited and well-sourced in a Medium article from a rep with ZkSystems).

• Additional applications have hospitals paying per-surgery for robots, utilities paying per volume of water treated, and logistics ports paying-off vendor’s financial investment in cargo-handling crains per container moved.

In these cases, the number of both suppliers and buyers is low, so even before digital connectivity was possible, the metrics for outcome-based pricing were easy to track relative to environments characterized by fast-moving products and packages.

Now, it appears a silver bullet has been developed that adds Internet of Things (IoT) data access for performance monitoring and financial accounting in an objective, immutable ledger of transactions visible to both parties, but that none can modify. Developed by SteamChain, this apparent first-of-a-kind solution is specifically designed to provide a “ready-to-roll full technology stack from machine data to the cloud, into the actual clearing of the financial transactions, in a single, automated tool,” says CEO Michael Cromheecke.

Incidentally, it’s the platform that has been adopted by Pearson, RōBEX, and ProBrew.

“Without the IoT/blockchain ledger,” RoBEX’ Francisco says, “we wouldn’t have a way to track the outcome, and we’d struggle with contracts. It takes away any issues where we’d have disagreement over the performance of the machine. It’s a clean way for us to build a very high level of trust with customers.”

Photo supplied by RoBEXMaaS-RoBEX-web.jpg

Outcome-based contract terms “can be different every time,” says Craig Francisco (pictured), robotic integrator and packaging solution builder, from RōBEX.

Before finding SteamChain less than two years ago, Pearson’s Senske reports spending roughly a decade testing and proving the pricing model with a “handful” of outcome-based pricing agreements that represented a “toe in the water.” But data collection and billing methods didn’t allow scale-up to a larger marketplace: Service technicians would visit customers’ plants to get machine PLC readings. He implemented SteamChain last year, which “is what makes this all possible,” he says, and the technology is unobtrusive, delivering via IoT gateway machine performance monitoring data and the exact, actual usage data needed for accounting in the third-party.

Cromheecke says his company’s financial solution was 20 years in coming. Working as a Rockwell Automation engineer servicing customers of robotics and servos, he spent 200+ days a year on the road servicing many packaging original equipment manufacturers (OEMs) and end users. He became fixated on overcoming the “it’s not my fault” game that prevented customers and suppliers from solving technical problems first, and then worry about who pays. And that’s what led him to reconsider traditional business models that prevent a “partnership” from going beyond marketing and into operations. 

 

Financial accountability redefines partnership.

“What we do with MaaS is not about investing in a machine. It’s about investing in a result to allow users to make better, more informed decisions. And their partner, the OEM machine builder, has an aligned interest in the performance of their business,” says Cromeecke.

What this means is that for both parties, machines that are well-maintained and producing more product are more profitable, and machines that are down are not. This is true down to the real-time minute, measured in performance and dollars. That’s different from leasing, where the end user owes the bank whether or not the machine is running. Likewise, it’s different from the traditional capex purchase in which the vendor gets paid in increments and milestones through final commissioning. After that, when things go wrong, customer-supplier friction often gets bogged down in trying to future out who’s going to pay for a repair.

Photo supplied by SteamChainSteam-Chain-graphic-web.jpg

This software screen from SteamChain illustrates the tracking of packaging units completed, along with potential faults/downtime events, as well as conversion from units to dollars.

 

That’s an old model that led to SteamChain’s creation. Even as technology has moved into the Fourth Industrial Revolution, most machine purchases are still based in the first industrial revolution, carried out the same way as a century ago. By turning real-time operational data into a financial tool, Cromheecke wants to help suppliers and their customers “navigate and negotiate the management of risk and the exchange of capital between those business partners. That’s really the concept behind Machine-as-a-Service.”

 

Risks and rewards.

In summary, here are a few things to consider about MaaS:

Flatten the budget: The desire to eliminate unknowns pervades every aspect of buying, running, and maintaining plant assets. For instance, a key aspect of financial planning is to flatten unpredictable budgetary peaks and valleys, which is a key selling point for outcome-based pricing.

Do faster financial analyses, innovation: Large organizations conduct complicated asset procurement calculations — such as hurdle rate or internal rate of return, minimum acceptable rate of return, and net present value. Paying for outcomes instead of assets simplifies valuation risk/cost factors, such as machine performance, long-term maintenance, and skills.

Speed plant improvements: Another risk, called “opportunity cost,” amounts to the losses of choosing an asset acquisition path filled with delays while your competitor may be stealing market share through their own innovations. Instead of getting bogged down in capex procurement and approval complications, companies can gain new, more efficient automated packaging assets to speed more and better products to market without delay.

Compare overall costs: Buying a packing machine can be cheaper than any other option in terms of pure dollars if the cost of capital is low. On the other hand: “If you’re not thinking about performance or the risk of long-term maintenance costs, or whether or not the machine is going to be able to achieve the result you want with the team you have in your facility, then you’re missing easily 50% of the opportunity cost connected to the valuation of that investment,” says SteamChain’s Cromheecke.

Negotiate end date up front: Once the vendor’s break-even is reached, they profit, just as the user does once a loan or lease is paid off. A September 2019 Bain & Co. analysis indicates this takes roughly six years. Packaging OEMS report that five to eight is common. Rather than worry about draining operational expenses indefinitely, the solution for buyers is to address this at the negotiating table.

Focus on core strengths: Variously, outsourcing financial burdens, labor, and maintenance is well-established in existing contract packaging, vendor-management inventory, and maintenance service contracts. External partnerships allow brands to better focus resources on core competencies, such as product development and brand marketing.

 

What will the future bring?

MaaS isn’t only a financial decision, but the money part is probably the most important.

“It’s really tough to predict the future,” Humsi says, for alternative pricing strategies in the packaging industry. As he sees it, the initial mad scramble by brand packagers get plants running and to backfilling orders will eventually “trail off” as consumers continue to drive demand for more packaged goods with more at-home and to-go eating vs. restaurant dine-in meals. “There is such a long tail of converters and customers, and their needs are so diverse,” says Humsi. “But the feedback we’ve been getting is that, coming out of COVID-19, the industry is definitely going to need to consider its revenue models.”

Created by Packaging DigestHumsi-quote-web.jpg

In turn, purchasing, financial, and legal departments may find value in considering this new purchasing model as they absorb the shock of the current economic crisis. Along the way to re-forecasting cash flows and seeking ways to attain cash liquidity amid capex budget impediments, they maybe more receptive to requests for MaaS coming from operations.

If plant operations and engineering leaders are able to crack to code of getting attention from the front-office, adoption could come sooner than the “many years” machine builders expect, for a few reasons:

Cybersecurity. Vendor managed inventory, maintenance, enterprise resource planning (ERP), data analytics, and, more recently, SCADA applications are now up and running on cloud-based platforms. Fear within the four walls of manufacturing is real, due to legacy systems. However, current-day gateways separate legacy systems to make IoT connections more secure. (See “3 Packaging Lines Improved by IoT Data.”)

New leasing rules. After years of off-balance-sheet accounting for lease expenses, a new rule from the US Financial Accounting Standards Board — Accounting Standards Codification Topic 842 (ASC 842) — will close that loophole after December 15 for public companies and 2022 for private companies, according to a rep at the Equipment Leasing and Finance Association, who said further implementation delays (there have been many) are “not likely,” adding that any such considerations would be “purely speculative.”

Big CPG deals in the wings. More and more machine builders are investigating MaaS, even if they’re not admitting it yet. In researching this topic, I learned that at least a “handful” more of the largest machine builders and global consumer goods brands are in various stages of investigating and possibly implementing this newly upgraded usage-based pricing model. As for the size, product category and type of organization MaaS best fits, speculation varies.

Longer term, Francisco from RoBEX believes the new generation of IoT-connected MaaS will change the way relationships are formed between solution providers and users. “What we’re bringing to the table is so different: a relationship that’s set-up to be a win-win from the beginning to the end. So, I see within two years, 30% to 40% of our business being part of our RoBEX FLEXX program. I see it being phenomenal.”

“The value has been proven out in many other markets,” says SteamChain’s Cromheecke. He adds, “We feel like we’re on the front end of a major market shift.”

Even longer term, an industry-wide blockchain standard could emerge as a standard clearinghouse and create pull-through as well as push-through. Once banks see the benefits, they may want “in” on the outcome-based game, too.

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