An overview of product-service systems
Contents
Introduction
What is the problem? As simply as possible, the problem is growth, or “a quantitative increase in size, or an increase in throughput.” Over the last century our society has substantially evolved and grown from what Ecological Economists describe as an “Empty-world economy” to a “full-world economy” in which the opportunity costs of growth have become significant. This increased growth can be linked to many phenomena, including population growth (An overview of product-service systems) , technological advances, and social evolution. As a result, this exponential growth has begun to strain our ecosystem and there exist concerns that we are causing irrevocable damage to our environment. Directly linked to our global society’s growth is an increase in the reliance on the consumption of resources and products.
“On a per capita basis, humans, especially those in the Northern industrialized countries and those in capital cities of the Southern countries, are consuming more resources than the planet can regenerate, and filling waste sinks at a more rapid rate than the planet can assimilate.”
The manufacturing of these goods and services can create negative environmental impacts, or externalities; pollution, climate change, and loss of biodiversity provide a few examples. An externality occurs when an activity or transaction by some parties causes an unintended loss or gain in welfare to another party, and no compensation for the change in welfare occurs. Essentially, if anywhere along a product’s life cycle, or PLC, the environmental costs associated with the product are not accounted for then a market failure is created, resulting in a reduction of aggregate social efficiency.
It is not the goal of this article to assess or solve the origins of this growth, but to analyze how the negative effects of massive growth in consumer products can be minimized. This article will attempt to address the role of property rights in reducing the environmental impact of consumer goods throughout their entire product life cycle. “The Key Question is how environmental impacts can be disconnected from economic activities.” Product-service systems, or PSS, will be presented as an alternative framework for businesses and consumers and analyzed as a method for reducing environmental harm associated with the production and use of material goods.
At the root of this alternative framework is the allocation of property rights throughout the entire product life cycle. The first section will investigate the economic theory behind these property rights, and how they affect manufactures and consumers. With this framework in place, Product Service Systems (PSS) will be defined and categorized. Academic status and examples will be presented, followed by existing market examples. These examples will be used to categorize the requisite conditions for creating viable PSS and to highlight conditions that are not conducive to this model.
Rationale – economic and otherwise
How has the economic theory surrounding the allocation of property rights between producers and consumers evolved, and how could this affect a product’s life cycle? Establishing property rights is often used to control market externalities. Property can be viewed as a set of rights to control a tangible or intangible thing. From a consumer product standpoint, traditionally property rights have typically resided with the consumer following the initial transaction. The fundamental question of Product Service Systems is whether realigning this property entitlement with the producer can alter the product’s environmental footprint throughout its useful life while enhancing producer profit.
The idea of shifting life cycle accountability onto the producer is not entirely new. In the early 1920’s Pigou suggested that environmental policy instruments, or taxes, might adjust or correct distorted control signals. The aim of these instruments was to internalize the costs to those responsible for the external negative effects in order to compensate those negatively affected. Along these same lines, shifting property rights to the producer throughout the life cycle of a product provides the manufacture with an incentive to account for the entire product life cycle. The Coase Theorem states that the initial allocation of legal entitlements does not matter from an efficiency perspective so long as they can be exchanged in a perfectly competitive market. In other words, under perfect competition, from an environmental perspective it would not matter whether property entitlements were distributed to the consumer or the producer because the market would determine the point of social equilibrium. Understanding that high transaction costs can affect perfect competition Coase explained in his Nobel Lecture (1991): “it is obviously desirable that these rights should be assigned to those who can use them most productively.”
Using the Coase theorem as a starting point, Calabresi and Melamed established five principles for the assignment of costs and the choice between the institutions of liability and regulation. Principles three and four call for placing social costs on those who can most efficiently reduce them or induce others to take care to reduce them. The property rights for environmental impacts and, thus, the responsibilities to take actions should initially be assigned to the actors who have the largest possibilities to influence the PLC environmental impact most efficiently. The key point is the concept that the producer can more efficiently abate environmental externalities, thus, the motive for exploring a PSS framework in which the producer accounts for and uses this responsibility to his advantage.
Product Service Systems
Tukker and Tischner describe Product-service systems as a specific type of value proposition that a business offers to its clients. PSS "consists of a mix of tangible products and intangible services designed and combined so that they jointly are capable of fulfilling final customer needs" Service business models have existed for quite some time; however, as our society moves towards a de-materialized economy integrating service based models with product models may provide benefits for producers, consumers, and the environment.
Early concepts of PSS as a tool for reducing lifecycle impacts of products and services through product servicing, remanufacturing and recycling were proposed, among others, by Stahel and Reday. Stahel and Reday advocated a need to distinguish between industrial and service-oriented economies, where the latter would provide incentive for producers to extend product life as long as they are generating service units. Figure 1, from Stahel (1998), illustrates Stahel’s concept of shifting our model from an industrial economy to a closed loop service economy.
These early concepts have laid a foundation for comprehensive research in the PSS field in the last 10-15 years, from which standard terms, definitions and practices have been established. PSS is still a relatively new field of study and is continually evolving; however, current Research categorizes PSS into three main types.
Product oriented PSS:
The ownership rights of the material artifact are transferred to the customer and a service arrangement is provided to ‘ensure the utility’ of the artifact over a given period of time. Examples include warranties and maintenance contracts.
Use oriented PSS:
The ownership rights of the material artifact are retained by the service provider in this configuration and the customer purchases use of the product over a given period of time or units of service.
Results oriented PSS:
While ownership rights of material artifacts are retained by the service provider, similar to use oriented PSS, the customer purchases utility as an outcome and not the use of a product over a given period of time. For example, instead of purchasing a washing machine, the customer purchases clean clothes delivered through a washing service.
Cook indicates that these types of PSS suggest that servicisation could provide opportunities to improve resource productivity, between factor 4 and 20. With the recent interest in exploring and developing PSS from an economic viability perspective many government organizations have sponsored research, which has resulted in further classification of service systems. Eco-efficient services have been termed to define a category of services that has been developed for the specific purpose of improving resource efficiency. The concept of Eco-efficient producer services can be used to minimize the environmental impact of consumption through:
- Closing Material Cycles
- Reducing consumption through alternative scenarios of product use
- Increasing overall resource productivity and dematerialization of product service systems
- Providing system solutions seeking the perfection in integrating system elements along with improving resource and functional efficiency of each element
Current research appears to indicate Eco-efficient PSS as a theoretically viable tool for increasing resource productivity. While the field of study is still in the development stage there exist a few concepts for applying PSS to achieve environmentally conscious resource consumption. Stahel provides numerous examples of B2B scenarios implemented to de-couple profits from resource consumption.
Schindler elevators is selling carefree vertical transport instead of elevators; Xerox is offering custom-made reproduction services instead of just selling photocopiers; Safety-Kleen and Dow Europe sell the services of chemicals instead of selling chemicals; Safechem and Dow Germany are renting solvents to dry cleaners; Mobil Oil is selling engine oil quality monitoring instead of engine oil (for its 'Mobil 1' synthetic oils); GE Capital and ILFC lease aircraft and Interface Inc. leases nylon carpets.
The majority of case examples are found in the business to business, or B2B, market, however a few business to consumer, or B2C, models have been studied and implemented. This paper will present two recent B2C examples that serve to illustrate the potential benefits associated with a shift towards PSS.
Case Examples
Baby Prams
One of the more recent case studies that attempts to evaluate the entire scope of the product-service system is illustrated in Mont’s PSS business model for baby prams, or baby strollers. Mont’s article “A new business model for baby prams based on leasing and product remanufacturing” is a thorough example of a B2C PSS model and the resulting implications. The study revolves around a Swedish producer of baby prams, known for its high quality, durability and commitment to safety. In 2000 the producer was one of the leading producers of prams in Sweden; however, the pram division was struggling to remain profitable. This was attributed to a reduction in production volume, which was explained by a large second hand market created by high depreciation after the first use. Mont’s research shows that implementing a PSS leasing scheme could be a good fit for this product for many reasons. First, prams have a large recovery value at the end of their useful life. Second, there is a discrepancy between product quality and the actual time use by the first customer, estimated at approximately 6-8 months. Third, high depreciation after the first use has lead to a large second hand market, estimated to represent 65-75% of total pram sales, which provides incentive for producers to devise a strategy to capture some of this market and regain lost opportunity.
Mont’s research suggests that a PSS leasing scheme could potentially increase the target market and the firm’s profitability and at the same time, through design, reduce environmental impact, increase resources productivity and reduce waste flow. The leasing scheme was designed to be managed at the retail level, and calls for a pram design that could be refurbished within 10 to 30 minutes. Retailers could absorb some of the implementation costs and in turn they would gain access to a larger customer base since they could now offer the same utility for a lower fee compared with traditional product purchases.
The entire pram design was investigated under the pre-tense of end of life recycling and remanufacturing at the retail level. Design changes were considered that would increase the quality and longevity of the product, in turn allowing the leasing term to be extended. The end result was a pram that could service approximately 8 leasing cycles before it needed refurbishment, compared to the estimated 4 cycles with the current design.
The research concludes with a financial analysis that predicts higher revenue per pram than through traditional sales models. The cash flow will be spread out along the life of the pram, instead of at the initial purchase, which will require some additional design attention from the producer. As for the environmental benefits, the study suggested potential advantages, but stressed that the environmental benefits are not automatic and a comprehensive analysis of associated environmental impacts needs to be conducted.
Interface Flooring
Another pertinent example of PSS is exemplified by InterfaceFlor, the world’s largest modular carpet manufacture. InterfaceFlor has been dedicated to carpet tiles since 1973 when their founder brought the idea from Europe to North America. In 1994 Ray Anderson, InterfaceFlor founder, experienced an environmental awakening and spurred InterfaceFlor’s commitment to eliminating any negative environmental impacts associated with the company by 2020. This has instigated many environmentally conscious programs at InterfaceFlor, including the Evergreen Lease, which is an example of a use-oriented PSS leasing scheme designed to benefit the producer, consumer, and the environment.
The evergreen lease allows customers to purchase the service of flooring from InterfaceFlor for a monthly leasing charge. Under this leasing fee, InterfaceFlor owns the property rights of the product and is responsible for the supply, installation, maintenance, and any replacement required. For the customer, this system ensures a simpler system that reduces the initial capital expenditure, creates easier monthly payments, and creates freedom to reconfigure your workspace during the lease term. From the environmental side, this model ensures that InterfaceFlor is responsible for recovering product at the end of its useful term for recycling and reuse. This diverts the end of life product from traditional waste streams and incentivizes InterfaceFlor to improve the design for recyclability and reuse in their process. This has lead InterfaceFlor to develop new materials and manufacturing processes focused on improving their environmental impact.
Academic Status
Once the rationale behind PSS has been developed and examples have been investigated, it is important to investigate the status of current research and attitudes towards the concept. Research from the beginning stages of defining PSS clearly focused on improving resource consumption and increasing potential producer profits through servicization. As the concept has grown and the corresponding research has continued it is surprising that little traction has been gained outside of academia. Cook describes a growing frustration in the research community as firms develop new service oriented products for commercial reasons without considering the opportunity for reducing resource consumption. In Cooks research he finds little evidence that concepts such as PSS or Extended Producer Responsibility, EPS, are able to transition from Academia into the business world. There are multiple theories to describe this lack of adoption, starting with Tukker and Tischner’s view that a lack of academic rigor is at fault. They also claim that the PSS community neglected to account for current business practices and literature regarding the business of servicing.
Cook’s article “The Transfer and application of Product Service Systems: from academia to UK manufacturing firms” provides insight into the lack of PSS traction. Cook identified three important limits to knowledge on PSS that contribute to the slow start of PSS delivery.
- The financial proposition of product services remains unproven.
- The environmental benefits that can be gained from using it have not been sufficiently quantified.
- The knowledge set associated with the concept is insufficient to produce the design methodologies that are necessary to help engineers in the design of the more environmentally friendly artifacts needed to support service.
Drivers
The range of business models that could employ a PSS is vast, making it difficult to determine and establish adequate methodologies for each case. Research has, however, focused on identifying potential generic barriers and drivers for PSS implementation. Mont outlines three conditions required for PSS to be profitable. First, PSS will be profitable if the cost of use and the disposal can be internalized, stimulating consumers to return products. Second, if the product has a high market value during the disposal stage, as seen in the baby prams study. Third, when an alternative scenario of use can generate additional profits.
These conditions are insightful when analyzed against the baby pram example and the evergreen lease from InterfaceFlor. Each of these examples involves a product with a high utility after the first stage of use. For the prams the stroller can be reused for another customer, for the flooring the modular tiles could be reused or recycled back into the manufacturing stream as input material. Additionally, both of these schemes can be shown to generate additional profits for the producers, and in some cases to reduce costs.
Drivers for PSS are also vast, but Goedkoop’s work outlines some of the key business drivers for PS systems. For product-oriented businesses PS systems can be used to create new superior value for clients, create unique selling points for commodity markets, supply a total offer, discourage newcomers by increased quality levels, and anticipate or respond to expected policy. For service manufactures PS systems can protect market share, reduce costs, extend service, communicate innovation and reduce the financial threshold for new clients.
Barriers
Similarly to the endless number of drivers, there is no shortage of barriers or roadblocks for PSS. One of the most widely cited barriers is a lack of knowledge, especially regarding the environmental effect PSS could have. Cook states that the research is unclear and inconclusive as to whether the resultant service oriented products are more environmentally friendly than traditional products sold through one off transactions. The next barrier is customer acceptance. This is an entirely new model for customers to adopt and it challenges the status quo for producer and consumer relationships. Additionally, little research has been conducted to evaluate the competitiveness of these PSS compared with traditional product sales.
Lastly, there is an inherent cost to begin implementation of PS systems due to the large infrastructure that may be necessary depending upon the application. In the case of the baby prams the producer would have to build a system to integrate the new model with retailers. This could be seen as a large organizational change and could accrue cost and resistance to change. In the case of InterfaceFlor their commitment to minimizing their impact superseded any infrastructure costs.
Discussion
This paper has assessed our current problem of over consumption and increased material usage and has considered the emergence of Product Service Systems as a tool to alleviate these issues. The theory behind producer and consumer property rights was investigated and used to develop a framework for establishing PSS. From this framework, various examples were explored and used to demonstrate the principals of PSS.
The pram example provided an academic case study done in cooperation with a producer that showed some promise for environmental success, as well as producer profitability. This case also outlined a model that would provide benefits to the customer as well. The InterfaceFlor example was used to show another version of a PSS scheme, one that is actually currently operating. Despite the lack of hard numbers from a research case study the InterfaceFlor example illustrates that in certain cases it can be conducive for the producer to implement PSS.
As a final note, the goal of this paper was to coalesce and compile the current information available on Product Service Systems and provide an easily accessible format to raise awareness of its potential. It has been shown that there exist conditions where PSS has advantages and can serve to benefit all parties, but there also exists evidence that PSS needs further investigation to be fully proven. PSS has largely been an academic topic over the last decade, inside of which it still has gained relatively small exposure. There is a lack of research and case study examples, especially in the B2C environment, which contribute to the low visibility and traction in the business world. And lastly, as is hypothesized, factor 4 to 20 reductions in resource consumption may be possible but the current information available is not sufficient to confirm the environmental impacts of these systems.
Resources
- Baron, David P. Business and Its Environment. New Jersey: Pearson Prentice Hall, 2006.
- Cerin, Pontus, and Karlson, Lennart. “Business incentives for sustainability: a property rights approach.” Ecological Economics 40 (2002): 13-22.
- Cook, M. B, T.A Bhamra, and M. Lemon. “The transfer and application of product service systems: from academia to UK manufacturing firms.” Journal of Cleaner Production 14 (2006): 1455-1465.
- Daly, Herman E., and Joshua Farley. Ecological Economics: Principles and Applications. Washington DC: Island Press, 2004.
- Goedkoop, Mark J., et al. Product Service Systems - Ecological and Economic Basics. The Hague, Den Bosch and Amersfoort: Pi!MC, Storm C.S. and PRé Consultants; 1999.
- InterfaceFlor. 2009. 5 Apr 2009. <http://www.interfaceflooring.com>.
- Mont, Oksana, Carl Dalhammar, and Nicholas Jacobsson. “A new business for baby prams based on leasing and product remanufacturing.” Journal of Cleaner Production 14 (2006): 1509-1518.
- Mont, Oksana. “Clarifying the concept of product-service system.” Journal of Cleaner Production 10 (2002): 237-245.
- Princen, Thomas. “Consumption and Environment: Some Conceptual Issues.” Ecological Economics 31 (1999) 347–363.
- Stahel, Walter. “From Products to Services: Selling performance instead of goods.” The IPTS Report 27 (1998).
- Stahel, Walter and Reday, Genevieve. “Jobs for Tomorrow, the potential for substituting manpower for energy; report to the commission of the European communities. New York: Brussels/Vantage Press, 1976.
- Tukker, Arnold and Ursula Tischner. “Product-Services as a research field: Past, Present and Future. Reflections from a decade of research.” Journal of Cleaner Production 14 (2006): 1552-1556.
