Product-service systems for the circular economy

Product-service systems

Product-service systems (PSS) is a business model through which manufacturers sell integrated products and services rather than products alone (Goedkoop et al., 1999). According to the ratio of products/services, PSS can be classified into different types (Hockerts and Weaver, 2002; Tukker, 2004): (1) product-oriented PSS, when manufacturers sell products while providing related services, such as maintenance and consultancy; (2) use-oriented PSS, when manufacturers sell the utility or accessibility of products without transferring the ownership to customers, such as leasing, renting, and sharing; and (3) result-oriented PSS, when manufacturers retain the ownership of products and sell the results of products, such as selling printed documents rather than printers.

The transit from traditional product-based firms to service orientation is complex and contextual. Bustinza et al. (2013) proposed that this requires a reconsideration of the management of supply and demand chains. Vendrell-Herrero et al. (2015) explored how servitisation affects upstream—downstream firm interdependencies in the context of digital business models and found that digital services could empower upstream and downstream firms differently under certain circumstances.

Many researchers have considered PSS promising sustainable business models because they have the potential to reduce total production and consumption throughout the entire product life cycle (Maxwell and Van Der Vorst, 2003; Yang et al., 2013; Yang and Evans, 2019). A number of firms have witnessed the potential of PSS to bring significant revenue and meanwhile reduce negative environmental impact (Baines et al., 2007; Tukker, 2004; Yang et al., 2017a). Some researchers have investigated how sustainability could be embedded into PSS development (Manzini and Vezzoli, 2003; Geum and Park, 2011; Yang, 2015), and a number of methods and tools have been developed to assist companies in developing sustainable PSS business models or increasing sustainable value creation in PSS, such as Matzen and McAloone (2006) and Yang et al. (2014).

Product-service systems and circularity

The Ellen MacArthur Foundation (2012) put forward the idea that in order to achieve a circular economy, it is essential for manufacturers or retailers to transform to ‘functional service models,' in which customers buy services or the use of products rather than the ownership of products. The manufacturers retain the ownership of products and therefore have a greater motivation to extend the cycle of products and increase the reuse and remanufacturing rates of the used products. Some other researchers also regard PSS as a promising form of circular business model. For example, Mentink (2014) implied that selling performance-based services is an approach that moves firms towards greater circularity in their business model.

The Ellen MacArthur Foundation (2015) proposed a RESOLVE framework, in which sharing is regarded as one of the important actions for businesses moving towards a circular economy. The Ellen MacArthur Foundation (2012) took washing machines as an example and calculated the circularity of the washing machines in different business models. The result shows that a leasing model could achieve more cycles than normal models. Yang et al. (2018), proposed that different types of PSS could affect the circularity of supply chains in a different way.

Case Study

From selling gas generators to gases

This chapter presents a large state-owned air separation unit manufacturers in China. The company used to be a manufacturer producing machines which separate air into different gases, such as oxygen, hydrogen. The machines are mainly used as part of engineering equipment in areas such as metallurgy, petrochemical and coal chemical industries, and aero industries. The traditional business model of the company is making and selling air separation units to its customers. Now the company has extended its business to include the sale of integrated engineering equipment as a total product-service solution (e.g., petrochemical equipment) and even further to the sale of industrial gases.

Co-existence of product-service systems business models

In addition to the traditional product-based model, the company has implemented three types of PSS business models.

Product-oriented product-service system: selling products and providing technical services

The company sells the air separation product units and also provides technical services, including installation, maintenance, and repair, as extra market propositions. This is the most common PSS business model operated in the company. It is a product-oriented PSS because the ownership of products is transferred to the customer, and the technical services are included as part of the original sales package.

Use-oriented product-service system: leasing products and providing technical services

The company leases air separation units, or an entire engineering system, to customers under contracts that usually last for a certain number of years. Leasing contracts are mainly tailored to customers with special financial needs (e.g., without the financial capability to buy equipment or build projects). This forms a use-oriented PSS, since the company retains ownership of the products and customers just pay for the use of products and services.

Result-oriented product-service system: selling industrial gases

The company also provides ‘industrial gas’ rather than ‘gas generators.’ This is result-oriented PSS because the company owns the gas generators and customers pay for the gases consumed.

The company started the first industrial gas project in 2003, but not until 2010, when the company went public, did it start the second one and make an extensive investment into industrial gas projects. Industrial gas projects have increased rapidly in recent years. As of 2015, more than 38 gas centres have been built in industrial parks in China. The gas centres produce industrial gases such as O,, N,, CO,, and H,; rare gases (e.g., Ar, He); and special gases to customers in various industrial sectors in industrial parks. There are four ways of providing gases: bottled gas, liquid gas (e.g., cold air separation of liquid), gasification, and pipeline industrial gas supply for industrial parks.