New research from The University of Alabama in Huntsville challenges a long-held business assumption that bundling services into solution packages strengthens relationships between manufacturers and their customers.

In a study published in Production and Operations Management, UAH Associate Professor of Marketing Dr. Yongchuan (Kevin) Bao and Assistant Professor of Management Science Dr. Yi Tan, along with co-authors in the strategy field, found that expanding product offerings to include services aimed at solving clients’ operational problems may increase the likelihood of customer default, potentially straining buyer–supplier relationships.

The research examines the unintended consequences of manufacturers shifting from selling standalone products to delivering integrated “customer solutions.” The work draws on a dataset of 2,218 observations from 446 publicly listed manufacturing firms between 2012 and 2020. While prior literature has emphasized the benefits of “servitization,” or bundling products with services, Bao, Tan and their co-authors identified a “dark side” to this strategy.

“While solutions are intended to strengthen relationships, they expose firms to the ‘frame problem’ – the inherent impossibility of anticipating all unique operational situations or customer problems in a complex task environment,” Bao explains. “The frame problem is a concept rooted in foundational artificial intelligence research that seeks to describe an innate problem of a computer program in which there does not exist a full set of algorithms that can specify all possible actions, uses or functions in different circumstances.”

When firms fail to meet customer expectations by solving problems arising in unexpected situations, disputes and defaults become more likely. To address these challenges, the research highlights two critical paths.

“First, invest in operational capability,” Bao says. “We found that firms with stronger operational capability are better equipped to mitigate these risks. High operational efficiency allows a firm to respond with the speed and agility needed to address the ‘unknowable unknowns’ that inevitably arise during solution implementation. Second, manage market expectations. Businesses must be cautious with heavy advertising, as it can inflate customer expectations to unattainable levels and attract a diverse customer base that is harder to serve effectively, further increasing the risk of disputes and defaults.”

The study was inspired in part by real-world observations from manufacturing executives, who reported unexpected customer disputes even after implementing comprehensive solution packages.

“For example, an executive of a system solution and service provider in the distributed energy field described a lawsuit against a client, for which it designed a wastewater discharge solution,” Bao says. “Even though the company developed a strong relationship with the customer, the switch to solution provision undermined it due to unexpected problems occurring in implementation of the solution, leading to legal disputes between the two parties.”

Instead, the authors recommend that manufacturers align service strategies with their operational strengths and carefully assess risks, particularly in volatile industries. They also emphasize the importance of managing customer expectations and ensuring fairness in transactions. The findings offer practical implications for manufacturers in regional and global supply chains, including those in North Alabama, where advanced manufacturing plays a key economic role.

“Our research signals a shift in how firms should approach the ‘servitization’ of their business models,” Bao notes. “Firms should move away from the assumption that solution provision automatically leads to better relationships.”