Enabling the 4th industrial revolution - "industrie 4.0" or the "internet of things"?

I've been struck recently by the range of people talking about new digital and data developments in manufacturing. Of particular interest has been the apparent explosion of discussion about industrie 4.0 (which is extremely popular in Germany), internet plus (which is being pushed by China) and the industrial internet (being promoted by GE among others).

Managers, consultants, policy makers and academics are all getting very excited about the potential of connected devices. The basic idea is that increasingly things (of all types) will be stuffed with sensors and connected to the internet. They will stream data back to the original equipment manufacturers who in turn will use sophisticated analytics to analyse and interpret the data. There are loads of examples. Caterpillar streams data back from mining and construction equipment, using this both to monitor the health of individual machines and also to identify ways in which productivity and efficiency might be increased. Rolls Royce monitors aero engines in flight, using sensors to track vibrations in fan blades, which allows them to predict whether or not maintenance is required. In the consumer world - wearable devices (e.g. Nike's fitbit or Garmin's forerunner) track and record exercise levels with the data being uploaded to the internet for benchmarking and comparison purposes.

One thing that I find interesting is the rate at which some of these ideas are developing and the level of interest there is in them. A good way of looking at this is to explore Google Trends, which basically tracks the popularity of search terms and plots these over time. Figure 1 shows a comparison of "industrie 4.0" and the "industrial internet". It neatly shows how effective the German Government and large industrial firms (including Bosch and Siemens) have been at promoting their vision of the future - industrie 4.0 - with a rapid rise of interest in industrie 4.0 since 2012.

 

Figure 1: Google Trends - Popularity of Search Terms "Industrie 4.0" and "Industrial Internet".

One could argue that industrie 4.0 is not a new vision. As Figure 1 also shows there has been interest in the industrial internet for at least a decade and indeed my colleagues at Cambridge IfM, most notably in DIAL (the Distributed Information and Automation Laboratory led by Professor Duncan McFarlane) have been getting our students to build demonstrators and simulations of intelligent factories for years. However, the recent excitement is a testament to the growing maturity of the technology and underlying data infrastructures that will enable a wider adoption of industrie 4.0 and this excitement has driven significant Government and policy interest, as well as research and development investment.

So is industrie 4.0 the answer? Are smart factories where materials and machines seamlessly collaborate to drive productivity and efficiency the future? I think the answer is "yes" and "no".  Much of the discussion about industrie 4.0 is still very internally focused - its a factory view of the world. A recent YouTube video illustrates the point. The video talks about a vision of tomorrow - the factory of the future - where machines and materials will use wireless data infrastructures to communicate and coordinate their activities. Yet the examples I started with are ones where the product has left the factory - manufacturers are worrying about how they can track their products once they go out into the field and are used in mines and quarries, on the wings of plans, or in our houses and cars. Here I would argue there is scope for a bigger and more impactful industrial revolution. The fourth industrial revolution will not just be about what happens inside factories, but it will encompass the entire value chain. It will involve remotely monitoring products as they are used in the field. Data will be collected and streamed back to original equipment manufacturers who will use these data to assess the health of assets, to determine whether any maintenance is required, to predict potential product breakdowns and failures. They'll use the data to improve the next generation of design, learning from experience. They'll use the data to look at how the customer's operation might be optimised. By gathering data from multiple machines in a quarry its possible to build a system model of the quarry and identify where bottlenecks lie and hence how productivity can be improved.

This extended view of the fourth industrial revolution won't just be enabled by industrie 4.0, but by the "internet of things" and that's why when you add "internet of things" to the Google Trends data a rather different picture emerges. Its clear that industrie 4.0 and the industrial internet are important component parts, but the real key to driving future success in manufacturing lies beyond the factory walls and this will be enabled by the internet of things.

 

Figure 2: Google Trends - Popularity of Search Terms Including "Internet of Things".

How UK Manufacturing Firms Can Create a Business Model Fit for Exports in 2014

Listen to a podcast by Andy Neely on this topic

I am optimistic that during 2014, UK companies will be exporting more if they can think radically about what the future holds for them and about what role technology will play. They need to be able to deliver value to their customers. To achieve that they will need to create new business models. They will need to put their traditional business model under the spotlight, and do some robust thinking about how they are offering good products and services to their customers, but I think there are excellent reasons to be optimistic and at the Cambridge Service Alliance, we see lots of manufacturing firms moving forward and succeeding.  Our partners  BAE systems, Caterpillar, IBM and Pearson’s have been pioneering new ways for manufacturing companies to capture value and they have lessons they can impart to others.

Take the use of technology for example. We know that the World is becoming more “instrumented", that companies are using more and more “senses” and that those senses are connected to the net and that they are “intelligent”. Those “senses” can help customers make smarter decisions. My mobile phone company knows when I leave my home because my phone starts moving. It knows when I walk to the station because it knows the pace that my phone is moving because it is tracking the GPS signal. It therefore knows the train I am catching because it knows when I start moving from a walking pace to moving to a train pace. It can predict what time I am getting into London, and it can text me a voucher saying: “Get 15 p off a cup of coffee between 8.45 am and 9 am on this particular morning”! Unbelievably it knows that my train is going to arrive in London at 8.40 am and wants to encourage me to go and buy coffee from a particular stand at Kings Cross station.

This technology already exists, I am not talking about a mythical future, it is already here and there are now endless new ways in which you can innovate your business model, to create new value for your customers.

Capturing all of the value in your business model that new technology can add will not be a quick process, it will take time. But we need to wake up to the reality that the changes taking place in manufacturing over the next five to 20 years are really profound. Manufacturing firms need to ensure that as we enter 2014 they have to be there and ready to capitalise on the economic recovery that is most likely taking place around the Globe. They will need to put their hard manufacturing yellow hats on to think about the longer term and how they can build a sustainable new business model in the light of some of the incredibly profound changes that are taking place in our economy.   

  

Clearly with the fast pace of technological change taking place all over the World traditional Strategic Plans will need to undergo radical change and need more flexibility than ever before. Long  term planning is essential, and our UK manufacturing firms will have to make predictions about where the World is going and they will need to think carefully about how they build the right capabilities in their organisations to capture the value from those changes. They must not lock themselves into one single path they must think about what we at the Alliance term “the alternative futures” scenario. Their business models  will need  to reveal the real future trends across sectors with a World class strategy that supports those trends.

They will need flexibility in the longer term to be able to adapt and respond to the way that the economies they are working in move, and also the way the technology moves too. They will need to be nimble and respond quickly to those challenges and changes.

One trend that they will need to be aware of, is that the traditional classification of sectors is breaking down. There will over time be a convergence of certain sectors, particularly where those sectors rely on data. There is an interesting question about what role Google or companies like IBM will play in those sectors  in the future. Both are really good at analysing data so will they suddenly find themselves in sectors that they haven’t traditionally been big players in?

Their business models will need to take into account what their competitors are doing, where their partners are and who they are collaborating with and wish to partner with in the future. It may just be right for them to embrace their traditional competitors and work with them in some way at some time in the not too distant future. This new “strategic thought” will influence their future success.

We are used to the term “ Big M manufacturing” and are aware of how manufacturing companies are supplying services to sustain the assets they sell to others for the entire life-time of these products. Manufacturing firms now work with others running everything, from the initial concept and the initial idea,  through to the design and the production process. The relatively narrow concept that people have technically thought of as manufacturing has now expanded to include the distribution of products, and the service and support and ultimately end of life care of those products, including recycling the products and components! Now that is impressive.

We know that “Big M manufacturing”, adds value across that entire set of activities that a company offers, and that manufacturing is evolving and will continue to evolve during 2014 and beyond. This new industrial age we have entered is unbelievably exciting. Factories matter, the production process matters, but manufacturing is now part of a much broader chain of services companies can supply to their customers.

One of the figures that gets quoted often is that for every pound you spend on the initial product, you spend something like four pounds on the service and support of that product through its life time. When products are created we need to think of the “through life” value and support.

For a  business model to succeed in 2014, firms will need to be innovative, a much overused word. The challenge for manufacturing companies will be to think differently about the role that their business plays and how they are going to create value from that role.  A lot of that new value is going to be created by data and technology.

I would advise companies to think robustly about the way that they can use data, either to improve the efficiency of their products and services, or to improve their customers efficiency. If they get  that combination right, particularly the innovation that can come about around the use of new data, their 2014 business models will stand a greater chance of success.   

Here we talk about how UK firms can capture value from exporting more to the BRICS, Brazil, Russia, India and China, but we need to remember that this is a global race, and that the BRIC economies will also be adapting their business models too. They know that they ARE having the same conversation and are also working towards making manufacturing fit for the 21^st Century.

Manufacturers as exporters can’t afford to ignore this global race, but they will need to make the right decisions, and to realise that “Big M manufacturing” is already a reality for many of the companies they are competing with.

My first Tip for 2014 is to get companies to focus on the outcomes that their customer wants. That outcome focus will lead to more profitable companies in the longer term. Customers don’t just want your products, they want the service or solution that the product offers and if you can give customers that final solution you will succeed. It  means that companies will really need to be clear about what their customer value is.

My second Tip for 2014 is to define what you are going to do in-house, and what you are going to ask others to do for you? How you collaborate and partner with people will be pivotal to your success.

My third Tip for 2014 is to understand some of the risk that is inherent when you start to move to these outcome based contracts. Companies will need to review what risk they are taking on, and how they mitigate those risks?

If they get these three things right, if they get the customer outcome right, the value delivery system right and understand the risk and the accountability spread, then I think UK manufacturing companies will be in a good position to capture value from their business models in 2014.

And one more tip from that Smarter planet phrase that IBM has coined. You DO undoubtedly have to think smarter. The World is getting more complicated for manufacturing firms, partly because sectors are breaking down and partly because of the speed at which technology is developing, but that also means there are many new opportunities that are opening up. Thinking smarter and thinking strategically about what you will and what you will not do is essential.

I know that the manufacturing renaissance is not just a vision for many UK manufacturing firms it is already a reality. Some are doing very well providing both products and services in this country and overseas. The market may be difficult, and it may be challenging, but there are many firms UK firms who already have a firm foot in that renaissance for manufacturing. They have got their business models right, and others will need to follow the lead they are setting in 2014.

Andy Neely, Cambridge Service Alliance

The Installed Base: How Well Do You Understand the Opportunity?

In a previous blog I talked about the reasons why firms servitize. One important reason is the installed base - the ratio of new product sales to installed equipment. In mature industries these ratios can be significant. Figures often quoted include an installed base of 13:1 for cars, 15:1 for civilian aircraft and 22:1 for trains. That is for every new train sold, 22 are already in operation and available for service and support. Consider that trains have a working life of between twenty and thirty years and you can see why the installed base offers a significant business opportunity. Indeed in many sectors, the rule of thumb used is that a product will consume 3-4 times its original purchase value through its operating life in terms of spares and consumables.  So a $1 million dollar piece of construction equipment will consume between $3-4 million in consumables and spares over its thirty year operating life.

Researchers at the Cambridge Service Alliance have recently been looking at the installed based, seeing what data we can gather to understand the size of the installed base in different sectors. Our preliminary analysis suggests that the traditionally quoted figures underplay the size of the installed base in some sectors, especially aerospace. Take, for example, US aerospace - in 1995 there were 212,000 US aircraft in operation (both military and civil). In the same year 2,441 new aircraft were shipped, giving an installed base ratio of 87:1. By 2005 there were 246,000 US aircraft in operation, with 5,426 new aircraft shipped, giving an installed base ratio of 53:1.

While both figures (87:1 and 53:1) are considerably higher than the figure traditional quoted (15:1), the reduction in the ratio is interesting. One might expect that the installed base ratio would increase over time. New products are sold at a rate that is faster than old products are retired, but in the case of aerospace, underlying market growth has a significant impact. The number of new civil aircraft sold per year, for example, effectively doubled between 1995 and 2005, and it is this market growth (in civil aircraft) that brings down the installed base ratio. Even so, an installed base ratio of 53:1 highlights the significant opportunity that exists.

The story in the automotive sector is rather different. Here we see slight growth in the installed base ratio between 2003-2008, from 13.5:1 in 2003 up to 14.7:1 in 2008. This growth is driven by an increase in the installed base of passenger vehicles, with 13 million new vehicles being registered in Europe in 2008 and 198 million in operation. A key issue in the passenger vehicle market is the rate of retirement of existing products. Given the relative maturity of this sector, new cars are often replacements for existing cars and so as new sales are secured, old cars are retired. For this reason it is unlikely that we'll see significant growth in the automotive sector in the installed base unless product life cycles increase and/or consumers decide to reduce the rate at which they replace their cars.

So this brief analysis suggests three issues to consider; (i) understanding the size and potential of the installed base matters; (ii) in some sectors the installed base ratio will not change significantly, as the market matures and product replacement becomes the predominant reason for new product sales; and (iii) significant market growth can reduce the installed base ratio, although even so the installed base can be an attractive market segment.

The Servitization of Manufacturing: Where Does Value Lie and When Is Value Realised?

One way of conceptualizing the servitization of manufacturing is to think about the two questions: (i) where does value lie, and (ii) when is value realised. In traditional manufacturing environments the value lies in products & parts – the physical assets – and value is realised at the point of sale – when the customer pays for the product. Many manufacturing businesses, particularly those with long life cycle products, have recognized that value can also be realized throughout the life of product, especially when products need repair and overhaul. Such firms have a strong focus on the aftermarket and capture significant value through the sales of spares and repairs.

An alternative perspective is to think about value lying in “solutions” rather than “products & parts”. This paradigm puts the emphasis on the outcomes the customer wants, rather than the physical product. The old Theodore Levitt quote “customers don’t want quarter inch drills, they want quarter inch holes” illustrates the point. Many customers don’t want to own the physical products that many manufacturers provide, instead they just want the end result – or the outcome – that the product delivers. When manufacturing firms switch to an outcome focus they often contract for capability, guaranteeing uptime and/or availability of their equipment through life. Rolls-Royce, in its aero-engine business, now contracts for Power by Hour, selling the thrust the engines deliver rather than the engines themselves. A significant advantage of contracting for capability is that the incentives of the customers and the original equipment manufacturers are aligned. In an aftermarket focused model, it is actually in the original equipment manufacturers interest for their equipment to break down, as they realise value when they repair their products and provide spare parts. When contracting for capability or outcomes, however, the original equipment manufacturer only gets paid when their equipment is working, so it is in the original equipment manufacturer’s interest to maximize equipment reliability, something that customers also care about.

One of the challenges of contracting for capability is the issue of risk. If original equipment manufacturers take responsibility for the outcomes their products deliver, effectively guaranteeing results for their customers, they inevitably take on significant risk. The original equipment manufacturer is now responsible for delivering outcomes, not just the product. Some servitizing manufacturers have decided that the risk involved in outcome based contracting is too great and some customers have decided they are not willing to cede control over the outcomes, so they are unwilling to enter into contracting for capability. In such situations there is an alternative approach to offering services - selling knowledge and insight – recognizing that value lies in the solution the original equipment manufacturer offers. Think here of manufacturers that also offer design and development or installation advice. Think of those that have moved into training and consultancy services. They no longer simply sell products. They also sell knowledge and/or insight. Figure 1 brings these four perspectives on servitization together into a single representation, which illustrates the strategic choices manufacturers can consider when exploring how to servitize. These choices are not mutually exclusive. Manufacturers can decide both to be aftermarket and advisory focused, although clearly the different positions require different organizational capabilities.

Figure 1: Conceptualising the Servitization of Manufacturing

Andy Neely

Director, Cambridge Service Alliance

Is Servitization for You?

Andy Neely, Director Cambridge Service Alliance

There’s much talk of the servitization of manufacturing – supplementing products with services. The most recent data suggests that some 70% of economic activity lies in the service sector. Yet this figure ignores the significant proportion of service within the traditional manufacturing sector. Capital intense manufacturing firms, like BAE Systems and Rolls Royce, now generate over 50% of their revenues from service and support. Others, such as the oil majors have vertically integrated, offering downstream retail services, as well as upstream extraction operations. The shift to services seems inexorable and pervades many walks of life, but is it for you?

In answering this question there are some basic issues to consider. The first is quite simply are you selling a product that people want or need to own? Some products are consumed during use – think of food or fireworks. Your customer has to take ownership of these products, as they are used during the consumption process and have no resale value after they have been used. Other products are aspirational – products that customers don't need to own, but that they choose to own because of the value the product confers. We don’t need expensive cars to take us from A to B, or expensive watches to tell the time, but some people choose to spend their money on these luxury purchases because of the status ownership of the product confers.

Clearly there is scope to offer services associated with both consumed products and aspirational products. Restaurants are service and they use food as an input. Suppliers can offer to automatically restock restaurant supplies, an inventory management service, associated with food stocks. Some businesses choose to rent or lease aspirational products – luxury cars and even designer watches. In fact it is almost impossible to define a product that cannot be accompanied by a service. The question is where does the value lie. And can the service be delivered efficiently enough to generate a decent return.

For more detail on the shift to services see the Cambridge Service Alliance report – The Servitization of Manufacturing: Further Evidence