( This article is excerpted from the complimentary report:
IoT: From Hype to Adoption — Five Ways Manufacturers and
Distributors Are Adopting the Internet of Things,
available for download here.)
In Part One of this series, we looked at how manufacturers and distributors are implementing IoT in three areas: 1) on the plant floor, 2) in supply chain and logistics, and 3) in service and repair. Here in part two we look at how IoT is being incorporated into products and used to create value-added services.
4) Incorporated into Products
End Use Visibility
Fundamental business transformations are possible when manufacturers embed sensors, connectivity, and intelligence into their products. Manufacturers traditionally have very little visibility into who is using their product and how they are using it. Warranty registration programs only reach a fraction of the actual users and provide little reliable information about how products are actually being consumed.1 IoT functionality that provides real value to the end user (not just value to the manufacturer) is more likely to be utilized (provided setup and connecting is simple and painless).2 IoT capabilities can give manufacturers very specific, fine-grained data and insights into how their products are being adopted3 such as: frequency of use, duration and time of use; relative popularity of different functions and types of use; and how their product may be used in novel unexpected ways. Manufacturers are often surprised at how their products are actually being used (or misused) once they gain that visibility. This can lead them to change the design of their products to more closely match actual use.
Product-as-a-Service
One of the more profound changes IoT enables is being able to offer product-as-a-service, where customers pay for use or achievement of a specific desired outcome, rather than buying the products. Sensors and connectivity in a product can provide the foundation for usage-based billing. The predictive maintenance capabilities outlined above provide the ability for the manufacturer to offer Service Level Agreements (SLAs) at predictable lower costs. Users win because they can continuously upgrade to the latest technology and are off the hook for maintaining the equipment. The environmental footprint of products can be significantly improved because products are built to last longer, require fewer repairs, and consume less energy and resources (all of which are costs the manufacturer now absorbs).
Mobile/transportation services can be offered on demand, such as driverless Lyft or Uber services that are coming soon. The customer’s interests and the manufacturer’s interests become more closely aligned. The cash flow and business model transition to a subscription basis, rather than strictly a product sales model. Examples of product-as-a-service include all three major aircraft engine manufacturers selling power-by-the hour instead of selling engines; Philips customers pay-per-lux with light-as-a-service instead of buying light bulbs; Schaeffler Industrial Services offers bearings-as-a-service for large complex machines like wind turbines or cruise ships with a multi-year, pay-per-rotation contract. Here are more examples and explanation of product-as-a-service’s business impact.
5) Creating Value-Added Services
IoT built into products enables the possibility to layer on many value-add services. For example, Fleet Advantage leverages data from their fleet of smart trucks,4 combining it with maintenance and route data from their customers to understand true cost per mile (normalized for terrain, load weights, weather, and other factors). This allows fleet managers to make smarter decisions, as well as track fuel economy, hours of service, driver behaviors (e.g. excessive acceleration and hard braking), and much more. They can detect when an engine wasn’t tuned up properly or a driver is staying too long in the lower gears and other opportunities for lowering fuel consumption (the largest cost for trucking companies). These value-add services reduce maintenance costs and outages, lower fuel consumption, and improve driver safety (reducing accidents and insurance costs). These kinds of high-value services help embed the manufacturer or distributor much more deeply into their customers’ businesses. They provide higher margins from more stable ongoing revenue streams, based on subscription business and the value delivered. Moving to value-add services must be done with care, as it represents a major change in the relationship, and organizational capabilities required. However, the payoff can be transformative.
Example IoT Use Cases
- Inventory Management — RFID, video analytics, and other sensors are being used to keep highly accurate perpetual inventory counts, thereby achieving optimal replenishment and higher service levels, with minimal labor required for cycle counting.
- Robot-assisted Order Picking – mazon’s Kiva robots bring products to the order pickers, who now stand in one spot as the shelves come to them. Amazon has over 100,000 of those robots across its many DCs. Locus Robotics is providing robot-assisted picking to Amazon’s competitors in a different way. The robot follows the worker, instructing them what to pick. After the picker has completed their portion of the order, the robot goes off to other workers to finish fulfilling other items for the order. This cuts way down on travel time for pickers and has increased picking rates about 3X.
- Predictive Maintenance — Sensor data combined with machine learning algorithms are being used to more precisely prescribe what maintenance needs to be done and when on specific equipment. This reduces downtime while simultaneously reducing the cost of maintenance.
- Automated Consumables Replenishment — In business and home settings, machines and dispensors are being equipped with sensors that detect when it is time to reorder supplies. Whether it is a giant bin of plastic pellets feeding a manufacturing operation or laundry soap for a washing machine, the equipment itself pays attention to the levels of consumption and of remaining supply and can suggest or automatically reorder the consumable supplies.
- Product-as-a-Service — Manufacturers and distributors that previously only sold equipment are now selling services where they retain ownership and maintenance responsibility for the equipment. This requires new capabilities but is usually rewarded with a much higher margin business. For example, instead of just selling air compressors, Atlas Copco sells compressed air at specified pressure, dew point, and purity via their AIRPlan service — the customer pays by the cubic meter. In their white paper, Siemens talks about their mature pay-for-use business offerings that are evolving into pay-for-outcomes models.
Enablers to Get There
Evolvable ERP, Advanced Analytics
IoT data is radically different from transactional data: with volumes of data that are orders of magnitude higher, diverse machine-level data, and real-time streaming characteristics. Traditional ERP systems are not designed to absorb these kinds of data. This requires an integrated set of IoT gateways, IoT applications, and enterprise applications. However, an ERP system that has good integration capabilities, the flexibility to incrementally add new capabilities, and a solid roadmap for IoT, machine learning, and advanced analytics can help companies along the IoT journey.
Flexible, Unified Invoicing and Revenue Recognition Required
The first two areas explored above — 1) on the plant floor, 2) in supply chain and logistics — can transform operational performance. The last three — 3) in service and repair, 4) incorporated into products, 5) creating value-added services — can transform a firm’s underlying business model. These new business models and new service offerings require flexible billing and invoice recognition. A manufacturer or distributor selling products, maintenance and repair services, product-as-a-service, and value-added services, potentially all to the same customer, needs to provide a single unified bill to their clients that clearly lays out all charges and the basis for them. Product-as-a-service and value-add services are recurring subscription services that could be based on just about anything: the number of rotations of a bearing, lumens of light delivered, percent of savings from fuel cost reduction, and so forth. The underlying financial system must be able to accommodate all these possibilities for billing while providing compliant revenue recognition. A good example is NetSuite’s unified billing and revenue recognition. For more on this, see the section The Need for ‘Universal’ Invoicing and Revenue Recognition in the article Crossover Businesses: Part Two–Flexibility and Integration Needed to Support Business Model Evolution.
Retrofitting: Brownfield Integration Capabilities
Most companies are not in the middle of building brand new ‘greenfield’ plants, warehouses, or transportation fleets. Therefore, it is important that IoT solutions are designed to be retrofitted into existing ‘brownfield’ facilities and equipment with minimal pain and complexity. This is not always easy, as older equipment tends to have proprietary interfaces and may not be designed to integrate with other equipment. IoT systems that have rich capabilities to reduce the pain of integrating with existing facilities are helpful in solving this challenge.
Multi-layer Security Designed in From the Start
Security in IoT is critical, especially where lives are at stake, such as in vehicles, dangerous plant equipment, traffic control systems, etc. Furthermore, security is more difficult because of the plethora of attack surfaces and vectors (i.e. potential paths and points of compromise), especially in IoT systems with thousands of heterogeneous, unsophisticated devices attached to them. It is essential that multi-layer security be designed in from the start. For more on the types of measures that should be put in place, see The IoT Security Imperative– Device Security Requirements.
Finding Good Partners and Systems
IoT can be daunting for emerging and growing companies that have limited resources, expertise, and budget. In the past, it was extremely difficult to find companies and individuals with IoT expertise and capabilities. Thankfully that is changing, though competition for the best resources is still fierce. Emerging companies will do best to choose partners who can take them the distance in strategy, implementation, and solutions. Systems with rich, deeply integrated partner networks (such as NetSuite’s Partner Program), can help a company realize their IoT aspirations. With the right partners and the right roadmap, IoT leadership is within reach, even for emerging and growing companies.
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1 Data from self-reporting on usage via surveys and registration forms is notoriously unreliable. — Return to article text above
2 The user experience in setting up and connecting smart products is critical to adoption and is an area that could use improvement. — Return to article text above
3 Similar to what happens when software solution providers transitioned from on-premise to SaaS models. SaaS providers are able to instrument their software to see exactly what functions are being used, how often, the sequence of use, where users are potentially confused, where there are system performance issues, and more. They have a tremendous amount of visibility unavailable to on-premise solution providers. IoT can provide similar visibility for physical products. — Return to article text above
4 For more, see side bar Disrupting the Truck Leasing Business in the article IoT Impact–Part Two. — Return to article text above
To view other articles from this issue of the brief, click here.