Our “technologies and tools” series continues with another look at Industry 4.0 for SMEs. Nico Adams writes about some business model possibilities, and the questions a manufacturing company should begin asking before they “get into” Industry 4.0.
“What is Industry 4.0, and how do I get into it?”
These are questions the team is often asked by manufacturing SMEs when they come to visit Swinburne’s Factory of the Future. More often than not, what our visitors have in mind is a techno-centric view of Industry 4.0. Many businesses have seen diagrams and graphics that present Industry 4.0 primarily as a collection of technologies such as cloud computing, the (Industrial) Internet of Things (IoT), additive manufacturing/3D printing, autonomous systems, robotics, cybersecurity, data analytics and, increasingly, artificial intelligence.
When confronted with a definition of Industry 4.0 in those terms, most manufacturers respond in one of two ways: they either fear that they are being sold “snake oil” or are worried about the level of investment and access to skills needed to take advantage of Industry 4.0.
The “snake oil” reaction centres around the newness of the technologies themselves: individually, many of them have been around for considerable periods, and a lot of the initial hype has passed.
Worries related to the level of investment needed to benefit from Industry 4.0 stem from the fact that businesses often don’t have the skill sets required to take full advantage of Industry 4.0 in-house or understand how to access them through partnerships. Furthermore, businesses often struggle to articulate how Industry 4.0 fits into the overall strategy.
What both these reactions are pointing to is the fact that a technology-centric approach often fails to articulate how Industry 4.0 adds value to a business. So is there a better way to approach Industry 4.0? It turns out there is.
It’s about business model innovation
The excitement and tremendous value add arising from Industry 4.0 is that the associated technology set enables profound business model shifts, through changing and opening up additional ways for businesses to create and capture value. This, in turn, allows companies to move away from competing on cost, price and quality towards competing on added value and business model. Let’s look at how these shifts occur.
In the first instance, many businesses start on their industry 4.0 journey by bringing better visibility into their operation: sensoring up a manufacturing cell, manufacturing line or supply chain allows a manufacturer to improve value capture through, for example, productivity increases, resource usage optimisation and the creation of better health and safety as well as quality outcomes (e.g. through ensuring adherence to processes etc.).
While business model innovation and competing on value do not live here, it is nevertheless the space where manufacturers learn what to do with Industry 4.0 technology and the data it creates. Once comfortable, businesses can then move on to shifting their business models, through taking advantage of concepts such as “servitisation” and “outcome economy” business models.
To understand what “servitisation” is, imagine yourself to be a manufacturer of air conditioning equipment. In a non-digital world, your business model would (very simplistically) be that you make the air conditioning unit and sell it to your customer. Additionally, you might surround this with a service contract allowing you to send a technician out when the customer is encountering issues with a unit you have manufactured. Your relationship with your customer, therefore, consists of two transactions, spaced out over long periods.
In the world of digital and Industry 4.0-enabled manufacturing, you might instead make a contract with your customer to keep his or her house within a specific temperature range all year round. To achieve this, you will install sensors to understand what temperature your customer’s home and the environment is at; you may also install insulation and the air conditioning unit that you continue to manufacture. Your customer, however, is not paying you for any of these activities. Instead, your customer is paying you for the ongoing service of keeping their house in a specific temperature range all year round.
In this business model, you have moved from a small number of “one-off” transactions towards creating a “product-service” system and thus a continuous revenue stream, based on services and enabled by a manufactured product. It takes the technology set we considered in the introduction of this article – sensors, the Internet-of-Things, data analytics, industrial control technology – to deliver this value proposition. While “product-service systems” and the notion of “servitisation” have been around since the 1980s, Industry 4.0 technologies are now rapidly driving them into the mainstream.
Outcome economy business models
Early examples of outcome economy business models even predate the servitisation business model discussed above. However, like servitisation, they are coming into their own now through the use of Industry 4.0 technologies.
What does the term “outcome economy business model” even mean?
In an outcome economy business model, a customer doesn’t pay for the manufactured object itself, but rather for the function of the object or the outcomes the manufactured object creates. In the simplest case, imagine paying for a car only when it works and transports you to your destination.
The classic example of this in manufacturing is Rolls Royce’s “power by the hour” business model: in the 1960s, the company moved away from a business model whereby it only manufactured aircraft engines and sold them to an asset owner. Instead, the business started to offer an engine and accessory replacement service, which was charged on a cost-per-flight-hour basis.
Industry 4.0 technology allows a manufacturer to detect very early on that a product is going to fail long before it will fail and cause downtime: a pump in the very early stages of failure but with significant remaining useful life left may change its operating parameters in very subtle ways (e.g. consume slightly more energy than usual). If these signals can be detected and interpreted early enough (through the use of sensors, IoT, predictive maintenance algorithms) a manufacturer such as Rolls Royce can convert this into a maintenance programme that avoids unplanned downtime. This, in turn, allows the company to sell “uptime” – i.e. flight hours – which, after all, is the function of an aircraft engine. Outcome economy business models tend to be very “sticky” and can lead to long-term beneficial relationships between the provider and consumer of an outcome.
Getting into Industry 4.0
To “get into” Industry 4.0, therefore, businesses should not start with considering technology, but rather with business model evolution in mind. The questions that should be asked are:
- “What are the next set of business outcomes our business wants to create?”
- “What value propositions are we making to our customer?”
- “What are the value drivers that deliver those outcomes (e.g. how do we deliver the value proposition technically, what are the strategic partnerships that need to be developed, what are the resources needed to deliver the value proposition, what are the cost structures associated with that)?”
Only once these questions have been answered should a business consider how technology – including Industry 4.0 technologies – can be used to build and deliver the value drivers that lead to the business outcomes that have been envisaged. An objective assessment of the business’s Industry 4.0 readiness may be the pathway to ask and answer these questions within the leadership team. This in turn, can help businesses define and/or refine their growth strategy underpinned by Industry 4.0.
The big opportunity for Australian manufacturing lies in the fact that Industry 4.0 allows manufacturers to compete on value. “Getting into” Industry 4.0 is rapidly becoming non-negotiable for all manufacturers. The changes in value capture and creation that digitalisation creates have a profound effect on business, the future of work and our lives.
The COVID-19 crisis has accelerated the shift towards a digital economy even further.
Manufacturers must act now to benefit from these profound changes, by (a) focusing on creating business value through the use of Industry 4.0 technology, (b) transforming all aspects of the business in an integrated way while also paying attention to developing leadership maturity and innovation capability and (c) by scaling investment in Industry 4.0, while learning how to de-risk such investments through, university-industry collaborations, leveraged money and the research tax incentive, to create long term and sustainable business outcomes.
When approaching Industry 4.0 from this angle, the rationale for investment becomes obvious.
Associate Professor Nico Adams is Director, Factory of the Future, at Swinburne University of Technology.
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