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Wednesday, May 13, 2015

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“Smart” Products Yield New Data and Revenues for Manufacturers


The Internet of Things (IoT) is transforming products in practically every industry. As original equipment manufacturers (OEMs) add connectivity to their goods and put sensors in everything from oil rigs to pharmaceuticals, they are generating data that can yield new revenue streams and even new business models.

More connectivity, more data
At its core, the IoT is a system of interconnected devices that communicate directly with one another to provide data or control functions. OEMs are adding this connectivity to traditional product lines as well as creating new products for the IoT, such as ingestible, sensor-embedded pills that tell doctors when a patient has taken them.  Market research firm International Data Corporation (IDC) predicts that by 2016, 70% of global discrete manufacturers will offer connected products.

The number of smart devices is expected to soar over the next five years, despite security and standardization challenges, which means more data for OEMs to use. Research firm Gartner Inc. predicts that there will be 25 billion connected devices by 2020, a fivefold increase from the almost 5 billion it estimates are in use today.

Adding connectivity enables manufacturers to differentiate their goods. It also creates revenue opportunities―including value-added services, subscriptions and apps―that continue long after the physical sale of a product.

General Electric (GE), for example, makes a wide range of connected industrial equipment, such as MRI scanners, wind turbines and jet engines. The company has long sold traditional service contracts, but in 2011 it launched a business unit that analyzes sensor data to help customers operate more efficiently. GE now tracks and analyzes 50 million data elements from 10 million sensors on $1 trillion of managed assets daily. In 2014 it made an estimated $1 billion in revenue from its big data analytics.   

These data-related services can provide real value for customers. For instance, GE has used information from wind turbine sensors to help wind farms increase their power output by up to 5% per turbine. Equipment manufacturer Rockwell Automation provides remote monitoring and diagnostic services for the sensor-equipped pumps it makes for offshore oil platforms; this support helps the oil company reduce downtime that can cost it $100,000 to $300,000 a day in lost production.

For the OEM, device-generated data offers benefits beyond added revenue streams.  The information can help a manufacturer learn more about how customers use its products, which in turn will help it develop better products.  OEMs can also use the data to pinpoint potential product failures, spare parts requirements and liabilities. This can help them improve the profitability and performance of their service contracts and better calculate what their warranty reserves and accrual rates need to be. 

An OEM’s infrastructure must support the IoT
Of course, manufacturers can’t reap the rewards of big data if they don’t have the integrated systems in place to manage the information. As they embrace connectivity, OEMs need a flexible, integrated platform that enables them to capture and use device-generated information, and adjust their business processes as necessary.

For example, adding subscription services or other new revenue models means that manufacturers must create new processes for billing customers and recognizing revenue.  So they need an enterprise resource planning (ERP) system that can adapt to these new business requirements.

On the customer relationship management (CRM) side, systems need to be able to accept information from devices, such as warranty-related data about a product malfunction. Besides being integral to return merchandise authorization and warranty management processes in general, this information can also facilitate the automatic determination of necessary actions, such as dispatching a service technician. Likewise, public companies and regulated organizations can use device data to support corrective and preventive action (CAPA) cases.

Cost-effectively enabling communication between devices requires open standards integration. Because these integrations are dependent on software, and all software-based devices are vulnerable to attack, this means that OEMs must also address security and data encryption issues.

Is product-as-a-service the next business model?
As manufacturers get used to managing device-generated data, their next step―beyond selling separate products and services―may be to integrate the two and sell business outcomes. An HVAC company, for example, would contract with the customer to keep a building heated/cooled to a certain temperature, instead of selling them heating and air conditioning units and service contracts. Or a paint manufacturer would keep an auto maker continuously supplied with paint, based on the auto maker’s real-time plant inventory and production schedules. 

This new business model could start to gain traction in the next few years.  IDC predicts that by 2018, 40% of the top 100 discrete manufacturers and 20% of the top 100 process manufacturers worldwide will provide some sort of “product-as-a-service” platforms.

Nonetheless, this model does have some significant hurdles to overcome.  It may be difficult in some cases to determine exactly what an outcome is, or what the payment structure should be. A digital supply chain is a very different animal than a traditional supply chain, so the IT implications could also be significant. A company’s major systems, from customer management to accounting, would all need to change to support the new process flow.

The future of product-as-a-service remains to be seen, but there’s no question that the IoT is already creating huge opportunities for manufacturers.  As OEMs build and sell smarter products, they’ll be generating data that can help them continue to develop new revenue streams and new ways of doing business.  

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