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The Supply Chain Management Blog covers the latest in SCM strategy, technology, and innovation.

IoT: Enabling a Brave New Manufacturing World

Guest Author

Andy Binsley, VP, Product Strategy, Supply Chain Management

The Internet of Things (IoT) is on the rise. For those of us not familiar with the concept, IoT refers to Internet-enabled devices that are connected through a remotely accessible network. IoT will undoubtedly play a major role in shaping the future and has already had a great impact on our lives – from changing the way we use thermostats in our homes, to the way large wind turbines are monitored in the North Sea.

IoT is also bringing efficiencies to the world of Manufacturing. It enables unprecedented visibility into machine performance on the shop flow, leading to greater effectiveness in production.

But, we believe this is just the beginning.

We believe IoT will also help manufacturers upend old business models and replace them with completely new ones.

To understand why, it’s illustrative to look at the way product companies currently work.  Products are invariably sold using a one-time buy-sell transaction; i.e. a buyer pays monies to a manufacturer and ownership of the product is transferred. This is the way you likely bought your refrigerator, your car, your television, and your furniture, just to name a few items. It is also the way businesses sell to other businesses. For example, a manufacturer of large trucks will sell its products to mining companies using a one-time buy-sell transaction.

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These one-time transactions have an important consequence. They mean manufacturers do not usually foster any relationships with their customers. Consequently, manufacturers typically do not know customer usage patterns and have no real insight into how end consumers are actually using their products. Case in point, the manufacturer of my car does not really have a relationship with me.  The manufacturer does not know how often I drive my car, at what speed, and in what condition. When they do hear from me, it is because I need the car repaired. 

This is important because it says manufacturers only learn about problems through repair information or through mining spare parts usage data. This is delayed, sparse information that gives manufacturers incomplete information about their customers and their products.    

Now, fast-forward to a time of IoT enabled product manufacturing. IoT enables manufacturers to be continuously connected to their customers. This is an interesting paradigm shift with several implications.

First, manufacturers can move to new business models such as IoT monitored pay-per-use. In this model manufacturers meter the use of a products or services and charge customers solely based on their usage. In the example I gave earlier of a truck manufacturer whose trucks are used in mining, the manufacturer can move to a model where they charge the mining company by hours of operation. Similarly, aircraft engine manufacturers have adopted the model of charging airlines based on hours of operation with their engines, rather than having the airlines buy the engines outright. And MRI manufacturers have moved to a model where instead of selling machines to hospitals, they charge by the image.

A second implication is manufacturers can create continuous relationships with their customers. This allows manufacturers to collect Big Data on customer usage patterns – with the ability to track and monitor exactly how end users interact with the products they purchase.  Think of Tesla cars and how Tesla can monitor customer driving patterns, e.g., how often they come close to draining the battery completely, what time they most often charge their cars, where they charge their cars (work or home), how frequently they use services such as navigation, etc.  This is information Tesla can use to better its products in the future. Continuous relationships allow manufacturers to monitor product performance in real time, look for potential defects and suggest preventative repairs. Perhaps the most important change, though, that results from IoT enabled continuous relationships is the ability manufacturers now have to upgrade their products through software. This is quite a sea change from the old model where products start to depreciate in value as soon as they are purchased. In the IoT enabled continuous relationship model, products can be updated with new software and actually increase in value!

From a business perspective IoT enabled connectivity creates several new possibilities for manufacturers. First, they can use the new pay-per-use models to enter new markets previously closed because they could not afford the full purchase price. This means manufacturers can take their products into promising emerging countries such as India, China and Indonesia, among others, and expand their market opportunity in the process.  Second, manufacturers can use the Big Data they collect on customer usage as well as product flaws and repairs, to drive improved product-market fit. Third, and perhaps most importantly, IoT enabled connectivity enables manufacturers to transition from product companies to “customer experience” companies. More specifically, in the old model of transactional relationships, manufacturers felt responsibility of their products up to their sale to the customer. In the new model of continuous relationships where payments are made on a pay-per-use basis, manufacturers only get paid if their products are performing as required by customers. This creates the incentive for manufacturers to ensure their products are continually working as required by their customers, otherwise they won’t get paid. The point to note, though, is that a well-executed “customer experience” approach should lead to greater customer loyalty as users find the products are continuously meeting their requirements.

To take advantage of the new business possibilities, manufacturers will need to make a few adjustments to their operating models. First, they will need to increasingly manage and maintain assets on behalf of their customers, and work to ensure they maximize “customer experience.”  Secondly, manufacturers will need to develop new competencies in logistics as they will need to ensure the proper placement of products at customer sites, and then their retrieval at their end of life. Thirdly, and perhaps most importantly, Manufacturers will need to change their ERP infrastructures to one that can incorporate product lifecycle management (PLM) directly with ERP, track pay-per-use business models, manage software and services bundled with products and have SKUs where software and services act as an integral part of the manufacturer’s product.

Once manufacturers make these adjustments, though, they will have the infrastructure necessary to fully leverage IoT to enter a brave new world of new business possibilities. 

For more information on implementing any of Oracle's Cloud Supply Chain Management Solutions visit our Cloud Elite Platinum Partner Hitachi Consulting.

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