What do you think are the main obstacles to implementation of Industry 4.0? Do you see big differences between industries?
What you need to get started is business alignment, and understanding of what KPIs you want to move and how you could move them. How do we drive above-and-beyond business outcomes? Today's situation is what you get if you hand responsibility for what is a fundamental business change to your IT organisation. This change should be driven by a company's top leadership. The change has to be designed business first, with whatever technology you choose being a result of what business outcomes you are looking for.
I am not convinced there is a technology paradigm that justifies us labelling it as
'Industry 4.0'. This is what people want it to be, but I have yet to see proof that it is. The proliferation of the internet has put us in the midst of a profound change in how information is shared. It is the highway. It already exists. I would argue it is somewhere between Industry 3.0 and 4.0. Industry 4.0 needs to be business model innovation. Machinery is already very sophisticated. When a typical customer buys a machine tool, they buy a Lamborghini. But they drive it like a Volkswagen. So there is massive under-utilisation of capability out there. What will allow customers to address this is a sea change in business models, which incentivises participants in ecosystems to contribute to a better use of this capability. And such participants could include non-industrial players like software providers, financial institutions, underwriters – take your pick. The customer owns the assets, but uses input from all these players to get more out of them. To me, this is what Industry 4.0 is all about.
Digitalisation could offer alternatives to traditional manufacturing business models such as ‘produce-sell-invoice-get paid-repeat’; Do you expect to see emerging usage-based business models for industrial equipment? What could be their benefits compared with traditional models? Could there be any disadvantages? Are non-industrial partners needed to enable new business models?
Hugo: Absolutely, there are some companies trying this out already. There are some striking examples of such business models being great successes, like cloud infrastructure providers. The big three, Amazon Web Services, Microsoft and Google Cloud, all operate this already, and it is a huge market. When I refer to an atomic unit, I refer to the smallest common denominator that you can define, which allows customers to achieve something that matters to them. In the case of cloud services, it is a computing cycle. They have completely reimagined the way you can consume that, and how you pay for it, through managed services instead of buying a computer. It has evolved so rapidly that in many markets it is today completely alien to even imagine running your own server rack. The cloud service providers figured out what their atomic unit is, and industrial manufacturers need to figure out what their equivalent is.
For big players who already run a major aftermarket business with spare parts and service, I imagine this will be easier. And it will make sense for big costly equipment which represents a major investment, but less so for small-ticket items like tools, which can have an economic life of less than a day. In manufacturing, equipment for mining or oil and gas exploration might for example be more applicable as a starting point for usage-based business models. There, the amount of material excavated is a key KPI, for which the equipment used to extract it is the critical driver. General manufacturing is more messy, with a vast number of things on the shop floor which can influence output, of which the machine or tool is just one. If we tried to sell a level of scrap rate to be achieved by a customers, there are probably hundreds of factors which could affect it beyond the choice of tool. So the current opportunity for introducing usage-based business models depends greatly on the vertical, and what it is you are selling.
Usage-based models are not devoid of risk. As any enterprise which has moved to cloud-based computing knows, if you do not understand what you are actually paying for, you could end up paying way more for cloud services than what it would cost to run servers locally. Especially if you do what is called 'lift-and-shift', taking a platform designed in the 1990s and run it in a managed services cloud environment. The same is true for large equipment manufacturers and their customers. A transition to a usage-based business model requires preparation and communication to make the organisation and its stakeholders aware and ready for the big change to revenue and cash flow dynamics from replacing equipment sales with recurring subscription revenues. This is a big challenge. You can think of it as 'the valley of death'. Many will likely begin this journey, but not all will make it through. If you have a new business model, but your organisation is not structured to enable it, then that is what kills it.
Usage-based business models may become widespread, but not universal. You would be surprised how many customers want to own their equipment. There is also a risk of overreach. Say that you supply one small, but critical, component, and you seek to offer what is essentially a full business process process outsourcing. Will you actually be able to do it? Maybe. But even then, there is the question does the customer want you to do it? Not necessarily. If we were to sell tonnage of rock crushed as a service, we could know how big their crushed tonnage is, and figure out what their productivity is, and hence how much money they are making. Customers may not want their suppliers to know how much money they are making. These kinds of misalignment are surprising common when you start scratching the surface of usage-based models. In cloud services, it is working because the atomic unit is very generic, applicable for everyone. This is not necessarily the case for industrial equipment.
Ulf: Ten years ago, I was responsible for business intelligence at Sandvik. At that time we relied heavily on the Porter model, and everything was about competitor intelligence. They were our competition, which we also looked to for inspiration on how to do things even better. Today we look more at pioneers, new entrants who can break through entry barriers. It is no longer as relevant to look at traditional supply chains with materials, components, finished products and end customers. Technologies in communications and electronics have been around for many years, and in the past ten years we have seen the consequences in terms of traditional business models starting to be challenged. The context and focus is shifting from competitors to ecosystems.
During the industrialisation era, when the steam engine was introduced and later, after electrification, the concept of machining was developed and it attracted top talent. The top people wanted to work with that. A new community, the metalworking guys, was formed. Several decades later, the first numerically controlled machine tools appeared, and that community was split into the traditional old school viewing the work as craftsmanship, and the pioneers seeing the potential from combining traditional skills and equipment with computer power, which offered exponential optimisation potential as opposed to incremental improvement for traditional approaches. This has been going on for several decades, and led to a situation with machine shops today often competing for talent and whose alternatives are simple, perhaps minimum-wage jobs. This is putting immense pressure on manufacturing industries to change, for example to offer knowledge as a service, and to grow productivity with the help of software and new business models, rather than through better machines and craftsmanship. Even at my age, I have come to realise the power of the transparency that the internet offers. I used to believe that you will always turn to your supplier for help and advice. But today you can compare different options quickly and easily online, and make your choice. This transparency is hitting industry hard now, eliminating pockets of excess returns. And it brings pressure to introduce new business models that can attract and retain - and perhaps require – top talent, which can thrive under these circumstances.