Unforeseen disruptions, market fluctuations, and macroeconomic issues. The last year alone has exposed the unpredictable nature of the market and supply chains.
Even new competitors popping up from other industries — think Google competing with CNC machine providers, a pump OEM, or a water fixture manufacturing company — can make or break a business. Finding ways to make your business more resilient has become imperative, and those who can do that while creating more value will be even more primed for success.
Improving resiliency is a huge undertaking, and if you’re like many people, you’re probably unsure of where to start.
In this article, I’ll walk you through the different factors that can help build resiliency at your business, how advanced technology can enable it, common hurdles to watch out for, and some of the top advantages you can gain from doing the work.
What makes a resilient business model?
First, let’s go over what we mean when we talk about business resiliency. Relayr has identified nine different points of resiliency that manufacturers can leverage and capitalize on:
• Revenue. Ideally, you’ll want revenue to be recurring, long-term, and predictable to manage through any macroeconomic or market issues effectively.
• Failure Risk Exposure. Is your failure risk exposure from you and your customers? Have you either covered some of this risk or monetized the risk? It’s also essential to determine if your accrued risk on your balance sheets is possible to be covered by a partner like a specialty re-insurer.
• Remote Equipment Visibility. This is constant monitoring of your equipment. Do you have access to the data outputs? Are you aware of what’s happening with the equipment and how it’s being operated? Can you help your customers operate the equipment better to capture more equipment lifetime?
• Maintenance Repair Costs. Ideally, you’ll want any maintenance or repairs to be predictable, proactive, and remote.
• Operation Cost. Similar to repairs, can you predict your operation costs?
• Spare Parts. How many spare parts do you still have in your inventory, and why? Do you need to have it in your inventory? Instead, can you offer it on demand?
• Utilization. An idle machine is a monetization opportunity. How are your machines being used, and can they be deployed elsewhere?
• Product Improvements. If you’re gathering data from your gear, your product department can work on a more accurate, real-time basis to provide better machines for your end customers.
• Remaining Useful Life. Lastly, what’s the lifetime value of your assets? How often do you interact with customers? When do they come back to purchase a new machine? Can you make the machines remain useful for longer or replace them so that downtime is minimized?
All these factors are opportunities for your business to harness, ensuring you can proactively and predictively harbor any storm.
How advanced tech plays a role in monetizing
You’re probably familiar with the Industrial Internet of Things (IIoT), artificial intelligence, machine learning, and big data. While these technologies are more enhanced than ever, they’ve also turned into buzzwords with promises of exponential business growth and prosperity.
IIoT, in particular, has been around for more than three decades, yet the concept still means something different to everyone. Many people define it as the connection of assets to gather data, such as smart home devices. However, the benefits of IIoT go well beyond that to address inefficiencies and other pain points in industrial settings.
But technology is only an element of a monetizing business transformation. In fact, technology investments should come well after you’ve defined your overall business strategy.
In general, people are done with piloting, and they’re finished with failed IIoT projects. They’re looking for business-impacting technology more than anything else. This leads us to the crucial question: How do you get there?
Common hurdles for successful business transformations
Any fundamental shift in how you do business requires a lot of upfront work and planning before you ever flip the switch on any technology. While every manufacturer is different in terms of market, size, etc., there are common factors that can get in the way of your success.
Not starting with the business outcomes
Remember: This type of transformation is not about technology. It’s not about digitization either. The manufacturers who are getting this process right — the ones with greater resiliency — take a step back and approach their monetization efforts through a business lens.
Determining your desired business outcomes first helps you outline yours and your customers’ challenges and how you will solve them. Starting with the outcome will dictate all the technology architectures to follow.
Additionally, this overarching strategy will allow you to determine micro-goals or the smaller, incremental steps you’ll take throughout the process. Not only do these goals help give your team smaller wins to celebrate along the way, but they also serve as moments to pivot or course correct if needed.
The Internet of Legacy Things
In the industrial world, assets are in the field for 20 to 50 years. Connecting these assets isn’t as easy as installing sensors or replacing them with new machines — especially with price tags of $200,000 to upwards of $1 million.
Therefore, it’s important to solve for the legacy and the existing install base through retrofitting. You need to make sure your technology solution and go-to-market strategy consider older gears you may have.
There are no cookie-cutter case studies out there
You could look at other industries for success stories, but digital business transformations are still relatively new in the manufacturing world. If you want to disrupt, you must get comfortable with being the first mover in your market.
If you’re a service provider or manufacturer of equipment and there is nothing for you to look to and copy, you have to start from scratch and develop it. As a first mover, you’ll probably come up against the classic inventor’s dilemma, but don’t worry: some stuff you’ll do wrong, yet others you’ll do right and improve.
This is an area where an expert partner can help guide you through the process, ensuring you have a sound strategy, the right resources in place, and are prepared for the cultural evolution needed for success.
Discounting the cultural mind shift
Many businesses get so wrapped up in the business transformation, and they forget to support internal changes. Worse yet, they underestimate how much focus and energy it takes to keep the momentum going.
Ask yourself: Do you have the right team in place who can make sense of the data you’re harvesting? How can you ensure others throughout the organization, especially those who aren’t used to the new processes or metrics, understand and are aligned? How do you set up an organization that embraces failure?
Changing the underlying mindset of your culture and the incentives that follow is a major factor in how well your business can adapt to new ways of working.
What’s in it for your business
As long as gear and rotating equipment manufacturers have been around, they’ve been differentiated by their products. Whoever had the best, longest-lasting asset for a competitive price would win the business. All of this is changing with technology.
About 200 CXOs at industrial companies were surveyed by relayr, and this year’s results showed that nearly half of U.S. businesses want to change the way they take products to customers. Even geographies are blurring. Where once German or U.S. companies would serve their respective markets, for example, now your reach can extend well beyond borders.
Today’s manufacturers need to start differentiating by exploring aftermarket services.
In the industrial sector, the interest of operators and their end customers isn’t aligned with manufacturers’ interests. This is because the manufacturer usually sells gears as a capital expense (CAPEX) and then goes away for 15 to 20 years and loses touch. They’re incentivized to build high-quality machines that don’t fail.
But, if the machines don’t fail, the manufacturers aren’t making any aftermarket revenue — and of course, the end customer doesn’t want the machine to go down. So, when we talk about monetizing your value, we’re really talking about aligning these interests.
Vertical integration is one area seen more and more in the industrial ecosystem as businesses look to remove barriers and create more value.
For original equipment manufacturers (OEMs), they’re forward integrating by trying to get into the aftermarket space to continue customer relationships, which will compete with the service providers. At the same time, service providers are backward integrating by being OEM-agnostic. They know how your equipment works, and it doesn’t matter who made it.
New financial models
A digital business transformation can enable numerous efficiencies and outcomes that can all make operations more resilient. One of the more popular strategies for manufacturers is switching to a pay-per-use model. You’ll also see this referred to as equipment-as-a-service (EaaS) or servitization.
Instead of purchasing an asset outright with pay-per-use pricing models, the OEM retains ownership and charges the customer on a subscription basis. Customers benefit by switching from CAPEX to operating expenses (OPEX), while manufacturers get more predictable and recurring revenue streams, additional customer touchpoints, and the flexibility to enter new customer markets.
EaaS is not a new concept but is a model seen more in software and consumer-focused industries. An example in the industrial world is “Power by the Hour,” coined by Rolls Royce, which was packaged as “Total Care” in the early ’90s.
Instead of selling jet engines outright, the company bundles them with a variety of services. Rolls Royce then leverages the data from the equipment to provide more guaranteed outcomes and performance of those assets. It’s committing to asset performance and charging for utilization, then bundling all the services and performance guarantees as well.
This is possible because Rolls Royce is closing the loop (see Figure 1). And by closing the loop to your customer, you can leverage the data from those machines to your benefit and the benefit of your customers.
As a closed-loop system, EaaS helps align the interests between manufacturers and customers. According to Bain & Company, not only does the customer experience a 15-percent reduction in operating costs, but the manufacturer or gear provider can make 50 percent more revenue throughout the lifetime of the asset. Additionally, aftermarket, uptime guarantees, and consumables all come with much more customer intimacy than traditional models.
While subscription models might not make sense for every business, it becomes more appealing when looking at your utilization. For example, suppose the utilization is high with rotating equipment, around 90 percent, or low at less than 15 percent. In that case, an EaaS model with uptime and availability guarantees starts to make a lot of sense.
Focusing on value over products
Often, we can’t predict issues, natural disasters, and other macro unknowns that may affect your business. What we can do, though, is identify those areas that are key for resiliency and how advanced technology, such as IIoT, AI, and machine learning, can help bring them to life. Whether it’s vertical integration, a pay-per-use subscription model, or machine uptime guarantees, it’s all about how you leverage the data and the value it can bring.