Digital transformation and the Internet of Things

If you place one grain of rice on the first square of a chessboard, two grains on the second, on
the third four, to the fourth eight and so on, you will soon find that you run out of numbers to count the amount of rice: With 63 doublings, there would theoretically be 18 trillion grains of rice (18,000,000,000,000,000,000) on the chessboard. Eric Brynjolfsson and Andrew MacAfee use this analogy in their book "The Second Machine Age" to illustrate what is an exponential development.

By the year 2025, up to one trillion things will be networked and will communicate with each other: factories, cities, infrastructure, smart products, cars. All areas will be affected by this and will also benefit from it. Take 3D printing and additive manufacturing, for example: a 90 percent price reduction on the 3D home printer has made this technology ready for the mass market since 2009. Last year, Local Motors' first car was printed in 3D. Series production is planned. In an Internet of Things like this, the physical and digital worlds merge. Systems, machines and individual workpieces continuously exchange information. All production and logistics processes are integrated.

The manufacturing industry needs solutions to respond to these challenges. The Internet of Things and the technology of cyber-physical systems - or CPS for short - offers the potential for such solutions. Mobile working, large amounts of data (Big Data) or even cloud technologies offer companies great opportunities and enable new forms of organisation and collaboration in industrial value chains.

The middle class is challenged

For the business locations of Germany, Switzerland and Austria, which are dominated by small and medium-sized enterprises, it is of crucial importance that the country's driving economic force takes up the challenge of Industry 4.0, because digitization will lead to changes in the economy of a similar magnitude as information technology did at the end of the 1980s. It is therefore high time that small and medium-sized companies become more involved in the discourse on Industry 4.0. Standards and norms are only just being created. Instead of adopting standards from large corporations that are unsuitable for SMEs, SMEs can now help shape them.

Given the speed and depth of digital change, many companies currently have more questions than answers:

• How much time remains to deal with digitization, with the topic Industry 4.0?
• How far are other companies in my industry?
• How are value chains and industries changing?
• How successful are other countries - the Americans with the Industrial Internet or the Chinese?
• Which business models are under scrutiny?

What do new business models look like...?

Industry 4.0 requires networked and integrative business models that are no longer implemented by a single company but by a highly dynamic business network. This will result in "integrated" cooperation and business models that will be increasingly tailored to individual and short-term customer requirements with greater involvement of customers, suppliers, partners and the market. In addition, Industry 4.0 and the individualization of manufacturing are creating new lead markets for German export companies in the mechanical and plant engineering sector. Business models based on individualized products are increasingly establishing themselves in all sectors of the economy, alongside plant and large-scale mechanical engineering and the previous focus on premium products.

Thinking in business models as a challenge

In the past, the classical model of thinking and acting looked like this: We have a good idea and develop a product. The product goes to market and the customer uses it. Today, the customer does not buy a product, but a service or services that are "composed" into solutions, and market success depends not only on the "good idea", but also on a corresponding logic that shows how an idea finds its way to the customer. 4] Because innovations are nothing without a corresponding business logic: a viable concept that contributes to an initially technical solution reaching the customer and that also systematically addresses the logic of value creation, market approach and revenue logic. In this way, even innovations that lack the potential for a technological quantum leap can mature into successful business model innovations.

Thinking in business models means the creative and holistic design of the individual dimensions of one's own business logic (namely positioning, supply, value creation, marketing and revenue logic). The point is to align these dimensions with a common goal - such as the desired positioning.

So far, the manufacturing industry is making the most of the new business opportunities associated with digitisation. The so-called "IoT Leaders" are characterized by three features in particular:

1. They recognized the penetrating power of IoT early on and organized themselves in such a way that they can react very quickly on the basis of performance and customer data and adapt to new requirements.
2. With digital solutions, they have managed to create substantial value for their customers ("value creation") instead of just value for themselves.
3. They generate these values primarily through new digital products & services ("integrated service bundles") and new, innovative business models.

In 2014, IoT Leaders generated an average of 64 percent more revenue from their IoT activities and thus achieved a return on investment 25 times higher than the so-called IoT followers (4th quartile). A disproportionately high number of IoT Leaders were identified in the industrial manufacturing sector. Value creation, i.e. the possibility of generating greater customer benefit than the competition, is the driving force and main success factor in all successful business models.

Examples of successful digitalization strategies

Examples of well-known large companies that are pushing ahead with their own transformation process at full speed and with high investments are well known. GE, for example, is investing more than one billion US dollars in the so-called "Industrial Internet" to install sensors and develop software systems to manage jet engines, locomotives, turbines, medical equipment and other machinery for customers. The goal is to generate four to five billion dollars in additional revenues in a few years with these new digital services or business models.

The following company examples show how the digital change is also taking place in small and medium-sized businesses and with which different strategies and approaches the companies are making their way into the world of Industry 4.0 and what opportunities are associated with this.

Industrial connectivity

In the "fourth industrial revolution" the factory organizes itself. The essential basis for self-correcting production is high-precision measuring technology and intelligent networking of the machines with each other. For the machines to run at all, they need energy, signals and data. For these basic elements of industrial automation, Weidmüller, the world market leader in the field of industrial connectivity (673 million euros turnover in 2014), offers coordinated components as an umbilical cord for Industry 4.0.

In cooperation with the Belden/Hirschmann company, Weidmüller has developed an infrastructure box that serves to distribute power, signals and data simply and reliably in future modular production plants. This is a big step towards the development of a standard in the virtual factory. The infrastructure box enables flexible production with smallest lot sizes.

Robotics & mechanical engineering

The Berger Group, based in Wuppertal, Germany, is a global systems supplier for the cutlery, tools, cutlery, technical blades and surgical industry (sales of around 18 million euros). On the basis of evaluated camera data, the individual robot units at Berger today communicate with each other in production and decide autonomously on production processes. If a machining process takes longer and the corresponding tool is therefore not available, the other robots can react. For example, a production process that requires less machining of a forging is preferred, without production stopping. When producing a pressure cooker, for example, the robot recognizes that it has to use a specific gripper. The robot responds to the input signals from the sensors. Berger develops eight to ten new processes or machines every year. Berger is currently developing an app for smartphones and tablets. This enables the operator to call up various machine data that are important for maintenance. This new service sector is expected to grow strongly. Berger is working on ensuring that the machines initiate their own maintenance via sensor technology. The more wear data is recorded and evaluated, the more precisely predictive maintenance can be planned.

Digital manufacturing

Collect and use data already during production - and pass the treasure on to the customer so that he can speed up his own work: That is service in the digital age. The Mönchengladbach-based company Helmut Beyers GmbH (23.1 million euros turnover) puts this into practice. It manufactures electronic assemblies and complete systems according to the designs and specifications of customers, for example control elements of intelligent cooling systems for food transport. Each individual production step is digitally mapped. All process data, for example the duration of the production processes or material consumption, flow into the production control system MES (Manufacturing Execution System). This program allows production planning to be optimized, because it bundles all relevant information on material flow, time expenditure or production quantities and also feeds them into the merchandise management system. Beyers' suppliers are also increasingly being integrated into this process. The digital data itself becomes part of the service for the customers. One example: test data from the production processes are made available to customers at an early stage. The customers in turn can use the information to accelerate their own processes before the assemblies are delivered. Digitization thus forms the basis for the consistent further development of Beyer's business model.

Sensors

For machines and systems to work perfectly, many parameters must match perfectly. Sensors constantly measure data: What is the speed of the machine, is the temperature correct, are vibrations still within the tolerance ranges to be maintained? Industry 4.0 goes one step further: Sensors and controllers must communicate with each other. They must continue to develop in a self-learning manner. In the future, the machines should make decisions autonomously. For example, that maintenance is due, a part must be replaced. This should no longer happen statically at fixed intervals, but in the future "predictive maintenance" should be possible by evaluating the data.
Sensors that see, feel and hear this are manufactured by the Oberhausen-based Lenord + Bauer group of companies. In addition to manufacturers of machine tools, Lenord + Bauer also supplies intelligent sensor technology to plant engineering companies in the rail transport and wind energy sectors. In trains, for example, these fine eyes and ears measure whether the wheelsets spin when starting up or jam when braking. In the case of wind turbines, the sensors check the temperature curves in the nacelle as well as the speed and angle of attack of the rotor blades. Undesirable vibrations or excessively high temperatures can indicate a technical defect. The precise measured values are therefore processed by the control systems and data outside the defined tolerances lead to premature replacement or maintenance. This reveals another challenge: the sensors must not only be intelligent, but also robust. Temperature and speed sensors are mounted directly on the engine, transmission, wheelsets or axles on railways. Rail vehicles and wind turbines are exposed to the weather. They must withstand heat, cold, storms and salty air - for decades. Ensuring the longevity of the products in such a technologically hostile environment is another core competence of the Oberhausen-based company.

Automation & digital monitoring

A nightmare for car manufacturers: The motor of a conveyor belt that transports components from one robot to the next fails. The entire production process comes to a standstill for hours - an immense damage. To prevent this from happening, Tünkers, the factory equipment supplier for the automotive industry based in Ratingen near Düsseldorf, a supplier of automation technology for series production (sales of around 200 million euros), has developed a digital monitoring system for conveyor technology. Together with the cloud software company Cumulocity from Düsseldorf, Tünkers monitors the transport systems - independently of the car manufacturer's central control unit. Sensors measure numerous parameters at regular intervals on the motors of the belts. If a motor runs slower or consumes more power than usual, this can be an indication of a malfunction. The data is sent via a mobile phone connection to a monitor module in the cloud and evaluated. In the event of an incident, the data is forwarded to the customer's service experts. The customer's specialists are notified by SMS and receive the information on their mobile phone, tablet or computer and can react immediately, repair the damage in the factory or, ideally, prevent it in advance. In addition, Tünkers offers a new business model with maintenance contracts, intervenes proactively with its own rapid intervention teams and repairs before a total breakdown occurs. With this service, car manufacturers can save maintenance personnel.

3-D printing

Transport and storage containers made of plastic are indispensable in logistics. The desire of customers for boxes in various sizes and equipment has increased significantly due to e-commerce. Design also plays an increasingly important role, individual colour requests can be fulfilled at short notice. And the product must be available ever faster. When it comes to the design and implementation of individual reusable solutions with special dimensions, Walther Faltsysteme GmbH in Kevelaer (sales of around 40 million euros) is able to meet customer requirements even faster since it produces prototypes in 3D printing. With its own designers and its own toolmaking department, packaging is developed to meet the individual needs of the customer. The prototype of a new packaging box can be made available to the customer in 3-D printing process in about three weeks, tested on the customer's system and then optimally adjusted to the new product. This means an enormous gain in time. Even small series of up to 100 pieces can be produced cost-effectively in this way.

Individualized series products through additive manufacturing

The Lossburg-based company Arburg brings two worlds together: injection moulding and additive manufacturing. By incorporating Industry 4.0 and host computer technology, the mechanical engineering company has developed a completely networked process chain for the production of individualized, traceable light switch rockers. Using the example of the rocker light switch, Arburg shows the path from a large series product to an individual plastic part. Arburg provides the technology and know-how for additive production, injection moulding and the networking of processes via a host computer system. Cooperation partners are the companies Gira (product and tool construction), Trumpf (laser inscription), Fuchs Engineering (quality testing) and FPT Robotik (automation). The process chain begins with product design at a CAD workstation with freeformer, which additively produces prototypes. This is followed by order entry and production of the light switch rockers with an Allrounder injection moulding machine. Laser marking with a data matrix (DM) code and quality inspection are integrated into the automated production cell. The freeformer turns the moulded part into a unique specimen, which in the next step adds an individual identification. The finished product is then packed in a robot cell and printed with a QR code. Using the individual code, the process and quality parameters of each moulded part can be called up online - following the specifications of the individual part-related traceability of Industry 4.0. The Arburg host computer system (ALS), which records the parameters and forwards them to a web server, is of central importance.

The digitization of own business model

Since many of these developments are disruptive, many companies will have difficulties with them. They will underestimate developments and react too slowly. And they will stick to their existing business models, which are (still) making them money at the moment. For example, Netflix has replaced the biggest video rental company Blockbuster; Spotify is challenging Apple iTunes; and mobile payment and crowdfunding will make life difficult for banks. Tesla is a newcomer in the car industry, as is Google-Car.

Disruptive innovations are therefore uninteresting for established companies for a long time,

• because they start in small niches and these niches are not worthwhile,
• because the technologies still have many teething troubles and are therefore not yet accepted in the mass market,
• because there are hardly any functioning business models that have sufficient earnings potential and
• because it is much more tempting to further develop existing business models that have been tried and tested for years than to create something completely new.

What remains to be done?

How do you succeed in designing the value creation logic of your own company as the basis for a new business model in order to realize sustainable competitive advantages and differentiation in the market? If this question is present during the journey to the new destination Industry 4.0, a lot has already been done. Companies that ask themselves the question of how they can keep up with the supposed revolutionary race must follow the following basic principles:

1. Dramatically increase the speed of innovation:

The bible for startup companies in Silicon Valley is entitled "Lean Startup - founding companies quickly, without risk and successfully". The core message? Don't take forever to develop the "perfect" product. Rather, the motto is: fast, simple and focused on the essentials. It's all about minimally functional products, but their core functions must work perfectly. No compromises should be made here. The range will be expanded and improved as soon as the first feedback from the market is received.

2. Think in business models, not in products:

This means going to the market quickly to see if the business model works or not. If not, the principle of "pivoting" applies: an immediate adjustment and correction, in other words, a kind of "swing in". Trial and error is the motto here. But this requires an appropriate error culture. It must be allowed to make mistakes as quickly as possible in order to learn from them.

3. Open Strategy:

No one can say today where the next big idea will come from. Therefore, companies must open up their strategy processes. Swarm intelligence inside and outside the company must be used. This requires opening, networking, but also focusing.

4. Create a Silicon Valley within the company:

Large companies have resources, size, power and the ability to run business models efficiently. Startup companies have other advantages. They are innovative, fast, flexible and willing to take risks. An ideal combination of both would be the solution.

One thing is certain: In order to realize the enormous potential of the growing networking - through the Internet of Things, machine-to-machine communication and Industry 4.0 - companies have to reposition themselves, their organization, processes, IT and last but not least their corporate philosophy.

Short and concise

The networking of things permeates all areas of life. The manufacturing industry needs solutions to respond to the challenges. The Internet of Things and the technology of cyber-physical systems offer the potential for such solutions. It is high time that small and medium-sized enterprises become more involved in the discourse and help shape standards and norms. Various company examples show which strategies and approaches medium-sized companies are using to make their way into the world of Industry 4.0 and what opportunities are available.

Please explore our Growth & Business Model Innovation  solution portfolio for more information.

This article was originally published by: IM+io

Author:
Carsten Vollrath
CEO @ Swiss IPG Partners Group