Forbes: ‘Machines As A Service’: Industry 4.0 Powers OEM Aftermarket Revenue Growth

By | Blog

Original equipment manufacturers (OEMs) are no strangers to boom or bust sales cycles. Traditionally, they’re either ramping up production to meet demand or seeking ways to slash costs when sales are down.

But Industry 4.0, or the Industrial Internet of Things (IIoT), is enabling new sales models that generate more consistent revenue streams for OEMs. There are considerable benefits for forward-thinking manufacturers that transition from selling a product to offering, “machines as a service.” Rather than relying on a one-time sale, they’re charging customers based on machine use and service.

Machines as a service can revolutionize the way OEMs design, sell and service products. It will be a win-win for OEMs and their customers, as both partners benefit from increased predictability.

Selling uptime as a differentiator

It’s a business model that’s becoming more prominent across a wide range of industrial products, including Rolls-Royce’s aircraft and marine engines. The U.K. company is an example of a manufacturer that’s leveraged IoT to turn a high-value asset into a continuous source of revenue.

Rolls-Royce offers “power-by-the-hour” service agreements that allow customers to pay a fixed rate per hour of operation rather than purchasing the engine outright. The company assumes responsibility for ongoing maintenance and provides predictive maintenance services based on insights from their IoT-enabled engines that wirelessly send machine data to four Rolls-Royce centers for monitoring.

Now compare that service model to the more common fail-and-fix approaches in which OEMs sell the equipment outright and only provide service when a machine breaks down. OEMs that adopt machines as a service differentiate themselves from competitors by guaranteeing 100% uptime and only charging for actual usage.

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Forbes: ‘What’s At Stake In The Race To Industry 4.0?’

By | Blog, Featured Post

As Industry 4.0 gains momentum in the manufacturing world, executives are calculating the risk-reward ratio of becoming early adopters of this technology. Some are considering the cost, in money and time, against the potential gains. Others are determining whether they should wait until their competition shows definitive proof of the benefits before striking out into the largely unknown territory. Still, others, stung by the over-blown promises of overly complex and costly earlier technologies, are simply wary. All of them are working to figure out what exactly is at stake in leading or lagging behind the Fourth Industrial Revolution.

To put it simply, the answer is that the future of your business is at stake. But most executives will see that answer as too simple or abstract, if not too glib.

To truly understand the risks and rewards of being among your industry’s leaders during this transformation, bring the debate down to earth. Consider one of the fundamental issues you deal with every day: the cost of poor quality and the cost of downtime.

Reducing the cost of poor quality and downtime

The daily battles that manufacturers wage to make better products and keep machines running figure prominently in Industry 4.0. Driving down the cost associated with these basic elements of manufacturing are among the most critical challenges a manufacturer must address — and for good reason.

The true cost of poor quality — the sum of the costs from repair, rework, scrap, service calls, warranty claims and write-offs from obsolete finished goods — can range between 5 and 30% of a manufacturing company’s total revenues, with the range for a majority of companies falling between 10 and 20%.

And that’s not counting the costs associated with lost customers.

This profit leakage is a staggering amount for an individual company, alone. When you calculate how it compounds through the supply chain, impacting the bottom line and ultimately the customer, the value of fixing the problem becomes clear.

Likewise, the cost of downtime reduces profitability in a variety of ways too numerous to detail here: lost production and capacity, higher labor cost per unit and inventory costs and added stress on employees and machines. When the machines are down, everyone’s attention is diverted from growing the business, whether it’s responding to new opportunities or innovating new products and services.

Though variable industry to industry, one survey places the cost of one minute of downtime in the automotive industry at an average of $22,000 per minute. If you can reduce your downtime costs to a fraction of that, the benefits to the bottom line alone will be substantial.

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The Cost Of Downtime In Manufacturing

By | Blog

A crucial part in any area of business to realizing greater savings is determining the cost of downtime before an issue arises. Formally called the true downtime cost, or TDC, this measurement takes into account a variety of business support and lost opportunity costs when a downtime issue occurs. Things like a computer crashing, a machine not working, or a software program needing critical updates will disturb the natural flow of a business and lead to these costs.

Downtime consultants estimate that almost every factory loses at least 5% of its productivity due to downtime, and many lose as much as 20%. To determine the cost of downtime, a business must analyze every cost factor associated with the possible downtime issues. This data is usually available in most companies and can be organized according to the TDC guidelines to find meaning.

Downtime in the Manufacturing Industry

The cost of downtime in manufacturing can be pretty significant. There are many areas within the manufacturing process that become affected when a system malfunctions or does not operate at its normal efficiency. Downtime influences factors like equipment availability, labor overhead, maintenance, engineering, and production.

The cost of downtime in manufacturing is determined by looking two major classes of costs: 1) Tangible Costs and 2) Intangible Costs.

Tangible Costs

The tangible costs of downtime in manufacturing include:

  1. Lost Production – Every product that a manufacturer produces represents some amount of potential profit. Whether it’s pennies or dollars, these values add up over time-based on how fast each unit is produced. For example, let’s say a company can produce 100 units per minute, and each of these units represents a potential of $1 of profit. For this company, the cost of downtime in manufacturing based on lost production would be $100 per minute, $6000 per hour, etc. 
  2. Lost Capacity – When all systems are fully operational, a manufacturing plant that is running at suboptimal capacity. It is important for a factory to plan for when there is a sudden increase in demand. When this occurs, the factory will need to operate at a higher capacity to fulfill the added business. Reducing downtime is important because it creates additional capacity for free and makes situations like these a non-issue.
  3. Direct Labor – When you reduce downtime in manufacturing, your production levels go up while your labor stays the same. This will decrease the labor cost per unit. Also, when there are less issues, employees can focus on their main task and increase their efficiency.
  4. Inventory – The cost of holding inventory is typically around 10%-30% of the inventories value, per year. This means that if you have 1 million dollars of inventory, it would cost $100,000 to hold it for a year. One cause of downtime is changeover between products. Reduced changeover downtime will allow smaller lot sizes and lower inventory levels, which will lead to a lower cost of holding.

 

Intangible Costs

The intangible cost of downtime in manufacturing is less obvious, but can include things like:

  1. Responsiveness – When downtime occurs, employees must focus on addressing these issues as their top priority. Since the cost of downtime in manufacturing is so significant, it becomes more important to solve these problems than focusing on customer service issues. For example, the TDC in the automotive industry is around $22,000 per minute!
  2. Stress – Downtime can cause a lot of stress in both employees and the machines that they are operating. When a system isn’t working, it can get overwhelming for an employee to accomplish their daily tasks. On the other hand, if a machine needs to produce at their maximum capacity for long periods of time, it becomes more likely that they will malfunction. People and machines perform better under less stress.
  3. Innovation – Downtime can be a very time-consuming issue for a business. This takes away time from other things like innovation and creative brainstorming opportunities. It is much more important to make sure a current system is working before imagining how to improve that system’s capabilities for the future.

The True Cost

Calculating the cost of downtime in manufacturing is not easy. To accurately calculate this, you need to take in several factors. Luckily, there are some calculators available online that can help you get started.

Downtime is a very prevalent thing in the manufacturing industry. On average, manufacturers deal with up to 800 hours of downtime annually. The cost of downtime in manufacturing can be very significant and cost a company millions of dollars. This is why it is critical to understand the cost of downtime, and find the right data acquisition system that enables you to monitor and mitigate downtime in production.

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