Digital transformation in manufacturing industry

Every industry is speaking about digital transformation or digitalization. It is true that manufacturing industries are often a bit slower, when considering new trends and technologies.
When we are speaking about Industry 4.0 or Smart Factory, we are also speaking about digitalization.

Digital transformation

What exactly means digital transformation or digitalization?
Gartner  describes it as the use of digital technology to change business models.
Especially in manufacturing industries this means the process improvement and automation based on digital technologies. Where out new business models can be implemented.

Let’s take an example of a company producing cereals. You can mix fruits and other ingredients and customize your own cereal mix.
To do so, they need to be able to transfer the data from the web shop to the production machines.
Every step needs to be included within the digital chain, as the customer specific process does not end with the mixture of the ingredients. It goes on, until the product is packed and provided with the customer address. Of course you also need to know, the order is delivered.

As you can see, this kind of business would not have been possible, without digitalizing the whole process.

Digital transformation in manufacturing industries

Servicification

This was just a “simple” example of new business models.

A big topic is servicification.
This means, that business models change from selling products to services.
Before we start to discuss, whether or not the above example is also a service, let’s take a more accurate example.

Imagine a machine vendor, such as Mikron. They currently sell milling machines as a product to customers. But what, if they stop selling the machine as a product and instead sell the service to shape metal?
The machine might be placed on a customer’s site (during the “service agreement”). The maintenance is done by the vendor, as they might observe the machine remotely.
Maybe with the machine also the operator is provided by Mikron. So the customer doesn’t need to hire his own Mikron experts.
The customer is now able to rent the machine during some months and then cancel the contract, when there is no more need.

If you know metal working industries, many more advantages will pop up in your mind. If not, let’s focus on the ones mentioned above.

The providers side

This was the perspective from the customer. Now let’s switch to the vendor.

First this is not only a change in the business model, but more an extension. The machines still need to be produced the same way as before. This includes the development, the creation of the components, the assembling etc.
But instead of just sell it after completion, it is now required to add further processes, such as maintenance, resource planning, shipment from one customer to another, insurances, law, check that the wife is happy with it and much more. The list seems never ending.

Another issue is that the customer might now easily switch from Mikron to Okuma, if he is not satisfied. You get everything with the rental, such as the operators, the maintenance etc.
With the old model, the machine was payed with the delivery (or maybe before) and the customer was kind of bound to the vendor.
Now you will get the money over time.

So what is it all for then? Of course it is not only because the customers want it.

Usually, when you rent something over time, you will make more money, than with just selling the product. At least until the end of live of the according product.
There are much more services you can sell. Let’s say you may buy the flexibility, to have more Operators to work during the night. For that you just need to order it one week before. It’s some kind of service level agreement (SLA).

Can I now see your mind coming up with some other ideas?
(Sorry Gerhard Fischer, but I will not give you all my ideas for free. ;-) )

What is digital?

Now this was about services. Where is the digital part now?

Maybe it’s a bit complex to explain with the above example, so let me take another one.

You of course know Audi, the car manufacturer. They produce the models in 3 classes, the A, the R and the RS classes. The main difference is the performance (power, speed etc.). They also have different components, but let’s focus on the performance.

Imagine, if they now just build one car. Over a wireless interface, they can unlock a higher class in the same car, which you are already driving. You pay this feature as a service, which means per time or application.

For Audi in this case, the car has always the same price to be produced. And of course they sell even the lowest class with a price that will cover the expenses.

The example of course omits a lot of important points. But to understand, what digital transformation means, it fits.

Just a new hype?

I admit that this could just be considered as a new hype. Maybe you think that it will disappear as fast as it came up. But Industry 4.0 is currently taking place and for me it does not look, as it would disappear the next few years. Maybe the word, but not the trend.

Because of that trend, I think, manufacturers will automatically start to discover new business models.

So I guess that digital transformation will take place. And you should not miss the point, where you catch the train, or you risk to lose the competition.

3 Responses to “Digital transformation in manufacturing industry

  • A lot of machine vendors sell the machines very cheep, because of the competition. The services are then often given for free, to have a sales pitch and to be different from competitors.
    I know at least one company, that is trying to implement exactly this model.
    I chose Audi for this example, because of the easy class structure. I heard that case to be considered by another big car manufacturer. But I did currently not prove, whether or not it is true.
    But of course I’m very interessed in other examples, so please let me know.

  • Mariano
    1 year ago

    I like that the article points out the opportunities for new business models based on digitalization and also that companies can sell services instead of products. But I am not sure if there are better examples for digitalization, since a lot of machine vendors already sell their products for very low prices in order to earn money with services. And also on the Audi example I thought that there are a lot of obvious reasons why they don’t do it already like this. I am thinking about other examples. Maybe I can find something. :-)

  • Jazz
    1 year ago

    Very nice article. It touches upon some key points for all companies as they approach industry 4.0. I think it is strongly being pushed along side LEAN manufacturing as well now. IT is changing Industry and the future is pushing forward fast.

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