Today we find ourselves fully entrenched in the Fourth Industrial Revolution, or Industry 4.0. Like steam and water power, electricity and assembly lines, and computerization, this new era of industry challenges the ways in which we live. But it does so in an entirely new way.
In his book The Fourth Industrial Revolution, Professor Klaus Schwab – also the founder and executive chairman of the World Economic Forum – describes the massive potential for technologies in this new revolution. He explains the sizable changes to the way we live, work and relate to one another due to a number of trends such as the adoption of cyber-physical systems, the Internet of Things (IoT) and the Internet of Systems. Industry 4.0 is infiltrating almost every industry in every country and generating tremendous change in a non-linear way at unprecedented speed.
Through this latest revolution we find that the manufacturing and distribution industry is evolving from the manpowered shop floors of the past to the smart manufacturing facilities of today. We find machinery outfitted with smart sensors to collect real-time data; artificial intelligence enabling superhuman production efficiency and seamless quality assurance; and impending 5G speeds to allow ever-larger volumes of data processing.
One of the most notable trends in manufacturing, influenced by the Fourth Industrial Revolution, is the rise of Anything as a Service (XaaS) and x-economies.
The rise in XaaS business models did not come about out of nowhere. Rather it spurned from the rise in what we call “x-economies,” and your understanding of these new economic models is critical as your company attempts to meet the demands of today.
Perhaps the largest factor driving the new economic systems is the actual consumers themselves. Millennials today constantly face the burdens of high unemployment, low wages and high debt. In an effort to relieve some of the pressures, this contingent of the population is increasingly embracing new business models that offer the latest products with greater flexibility and lower costs.
In today’s market, we can point to the startup companies who acted as pioneers with these new offerings. However, manufacturers – either through acquisitions or organic development – are beginning to evolve their business models to meet the needs of the modern consumer.
Some examples of these models include:
According to research by CBInsights in January 2019, of the world’s 310 private companies valued at $1 billion, 23 of them belonged to an on-demand industry. With this, on-demand services represent the largest of these x-economy business models and the industry is only continuing to grow. The fact is that consumer behavior has changed. Immediate access to messaging, emails, media and other online functionality has generated a sense of entitlement to fast, simple and efficient experiences.
We can look to Uber as one of the companies regarded as popularizing the on-demand model. Today on-demand services exist for every category imaginable, from printing to dog walkers to babysitters and massages. In terms of manufacturing, the growth of on-demand services has triggered a rise in on-demand and micro-manufacturing.
The sharing economy, defined as consumers “sharing” products and services directly rather than purchasing via a retailer or distributor, is another business model that continues to see rapid growth. Experts predict that as a whole the sharing economy will grow to 86.5 million U.S. users by 2021, a drastic increase from 44.8 million in 2016. Common examples of the sharing economy at work comes from Airbnb and Zipcar, where unused rooms and private vehicles, respectively, are “shared” with consumers.
The sharing economy poses many benefits for the everyday consumer. But what does it mean for manufacturers? What happens when consumers elect to borrow goods as opposed to buy new products? It is up to you to evaluate your business model and adjust accordingly.
Subscription box services
Subscription box services have become increasingly popular due to their highly targeted nature and ease of use. In fact, as of 2019, 54% of online shoppers say they subscribe to a subscription box service. In the same survey, researchers learned that the top brands are Dollar Shave Club, IPSY, Blue Apron, Bark Box and HelloFresh. But these companies are just the tip of the iceberg when it comes to the subscription box market.
This model also presents another thing: a unique opportunity for manufacturers to sell directly to consumers.
It was the mid-1990s when eBay and Craigslist emerged, bringing new opportunities for individuals to harness the power of the internet to sell and purchase used goods. Now, nearly two decades later, this concept of the online consignment store continues to grow to help streamlines the process and offer environmentally-conscious consumers an alternative to buying new products. In fact, the secondhand economy spiked to $24 million in 2018 and projects to hit a $64 billion valuation within the next 10 years.
Similar to the sharing model, online consignment stores pose a threat to manufacturers, while concurrently providing a unique opportunity to think differently about their existing business models.
Anything as a Service models are becoming increasingly popular, especially as cloud computing develops more ubiquity. The principle behind XaaS is that businesses can provide better, more cost-effective solutions to customers via subscriptions or pay-as-you-go models than via traditional software licensing models.
Today, the most common XaaS model is Software as a Service (SaaS), which provides individual software applications and services through the cloud. However, Platform as a Service (PaaS) and Infrastructure as a Service (IaaS) have also gained traction as a way for technology companies to expand their footprint.
Historically, XaaS referred to cloud computing. However, the term is beginning to define all service-based models ranging from Manufacturing as a Service and Product as a Service to Transportation as a Service (think Uber and Lyft) and Shopping as a Service (like Trunk Club and Stitch Fix). Regardless of what you call it, one thing is clear: customers’ needs are evolving and business strategies must adapt accordingly to keep up.
The primary drivers behind manufacturing have long been the desire for engineering excellence and operational efficiency. However, over the last decade and the rise in digitization, the push for these goals has only accelerated.
Between a lower cost of entry and new technologies, the competitive grounds now exist in product features and functionality. One example of this is the widespread availability of Bluetooth-enabled devices. In fact, Bluetooth revealed that nearly 4 billion Bluetooth devices shipped in 2018 alone. The types and range of products with Bluetooth capabilities only continues to expand – revealing the drive to push functionality in our goods.
Furthermore, the rapid growth of online retail – led by companies like Amazon – has decreased margins and led to considerable cost-cutting. Now manufacturers are feeling the effects as well, as the push to deliver products faster and for less only grows. In response, manufacturers are increasingly leveraging technology to improve operational efficiencies, reduce waste, and support lean production initiatives.
So what are manufacturers doing when today’s market is full of feature-saturated products and costs cut down to the bone? Taking on a more customer-centric approach and exploring new service-based business models to build value and grow relationships with customers in a modern, connected world. By adding services to their company offerings, manufacturers gain a competitive edge in a rapidly evolving industry.
Digitization is changing product design methods and the way contract manufacturers produce those products. Between technologies like sensors, data analytics, the IoT, and cloud computing becoming more commonplace in the industrial world, OEMs and B2B companies are adopting their own version of “as-a-service” models.
These changes have led to the expansion of Manufacturing as a Service (MaaS), where businesses can leverage a shared network of manufacturing infrastructure – from machines and maintenance to software and networking – to produce goods.
MaaS platforms are making considerable headway with major industrial companies in a variety of sectors ranging from automotive, aerospace, health care and defense. For example, BMW, GE, NASA and the Dell Technologies are some of the big name customers of Xometry, a company whose main product is an instant quoting platform with a massive network of machine shops.
In practice, MaaS may include a singularly managed network of manufacturing equipment or a network of self-managed manufacturers. This system is particularly popular among smaller startups. With MaaS networks in place, manufacturers integrate with one another to purchase and share equipment, as opposed to each manufacturer owning and using their own machines. Typically, the equipment is connected to the internet, giving all parties real-time insight into the equipment’s status and use.
With a singularly managed network, customers send an order for a part, including design files and specs, and based on workload, materials, workforce availability, location and scale, the network dynamically routes the order to a given facility or set of facilities, to most efficiently fulfill the request.
With manufacturer networks, on the other hand, customers research and submit projects to in-network manufacturers. The manufacturers then automatically review the designs – including geometrics, the required pathways cutting-tools, and the necessary materials – and provide fast, precise quotes to prospective customers.
Between faster production speeds and lower costs, companies are already reaping the benefits of MaaS offerings. We see increased and more efficient R&D efforts, innovation and prototyping. Furthermore, by distributing costs for equipment, software, maintenance and repairs evenly among a group of companies, the systems helps each business significantly reduce expenses which in turn improves the bottom line.
MaaS availability also improves ROI by making it easier for companies to expand their capabilities and scale quickly in a way that may be expensive and difficult if they were tackling the situation on their own.
The benefits of MaaS can be seen in certain industries that require high-tech manufacturing capabilities, such as those in a semiconductor fabrication plant. By making manufacturing services more accessible and cost-efficient, more chip design companies are emerging and bringing notable innovations to the industry as a whole.
What are the other benefits of Manufacturing as a Service?
The MaaS business model does more than speed up production times and cut costs for those on a budget. It also encourages collaboration and new partnerships by democratizing the manufacturing process. Even more, it leads to well-balanced workloads for manufacturers and allows other manufacturers to have a shot at projects they may not otherwise have access to.
In efforts to adjust to evolving customer needs, more manufacturers are shifting to become customer-focused. One method of achieving this is the adoption of Product as a Service (PaaS) business models. With Product as a Service, customers pay to use or lease a product without actually owning it. Instead, the company leasing the physical product, service or support is the owner and is responsible for the maintenance of the product.
The Product as a Service business model for manufacturers is driven by three key factors:
Through the use of sensors and the internet, manufacturers can suddenly gain near real-time feedback about their product usage, as well as collect better data from across the value chain and manufacturing operations. Then add in the functionality of cloud computing.
Now manufacturers can easily consolidate data from across all touch points and integrate artificial intelligence and machine learning to gather even more information from this consolidated data. All of this then allows the manufacturers to better understand the consumers using their products. This does more than set up a one-time transaction, it lays the foundation for a long-term relationship.
With the growth and integration of new technologies such as IoT, artificial intelligence and machine learning, there is greater visibility for manufacturers to assess their products and operations. From there, manufacturers leverage this information to build digital services to augment their other manufacturing and product services.
For example, ThyssenKrupp is a German multinational conglomerate and the world’s fifth-largest elevator company. Using IoT technology, the company rolled out digitally assisted services to predict required elevator maintenance. This means that the data collected from elevator sensors allows algorithms to process that information and predict when the elevator needs maintenance – before it breaks down. Now not only does the company provide elevators and technology at their hands, but they have reached a broader customer base by incorporating their sensors into competitors’ elevators.
In addition to Manufacturing as a Service, Product as a Service, and other digital services, cloud networked manufacturing opens up a broad range of services for manufacturers to explore. These include, Design as a Service (DaaS), Experimentation as a Service (EaaS), Equipment as a Service (EaaS), Simulation as a Service (SIMaaS), Management as a Service (MaaS), Maintenance as a Service (MAaas), and Integration as a Service (INTaaS). Diversifying offerings in this way is a key benefit for manufacturers that embrace service-oriented models.
Either way, one thing is abundantly clear: the future of manufacturing exists in customer-centric manufacturing services.
At the end of the day, you need people around you who know and understand your industry. At Baker Tilly, we have a dedicated Manufacturing and Distribution practice led by individuals committed to understanding the unique challenges the industry faces on a daily basis. Our team is ready to work alongside you to strategize for the future and set you up to thrive as the industry evolves.