How manufacturers can maximise the value of smart connected products and minimise the risk

Posted on 28 Feb 2024 by The Manufacturer

Digital disruption has left industrial manufacturers facing a stark choice: Innovate now or risk future obsolescence. Connected smart products can offer manufacturers new ways to drive innovation, save money, allow for top-line growth and create new business models.

Smart connected products in the manufacturing sector can generate revenue and cost efficiencies. While the long-term return on what is often a large initial investment may be discouraging, companies need to invest in smart products today to remain not just competitive, but relevant in the years to come.

A revolution in manufacturing through smart connected products

As is the case in many other disrupted sectors and industries, technology has had a massive impact on the manufacturing industry. The advent of cloud computing, artificial intelligence (AI), machine learning (ML), and the Internet of Things (IoT) have spawned a new class of electro-mechanical products in industrial manufacturing.

These smart connected products range from consumer devices to industrial machinery. They’re smart because they are capable of sensing, collecting and transmitting data within an ecosystem of connected devices and across all stakeholders, including end users. They’re connected through the IoT by using embedded software integrated with cloud-based platforms that are continuously evolving as market demands change.

Smart connected products can share information about themselves, their environment and the end user. The diversity and number of smart connected products crosses a vast array of sectors, from automotive and healthcare, to smart packaging and industrial equipment. Smart connected products also have the ability to increase the performance of the fully connected product, such as increasing the horsepower of an engine that would be limited by its physical capabilities without being smart and connected (this is a value statement, i.e., four cylinder engines can put out a six cylinder power which is more cost effective, fuel efficient and makes a car lighter).

Through the IoT, manufacturers can more seamlessly integrate and optimise industrial production while improving output, efficiencies and cost savings. However, smart connected products are about more than integrating new technologies. The real task for manufacturers is to find the right balance between the right business model through vertical innovation while continuing to build on existing products horizontally along the value chain.

A compelling business case for investment

Manufacturing companies currently generate more than 1.8m terabytes  of data each year. But they don’t know how to collect, analyse or monetise it. Without the ability or capacity to leverage this information, manufacturers can’t benefit from valuable insights that could potentially generate cost savings or new revenue streams. At the same time, emerging competitors are outpacing legacy manufacturers around innovation, cutting into market share and leaving them vulnerable to being left behind.

Using their established record of product development as a springboard, manufacturers can transition from selling physical products to building software-defined intelligent interconnected products. Simultaneously, they can advance their pre-existing products to remain competitive. This should include the expansion of intellectual property (IP) through the evolution of current products, or through the creation and buying of new IP.

While there is a huge upside for investment into smart connected products, the downside is the length of time it can take to realise the value. It could take years to see a return on investment (ROI) on smart connected products. This delayed ROI may cause manufacturers to take a wait-and-see approach. In the short-term, companies may remain competitive, but in the long-term, sticking with the status quo to avoid the daunting upfront investment will likely threaten their survival.

Although delayed ROI presents some risks, manufacturers can begin to realise cost savings in the near term as their investments take root. At the very least, manufacturers can start to address customer expectations early in the transition to smart connected products that help to build strong customer relationships for the long-term.

Five ways industrial manufacturers can maximise the ROI of smart connected products in both the short-term and long-term

Many manufacturers are already making the transition to smart connected products, yet few are taking full advantage of the value creation potential. To maximise the opportunity and remain competitive and relevant in the industry, industrial manufacturers will need a course of action. Here are five ways manufacturers can remain competitive and relevant in both the short- and long-term:

1. Focus on short-term savings to invest in long-term revenue generation

Because it can take time to generate revenue from smart connected products, industrial manufacturers will want to consider funding their journey by reducing costs in a number of ways, including value engineering. These short-term cost savings initiatives can provide critical funding for investments in smart connected products.

Industrial manufacturers will also want to think about developing smart connected products for internal use cases (e.g., supply chain, manufacturing) first. This can help to speed up capability-building and serve as a revenue bridge to create value in the short-term, while companies focus on the longer-term goal of building out new lines of business.

A recent EY-Parthenon analysis on smart connected products value pools (economic value potential through cost reduction and operating efficiencies) over the next seven years indicates that industrial manufacturers could save US$1.8tn through a range of cost efficiencies.

There are several ways manufacturers can reduce costs in the short-term:

  1. Inventory management: Use the IoT to track product inventory in and out of distribution centres, helping to reduce errors and optimise inventory levels.
  2. Supply chain visibility: Deploy smart sensors across the supply chain to enable real-time tracking of inventory and environmental factors in production sites. These sensors can optimise processes, ensure compliance and drive informed decisions.
  3. Product development: Integrate IoT in the product development phase (prototypes) and in established products to allow manufacturers to collect real-time user data, which they can use to enhance product development through data-driven decision-making. An example may include a smart refrigerator manufacturer using sensors to gather data for design improvements.
  4. Operational excellence: Leverage the IoT to heighten operational excellence on the factory floor through better automation processes, optimal resource allocation and other data-driven intel on operational efficiencies, from sensors monitoring machine downtime, to connected devices enabling predictive maintenance.

2. Let startups and other partners do the heavy lifting early on

Leading manufacturers are adopting an ecosystem-driven approach to smart connected products. They’re using partnerships and connections with products from other manufacturers to promote data sharing. Value creation platforms help manufacturers capture new value pools across markets and industries, accelerate speed-to-market, reduce costs and spark innovation.

Ecosystems also offer important insights by seamlessly connecting smart connected products, data, tools and experiences. Industrial manufacturers that establish successful ecosystems can boost their revenue growth and earnings by more than 13%.

To maximise ROI, manufacturers can let startups and other partners do the hard work first, bringing them into the ecosystem once the market emerges and the risk profile improves. Alternatively, industrial manufacturers can buy or build a set of capabilities, taking advantage of the early innovations of others.

For example, a European wind energy leader built a modern smart connected product platform for remote monitoring, updates and analytics. The company went from having no visibility into the health of any of their wind turbines, to connecting, monitoring and controlling the health of 30,000 wind turbines remotely by creating a smart connected product and IoT platform app. Integrating smart connected products allowed the company to remotely update the software, resulting in increased performance and productivity, while newly implemented predictive maintenance capabilities resulted in significantly lower service costs.

Partnerships will be key in the short-term to ensure that manufacturers aren’t building IoT products from scratch. However, finding ways to monetise smart connected products through partnerships can create ways to minimise ROI.

3. Know what you are selling and to whom

When considering their product’s go-to-market strategy, manufacturers sometimes fail to appreciate that they are no longer selling physical products and that the value proposition they are offering is more of a business sell than an operations sell. This requires a different buyer and the ability to cross-sell into industries that are less known to manufacturers, such as Software-as-a-Service (SaaS) models. In addition, go-to-market strategies usually include new services that manufacturers are not equipped to support or service. Products that don’t work as they should can result in poor customer satisfaction and slow growth to adoption.

One way to approach the go-to-market challenge is to shift the innovation paradigm. Traditionally, companies innovated horizontally along the value chain. With smart connected products, industrial manufacturers can innovate vertically. They can elevate the smart connected product stack by embedding intelligent systems and software for task automation, and to generate new revenue from personalisation. This will allow manufacturers to gather new and deeper insights into customers.

Additionally, generative AI (GenAI) and natural language processing technologies can play a significant role in enabling smart connected products to seamlessly engage with users. Opportunities may include offering prescriptive instructions for maintaining equipment or identifying resolutions to problems operators encounter.

4. Get customers involved early

As manufacturers establish a closer connection with their customers, they must adjust and enhance their products and offerings to transform into customer-focused organisations. By gaining an intimate knowledge of customers’ needs and delivering ‘signature moments’ that drive brand and market differentiation, manufacturers can set new growth agendas. Incorporating smart connected products will unlock avenues for capitalisation. This can position manufacturers as strategic players within evolving physical and digital ecosystems.

When planning early-stage customer involvement, industrial manufacturers can take a four-phased approach: explore, create, incubate and activate. This path can drive deep customer insights, comprehensive market fit and scalable product development.

The key to maximising ROI will be to get customers involved early and often. Manufacturers will want to use a lean startup approach so that they don’t overbuild, and then test low-cost, low-fidelity prototypes with customers that focus on learning and speed.

Based on the knowledge of their customers’ memorable moments and their learnings from the prototyping, manufacturers can pace releases to drive speed to market and build both early competitive advantage and stickiness with the market.

5. Take a smart approach to managing risk

The opportunities for smart connected products are abundant, but there are also challenges that industrial manufacturers shouldn’t ignore. It takes experience to make the transition, yet many manufacturers aren’t asking the right questions when it comes to smart connected products: Is the product viable? Has it done well with customers from a research, design and testing perspective? Is the technology or platform’s ability to develop an ecosystem mature enough? Is there enough go-to-market experience? Is long-term financing secured?

To better manage the risks, manufacturers will want to have fulsome answers to each of these questions.

Once manufacturers have established an initial risk profile, they’ll want to zero in on the following areas.

  • Set the digital agenda early: Choose the right software that offers digital capabilities alongside the correct technology stack during the concept design phase (as opposed to post-launch).
  • Establish multidisciplinary agile teams: Deploy agile pod teams that comprise self-organised, cross-functional researchers, designers, technologists, data scientists and business strategists. The right people with the right skills can explore, create, incubate and activate smart connected products in the market.
  • Develop an end-to-end commercialisation approach fostered by ecosystems. A four-phase approach to commercialisation — explore, create, incubate and activate — can deliver go-to-market opportunities, speed and agility, and paths to monetisation, particularly when it is paired with an ecosystem-based approach, which is essential for competitive advantage in today’s market.
  • Bridge the revenue gap with a clear path to monetisation prior to ROI. Pursue interim value creation opportunities, while building the vertical innovation smart connected product stack. Find the right combination of traditional products, a specialised proposed product portfolio and the right partners within a bespoke ecosystem. This will give manufacturers a prime opportunity to define their place in the market as they build their smart connected product stack.

A thoughtful, risk-managed approach can reap rewards in the near term, and down the road

Every industrial manufacturing company needs to be thinking about how to invest and integrate smart connected products into their business. At the same time, they need to remain aware of the increased complexities involved in a larger ecosystem of technology, systems and businesses. Manufacturers may need a different approach to stakeholder alignment, and more thought around which systems need to be integrated.

They’ll also want to prepare for the possibility of longer cycles and unknown issues around security. Rather than running headlong in, manufacturers will want to make accommodation to crawl before walking and then running. This includes recognising that smart connected products require a new business model rather than simply a new operations model.

Ultimately, leaders that take the smart connected product leap today will be better positioned to out-innovate and outperform in the future. Those who don’t may be fine for now, but risk investing more to save outdated products and irrelevance just a few years down the road.

Jerry Gootee HeadshotJerry Gootee, EY Global Advanced Manufacturing Sector Leader

Jerry currently serves as EY Global Advanced Manufacturing Sector Leader and Ernst & Young LLP Global Coordinating Service Partner on several global accounts in the sector. With over 27 years of experience helping global organisations with their auditing, tax, transactions and consulting needs, he has led and coordinated projects across functions and domains such as robotics and process automation, finance and back-office transformation, site selection, external and internal audit co-sourcing and controls support, supply chain transformation, tax planning and incentives, M&A due diligence and post-merger integration services and global mobility services.

David W. Takeuchi EY Global Strategy and Transformation Business Model Innovation Leader

David leads Strategy and Transformation for the Advanced Manufacturing and Mobility sector. He understands a client’s business and brand objectives from a customer’s view, a thought-leader in transforming and innovating customer experiences while redefining new business, operating and service models. He works with design thinking, agile innovation, digital engagement, and immersive experiences providing insights to disruptive opportunities. David was a founding partner of Bedrock Consultants, a group of design and management consultants focusing on the power of innovation, strategy, and digital transformation.

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