The Economist IoT Business Index 2017 - Revolution in the making

This article is part of a larger investigation into how IoT is affecting businesses in real ways.
Find out more in the 2017 IoT Business Index by the Economist Intelligence Unit

The digitisation of manufacturing holds the potential to spur a new industrial revolution, many believe. Manufacturers are still working on the foundations, but IoT investment is set to grow

The Internet of Things (IoT) has many potential implications for the manufacturing sector. First, it is manufacturers who will install IoT functionality into the products that we buy and use, which will in turn give them the opportunity to change the nature of their relationship with customers and of the value they offer.

Second, and just as significantly, the machinery that manufacturers use to create their products is ripe for the instrumentation, automation and more sophisticated analysis that the IoT allows. Indeed, so great is the expected potential of the IoT in manufacturing that some are predicting a fourth industrial revolution (“Industry 4.0”) to spring from its use.

So far, however, manufacturers have made more progress with adding IoT functionality to their products than in their internal operations, according to the IoT Business Index 2017, compiled by The Economist Intelligence Unit and sponsored by Arm and IBM.

When it comes to the use of the IoT for products and services, the manufacturing industry’s index score —which represents the average level of IoT achievement across the sector— from 4.23 in 2013 to 4.78 in 2016. This means that the average manufacturing firm has moved from the research phase towards the planning phase.

Of course, many manufacturing companies have already achieved early or extensive implementation of IoT-enabled products, including one-quarter of executives from the manufacturing sector surveyed for the index. For some, this new connectivity provides the opportunity to have a direct channel of communication with customers for the first time. Others are using the data collected from IoT-enabled products to offer new services—and new value—to their customers.

Finnish crane manufacturer Konecranes, for example, uses data collected from the sensors embedded in its products to detect service issues instantaneously, thereby minimising outages for its customers. IoT-powered features such as these are “how we intend to stand out from the competition”, says Juha Pankakoski, the company’s CIO.

The manufacturing industry has yet to make as much progress with the application of the IoT to its internal operations. The sector’s index score for internal IoT has retreated slightly, from 4.69 in 2013 to 4.48 in 2017. This suggests that the average manufacturing company is still in the research phase of its IoT journey.

This is not to say that manufacturing firms are not making use of networked equipment, argues Tanuja Randery, president, UK and Ireland, at Schneider Electric, a supplier of power systems on which many companies in this industry rely.

“Machines talking to machines is something that’s been happening in factories for decades,” she says. “But while machines can talk to each other, they’re not necessarily talking to IT systems, and that’s a bigger problem.” It is this failure to bridge the gap between operational technology (plant and equipment) and information technology (computers and digital systems) that most probably explains the sector’s relatively slow progress in the IoT Business Index.

Creating such a bridge requires not only technical integration but also a shift in culture and capabilities, Ms Randery argues. “In many countries, manufacturers are dealing with an ageing workforce. It’s a workforce that in many cases is simply not trained in software and analytics. These are not core competencies from a manufacturing point of view, and this, to me, seems a huge hurdle.”

The IoT business index for the manufacturing industry

There are signs that the industry is starting to address this, however. Just over 20% of survey respondents from the manufacturing sector say that they have hired talent with IoT capabilities in order to use the IoT more extensively, roughly in line with the cross-industry average (19%). But 44% say they plan to do so in the next three years, compared with 34% across all industries. Even more have provided staff with training to work with the IoT (37%) or plan to do so in the next three years (43%).

The advent of manufacturing systems infused with IoT features will not just require new skills, however. According to a recent blog post on the Harvard Business Review, co-authored by Harvard Business School professor Willy Shih and Helmuth Ludwig of Siemens PLM Software, it will reinvent the cadence of manufacturing work.

Traditional manufacturing is carefully planned, with each process “time-triggered” in accordance with broad demand signals, they write. In future, by contrast, manufacturing will be more “event-triggered”, so that goods are only manufactured in response to a customer order coming in or plant-floor machinery receiving a “go-ahead” from a system further up the chain (an inventory system alerting that new raw materials have arrived, for example).

The change requires a new approach to decision-making, the authors argue, in which factory workers negotiate the best way to keep production lines moving amid a veritable deluge of “events”.

To add to the challenge, the most advanced manufacturers are increasingly looking beyond the plant floor and seeing Industry 4.0 touch the supply chain, too, with a view to routing delivery trucks in the most efficient ways possible and preventing out-of-stock situations at retailers and distributors, says Jagjit Singh Srai, head of the Centre for International Manufacturing at the University of Cambridge in the UK. This, too, will add to the data deluge.

“All the signs point to a situation where manufacturing companies have to think about more than factory-level concepts,” he says. “There’s a lot of optimism that intra-factory communications will be important and that there’ll be take-up there, too, over the next few years. But manufacturers need to take into account everything that happens between them making a product and that product finding its way into the hands of a customer.”

At US industrial automation company Rockwell Automation, chief technology officer Sujeet Chand is confident that manufacturers can overcome these challenges and agrees that the biggest driver will be meeting customer expectations. It is this need that lies behind manufacturer’s continued interest in the IoT, he says.

“They’re interested in using the technology and connectivity to get value from the data that exists on plant floors, to combine it with data from the wider business and use it to optimise production and increase the productivity of the manufacturing plant to deliver what customers need, when they need it,” he says. “At a high level, that’s what we’re all chasing.”

The vision is working for Rockwell itself, he claims. “We may not be a consumer packagedgoods company, but we do manufacture products—around 350,000 discrete products in total. Thanks to the IoT, we now have a very good handle on what’s being bought on a regular and global basis, what’s in our inventory, what’s on distributors’ shelves. We’re already driving our production today to stay in close step with that.”

Go back six years, he says, and Rockwell Automation would typically fulfil a customer delivery just 82% of the time. “Today it’s more like 98%, because we’re managing through IoT-enabled visibility that we simply didn’t have before.”

In time, more manufacturers will join Rockwell, the survey indicates. When asked about their IoT investment plans for the coming the three years, 44% of manufacturing executives surveyed say they plan to grow their investment by 11% or more.

That investment should help to bridge the gap between operational and information technology—and perhaps spark that highly anticipated new industrial revolution

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About this article This article accompanies The Internet of Things Business Index 2017: Transformation in motion, an investigation of business adoption of the Internet of Things (IoT), conducted by The Economist Intelligence Unit and sponsored by Arm and IBM. It draws on a global survey of 825 executives from a range of industries, including 75 from the retail and consumer goods sector. Responses to a subset of survey questions were used to calculate two index scores: one for the external use of IoT (i.e. with respect to products and services), and the other for the internal use (i.e. with respect to internal operations and process). The index score for each industry represents the average stage of progress for companies in that industry. For more details on the survey and index methodology, read the full The Internet of Things Business Index 2017: Transformation in motion report.

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