How to Solve the ‘Service Dilemma’ in Manufacturing

Jan. 9, 2016
Manufacturers recognize the need to offer not only products, but services as well. But actually achieving that has proved to be challenging—what Cisco calls the service dilemma. Embracing digital technologies can help, as Caterpillar shows.

Whether in the consumer world or in industry, it’s become increasingly important for manufacturers to sell not just products, but services as well. Industrial machine builders, and even system integrators, can drive new business growth if they’re able to successfully leverage those service capabilities. And those that don’t will risk falling behind.

The idea of manufacturers building out a service model for their businesses is one that seems to be taking hold. It’s an important revenue model as a strategy for growth in an age of connected devices and digital information.

“Manufacturers are recognizing that the services model is really an opportunity to leverage their strengths,” says Chet Namboodri, senior director of private sector industry marketing for Cisco Systems, explaining the transition that has been taking place over the past couple decades. “We’re now at a market transition.”

Unfortunately, making the transition to a service model is easier said than done. “The complexity of building out a services model alongside a product has proved to be very, very challenging. We refer to it as a service dilemma,” Namboodri says. “The complexity is holding manufacturers back.”

The dilemma is considerable. In a recent survey of 625 senior manufacturing decision makers—from both industrial machine builders and end-user manufacturers—Cisco found that 86 percent view the transition from product-centric to service-oriented revenue models as a core part of their growth strategies. However, only 29 percent believe that services will grow faster than the product aspect of their business.

“In one breath, they’re saying they’re going to move to a services model, but in the next breath, they’re not making it happen,” Namboodri laments.

It’s complexity and a lack of digital capabilities that are holding manufacturers back, according to Cisco. The two-front war—managing products and services simultaneously—is at the forefront of complexity, but the need to make it work will be vital to competing in a dynamic marketplace.

A digital model can vastly facilitate the service model, Namboodri says. “And the payoff can be tremendous,” he adds. Cisco’s economic analysis show profits for an average $20 billion manufacturing company that digitizes rising 12.8 percent over the next three years, and 19 percent over 10 years.

Cisco’s survey respondents are well aware of the digital disruption they faced. When asked which technologies would most change how they manage production over the next three years, topping the list were cloud computing (37 percent), the Internet of Things (IoT, 33 percent) and Big Data analytics (32 percent).

The service-oriented revenue model that executives seem to think will be so important to their growth strategies is dependent on these digital technologies as well. Two-thirds of respondents said this is true to a large or very large degree, with another quarter of them saying those models were dependent on digital technologies to a moderate degree.

Caterpillar is one manufacturer making digital capabilities work to grow its service business, recognizing the value of connected machines. In the mining industry, where customers keep chasing cost—the top line getting ever closer to the bottom—Caterpillar is connecting its dozers to the IoT to make a difference, understanding better how to control costs.

“We really have to understand how their mobile equipment is performing,” says Craig Watkins, global marketing, Caterpillar Mining. “If that one shovel goes down, revenue streams are going to be impacted.”

By connecting sensors to the dozers, Caterpillar is able to increase availability of the machines, but can also take that connectivity a step further, Watkins says, helping its mining customers improve their operation. They can see how effectively the machines are being loaded and run. They can see where the equipment is, and how best to get them from point A to point B.

“We’re definitely seeing a strong demand in the marketplace,” Watkins says. “There’s an intense focus on cost and capital reduction. For the services they provide to their customers, they need to make that shift as well. They need more insights.”

Given that all the new machines rolling out of its factories will be connected, Caterpillar will be able to understand what performance looks like on a global basis, Watkins adds. “We can see what is the best-in-class way to use that equipment and get the most out of it,” he says. “We’ll be able to understand the boundaries and limitations of our machines much better, and will be able to design better machines.”

But the kind of service Caterpillar is offering as it embraces the digital technologies available today doesn’t stop there—not even close. With its Cat MineStar capabilities, mining customers can now operate the machines remotely. Caterpillar demonstrated this feature recently sitting in a trailer at the Phoenix International Raceway, where people got the chance to drive one of the largest bulldozers in the world (a Cat D11T, weighing in at about 230,000 lbs) located 150 miles away in Tucson, Ariz.

In fact, the signal was actually traveling from the demo trailer to a Cisco NERV truck over wireless, on to Caterpillar’s headquarters in Peoria, Ill., and then back to Tucson—providing four screens of video to the driver in real time, allowing him to fully operate the dozer.

Why operate a mining bulldozer remotely? “It’s dusty, noisy and hazardous at a mine site, and the mine site is usually located in the middle of nowhere,” Watkins says. “We’re getting people out of harm’s way, but we also keep them closer to their families.”

Although there’s a short learning curve, Watkins says, the benefits of remote operation come quickly. “It doesn’t take very long for them to adjust and become highly productive on these machines,” he says. “Once they get used to the machine, we get some offsets. We reduce the amount of time it takes to transport an operator out to a machine. They can work a longer work day because the operator gets less fatigued throughout the day (because they don’t get shaken around). They’re less prone to injury, and get less tired. Overall, everybody wins. The mining company wins because productivity increases. And the operators are happy, and home with their families, making it easier to find operators.”

All of this is enabled by connectivity and some 100 odd sensors on machine, Watkins notes.

Economic research by Cisco Consulting Services indicates $383 billion in digital value at stake coming from connected products, connected machines, and new service models. Manufacturers are currently leaving 76 percent of the overall industry value at stake on the table.

“One of the key points here is that the world is shifting,” Watkins says. “We’re on the verge of disruption, and the incumbents have an opportunity to embrace it.”

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