Connected Products Changing Manufacturing Business Model

There’s been a flurry of activity over the past few years indicating a greater reliance by manufacturers on product lifecycle technologies ranging from increased use of CAD/CAM/CAE software to full-blown product lifecycle management software suites. Just a few weeks ago I wrote about how expectations are growing for a PLM surge in manufacturing; shortly thereafter, GE and PTC announced that they have expanded their collaboration to include a reseller agreement and joint product development as well as sales and marketing. Clearly, there’s quite a bit of activity in the manufacturing PLM space, and where there’s smoke, there’s usually fire.

Throwing more fuel on that fire is a recent article by Jim Heppelmann, CEO of PTC, which was published in Frost & Sullivan’s Manufacturing Leadership Journal. The article, titled “Transforming the Relationship Between Products and Services”, looks at how more manufacturers are looking past single sales transactions and into “creating multiple opportunities for an exchange of value, and simultaneously transforming the relationship between manufacturer and customer.” This new business model is blurring the lines between products and services for many manufacturers and is leading to a “rethinking of nearly everything, from how products are conceived, designed, and sourced to how they are produced, sold, and serviced. We’re at the early stages of a fundamental transformation, marking what could be one of the most significant business model disruptions since the Industrial Revolution.”

Heppelmann’s conclusions are, in part, based on data from a survey of 300 global manufacturing executives commissioned by PTC and performed by Oxford Economics, a global forecasting and quantitative analysis firm. Nearly 70 percent of responding executives said they expect their companies to undergo significant business process transformations over the next three years. The executives hold these expectations because they believe “they’re nearing a point of diminishing returns with their focus on improving manufacturing operations, with more than half saying they believe they’ve already wrung out almost all the potential savings from efficiencies in their production processes,” Heppelmann states in his article.

While this is undoubtedly true for many manufacturers, I have to wonder how true this statement holds for the majority of manufacturers. After all, less than a year ago I attended a presentation by Laurie Harbour, president of Harbour Results, at the Manufacturing in America Symposium. According to her analyses of current manufacturing data, manufacturers as a whole haven’t become more efficient over the past several years. “The extra revenues being brought in now [due to the upturn in U.S. manufacturing] are just hiding the inefficiencies,” she said. The data she produced showed that revenue per full time employee in 2011 was $160,000, but was only $149,000 in 2012. In 2012 revenue increased 16 percent over 2011 but throughput went down 7 percent, she said, which represents about an $11,000 loss per full time employee.

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