PTC Live Global 2013: All About Design for “Servitization” —Part One

This was my third time attending the PTC Live Global (formerly PlanetPTC Live) conference, and by now I can say with some conviction that, compared to its large product lifecycle management (PLM) and computer aided design (CAD) software peers, PTC provides the most inspiring keynote presentations by its top executives and customers. There are no flashy marketing gimmicks, overselling, and industry gobbledygook, but rather down-to-earth descriptions of current trends and challenges in a language that manufacturers and engineers understand well. While the “Product and Service Advantage” mantra from last year’s conference remains often cited, this year’s conference theme was “Manufacturing Transformation” given that manufacturers around the globe are undergoing a profound transformation.

Manufacturing Transformation, It Is
Manufacturing competitiveness hinges on transformation to respond to several concurrent market shifts and technology trends. The goal is not only to “make better things”, i.e., create products and services that meet customer needs and are truly innovative and distinct, but also to “make things better”, i.e., in a smarter way to, say, reduce redundancy and waste in the production process. The latter can be achieved by facilitating the improvement of the engineering, service planning and execution, and management of the production process, and by creating a closed feedback loop to ensure continual improvement and alignment across the entire business.

PTC CEO Jim Heppelmann talked about seven external market shifts and technological changes that are reshaping the competitive landscape for manufacturing firms, ushering in a new era of not only challenges and changes, but also growth and economic opportunity. Some of these trends have been present and apparent for some time, starting with digitization, which Heppelmann defined as “replacing analog product and service information with a fully accurate virtual representation that can be easily leveraged across the value chain (engineering, factory floor, service).” According to Heppelmann, companies will increasingly rely on one true digital representation of a product that will include not just the product’s geometry and bill of materials (BOM), but also the approved vendor list (AVL), materials in each component, regulatory approvals, manufacturing processes, 3D printing, service requirements, etc. PTC Creo and Arbortext are PTC’s products that can help in the distribution of digital info, Creo for design and Arbortext for field service.

Next Heppelmann spoke about globalization, which he defined as “the general shrinking of the world driven by technology that eliminates economic and geographical divisions and opens new markets.” While globalization is typically associated with more negative phenomena such as immigration (workforce mobility and work visas), outsourcing (job losses to lower wage countries), and humongous imports of cheaper goods (resulting with trade deficits, etc.), globalization can also bring about opportunities. To achieve economies of scale, companies should leverage their product development investments by delivering their products to every available market. McKinsey & Co. predicts that by 2025 emerging markets will generate $30 trillion in annual consumption and 70 percent of demand will come from those markets. No smart company will want to cater only to the 30 percent of the market available in the developed world.

Manufacturers are thus approaching innovation with a range of techniques, such as scouring emerging markets for items that can be sold in mature economies and even opening up the innovation process to the public (Boston Scientific’s open innovation portal is one example). Reverse innovation is another area that is growing more popular, as firms design products for emerging markets and bring them to developed ones. For example, furniture maker Herman Miller developed “desking”, i.e., tabletops with small screens that separate workspaces, via its overseas research and development (R&D) division. The firm is now migrating that popular design to the U.S. market. The “design anywhere, build anywhere, and sell and service anywhere” mantra is becoming an imperative (PTC’s flagship Windchill collaborative PLM offering can help in that regard).

Heppelmann then discussed how globalization is in turn related to worldwide regulation, i.e., “enforcement of government rules, non-governmental organization policies, and industry standards related to environment, health, safety, and trade.” Many jurisdictions limit the amount and/or source of origin of certain materials that a product can contain, and there are an estimated 2,000+ regulations worldwide. One of the most talked about regulations is the Conflict Minerals Law as part of the Dodd-Frank Act that requires proof of origin of the so-called T3G (tantalum, tungsten, tin, and gold) metals that are used in products. Tracking those materials through the supply chain and then disclosing and reporting on them to the proper regulatory authorities is a complex product management task that again demands a sophisticated PLM system with sustainability and product analytics modules that can predict and mitigate related regulatory risks, i.e., Windchill in PTC’s case.

Mass Customization Still Rules
Regulation adds another layer of complexity to Localization/Personalization/Mass Customization, since regulations vary by jurisdiction. Heppelmann defined the fourth market shift as personalization—“efficiently tailoring products and services to accommodate regional and personal preferences.” Modern products must be customized to meet the needs of local markets, whether it is for language, climate, culture, or price. Think of the portable UV sonograms that were created for remote regions in developing countries. Or the Volvo trucks designed for various countries or configurations, such as whether the driver will use the truck to sleep in, whether the truck is used in hot desert areas or in wintry conditions, etc.

In its recent survey of leading global manufacturers and the subsequent “Manufacturing Transformation” report that was commissioned by PTC, Oxford Economics (see the report here) states that manufacturing firms must blend the following three types of knowledge to remake their strategies:
  1. Domain knowledge—knowledge of the product and how it interacts with other products and systems;
  2. Operations knowledge—for making things better, faster, and cheaper than the competition; and
  3. Customer knowledge—knowledge of what an end-user demands or is about to demand.
These areas are reduced in the strategy and planning process to a simple yet profound question: What constitutes a core value driver and what does not? In the case of global agricultural-equipment manufacturer John Deere Inc., a key driver for the tractor manufacturing strategy hinges on drive trains, the design of which drives the design of the rest of the tractor, which ultimately affects power density, turning radii, and similar performance parameters valued by customers. The size and configuration of the drive train determines where an operator sits on the machine. Different-sized tractor models are the first layer of complexity for producing drive trains. Additionally, there are customers who want different types of transmissions (power shift, infinitely variable, collar shift, or low cost) as part of the overall drive-train package.

These layers of complexity quickly made it apparent that the machining of drive-train castings and gears had to be a core internal competence for the company. To achieve mass customization, the product has to be configurable enough to meet the company’s needs while standard enough to be scalable. John Deere ships fewer than three units per configuration of many tractors that sell thousands of units in total. The Oxford Economics report predicts that a shift towards companies developing global product platforms will occur, in which a customizable local or regional product family sits on top of a common generic platform (or “chassis,” in the case of the automotive industry) This trend will slowly replace the former practice of having multiple disparate platforms for different market segments. PTC has incorporated this into their product configurations—by integrating Creo Options Modeler and Windchill, PTC is enabling equipment manufacturers to handle global product configurations and variants.

But while the one-off customization of each mechanical product is still not economically viable (yet—see the section on 3D printing in part two of this blog, to be published next week), software can get you to individual personalization, because software has no manufacturing costs to it (think of smartphones being unique in terms of what apps they contain for their owners).

Newer Macroeconomic Forces
Heppelmann then addressed the remaining three trends that are of a more recent nature, such as the advent of software-intensive (smart) products, which he defined as “integrated systems of hardware and software capable of sophisticated human-to-machine interaction, diagnostics, and service data capture, with additional value delivered through enhancements.” In other words, traditional mechanical products are no longer just mechanical—they are electronic and software products as well. Someone witty recently said that “car tires’ purpose is to prevent the computer from hitting the road and being damaged.” Perhaps a manual vacuum cleaner is not yet utilizing software for better performance, but many other simple home appliances have lots of computing power—think of the upscale Jura coffee makers that tell you when the time has come for filter replacement and internal cleaning and descaling (with a detergent pill), and offer you several different coffee drink options, etc. Or the  iRobot and its Roomba cleaning robots that definitely have sensors and software. On the down side, embedded software in products makes them vulnerable in terms of security, privacy, viruses, bugs, etc., which becomes yet another issue to worry about.

This trend forces interdisciplinary teams, cross-functional product development, and systems engineering. For example, the Tier 1 automotive supplier Continental reportedly now has more software developers than mechanical engineers. PLM products for sophisticated manufacturers now need to be able to build bridges between mechanical CAD (MCAD), electronic CAD (ECAD), and application lifecycle management (ALM) platforms to coordinate interaction among these multidisciplinary teams. PTC Windchill and MKS Integrity (acquired in 2011) are two PTC products that offer this ability (although the ECAD capabilities come via partner solutions such as Cadence, as none of PTC’s peers currently have their own ECAD capabilities).

Embedded software leads to the connectivity trend, i.e. “pervasive networks of ‘things’—often mobile—embedded with sensors and individually addressable to enable sophisticated monitoring, control, and communication.” Heppelmann cited the Fitbit One and Nike FuelBand wireless activity/sleep tracking devices and the Schneider Electric energy efficiency solutions (its product installations are connected directly to a large remote command center with all appropriate monitoring dashboards). Remote diagnostic data can be used to adjust the internal temperature of buildings in order to extract better energy use from the equipment. Given that air conditioning costs can sometimes amount to around 40 percent of a commercial customer’s total energy bill, this is not an inconsiderable value proposition.

As another example, Emerson’s Climate Technologies recently made a strategic decision to focus on sensor-based diagnostics as a differentiator. The initial reason for equipping the compressors with sensors was to measure use and changes in electric amperage, which is often a key performance indicator (KPI) for a variety of under-performance or fault conditions. As more customers installed the sensor-equipped Emerson compressors, the company noted it was harvesting a rich set of usage data, and could be used at supermarkets and other places of heavy use to discover the full extent of industrial cooling challenges. Customers were speaking to Emerson about issues such as the size of maintenance departments, energy bills, tracking refrigerants, and ensuring food quality—topics that went above and beyond the technical operation of a compressor unit. This feedback helped the Emerson field technicians realize that a larger revenue and customer loyalty opportunity existed, and it could be tapped into simply by connecting the compressor units to applications that used sensor data. How has PTC embraced Heppelmann’s connectivity trend? The company’s Servigistics’ Command Center and other service lifecycle management (SLM) capabilities acquired in 2012 seem to be viable PTC solutions for these kinds of issues.

The Service Imperative
One opportunity that smart and connected devices will create for product designers and support personnel is the ability to remotely diagnose and service products in the field. Because “smart” products are software-intensive networked products that have sensors and connections back to the original manufacturer, service needs can be reported before failure. That remote monitoring and serviceability in turn creates business models that don’t necessarily transfer ownership, which brings us to the next big trend of creating product-as-a-service offerings.

Heppelmann defined servitization as “a fundamental business model shift in which products evolve to become integrated ‘bundles’ of services capable of delivering new value continuously throughout the customer experience lifecycle.” In this definition, servitization represents a change in design thinking away from the physical manifestation of the product and towards conveying the benefits of product usage to the end user.

Historically, the service dimension of manufacturing focused on repairing and maintaining products. As a separate business, service was almost an afterthought compared with the all-important new product sale. Today, however, more manufacturers are viewing service not simply as a way to enhance the value of their present products, but as a distinct value proposition and revenue generator in itself. For example, Rolls Royce no longer sells just airplane engines to its customers, as it has a service-based offering called TotalCare that sells only the hours that each engine is in service. From scheduled maintenance to overall management, Rolls Royce guarantees an engine’s performance by taking responsibility for its operations. TotalCare transfers the risks and costs associated with an engine being offline to the vendor, thereby making reliability and uptime major incentives for both the customer and Rolls Royce. The aforementioned Oxford Economics report cites that many firms plan to use a portfolio of strategies to improve their service propositions. The aerospace and defense (A&D) industry and medical device manufacturers are leading in this regard with performance-based contracts. Similar to the Rolls Royce TotalCare or BMW’s Ultimate Service solution, these contracts are about a customer paying a vendor based on the product’s performance against a set of defined metrics.

In the part two of this blog series, to be published next week, I will talk about the news that came out of the PTC Live Global 2013 conference, and PTC’s companion Servigistics Exchange conference.
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