The Rise of the Internet of Goods: A New Perspective on the Digital Future for Manufacturers >> HOME


The New Face of Manufacturing

iStock-690675674-web.jpg

The combination of digitized distribution, digitized production, and new manufacturing platforms — what we call the Internet of Goods — allows the creation of new business models for manufacturing that are capable of expanding the market and changing the geography of production.

Just as the internet would not be possible without fast connections, the Internet of Goods would not be possible without digital distribution. Some commodity goods will still be mass-produced and shipped around the world. But the ability to easily move around goods and parts means that economies of scale in production are no longer quite so compelling. Instead, there will likely be a move towards pushing manufacturing to the edge, into local facilities that can easily engage in short production runs.  

How fast will the shift happen, and how far will it go? It depends on the creation of new business models rather than the technology itself. Remember that no one knew how to monetize search until Google paired it with targeted advertising. Ecommerce didn’t take off until Amazon realized that free two-day delivery was a big deal for consumers. When Steve Jobs and Apple created the first smartphone, no one knew that mobile applications and the App Store were going to be so important.

Keeping in mind the essential unpredictability of innovative business models, what might the future of manufacturing look like? One key is customization. U.S. consumers are more ethnically and culturally diverse than in the past, and they have high expectations for quality, low prices, and variety.

Some consumer products—such as clothing, shoes, and furniture—are substantially more comfortable if fitted to the individual. One can imagine a subscription plan where you are measured once, and then when you need a new piece of apparel, you order it online, and it’s delivered the next day from a local manufacturing facility.  

Ideally, the design software would have the capability of mapping the original set of measurements onto any style of footwear. This tight integration of software and hardware would be a difficult task but would create a durable competitive advantage.

The same principle applies to industrial components. Parts can potentially be precisely tailored to the particular application and situation—say, a piece of HVAC equipment in a tight space –rather than constrained by the demands of mass production. Embracing this business model would require a substantial rethink of design, sourcing, and production, but the gains could be enormous.

Another key might be accelerated innovation and introduction. A company designing a new product can source the needed parts simultaneously from nearby local production facilities. Once the design is approved, then the new product can quickly go into production around the country with critical parts being sourced from one location and distributed through the ecommerce fulfillment network.   

Another potential business model might be built around environmental sustainability. Mass production from a central location inherently imposes an extra burden on the environment due to added pollution from transportation. By some calculations, just one container ship can produce as much pollution as 50 million cars. Digitized local production could substantially reduce that environment burden.

Finally, one logical business model might be the franchising of local production facilities, similar to the franchising of restaurants or other businesses. The franchising company supplies the technical knowledge and materials through the manufacturing platform, while the franchiser makes the sales and operates the equipment. 

OBSTACLES

Several issues may impede the shift to the Internet of Goods. Cost is one potential obstacle. A survey by McKinsey suggested that companies expect about 40-50 percent of the existing installed base of manufacturing equipment will need to be replaced to achieve digital readiness. McKinsey Global Institute then calculates about $115 billion annual capital expenditures will be required over the next decade to deploy these new technologies.

These amounts are well within the capabilities of the largest firms. But given the funding constraints for small and medium-sized companies, making the business case for state-of-the-art equipment is often not easy.

Another big obstacle is the availability of the necessary engineers, technicians, and software developers. “We don’t have enough people to program robots,” worries the CEO of a multi-billion dollar company that makes products for both the consumer and business markets. Adds another CEO of a multi-billion dollar industrial company: “There’s a fear of giving up control. The programming is coming from India, not within your four walls.”

Finally, there is the continuing downward pressure on prices coming from imports from China, as noted earlier in this report. However, business models that are built on the digitized Internet of Goods are much less susceptible to competitors at the other end of long supply lines.