WEF – Accelerating impact of industrial IoT SMEs · Maximizing the performance of a single asset (e.g. machinery, tools, inventory, equipment, people) Production Line: Improving

WEF – Accelerating impact of industrial IoT SMEs

Economic impact & KPI workstream

September - 2019

Economic Impact and KPIs Workstream©2019 Deloitte Touche Tohmatsu. Todos os direitos reservados. 2

1 How IIoT Creates ValueBrazilian premises for calculating the economic impacts of

IIoT in SMEs

2 Brazilian PremisesOur methodology for calculating economic impact of IIoT

initiatives

3 Economic Impact and KPI MethodologyOur methodology for economic impact and KPIs of IIoT

initiatives

Index



IIoT in SMEs


initiatives

3 Economic Impact and KPI MethodologyOur methodology for economic impact and KPIs of IIoT initiatives

Index


IIoT offers many benefits such as connectivity, efficiency, and reliability, which can leverage growth and operational efficiency for the manufacturing industry…

How IIoT creates value

P R O D U C T S

E N G I N E E R I N G

C U S T O M E R S

P L A N N I N G

F A C T O R Y

S U P P O R T

• Reducing “idea to market” time

• Linking design with product intelligence

• Improving engineering effectiveness

• Enhancing capability effectiveness

• Production asset intelligence

• Activity synchronization and flow

• Creating leverage for technical talent

• Customer configuration knowledge

• Support optimization

• Adding intelligence to existing products

• Creating new data products and services

• New product possibilities through I4M tech

• Marketing and selling products

• Aftermarket experience

• Dealer integration

• Demand sensing and planning

• Supply planning and supplier integration

• Outbound network optimization

IIoT Value Potential

New Revenue

New Business Models

Incremental Revenue

Productivity Improvement

Cost Reduction

Risk Reduction

G R O W T H

O P E R A T I O N S


...but the full value of IIoT is only unlocked as the digital maturity of the organizationevolves, starting from connecting single assets to creating a digital factory network

How IIoT creates value

Single Asset:

Maximizing the performance of a single asset (e.g. machinery, tools, inventory, equipment,

people)

Production Line:

Improving the performance of a series of dependent assets (i.e. production line or

manufacturing cell)

Factory:

Optimizing the performance of an individual plant by better connecting and utilizing assets

Factory Network:

Maximize network performance by sharing capacity across sites in real time and connecting to the entire

supply chain and product development cycle

Exponential value will be unlocked for manufacturers by implementing a complete Smart Factory or network of Smart Factories across the enterprise

Smart Factory Digital Maturity

Opport

unity V

alu

e

Core value Transformational value



IIoT in SMEs


initiatives

3 Economic Impact and KPI MethodologyOur methodology for economic impact and KPIs of IIoT initiatives

Index


In Brazil, the industry is still lagging in it’s digital transformation, with mostorganizaions still transitioning from the 2nd to the 3rd industrial revolution

Brazilian premises – Manufacturing SMEs digital maturity

Entity People

Lack of knowledge of IIoT value

and strategy by the leadership

Low use of digital technologies in

the production site

Lack of qualified personel for

digital and IIoT capabilities

Low understanding and usage of

analytics and big data strategy

Low level of digital technologies

and data usage to support

opperations

Low levels of digital platforms use

for connecting with clients and

suppliers

Data

Tecnology Operations Value Chain

Source: http://www.sebrae.com.br/sites/PortalSebrae/artigos/artigosCoperacao/saiba-o-que-e-a-industria-40-e-descubra-as-oportunidades-que-ela-gera,11e01bc9c86f8510VgnVCM1000004c00210aRCRD


For this project, we are considering the following premises:

Brazilian premises

Brazilian premises:

• Brazilian economy is still recovering from recent crisis;

• Digital maturity in manufacturing sector in Brazil is still on lower levels, specially for SMEs, with low levels of digital technology usage and data driven strategy adoption;

• High taxes in Brazil make investments in technology highly unattractive for most companies;

• Since the objective of the project is to scale up from the first few pilot phase initiatives to national-wide scale, the IIoTinitiatives on each SME should encompass technology application, with little to no technology development due to the Project resources limitations;

Economic Impact and KPIs premises:

• IIoT economic impact and KPIs are hard to measure due to its disruptive nature, although, for the scalability reasons mentioned above, the KPIs and Economic Impact methodology should be simple to implement, measure and run, both for the project team to run the methodology and for the SMEs to understand it’s value and impacts;

• Considering the limited schedule of the project, there may not be enough time for a proper measuring of the metrics, for this reason, estimations and extrapolations may be executed for the calculation of the economic impacts.



IIoT in SMEs


initiatives

3 Economic Impact and KPI MethodologyOur methodology for economic impact and KPIs of IIoT

initiatives

Index


In manufacturing, the value is represented by four main drivers: improve revenue, increase margins, boos asset efficiency and exceed stakeholder expectations

Economic impact methodology – Manufacturing value drivers and metrics

ImproveRevenue

IncreaseMargins

ExceedStakeholderExpectations

Boost Asset Efficiency

MANUFACTURING VALUE DRIVERS

• Improve volume of sales;• Improve the focus of sales and

marketing activities;• Enable the development and

delivery of new products and services;

• ...

• Improve the efficiency of business processes by accelerating business processes and the distribution of information;

• Increase efficiency of Property,Plant & Equipment;

• Reduce inventory;

• ...

• Decrease selling general and administrative costs;

• Decrease costs of goods sold;• Improve the cost-effectiveness

of customer interactions across touchpoints (sales staff, contact centers, web, branch offices, etc.);

• Improve overall performance by fixing poorly-performing entities;

• ...

Generate value by increasing production, acquiring new customers and creating new products and services. Ex:

Generate value by making more money off each product or service you sell. Ex:

Generate value by improving the productivity of both short- and long-term assets and potentially selling excess assets. Ex:

Mostly intangible value added by enhancing company strengths and managing external factors. Ex:

• Improve employee well being;• Improve customer satisfaction;• Improving brand value with

sustainability initiatives;• ...


These four value drivers represent all metrics in the organization

Economic impact methodology – Manufacturing value drivers and metrics

ImproveRevenue

• Value of data

• Speed to market

• Predictive analytics helped global tire company analyze customer insights, growing solutions offerings into a $11B business in 5 years

• Demand sensing used by global CPG company to improve forecast accuracy by 12.3%

• Cost of quality

• Cost of serviceIncreaseMargins

• Predictive analytics saved $140M by reducing wasted stock at global ice cream producer

• Global inventory visibility added flexibility and agility, saving magazine distributor $6-10M annually

Boost Asset

Efficiency

• Autonomous warehouse robotics reduce click-to-ship time from 75 minutes to 15

• Connected devices reduce mean downtime by 50% on large medical devices

• Transparency

• Mission achievement

ExceedStakeholder

Expectations

• Reorders & refills

Marketing effectiveness

• Operational costs

• Cost of R&D

• Cost of raw materials

• Click-to-ship time

• Order fulfillment

• Idle assets

• Idle workforce

• Sustainability

• Risk mitigation

• Employee healthand safety

• Virtual reality allows users to build custom furniture to gather feedback before company mass produces

METRIC EXAMPLES IIoT EVIDENCEMANUFACTURING VALUE DRIVERS

Source: Deloitte studies


To measure the value captured in each pilot, key metrics should be evaluated according to the goal of the respective use case

Economic impact methodology

Define Goals What are the goals of

the IIoT pilot?

Convert Goals Into Metrics

What is going to be measured?

Develop MetricsWhich internal

organizations can provide baseline data?

Collect MetricsHow and how often should you collect

metrics?

Capture & Measure Value

What value is created?

USE CASE BENEFITS / GOALS

▪ Improve operations

▪ Optimize assets

▪ Enhance services

▪ Generate revenues

▪ Increase engagement

▪ Improve well-being

▪ Strengthen security

▪ Conserve resources

FINANCIAL IMPACT

Source: PTC White Paper,”Quantifying the Return on Investment (ROI),” PTC, 2015 <http://www.ptc.com/~/media/Files/PDFs/IoT/Quantifying_Return_On_Investment.pdf>

ROI ($ %)

Payback (years)

EBITDA ($)

VALUE DRIVERS METRICS (KPIs)

Improved Revenue

Increased Margins

Asset Efficiency Gained

Exceeded Stakeholder Expectations

Transparency

Employee health and safety

Sustainability

Risk mitigation

Click-to-ship time

Order fulfillment

Idle assets

Idle workforce

Cost of quality

Cost of service

Operational costs

Cost of R&D

Value of data

Speed to market

Reorders & refills

Marketing effectiveness


Then, for the pilot evaluation, the value captured should be translated in financial impact indicators such as ROI and/or Payback

Economic impact methodology – Financial impact: ROI and Payback

For this project, considering the need for scalability and the resources limitation, we recommend Payback and/or ROI as standard financial

metrics, as they are more simple and easy to understand for the companies

𝑅𝑂𝐼 =(𝐺𝑎𝑖𝑛𝑠 −𝐶𝑜𝑠𝑡𝑠)

𝐶𝑜𝑠𝑡𝑠∗ 100 =

(𝐼𝑚𝑝𝑟𝑜𝑣𝑒𝑑 𝑅𝑒𝑣𝑒𝑛𝑒+𝐼𝑚𝑝𝑟𝑜𝑣𝑒𝑑 𝑀𝑎𝑟𝑔𝑖𝑛𝑠+𝐼𝑚𝑝𝑟𝑜𝑣𝑒𝑑 𝐸𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑐𝑦+𝐼𝑚𝑝𝑟𝑜𝑣𝑒𝑑 𝑉𝑎𝑙𝑢𝑒 𝐶ℎ𝑎𝑖𝑛)−(Σ𝐶𝑜𝑠𝑡𝑠 𝑖𝑛𝑣𝑜𝑙𝑣𝑒𝑑)

(Σ𝐶𝑜𝑠𝑡𝑠 𝑖𝑛𝑣𝑜𝑙𝑣𝑒𝑑)* 100

ROI (Return on Investment)

What is the percentage of return of my investment?

𝑃𝐴𝑌𝐵𝐴𝐶𝐾 =𝐼𝑛𝑖𝑐𝑖𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡

𝑒𝑎𝑟𝑛𝑖𝑛𝑔𝑠=

𝐼𝑛𝑖𝑐𝑖𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡

(𝑎𝑛𝑢𝑎𝑙 𝐼𝑚𝑝𝑟𝑜𝑣𝑒𝑑 𝑅𝑒𝑣𝑒𝑛𝑒 + 𝑎𝑛𝑢𝑎𝑙 𝐼𝑚𝑝𝑟𝑜𝑣𝑒𝑑 𝑀𝑎𝑟𝑔𝑖𝑛𝑠 + 𝑎𝑛𝑢𝑎𝑙 𝐼𝑚𝑝𝑟𝑜𝑣𝑒𝑑 𝐸𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑐𝑦 + 𝑎𝑛𝑢𝑎𝑙 𝐼𝑚𝑝𝑟𝑜𝑣𝑒𝑑 𝑉𝑎𝑙𝑢𝑒 𝐶ℎ𝑎𝑖𝑛)

PAYBACKHow much time will be required to recoup the funds expended on my investment?


Another useful financial KPI is the EBITDA, which measures the operational profitability of a business and can be used to valuate the impact of an investment in the profitability of a plant, but it is more complex to calculate than ROI and Payback

Economic impact methodology – Financial impact: EBITDA

EBITDA (Earnings Before Interests, Taxes, Depreciation and Amortization)

What is the impact of the investment in the operational productivity of my plant/production line?

(1) EBITDA = NI+ I + TX + DP + AM

(2) EBITDA = OP + DP + AM

NI= net income; I = interests; TX = taxes; DP = depreciation; AM = amortization; OP = operational profit

EBITDA is a measure of operational profitability without taking account interests, taxes, depreciation and amortization and the economic impact is calculated by

subtracting the EBITDA after the investment from the EBITDA before the investment. We recommend this method only if for use cases that impact many

dimensions in the organization, for other cases we recommend using ROI and Payback.

Economic Impact = EBITDA(after ivestment) – EBITDA(before investment)

Why not use EBITDA?

• More complex to calculate than ROI and Payback and thus, may be harder to scale up to a greater number of use cases;

• Only makes sense if the use case impacts more than one dimension of the plant;

Why use EBITDA?

• Shows the direct operational impact of the IIoT in the whole plant or production line;


Example of Economic Impact and KPIs

Use Case – Predictive maintenance for onlyone machinne (using ROI and Payback)


Predictive maintenance use case

Economic impact methodology – Examples

Define Goals What are the goals of

the pilot

Convert Goals Into Metrics

What is going to be measured?

Develop MetricsWhich internal

organizations can provide baseline data?

Collect MetricsHow and how often should you collect

metrics?

Capture & Measure Value

What value is created?

METRICS

USE CASE BENEFITS / GOALS

▪ Improve operations

▪ Optimize assets

▪ Reduce maintenance costs

VALUE CAPTUREDVALUE DRIVERS METRICS

Improved Revenue

Increased Margins



Downtime hours

Operational costs

Maintenance costs

ROI ($%)

Payback (years)

EBITDA ($)Employee health and safety incidents

𝑅𝑂𝐼 =(𝐺𝑎𝑖𝑛𝑠 − 𝐶𝑜𝑠𝑡𝑠)

𝐶𝑜𝑠𝑡𝑠∗ 100

𝑃𝐴𝑌𝐵𝐴𝐶𝐾 =𝐼𝑛𝑖𝑐𝑖𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡

𝑒𝑎𝑟𝑛𝑖𝑛𝑔𝑠


Predictive maintenance use case – ROI Calculation (1/3)


Operational costs• Reduced by $15,000(measured)



Increased Margins


Improved Revenue


Downtime hours• Reduced by $6,000 Calculation:300 (reduced hours) * 20 (man/machine-hours)

Employee health and safety incidents• Intangible

Cost of maintenance• Reduced by $8,000(measured)

𝑅𝑂𝐼 =Gains Costs

Costs∗ 100

−

Gains calculation (per year)

Total = $ 23,000 Total = $ 6,000Total = NA Intangible

$ 23,000+

$ 6,000

$29,000




Initial investment• $15,000



Fixed Costs Variable Costs

Predictive maintenance software license• $ 1,000


Costs∗ 100

−

Costs calculation (per year)

Total = $ 15,000 Total = $ 1,000

$ 15,000+

$ 1,000

$16,000





What is the percentage of return of my investment?𝑅𝑂𝐼 =

Gains Costs

Costs∗ 100

−


Costs∗ 100

−=

$29,000 $16,000

$16,000

−∗ 100 = 81.25 %


Predictive maintenance use case – PAYBACK Calculation


PAYBACKHow much time will be required to recoup the funds expended on my

investment?𝑃𝐴𝑌𝐵𝐴𝐶𝐾 =

Initial investment

Earnings∗ 100

𝑃𝐴𝑌𝐵𝐴𝐶𝐾 =

Earnings* =

Initial investment = $ 15,000

= 0.53 years

increased revenue

( $0)

increased margins

($ 23,000)

increased efficiency($ 6,000)

Fixed costs

($ 0)**

Variable costs

($ 1,000)

* Assuming all present values have been calculated

** Fixed costs for payback calculation doesn’t consider the initial investment


Predictive maintenance use case – Result


𝑃𝐴𝑌𝐵𝐴𝐶𝐾 = 0.53 years

𝑅𝑂𝐼 = 81.25 %

Economic impact for the predictive maintenance for only one machine use case

𝐼𝑁𝑇𝐴𝑁𝐺𝐼𝐵𝐿𝐸 𝐺𝐴𝐼𝑁𝑆 = Increased worker health and

safety by avoiding unhealthy

working conditions in the

maintenance operation

Documents

WEF – Accelerating impact of industrial IoT SMEs · Maximizing the performance of a single asset (e.g. machinery, tools, inventory, equipment, people) Production Line: Improving