Podcast transcript: How connected and sustainable products are the future of manufacturing
37 min approx | 19 October 2021
Susannah Streeter
Hello and a warm welcome to the EY and Microsoft Technology Directions Podcast. I'm Susannah Streeter and in this episode, we're focusing on connected and sustainable products. Today we're talking about the business buzzword we all know. You guessed it – transformation. We're aiming to bring clarity to this word in a very specific sense as it relates to products. What does it mean to transform your product strategy? And what are connected products? In today's digital world manufacturers must think differently about product innovation. We'll explore how connected and sustainable products are the way forward. And the underpinning of all of this, what does it mean to be a sustainable product? In this episode, we're going to explore the extent to which so-called connected products can help solve the transformation challenge. We'll share examples of connecting physical products to the digital world using unique IDs to create item-level transparency and traceability. How a digital-first approach allows companies to deliver on sustainability and ultimately drive value. And I'm really pleased to say we have two eminent thought leaders who will guide us through the rapid developments taking place, discuss what's stopping businesses from implementing much-needed change, and offering plenty of solutions along the way. But before I introduce them, please remember conversations during EY podcasts should not be relied on as accounting, tax, legal, investment, nor any other professional advice. Listeners must consult their own advisors.
Joining me now from Cleveland, Ohio, Jerry Gootee, EY's Global Advanced Manufacturing Leader. Hello there, Jerry.
Jerry Gootee
Hello, Susanna. Great to be here.
Streeter
It's fantastic that you can be with us. So much to talk about. And I also want to introduce David Breaugh, America's Business Lead for Manufacturing Industries at Microsoft. Welcome, David.
David Breaugh
It's my privilege. Thank you for including me.
Streeter
Thank you. So, let's kick off. So, Jerry, make this real for our listeners. Simply what are connected products?
Gootee
Well, thanks, Susannah. You know, first I'm sitting here at EY, Nottingham Spirk Innovation Hub. And I have to share that connected products are all around me. Of course, you know I've got my phone here, I’ve got my watch, one's connected with Wi Fi, the other Bluetooth and if I look over there in the corner, I see some CNC machines that are also connected, one wired with ethernet cable, another using Wi Fi. And they're also connected via a computer that's like many here, connected and working at the edge. That is connected via the cloud hosted by Microsoft Azure. I'm sure all of our listeners can look around, you probably have connected things, whether it's a product, whether it's a machine, whether it's a device, and we all know what happens when we lose and drop our connection. You know, I have to share Susannah, yesterday, I'm on a little bit of a road trip, I lose my GPS on my phone. And next thing you know, I'm kind of scrambling figuring out how I'm going to make it to my destination. Fortunately, I was able to make it, so we were all getting addicted to being connected. And the last study I read indicated there are two times more connected products than there are people and frankly I think that'll likely double every year going forward.
Streeter
It sounds like it certainly will, as you say we're addicted. David, what's driving this explosion of connected products?
Breaugh
Well, I would say that, you know, this is not a new thing. Connected products have been around for a long time. OnStar is like 25 years old, around being connected to vehicle. There's been a rapid convergence. However, recently that's really driven a couple of different trends that I think is creating kind of a milestone around the way that companies are thinking about the way they want to go to market in the future. This concept around continuously changing consumer demands, the ability to really digitize product innovations and then the lower cost of advanced technologies like machine learning and AI. This has created new opportunities for companies to really rethink their target markets, their customer value propositions and really think about how they partner with new innovative companies in a way that they didn't with their existing business models.
Streeter
I just wanted to ask Jerry, do you think this whole trend has accelerated because of the pandemic?
Gootee
Absolutely, I think many companies may be viewed this as a nice-to-have and pretty quickly became a must-have. I mean, I just look at, at companies that, that needed help within their factories. But we're very concerned and fearful about allowing outsiders and third-party contractors in, they had to think about remote monitoring, they had to think about some of the new digital technologies like augmented reality, in order to get the support, but also protect their workforce. So they weren't in a situation where, you know, they were going to be down for weeks or months at a time. So I frankly think that the pandemic has seriously accelerated this movement toward connected products from at least several years.
Streeter
And what kind of examples are you seeing, like day-to-day examples that are becoming really popular?
Gootee
Well, David, I'm happy to sort of jump in here, you know, I have to share that I'm looking at a really exciting new product here at the Innovation Hub, which is an E-bike. And what's cool about this electric bike is, you know, it quickly moves from being an E-bike that does 10-15 miles per hour, you know, won't jump out from under you, to a moped to an all-out motorcycle. And it doesn't require someone to go to the service station to make these changes. Literally, it's a software change, it's a click on an app on your phone. So now all of a sudden, you know, the need for in and out working with technicians has immediately been eliminated by the ability to push software, push upgrades, via the web, onto devices that allow customers to change those experiences based on what they're looking for. A real, real big revolution, ordinary change in products going forward.
Streeter
So, constantly evolving products, that certainly is getting a lot of traction already. David, I want to ask you what kind of industrial examples you're seeing in this space?
Breaugh
Well, I mean, I look at Jerry, as an innovator, a thought leader and an operator, right, he's running an operation that actually does stuff, they don't talk about stuff, they don't just showcase stuff, they actually do stuff. As you think about connected products, it crosses vehicles, machines, even workers. And really what it changes is the ability to provide real-world and real time awareness to enable new digital services, and even experiences across customer bases. So there's multiple ways this can be applied in the industrial industries that I support. It really lands around configuration around new products, right? There's lots of new skews, there's the need to personalize things around asset tracking and monitoring in regulated industries, the need to be able to do verification and validation around performance. And then we're seeing companies start to elevate process control above a PLC, or a set of applications that sit on the shop floor where they can start to string together, the material flow, and the latency that hides in the hidden factory between stations. So this concept of an aggregated set of process controls, is something that is very opportunistic, around identifying a lot of latent losses that companies don't even see today. And then finally, the ability to do simulation, right, the ability to build digital twins, to look at different scenarios before you take them to action. So this has created a whole new generation of value, but also a whole new array of sensors, connectors, and even APIs that have created a new explosion of data that we've never seen before.
Streeter
Yeah, this huge proliferation of data really is remarkable. Jerry, let me ask you, how do you think this is going to affect services in particular?
Gootee
Well, think about if a product can tell you when it needs attention, think about the value of that service. And that's really where we're, you know, that's the direction that we're moving in and think about the customer loyalty and the stickiness that's going to create not just at the point of sale or the time of purchase, you know, let me give you an example. And all of us have sort of experienced this right? You have an appliance or you have a furnace that that goes out and you call for service. They arrive. They charge a service appointment fee and likely diagnose that you need a new part. Of course, they don't have it on the truck. And they hope to be back in two weeks, none of us really enjoy that experience right? Now rethink this service situation, you know, your furnace goes out or before the furnace goes out, because it's connected, it's being monitored. And through this monitoring capability, there is a problem code that's identified based on that problem code. Parts are sourced, technicians are actually sent out with those parts. And what do you know, the furnace in this particular case gets fixed before you know you have to have a night’s sleeping in the cold. What a new, you know, exciting, different way of taking care of your customers. And at the same time dealing with a real issue that we have right now, which is we just don't have enough technicians. So having them come out two or three times to fix something also is, you know, problematic. So you know, as David was sharing, there's lots and lots of ways that services are improving. There's also ways for companies to monetize through premium services and the like, and create new revenue streams and even standalone businesses with this new capability and more connectivity to the actual products and creating better customer experiences.
Streeter
Yes, these new business models that are emerging, which are really fascinating. David, what kinds of new models are we seeing, do you think, because of this revolution in connected products?
Breaugh
Yeah. So, like I said before, I mean, a lot of these business models have been around for a long time, but they're becoming a lot more pervasive. So, most people are aware of power-by-the-hour in jet engines, there were similar models that were set up for construction equipment, think about like cement trucks, or backhoes, and then other asset-intensive industries around things that just kind of churn. And they're delivering an output that can be measured. So we're working with a few companies to develop new models. This is around product-as-a-service. And as much as it becomes a challenge around the digital engineering, it also becomes a challenge around the commercial model. And so you got to figure out how do you design and get paid for the outputs and outcomes that are being delivered, instead of just the product itself? In the old days, most of the discussion was around the transaction. And that's where the sourcing, and then negotiation, a lot of the terms and conditions were based on. You know, what does that product do when you buy it? Now, there's a lot of different terms and conditions around entitlements, and other things that happen after the initial transaction. And so, there's a couple of interesting examples that I would highlight. One is, we were working with a manufacturer over in Europe, they were selling food processing and packaging equipment and material, and they're moving to dairy-on-demand. This is a very interesting business model. It is targeted at developing countries, and countries that maybe don't have cows, at maybe countries that don't have a diet that is beyond milk, right? How do you like sell yogurt and feta cheese and things like that into new markets. Another great example is a company that is trying to incubate a new line of business where they're going to launch a fleet of drones that are going to provide inspection services for solar panel fields and wind farms to be able to inspect what good looks like. There's a lot of challenge in terms of processing the day-to-day operations, in terms of whether there's debris on a wind blade, or whether there's actually a crack.
Streeter
Yeah, it's really interesting example there, you can see really how this remote inspection capability can be so useful. And talking of wind farms, David, how can connected products improve a company's sustainability credentials?
Breaugh
So there's a whole concept that we follow around a digital feedback loop. It's the core of how we approach product transformation. The starting point is just getting connected and getting visibility but the epitome is our digital twin technology enables real-time monitoring and control. It also leverages advanced capabilities that allow you to learn with AI and ML. And then autonomously update, self-heal, and even improve systems-level designs. Over time, we acquired a company called Bonsai that actually does reinforcement learning. What that means is we teach machines how to behave based on the outputs of what they do. And so this becomes reinforcement learning, machine teaching. And so we're doing that autonomously, with several companies. It helps companies be able to reinforce the way that their operations learn and behave over time. The unintended impact of that is that we were able to also identify opportunities to save energy, water, carbon, and waste. And then since then, we've been able to really take that into a new market opportunity for Microsoft. We recently announced the sustainability cloud. And that's an opportunity to help companies leverage our experience and help them facilitate and accelerate their own sustainability journey moving forward.
Streeter
Fascinating examples. Let me bring in Jerry, because I'd like to get your view and how all of this can improve transparency and traceability and help companies truly transform, going back to our initial buzzword, of course of transformation.
Gootee
Well, that's a big, big question, Susannah. So, you know, first off, we've discussed how important connectivity is, when it comes to transparency and traceability. It's a game changer, right? I mean, it can really help us with reducing waste. Obviously, there's issues, potential issues around counterfeit products that can be dealt with. And, you know, we've all heard about the issues with supply chain. So it can be a real enabler, to improving the overall supply chain performance for companies. Let me just make a couple of comments about waste. You know, we all know that there's trillions of dollars that's wasted every year in the food industry. Imagine if through connectivity, think, you know connected food labels, all throughout the processing and the logistics, from farm all the way to the kitchen table, if we could eliminate by monitoring temperature, moisture and all the other indicators, you know, key indicators of food quality, if all that could be measured, it would be an absolute game changer. I mean, some folks have even said we could take 50% of that waste away. Let me comment a bit about the overall supply chain and all the issues that we're all facing. If any of you have gone out to try buy, you know, tried to buy a new car. You'll all know there aren't many on the lots. Right? So, we've all heard a great deal about the chip shortage. There's lots of you know, pick up a paper, lots of chemicals and key materials, and commodities that just aren't available. There's a huge shortage. So you know, with improved traceability and transparency, you know, downstream customers can quickly look for alternative sources, they can revise their logistics and production schedules to minimize the impact of these shortages. Susannah, maybe I can provide just a really simple example to make this real world. Do I have a minute or so to do that?
Streeter
You certainly do. Go ahead.
Gootee
Okay. I don't know about everyone else, but I love pizza and so does my daughter, so let me use a pizza example. So, let's say that you're making pizzas for a big pizza party for your daughter's soccer team, and you only have one oven. So, fortunately, you’ve got an assistant coach that's also willing to make pizzas. You order the ingredients from your favorite local grocery store and you have them delivered by noon. You think you’ve got plenty of time to get the pizzas done before the big party. Unfortunately though, the ingredients arrive and you learn that the store was out of pepperoni but sent extra onions and you're really looking forward to this pepperoni, onion pizza and so are your daughters and your daughter’s teammates. You know at the same time your assistant coach receives ingredients but was missing onions but got extra pepperoni. Now, unfortunately by the time you realize that you’re both missing ingredients, it was too late to get your pepperoni, onion pizzas cooked and ready for the party at all. Last thing you want to do is disappoint your daughter and your daughter's team. Now, let's assume when you order the pizza ingredients, the store immediately alerts you that they don't have all the ingredients and they connect with other stores in the community and make sure that the pepperoni and onions show up where they need to be. Or because they've alerted you, you now have time to work with your assistant coach to share ingredients with plenty of pepperoni and onions between both of you to prevent the big pizza crisis. It's a simple example, Susannah, but it's exactly what companies are using control towers to do for them in a much more sophisticated environment. The control tower, think about it as a global view of all the inputs, just like all those ingredients I talked about, of actually the production, what's happening on the shop floors, within the manufacturing facilities, and then the output, you know, what's actually being delivered, what's in the distribution channels, etc., across that full end-to-end supply chain. If you think about that pizza example, right. And with the connected products, the control tower can be used to quickly change the orders around to reroute shipments, refined production schedules, and optimize supply chains to meet actual demand. It's absolutely critical during these times of supply-chain shortages to have this capability.
Streeter
Absolutely. When you hear about all of the bottlenecks, and the goods being in different places around the world, having that control tower aspect must be so useful for so many companies. So David, I want to ask you, though, let's look at the view of the customer. How do you think connected products can give a unique insight into that?
Breaugh
Yeah, so Jerry's spot on, I think we should expect more shortages moving forward, given the disruptive nature of supply chains today, especially the fact that a lot of them are global. And there's not a lot of nuance between the way that things are going to operate between geographies. I think one of the things that we look to, as we talk to our customers, is the strategic benefit of being able to position connected products as becoming the voice of the customer. This allows companies to extend beyond the initial purchase and provide a way to be connected to their customers across the usage horizon until the end of life. This is particularly important in fast-moving industries where products have to be prescriptive around demand changes and personalization. When we work with companies like automotive, aerospace, and agricultural equipment, these are industries where products need to be supported for decades. And so the deeper levels of understanding around design through service is critical around having visibility into how customers actually use these products both right and wrong, and where and when the points of failures occur. As my manager Çağlayan Arkan says, this gives you the power to have presence to rewrite the future of your business.
Streeter
Yes, fascinating, that visibility that can be glimpsed through this. Jerry, how do you think all of this can improve the chances of companies developing longer-term relationships with the customer. I suppose if they get the right level of pepperoni right on the pizza, they just keep coming back.
Gootee
Absolutely all this talk at lunchtime is really getting hungry, Susannah and David. So in addition to pizzas, you know, I also like to, although I don't have a motorcycle, I sure would like to have a motorcycle so maybe let me take us back to that e-bike example. And because it's connected, because of that modular design, it sort of moves to supporting a 14-year-old, or your teenager, or that adult that wants to use it as a full motorcycle. But let me add another little feature here that really gets into what David was talking about. And this ability to really provide an amazing customer experience after the point of sale and really build that long-term relationship. So now, let's assume that you're headed for an adventure, you're on your bike, get the wind in your hair, you're heading to the mountains, and you're looking for an off-road experience, you're not looking to go to a service station to do it, you literally can go on to that app, a premium service will allow you to real-time make adjustments to the handling, and to the torque and everything that you would need to really make this an off-road bike. Again, adding value to you as the customer, but also to the e-bike company, as well. I mean you're going to see this more and more. I think going forward with products is this ability to not only stop, you know at the point of sale, but the ability to continue to add value all through the life of a particular product is a very exciting development for us as customers and also for our clients as well.
Streeter
I suppose fostering this kind of enduring relationship, by knowing the customer better whilst helping improve your sustainability credentials as well, is a pretty powerful combination. And it's becoming even more important, isn't it Jerry, given that sustainability and transparency is so high up on younger consumers' demands now?
Gootee
Yeah, it's definitely a trend that we're seeing. And you hear a lot about regulation, clearly regulation is driving a lot of momentum, but also with customers and consumers, you know, I'll share that even in the industrial space, we're seeing more demand for eco-friendly equipment, machinery. Almost every client we work with, now, they have big commitments to reduce their greenhouse gases over the next 10 years. And, you know, the only way they're going to get there is not just looking at real estate and their own production emission. But as important as really looking at their products, and how they're designed and how they're manufactured, has a big, big obvious impact on the environment. And, you know, I can think about a local retail store and think about, I think all of us can think about our favorite retail store, you walk into that store. And as they make big sustainability commitments, they'll need to know okay, where did that merchandise get sourced? And how was it produced? And when we think about the labor? It was the labor? Were they underpaid? Were they mistreated in any way? And then when you think about the energy use, are they using state of the art, you know, energy-efficient systems? When you think about the refrigeration, is it efficient? Are they using the next generation of more eco-friendly systems? I have to say, you know, what we're really seeing is lots of shoppers do care, and sustainable friendly products and companies are driving and will continue to drive greater revenue and greater valuations into the future, Susannah.
Streeter
Yeah, you can really see from what you've both been talking about, the huge value that certainly these connective products can add. But David, there are still challenges ahead, aren't they, which is hampering the adoption of this strategy?
Breaugh
I mean, there's still a lot of challenges that need to be considered around a connected product strategy. The number-one question we always get, when we encounter this type of discussion with our customers, is how do we secure the data and protect their IP from cyber risk? Right, this could potentially lead to catastrophic consequences if it's not considered early. And so well, we work with a lot of companies that are trying to do like use case-by-use-case, you actually need to step back and really think about this more broadly. And think about that as the initial operating principle around your architectural design. So part of the cloud versus Edge becomes the way that we engage our customers very early. Most of them are on the IT side. But as we get into use cases, and really think about how we develop and deliver business change, it becomes a very kind of hairy discussion. The other piece of this is how we think about exposing IP, where a competitor could come in and reverse engineer and copy what companies are doing as most product companies are trying to move to more software-as-a-service based business models. They're easy to reverse engineer. And so being able to kind of protect that IP, and be able to make that more adjacent, but also more agile is something that we have really adjusted our engagement profile with customers. So this concept of how do you build a software factory within your company is something that we have, I wouldn't say perfected but we've actually adjusted, we're a lot more mature than we were a couple of years ago. And then finally, the counterpoint of this is as we get locked in, and as companies look to Microsoft and others to be able to be their provider, are we actually changing the ability for other companies to innovate right as customers get locked in, are we not allowing people to think about the next generation of opportunity and ideas.
Streeter
What's your take on this Jerry?
Gootee
Well, you know, I'm a firm believer that innovation always comes from necessity. And, you know, typically, as soon as you stop meeting the needs, pretty quickly, you know, new inventions and new creations and new innovations going to curve, notwithstanding any restrictions that that may be created by, you know, I just sort of described in this new environment. And on the one hand, we're talking about when you buy a product and you know, use words like sticky. At the same time, though, I still believe in the power of customers knowing what's good and what's not. And if it's not really meeting the needs, and growing needs, by the way, innovations are going to occur, they always have over the history of the world, right? So I'm a big, big believer and very bullish on innovation. And I really don't think it's going to slow it down that much. So there you go, David, sorry to tackle your counterpoint there.
Streeter
But to me, what could slow things down is not getting the right talent into the company, because there's a real fight for skills right now across the industry needed to drive forward change and develop these new innovations. How can this shortage be overcome?
Gootee
That's the million-dollar question, right? We've talked a lot about technology, we've talked a lot about process and business models. But at the end of the day, we all know, it's about people, and it's about being able to upskill people to this new digital, more connected environment. And, you know, we're seeing lots of companies trying to tackle this, right. I mean, there's self-learning materials there, lots of corporate retraining programs, you know, we're even seeing a number of companies working together, and forming sort of digital institutes. And I'm right here at the innovation hub in many, many ways, you know, this is all about sort of upscaling and, you know, helping teams and people understand what these digital technologies can really do for you. I'd also say that a big reason that a big people agenda item that doesn't get as much attention is really the leadership agenda. So frankly, I think we find situations where engineers and folks out on the plant or in the plant are very, very aware, very knowledgeable of these different digital technologies that require this whole conversation, you know, how to be more connected. But there's a real gap with the knowledge, awareness and buy-in of leadership, I like to call it you know, sort of this, the gulf between the 38th floor and the shop floor, or the production floor. And, and we see this as a real opportunity to help leaders understand how these new digital capabilities can solve real problems. And that's what it's really about. It's about closing the gap while working together with your teams, and going after issues, challenges or new opportunities. And it really is both a leadership agenda together with, you know, having the right people to get the work done, those two really need to come together. And something we're excited, and I'm excited to share that we're helping companies do here at the Innovation Hub, Susannah,
Streeter
Wow, I want you to peer into your crystal ball and look forward five years. David, just how confident are you that connected supply chains really will be the norm?
Breaugh
The things we were thinking about 20 years ago are possible today, because of the advancement of technology. We have great partners like EY to help make it happen. But at the end of the day, it comes down to believing and making sure that the workforce adapts to these advanced capabilities that are being brought forward.
Streeter
Okay, Jerry, what do you think? Do you think in five years’ time, we really will be on track to reach net zero, and that companies will have adopted all these technologies they need to ensure you know, we are as efficient and sustainable as possible.
Gootee
Well Susannah there's real momentum building, you know, in particular in Europe right now and frankly, I think we all see it accelerating and you just need to look at where capital is going to see that this sustainability movement is real. I mean, if you take a look at autos, for instance, most of their capital investment is going into EV production. You know, if you're in a board meeting, or you're listening in on investor calls, I mentioned earlier, the importance of regulation. You know, they're all demanding progress. And, you know, as David has discussed with great technology analogies and capabilities coming out of companies like Microsoft and the technology is ready to scale to make this all happen you know I think in five years and we look back and we see what's really made a big impact, I do think this focus on reporting will be important so in addition to reporting on your on your finances and your commercial performance, I do think the requirement to also report on how well you're achieving your sustainability commitments and ambitions will be really, really important and I think you know, as they say, what gets measured, gets done I think it'll be a game changer I think we'll look back in five years and think wow, we've made a lot of progress. There'll be more to come of course, but absolutely. I think a lot of progress will be made Susannah.
Streeter
So it really is a game changer. Thank you so much to both of you. David Breaugh, Americas’ Business Lead for Manufacturing Industries at Microsoft, and Jerry Gootee, EY's Global Advanced Manufacturing Leader.
Breaugh
Thanks very much.
Gootee
I have enjoyed the conversation.
Streeter
It's been so great to have you on the podcast, and it's clear there are so many exciting connected technologies being developed. The challenge is now to use them to maximize their advantages.
For more information, you can visit ey.com/microsoft. And a quick note from the attorneys. The views of third parties set out in this podcast are not necessarily the views of the global EY organization nor its member firms, wherever they should be seen in the context of the time in which they were made. I'm Susannah Streeter I hope you'll join me again for the next edition of the EY podcast, EY and Microsoft, your digital world, realized.
