Internet of Things forces rethink of KPIs: McKinsey

Dive Brief:

  • The increasing use of Internet of Things (IoT) in manufacturing, retailing and other industries is forcing companies to rethink key performance indicators (KPIs), as the embedded digital technology enables gains such as streamlined inventories, savvier customer service and better-informed preventative maintenance, McKinsey said.
  • “You need to think totally differently about the KPIs, the incentives and the performance management of people on a very practical level,” Mark Collins, a McKinsey partner, said in a podcast. For example, whereas the current “hero of the hour” on an assembly line is a worker who makes an essential repair, the future hero will use IoT for “predictive maintenance” that ensures “the repair is never needed in the first place.”
  • To successfully deploy IoT, a company’s technology leader and its CFO and others in the C-suite need to closely align, according to Michael Chui, a McKinsey partner. The company leader has “to say what’s being targeted, for example, ‘We’re going to target unplanned downtime. We’re going to target inventory management cost.’”

Dive Insight:

IoT by 2030 could globally “unlock” $5.5 trillion to $12.6 trillion in value, including among consumers and customers of IoT products and services, McKinsey said. Business-to-business applications will account for 65% of IoT’s economic value by 2030, with standardized uses in manufacturing, hospitals and other settings yielding 26% of the value.

IoT and other “Fourth Industrial Revolution” technologies such as robotics, virtual reality and data analytics have increased the agility, resilience and productivity at 90 factories worldwide, the World Economic Forum, labeling them as “lighthouse factories.”

For example, Foxconn aggregates sensor-based, real-time IoT data for energy, emissions, waste and water management at its plants assembling the Apple iPhone in Zhengzhou, China. It has cut energy use by 30%, according to the World Economic Forum.

Similarly, Ericsson at a factory assembling 5G equipment in Lewisville, Texas, uses IoT sensors to reduce energy use by 24%, the forum said.

IoT enables companies to monitor assembly line tools or chemical factory equipment and avert unplanned downtime, Chui said. “You don’t lose the output of that entire line, which can be millions of dollars per day.”

IoT can also help untangle pandemic-induced crimps in supply chains, revive productivity growth in construction and boost the efficiency and availability of healthcare, according to McKinsey.

The technology offers “the ability to do diagnostic tests that were previously only possible in acute-care settings,” Collins said. “Now, suddenly, I can do these with a wearable on my wrist and be done in 30 seconds.”

IoT “can make a real difference in terms of both quality of life and also detecting potential disease or deterioration earlier — helping to promote life as well as expanding its quality,” he said, noting that healthcare is the fastest growing IoT application.

Innovation and the pandemic has spurred the rapid spread of IoT, with the average U.S. home now using more than five connected devices compared with one device five years ago, Collins said.

Cities have used IoT to track air and water quality, Chui said. To reduce traffic jams, they measure the number of vehicles on city roads and impose “congestion pricing” on motorists during peak drive times.

Several challenges slow the spread of IoT, McKinsey said. Indeed, IoT by 2020 generated $1.6 trillion in value, at the lower range of forecasts made in 2015.

First, consumers sometimes struggle to balance their privacy with the convenience from IoT, McKinsey said.

Also, more than 70% of manufacturers worldwide are stuck in “pilot purgatory,” delaying the deployment of IoT and other advanced manufacturing technologies, the World Economic Forum said.

Business management of IoT during the past five years has not kept pace with advances in network connectivity, batteries and advanced analytics, Collins said. Companies assign IoT to a factory manager or a Chief Information Officer rather than integrate it into an overhaul of their operating model.

“The technology has changed, but the actual way of work has not,” with companies using the same KPIs and reporting as before, he said. “We find that when you bring these operating-model factors together with some of the fantastic technology that you have today, you really can produce some pretty magical results.”

Some multinational companies have fumbled the deployment of IoT by failing to designate an office in charge of the global IoT agenda, Collins said.

At one global company, individual factories at various locations worked well using different IoT applications and vendors for a discrete purpose, he said.

“But when it came to looking across the company as a whole, it was next to impossible to get an aggregate view,” he said. “It meant as you thought about scaling those solutions, you were structurally limited and almost had to go back to the start and reengineer.”

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