Defining IoT Business Cases - An Example
In Part One of this guide, we detailed a process you can use to help develop an initial business case and problem understanding for your IoT system -in order to help you determine whether its worth pursuing the development further.
In this second part of the post, we’ll work through an example of the process detailed.
The Affogato Aficionado
Let’s assume that you own a business that supplies coffee machines to hospitality companies at low cost, on a rental basis.
As part of your strategic goals - making operational efficiency a focus this financial year - you’d like to find ways to reduce the amount of normal and emergency servicing carried out each year.
You charge $30 per week for machine hire. The contract includes an agreement that you’ll service the machines to ensure they stay in peak working condition. Servicing is agreed to be charged separate to the rental fee, at $35 per hour, of which $25.25 is staff wages.
Currently you have 2,000 coffee machines in the wild. Servicing is carried out on rotation, with each machine being serviced once every 6 months. You feel this might be excessive, but keeping machines operating at full capacity for your clients is imperative for you.
Due to the heavy usage that the machines get, 5% per year of them break anyway - approximately two a week - despite the regular servicing. This leads to emergency call outs by not-so-happy clients. Each emergency call out increases the backlog of units to be serviced, as well as negatively affecting customer satisfaction.
A Stick in the Sand
Knowing that we want to improve the machine servicing / maintenance, let’s create a quick benchmark of our existing servicing costs.
Regular servicing is:
Twice per year, on site
Takes two hours per service including travel
At a rate of $25.25 for staff wages, charged at $35 per hour
Total cost of normal servicing is $25.25 x 2 hours x 2 per year x 2000 machines equals $202,000 per year. For the sake of simplicity we assume no parts replacements.
Total profit from servicing is the difference in charge out rate, or $78,000 per year
Emergency servicing is:
5% of the 2,000 in service units, which is 100 units / year
At two hours per service including travel
At $25.25 for wages, charged at $35 per hour
$300 in parts plus 16.6% mark up ($350 total) per service
Total cost of emergency servicing is (25.25 x 2 x 100 ) + (100 x 300) = $35,050 per year
Total profit of emergency servicing is the difference in charge out rate and markup, or $6,950 per year
From the above, we’ve now got a clear benchmark on the total annual servicing costs and profits, which we can use to compare suggested improvements against:
Costs are: $202,000 + $35,050 = $237,050
Profit from servicing is: $78,000 + $6,950 = $84,950
For the sake of simplicity in this example we’ll look past trying to model the monetary value of customer satisfaction.
Worth More Than a Cup of Coffee
From being in the coffee machine supply and servicing industry for many years, you’ve come to understand that the brand of coffee machines you supply - due to their compressors and internal construction - exhibit certain ‘symptoms’ when not operating optimally. In essence their vibration and sound profiles begin to change, and get progressively louder as their condition deteriorates further.
You feel that if you could keep track of the sound profiles produced by each machine, servicing only as-needed, you could safely reduce the frequency of servicing the coffee machines by 50%, from twice a year to just once. You don’t think however that you could reduce the number of emergency servicings you need to do per year, but at least could help improve customer satisfaction .
You come up with the idea of fitting each coffee machine with a small embedded device that monitors the vibration profile of the machine throughout the course of the day. The device would report the recorded sound and vibration profile back to a cloud database at the end of each day. By comparing the five day running average sound and vibration levels of each machine, you can see when changes start to occur, and thus which ones are in need for servicing.
By repeating the previous set of calculations, but this time taking into account the reduced servicing frequency (once per year vs twice), we can calculate the maximum difference that our IoT solution could make.
| Service Item | Original ($) | With IoT System ($) | Difference ($) |
|---|---|---|---|
| Normal - Cost | 202,000 | 101,000 | -101,000 |
| Emergency - Cost | 35,050 | 35,050 | 0 |
| Total - Cost | 237,050 | 136,050 | -101,000 |
| Normal - Profit | 78,000 | 39,000 | -39,000 |
| Emergency - Profit | 6,950 | 6,950 | 0 |
| Total - Profit | 84,950 | 45,950 | -39,000 |
From the above table we have worked out with the IoT system implementation that:
Normal servicing costs have dropped by $101,000 per year
Emergency servicing costs remain unchanged.
Normal servicing profits have also dropped however, by $39,000
Emergency servicing profits remain unchanged
While profit generated from servicing has dropped by $84,950 to $45,950, the net gain is $62,000 ($101,000 in servicing cost savings minus $39,000 in decreased profit)
At this point it would be up to you as the business owner to decide what you’d like to do next:
In the long run - would $62,000 of additional profit each year be worth the effort and additional investment?
Do you have a discretionary budget available to pursue a Proof of Concept or pilot scheme to validate your assumptions?
Who can you talk to in order to get more insights on the technical aspects, and costs, of the project?
What would a minimalist IoT deployment look like to validate the concept and test any underlying assumptions?
By focusing on understanding the value that an IoT system could bring to your business first before getting stuck into the technology side of things, you can more effectively manage your business risk up front and be more confident in your decision if do decide to pursue the project further.
We hope that you found this worked example useful. If you’d like to talk to someone to help you work through the business case for an IoT system you are considering, feel free to get in touch with us.