In this work, we present the first embedding model specifically designed for Industry 4.0 applications, targeting the semantics of industrial asset operations. Given natural language tasks related to specific assets, our model retrieves relevant items and generalizes to queries involving similar assets, such as identifying sensors relevant to an asset’s failure mode. We systematically construct nine asset-specific datasets using an expert-validated knowledge base reflecting real operational scenarios. To ensure contextually rich embeddings, we augment queries with Large Language Models, generating concise entity descriptions that capture domain-specific nuances. Across five embedding models ranging from BERT (110M) to gte-Qwen (7B), we observe substantial in-domain gains: HIT@1 +54.2%, MAP@100 +50.1%, NDCG@10 +54.7% on average. Ablation studies reveal that (a) LLM-based query augmentation significantly improves embedding quality; (b) contrastive objectives without in-batch negatives are more effective for tasks with many relevant items; and (c) balancing positives and negatives in batches is essential. We evaluate on a new task and finally present a case study wrapping them as tools and providing them to a planning agent. The code can be found here.

Small Language Models (SLMs) are becoming increasingly popular in specialized fields, such as industrial applications, due to their efficiency, lower computational requirements, and ability to be fine-tuned for domain-specific tasks, enabling accurate and cost-effective solutions. However, performing complex reasoning using SLMs in specialized fields such as Industry 4.0 remains challenging. In this paper, we propose a knowledge distillation framework for industrial asset health, which transfers reasoning capabilities via Chain-of-Thought (CoT) distillation from Large Language Models (LLMs) to smaller, more efficient models (SLMs). We discuss the advantages and the process of distilling LLMs using multi-choice question answering (MCQA) prompts to enhance reasoning and refine decision-making. We also perform in-context learning to verify the quality of the generated knowledge and benchmark the performance of fine-tuned SLMs with generated knowledge against widely used LLMs. The results show that the fine-tuned SLMs with CoT reasoning outperform the base models by a significant margin, narrowing the gap to their LLM counterparts. Our code is open-sourced at: https://github.com/IBM/FailureSensorIQ.