Digital transformation in the manufacturing industry: challenges and accelerators

The manufacturing industry is one of the industries which moved rather slow from an enterprise-wide and certainly ecosystem-wide digital transformation perspective.

Several driving forces of digital transformation in the manufacturing industry are relatively similar to those in other industries. Moreover, industry initiatives and national initiatives across the globe such as Industry 4.0 (Germany and parts of the EU) or the Industrial Internet (Consortium) accelerate transformations with IoT (the Internet of Things) and the integration of IT and OT as key components.

Industry 4.0 offers multiple benefits – enhanced productivity is just the beginning (The Boston Consulting Group)

The changing expectations of consumers impact the entire supply chain as various manufacturers obviously depend on each other so even manufacturers which don’t produce consumer goods are impacted by these consumer changes. Moreover, manufacturing decision makers also have different expectations as, in the end, we are all consumers. It leads us to the data-intensive and (semi-)autonomous evolutions in Logistics 4.0 where speed and connectivity, with again IoT (Industrial IoT) and cyber-phsyical systems being key.

Digital transformation in manufacturing - Industry 4.0 challenges, opportunities, drivers and outlook 2017 and beyond

Digital transformation in manufacturing: evolving towards the ‘as a service’ economy

Other drivers include traditional digital transformation goals on the level of enhanced efficiency, cost reduction and, in more mature stages, innovation and the development of new revenue sources in an age where data – and how it is leveraged – is the currency of automation, optimization and profound transformation at the core where new business models in an ‘as a service’ economy are sought.

The manufacturing industry obviously is a broad industry with giant multinationals and smaller manufacturers; and with industrial manufacturers which produce for industrial partners and manufacturers of goods that are closer to the consumer.

Just like many other industries, the manufacturing industry is diverse and moving at different speeds. While in general digital transformation strategy has been missing and initiatives have been ad hoc, things are changing in some areas but as we’ll see a holistic picture is still missing and the goals remain relatively traditional and isolated.

The similarity between digital transformation and Industrial Internet drivers

Regarding the areas where change is happening one can, for instance, only notice the key role of IoT in the manufacturing industry, advanced data analytics, digital twins and the various components of the Industrial Internet or Industry 4.0 space with an obvious place for, among others, advanced data analytics, industrial robots and collaborative robots, a.k.a cobots.

As mentioned previously, manufacturing is not just the largest industry from an IoT spending perspective, it is also at the center of the Industrial Internet of Things (IIoT).

By 2022, driven by rising customer expectations and competition from the platform economy, 25% of manufacturers will be engaged in cross-industry collaboration, resulting in a 10% revenue increase. (IDC)

Some even say that the Industrial Internet of Things only is about the manufacturing industry. Although that is not correct, it’s easy to see why this is the case, if we look at the main Industrial IoT players and at the areas where most IIoT spending occurs.

The reasons why the manufacturing industry is so active in Industrial IoT are threefold and directly relate with manufacturing industry challenges and digital transformation challenges or, more positively, opportunities.

Three large challenges in the manufacturing industry

Economic, geo-political and consumption uncertainties – the need for efficiency

Looking at the end of 2016, 2017 and probably the years beyond, a challenge that hasn’t maybe been the most pressing in past years but clearly has become crucial for the future: geo-political and macro-economic conditions.

The manufacturing industry is going through extremely uncertain times and unpredictability regarding consumer spending/confidence on one hand and the larger geo-political and macro-economic picture on the other is high. There is the protectionist climate in the US whereby manufacturing is one of the key focus points of the new presidency. In other regions similar protectionist risks are present.

European manufacturers are rallying to drive the Industry 4.0 vision forward, amidst the growing uncertainty (and let’s not forget the Brexit uncertainties) even faster than before. Also in other parts of the world initiatives are taken in an undeniable reality where globalization has gone from an evidence for many to a source of distrust for many others.

It is clear that in such conditions the push to automate and save costs, while increasing efficiencies (enhance time-to-market, digitize and digitalize to maximize revenue, etc.) becomes even higher. It is most certainly here that we see an even faster than expected uptake of the Industrial Internet of Things whereby the initial drivers are the same as in the initial digital transformation drivers: increase agility and reduce waste, bring down costs and enhance efficiencies, from manufacturing operations and business processes to maintenance and services.

The customer factor: from speed to better products, services and customer experience

Once these efficiencies and the rather process-oriented and internal-facing Industry 4.0 or Industrial Internet objectives we’ve just mentioned are achieved, new opportunities arise and efforts are done, looking more at customer-facing optimization and innovation.

Note: obviously, in practice, these various goals can be and are sought at the same time (it is not a gradual processes although de facto prioritization is essential). Automation, optimization and the efficiency- and cost-driven goals do have a customer-centric goal as well.

In the end, speed and information-rich, streamlined process optimization efforts don’t just bring down costs but also are what both end customers and the many partners in the manufacturing ecosystem seek. In an increasingly complex and connected value chain (which is another challenge and opportunity for manufacturing) and in the optimization of industrial and business processes, data/information and the Industrial Internet of Things plays an inevitable role. At the same time both are key components of the ability to work in a more customer-centric way in various regards: the improvement of services (towards consumers or industrial partners as is illustrated in the story of how ABB Robotics could offer far better services to its customers, buyers of industrial robots, thanks to the Industrial IoT), the production of goods which are better tailored to customer demand through actionable data and insights, customer experience enhancement through collaborative models and data regarding quality, the list goes on.

Competition and the disruptive impact of manufacturers who have transformed at the core

A third element and also an inevitable consequence of the first two is closer to digital transformation at the core – in the business models and in the detection of new information-driven and connected revenue opportunities in the ‘as a service’ evolution.

By 2024, over 60% of G2000 manufacturing organizations will rely on artificial intelligence platforms to drive digital transformation across the supply chain, leading to productivity gains of over 20% (IDC)

The old concept of the extended enterprise is pushed much further in the development of new revenue sources, built around services and information, often in collaboration with a-typical partners. Moreover, it’s also key to see how digital transformation initiatives and innovations can be realized in the more traditional ecosystem context of manufacturers with, for example, retailtransportation and logistics etc.

It’s in the dimension of innovation regarding information-based services and ‘products’, that the most mature manufacturing industry players shift business models or at the least find new ways to increase profitability.

It’s also here that leading manufacturers become ‘disruptive’, which obviously then is an additional – competitive – challenge for other manufacturers who haven’t reached the same levels of maturity or ‘innovative disruption‘.

In this context it’s important to point out research of The Boston Consulting Group, released end 2016, that many manufacturers see Industry 4.0 as a priority (many also weren’t familiar with the term which influences the outcomes no doubt) but relatively few look at the possibilities to tap into new revenue sources, let alone increase revenues to begin with. There is still a lot of emphasis on productivity optimization and a holistic approach/strategy lacks.

It’s the same picture we see popping up over and over in other industries too and shows how we can’t keep stressing the importance of digital transformation strategy and of a holistic digital transformation perspective enough. More on the research of BCG below this post.

Digital transformation and Industry 4.0 challenges to address in manufacturing

On top of these three challenges and opportunities in manufacturing (and the industrial Internet) are several other manufacturing challenges.

The traditional manufacturing skills gap challenge has close to everything to do with the integration of IT and OT (operational technology) and the other technological and customer/service/innovation evolutions mentioned above.

So, to summarize and, reading between the lines of our three Industrial IoT and at the same time digital transformation drivers, we have the following drivers/challenges/opportunities for digital transformation and manufacturing:

  • An uncertain macro-economic and geo-political context where risk needs to be managed and cost reductions and enhanced efficiencies are inevitably (read: automation).
  • A more complex and connected supply chain where data/information and speed are key.
  • The need to better understand the possibilities and benefits which can be achieved. While that is a strategic and information matter, it also requires manufacturing companies to understand technological enablers of new opportunities such as digital twins, robotics, artificial intelligence and 3D printing to name a few – within their benefit, use case and holistic context.
  • A changing customer with an increasing need to be not just more customer-centric but also be more customer-adaptive and innovative.
  • A highly competitive landscape in which faster movers are poised to gain advantages and even become disruptive.
  • The need to diversify and tap into new revenue sources, leveraging new ecosystems, and (connected) data, to thrive and in some cases survive.
  • A lack of clear vision and of a strategic holistic approach to tap into the revenue growth and new revenue source potential of Industry 4.0.
  • The human talent dimension in an altering reality where technology and innovation play more profound roles and the talent in many of the mentioned areas (data, industrial IoT, convergence of IT and OT, new business models etc.), nor the culture are present to take the necessary steps.

Industry 4.0 and the changing face of work in manufacturing

Regarding the human talent and skills gap dimension, it’s clear that as Industry 4.0 arrives and the digital transformation of manufacturing continues, the work reality changes.

According to IDC (data end 2016, more below), by 2020, 60 percent of plant floor workers at G2000 manufacturers will work alongside automated assistance technologies such as robotics, 3D printing, AI and AR/VR.

Moreover, let’s say it as it is, the ongoing automation, optimization and transformation, comes with a human cost. From a sheer business perspective this is a challenge as well.

We need add the human consequences, as they MUST be addressed in times when people see fast digitalization as a threat. Each organization, and in manufacturing it is certainly a key element, must realize the impact of automation and that it has a role in society, whereby overlooking human costs can lead to further erosion of brand equity and trust and declines in consumer confidence and buying ‘power’.

More resources on Industry 4.0 and the digital transformation of manufacturing

Of course we didn’t tackle all manufacturing challenges and digital transformation opportunities nor the evolutions in specific manufacturing industries.

Below are a few additional sources you can check out regarding digital transformation in manufacturing in 2017 and beyond:

10 Predictions for the Manufacturing Industry.

In this blog on IDC Manufacturing Insights, Kimberly Knickle, gives an overview of the main 10 predictions which IDC published end 2016, for the coming years.

The post essentially contains the 10 predictions – with data – as you can find them in the report (and of which we mentioned a few) and some more challenges in the manufacturing industry such as more integrated IT and operations (the convergence of IT and OT we’ve mentioned), business security and the need to rethink the future of work in manufacturing.

Sprinting to Value in Industry 4.0.

As mentioned earlier, The Boston Consulting Group released a report about the evolutions in Industry 4.0 and the implications for the US manufacturing industry.

On top of detecting challenges regarding the gaps between the perceived needs to move (faster) in Industry 4.0 among manufacturing professionals and the lack of strategic vision and speed to do so with a far too restricted focus on optimization and not enough focus on generating more revenues, let alone, the identification of new sources of revenues.

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