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Why Manufacturers Should Embrace Digitization

Manufacturers stand to reap big benefits by digitizing their operations, not only financially through cost reductions but also operationally, to gain such abilities as being able to fast-track production changes in response to market conditions in real, or near-real, time.

Jonathan Van Wyck, partner and managing director at the Boston Consulting Group, says gains from digitization are too substantial for manufacturers to ignore and that over time it will become the de facto way of competing. The real challenge, he says, is to attain the speed and scale of digitization to operate optimally.

In a conversation with Knowledge@Wharton, Van Wyck discusses the opportunities and challenges manufacturers face as they embrace the Internet of Things, advanced robotics, artificial intelligence, data analytics and other technologies. The stakes are high. “If you’re not operating under this new paradigm, you’ll fall behind and ultimately be uncompetitive,” he says.

An edited transcript of the conversation follows.

Knowledge@Wharton: Is digitizing operations an optional move for manufacturing companies or is it becoming a must? What are the main reasons for this?

Jonathan Van Wyck: It is absolutely a must and I think companies are increasingly realizing this. Of the companies that we’ve talked to and surveyed, roughly 80% are actively working on an integrated digital operations program under one overarching vision. The upside that companies are seeing is too great to ignore and over time it will become the de facto way of competing. If you’re not operating under this new paradigm, you’ll fall behind and ultimately be uncompetitive.

The impacts we’re seeing — 10% to 20% of value-add production costs coming out, 15% to 30% reduction in working capital, and other results — are too substantial to ignore. What we’ve noticed is that while the opportunity is out there, and there are many individual instances that prove what’s possible, the real challenge is the speed and the scale at which companies are digitizing their operations. We have focused a lot of our research on how you can translate this vision into reality and get benefit at scale.

Knowledge@Wharton: Could we drill deeper into what manufacturers mean when they talk about digitizing operations? Is it about artificial intelligence and machine learning or is it a broader range of technologies?

Van Wyck: At the highest level, it’s essentially extending a digital thread across your entire operation’s value chain through product engineering and product design, to supply chain management, how you interact with suppliers, how you manage the logistics to production, the actual manufacturing itself, and all the way, ideally, into distribution and how you support your products in the field. That’s the highest-level definition.

Once you unpack that into the underlying technologies, we would say it’s much broader than just artificial intelligence or advanced analytics. We have nine technologies overall ranging from advanced robotics, data capture and the cloud, elements of how you enable the whole opportunity, analytics, machine learning, artificial intelligence, and then some of the tools in the field to activate or access that knowledge, augmented and virtual reality, simulation, and others.

“The upside that companies are seeing is too great to ignore and over time it will become the de facto way of competing.”

Knowledge@Wharton: I’d like to go back to what you said about how companies are hoping to cut their production and supply chain costs and also increase their revenues through the use of digital technologies. But they often see mixed results. Why is it hard to digitize operations?

Van Wyck: There are three main reasons. The first is the degree of change that’s required for the individual actors. For instance, the mindset of a manager in a manufacturing site needs to shift from the traditional way of root-cause analysis to leveraging an advanced analytics dashboard. That’s a big shift. A lot of times change management is underinvested in. While people are given the tools, they’re not given the necessary training and support.

Second, the hard part about digital operations is that it cuts across traditional functional silos. The manufacturing organization can’t execute independently. You have to interface with a traditional IT function. You need to oftentimes interact across the manufacturing and supply chain or procurement or even engineering organization to access the full opportunity. That’s something that many companies aren’t set up to do well.

And finally, there is the skills and capabilities piece. It’s very challenging for many manufacturers to hire the skill sets, the data scientists, the designers, and others who are required to execute on this. That creates a big supply limitation on the ability to develop the tools and push them out to the organization.

Knowledge@Wharton: You referred to the survey that you and your colleagues at BCG have developed to help manufacturers understand where they stand in terms of the speed of implementation, as well as the savings and growth impact of digitization. What have you learned so far from your study?

Van Wyck: We surveyed about 250 executives and managers from global manufacturing companies across a range of industries. We found that while everyone is working on digitizing their operations, most are frustrated with the speed and the scale at which they’re able to deliver results.

Also, companies are currently fixated on attacking production costs. So when people talk of digitizing operations, predominantly they really mean Industry 4.0 in the four walls of the factory. That was an eye opener for us. We learned about some of the challenges that I mentioned earlier and also which use cases are driving predominant value for each industry.

Knowledge@Wharton: You mentioned that production is where companies are seeing the most potential impact. What are some of the reasons for that?

Van Wyck: Well, predominantly because it typically sits in one organization. Organizations usually have a manufacturing group, either a global organization or a sub-organization, within each business unit. It’s fully controlled by the company and they can pull the requisite levers to test different things and develop proof-of-concept, etc. Whereas once you get into the supply chain, you’re operating across functional silos of the organization. You have to deal with suppliers or other logistics providers, and oftentimes that’s outsourced, to access the data and to develop the insights. I think that’s the predominant reason why companies are starting with manufacturing.

“The real challenge is the speed and the scale at which companies are digitizing their operations.”

Knowledge@Wharton: In which industries have manufacturers made the greatest headway in digitizing their operations?

Van Wyck: From a production standpoint, i.e. attacking production costs, I think automotive is leading. They were one of the early adopters of robotics and very early adopters of the whole ‘Lean’ concept. They have a very strong foundation upon which to build and are relatively advanced from a manufacturing capabilities standpoint. On top of this, automotive is a very competitive industry. They’re always looking for what’s next in terms of where the opportunities are to increase the year-over-year productivity gains. So that’s where I see the most development on Industry 4.0 at present.

Knowledge@Wharton: Could you share some examples of companies that have seen the greatest impact on costs and revenues?

Van Wyck: The Ford Motor Co. is an interesting example. They have set up an advanced manufacturing center with a team that is relatively small but has a range of capabilities and specific technical competencies. For instance, it has additive manufacturing experts, as well as people who understand the manufacturing process. They’ve co-located all of them in an innovation space that has a series of cells set up to develop proofs-of-concept. They take various pain points from the business — from manufacturing plants or different parts of their organization — and they see how they can solve these using digital capabilities.

Once they have an idea, they leverage one of the cells to develop the proof-of-concept. So you’ll see different robots there with different end-effectors that are trying to solve different pain points. Or, trying to figure out how do we move materials around the manufacturing center without any labor associated with that. There are different AGVs (Automated Guided Vehicles) operating in a very controlled environment.

Once they prove the concept from a feasibility standpoint, they do it in a small setting. And then, they have a package that they can push out to the individual plants. I think that’s an important capability to help jump start the deployment of these individual use cases. It’s hard to expect the individual plants to be able to do that on their own. You often do need some kind of central support to galvanize productivity and progress in this area.

Knowledge@Wharton: What do you think other manufacturers can learn from auto companies that are starting to implement these digital technologies?

Van Wyck: One of the big implications is that it requires more centralization, which is, I think, challenging for some companies. Leaving this to the individual business units or even manufacturing sites has proven not to work. Because of challenges around change management, around accessing the skills and capabilities, it requires some degree of central support. Sometimes this runs counter to a company’s operating model or business philosophy.

And that’s, I think, more broadly true within this digital revolution that’s happening in industrial goods. Some level of central support and governance is required to drive digitization at the right speed and with the right level of effectiveness. How do you strike the balance between providing the support that your operations need to do this effectively, in a customer-centric way, and not resulting in additional bureaucracy, is the trade- off that has been critical to manage.

Knowledge@Wharton: When you look at manufacturers, do you see them struggle primarily with the technology or is it mostly the cultural issues in implementing digital that is the main hurdle?

Van Wyck: It’s 100% the latter. There are many companies I’ve found with extremely high degrees of sophistication around individual technologies. The problem with Industry 4.0, and with digital operations more broadly, is that it’s not about just implementing one technology.

If it was just implementing a technology in their operations, I think companies would be much farther ahead. But it’s about how do you stitch together these technologies into a use case that may have multiple different technologies embedded in it. And then, how do you drive that change into the organization and drive a culture around that with the right skills and capabilities, and the right operating models to support and guide it.

“At the highest level, it’s essentially extending a digital thread across your entire operation’s value chain.”

Knowledge@Wharton: Based on your research and your experience, what would you say sets apart manufacturers that are leaders in digitizing operations from those who are lagging behind?

Van Wyck: We’ve essentially developed 13 different dimensions and we’ve done research around which of these dimensions are most correlated with leaders relative to the laggards in the space. Of the 13, three dimensions have bubbled to the top. The one that correlates the most with both speed of deployment and also value realization is having bold, ambitious, and very clear targets. For instance, companies who are willing to stand up and say, “We expect to see, say, $500 million of benefit through digitizing our operations by 2022.” This is just an example, but basically companies that are much more specific in the targets they set see faster and stronger results than those who are hedging and uncertain about what the benefits may be.

The second one is around the technology enablers. Companies that have invested in the necessary IT infrastructure, in data and digital platforms, drive disproportionate value. Third is the organizational capabilities. For instance, companies that added data scientists, UX/UI designers, systems architects, etc. to their teams move faster and see much more value.

So, the three most important differentiators are clear and bold targets; investment in the underlying technology infrastructure and the data and digital platform; and investment in the organization and the necessary skill sets. Our research suggests that companies who do these three things well deliver three times as much value and deliver that three times as fast.

Knowledge@Wharton: What was your biggest surprise in doing this research? Did anything unexpected pop out at you?

Van Wyck: Yes. Of the 13 dimensions, some were relatively lower than we expected. For instance we thought the higher the digital operations leader is in the organization, the more success you would see. But we found that this was not true. It doesn’t really matter … whether this is a direct CEO responsibility or if this is somewhere deeper in your organization. That was a little counterintuitive to us.

Similarly, we expected that companies, from a governance standpoint, with a clear, centralized group managing the overall deployment of digitization, would do better. While [having this group] does have an impact, it definitely was less beneficial than we expected. The takeaway for me is it doesn’t actually matter how you structure the program, as long as you have the three things that I talked about earlier.

Knowledge@Wharton: If a manufacturing company wants to start digitizing its operations, where should they begin? What would you advise them to do?

Van Wyck: It depends on your level of conviction around the digital operations opportunity. One model is the ‘factory-of–the-future strategy.’ This is more appropriate when you’re in the exploratory mode. It basically entails taking one physical location and designating it as your ‘factory of the future.’ This becomes the testing ground against which we deploy different use cases and test the results, see what the impact is, see what’s possible when we stitch several use cases together and change the way our company manufactures.

However, if you’re certain of the opportunity and you want to go faster, there is another model you can adopt. In this, you start with narrowing down the technologies, the use cases, and the pain points in your operation. What are the highest priority pain points to be addressed? Is it quality? Is it the labor cost? Is it coordination costs across the supply chain? What are the use cases against these pain points? Prioritize the eight to 10 areas that will drive 80% of the value. Then line up projects with funding against each of those areas. But this requires a level of conviction around getting started that not all organizations have.

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