How can middle market manufacturing enterprises accelerate the implementation of their Industry 4.0 plans so they don’t miss out on the next wave of industrial progress? By Eskander Yavar
Manufacturing used to be all about man and machine. Now we have to add another variable to the equation: digital. It’s time for mid-market manufacturers to gear up for the digitally-driven fourth Industrial Revolution. Overcoming the challenges involved is critical to their success.
Most mid-market manufacturers are already aware of Industry 4.0, the confluence of technologies that are calling into question the very definition of manufacturing and blurring the lines between the tangible and intangible, the digital and the physical, and products and services. This is confirmed by BDO’s inaugural Industry 4.0 Middle Market Benchmarking Survey1, which found that 99% of mid-market manufacturing executives are at least moderately familiar with Industry 4.0 today.
The shift to Industry 4.0, however, can be challenging. It demands that manufacturers not only improve their existing production models, but also seek out new business models to create and deliver value in new ways. Viewed in that light, it’s a daunting task, which might explain why just 5% of senior executives right now say they have actually reached the implementation stage of their Industry 4.0 journeys.
Although most manufacturers are convinced of the transformative potential of Industry 4.0–54% have already developed, or are in the process of developing a 4.0 strategy according to the survey–they’re still struggling to get their strategic initiatives off the ground.
Communication Problems: Manufacturing executives identify poor communication between internal stakeholders as one of the greatest barriers to Industry 4.0 adoption. Successful adoption hinges on collaboration between departments across the entire business, and misalignment on goals or misunderstandings of how to execute on strategy can lead to bottlenecks when it comes time to put Industry 4.0 plans into action. Poor communication may also stem from a historic view of IT as an obstacle to change, rather than a driver of innovation.
Justifying the Cost: Another top challenge to Industry 4.0 implementation is cost. Many middle market manufacturers may not feel they have the available capital to make worthwhile investments in new tech and training, especially compared to their larger peers. In fact, 54% of middle market manufacturers cite underinvestment as their greatest barrier to implementation. Purchasing new, cutting-edge tools, whether machine or digital, isn’t cheap. Retraining workers or hiring new talent to use these new tools and technologies is also costly. It may take money to make money, but that doesn’t mean manufacturers can just open the corporate wallet. Half the battle is securing the budget needed to make the next pilot initiative a success.
The Intimidation Factor: Industry 4.0 may seem like something to aspire to, not a practical investment for where mid-market manufacturers are today. Advanced digital enablers like artificial intelligence, virtual reality, or blockchain might seem like distant dreams for companies that are still focused on migrating to the cloud. Some manufacturers may feel like they’re simply not ready to invest.
“Industry 4.0 is about more than implementing technology. It’s about defining your
organization of tomorrow.
The Impact of Insufficient Investment
The longer that middle market manufacturers wait to enable change, however, the more likely it is that competitors will move first to meet the needs of their customers. When it comes to the consequences of inadequate Industry 4.0 investment, middle market manufacturers are most concerned that non-traditional competitors will encroach on their territory. New technologies have lowered the cost barriers to entering the business, so well-equipped startups without long-standing manufacturing roots pose real threats to traditional manufacturers. These new entrants may compete directly with manufacturers by offering more affordable, hyper-customizable products, while others may change consumer habits that have downstream consequences.
For instance, the rise of the sharing economy has changed consumer sentiment towards owning property or cars by allowing them to rent or use products as needed. Ride-sharing services, for example, are already impacting consumer interest in purchasing personal vehicles, which could ultimately hurt, or at least transform, auto manufacturers’ strategies if the trend continues.
Incremental Change is Key to Transformation
These barriers can be intimidating for manufacturers eager to start their Industry 4.0 journeys, but they needn’t be insurmountable. Industry 4.0 is a continuous evolution, rather than an overnight metamorphosis. Incremental improvements can combine to broader business transformation over time. While value can be created in different ways depending on a manufacturer’s level of Industry 4.0 readiness, incremental improvements that yield immediate ROI are available to all manufacturers. Change can start with a single improvement initiative in one part of the business, and even small, functional changes can have ripple effects across the entire organization. When driven by an overarching Industry 4.0 strategy, these incremental improvements add up to enterprise-wide ROI.
The key to getting started is focusing on goals for value creation, rather than on specific tools or technologies that will enable that ROI. Start with the high-level objective, whether it’s greater performance agility, better inventory turnover, or a reduction in production errors, and work backwards from there. Ask the question, “How will information transparency, availability, and automation unlock business value to this capability?”
Industry 4.0 is about more than implementing technology. It’s about defining your organization of tomorrow. What will your organization continue to stand for? Where does it want to be positioned in the market within two or three years? What are the future needs of your customers?
Only after you understand your future state, can you develop an effective strategy that includes the use of Industry 4.0 technology enablers.
While it may take time to achieve broader business transformation, starting small will help to demonstrate the ROI behind implementing an Industry 4.0 strategy. These pilots can be the building blocks for a business case to move the organization forward. Small initiatives with clear ROI can build momentum and will eventually pay for themselves.
How To Get Started
First, understanding how the forces of change today could reshape the business environment of tomorrow. Second, identifying the potential impacts and opportunities. Third, reimagining your business model and operations for the forecasted future.
Ask yourself these questions: What will be the next frontier of value in your industry? What new customer needs will you need to address? Can you achieve competitive advantage through differentiation, or does your business model need to evolve? The answers to these questions will direct your Industry 4.0 strategic vision.
The starting point of your Industry 4.0 journey is based on a realistic assessment of where your organization is today. This current state assessment is critical to setting attainable goals, maximizing existing assets, and developing an executable roadmap grounded in reality. You can measure Industry 4.0 readiness and potential using a middle-market specific view of Industry 4.0 maturity. The six dimensions of the Industry 4.0 Middle Market Maturity Model are: technology, data, process, organization, governance and security. Each dimension should be viewed as interrelated and interdependent components of the planning process.
1 / Technology
Many manufacturers are already using Industry 4.0 technologies like cloud computing, advanced analytics, and IoT, and some have more sophisticated tools like artificial intelligence, 3D printing, and robotics process automation in their sights.
Some manufacturers are also investing in Industry 4.0 enablers like blockchain or digital twins. According to BDO’s 2019 MPI Internet of Things Study2, around 28% of U.S. manufacturers have so far embraced digital twins, virtual replicas of physical assets that can be used to test, monitor, and optimize performance in the real world. Effective digital twin software gathers and analyzes data from IT and OT sources for teams to contextualize and act upon.
While most middle market manufacturers (76%) express confidence in their IT department’s ability to integrate new technology, any new program or machine can obviously introduce compatibility and training issues. Leadership must therefore work with all internal departments to audit existing technology and determine what can be easily integrated with new technologies and what needs to be replaced. IT systems must be scalable to accommodate Big Data growth and higher computing power needs. Upgrading systems now can help prevent systems overload down the line.
2 / Data
Disruptive technologies are enabling manufacturers to leverage their data in new ways, beyond the primary use case, to unleash new value from additional operational efficiencies, to better risk management, to new sources of revenue. The first step is ensuring the data collected is clean, accurate, and accessible. This entails creating an information governance strategy, if one doesn’t already exist, to ensure data is trustworthy. But the power of data cannot be harnessed without strategic intent and foresight. As technological disruption continues to accelerate the pace of change, the ability to turn data into insight and insight into action, has the potential to set a manufacturer apart from its peers.
For example, BDO worked with a leading manufacturer of emergency vehicle preemption devices for traffic lights to help them harness their data. While this company enjoyed a sizable market share, its only recurring revenue stream was reselling to existing customers when it was time for an upgrade. To hone their competitive edge, the company then created a new analytics platform to aggregate all the data collected from their devices. This way, they could provide real-time information to first responders to help them reach the site of an emergency as fast as possible. By capitalizing on data that already existed within their systems, they can now offer access to this data as a subscription, improving the value of their services for their existing customers while also creating a new, recurring revenue stream.
“Today, still only 53% of manufacturers say they have achieved enterprise-wide process integration, let alone integration with their suppliers and customers.”
3 / Process
In an Industry 4.0 world, process isn’t just about operational excellence. It’s also the engine of customer experience, enabling a company to provide a consistent and efficient experience across all channels and customer touchpoints by integrating data and functionality.
As Industry 4.0 increases connectivity, the view of process must also extend beyond internal processes to inter-organizational processes. Today, still only 53% of manufacturers say they have achieved enterprise-wide process integration, let alone integration with their suppliers and customers. Striving for an entirely seamless customer experience across an entire business should be every manufacturer’s goal. An end-to-end view of process flows is essential to optimizing efficiency, identifying communication breakdowns and areas for improvement, and increasing the businesses’ flexibility and responsiveness to marketplace needs.
4 / Organization
To successfully integrate new Industry 4.0 technologies, leaders need to find ways to promote workforce buy-in throughout all levels of their organization. Fostering a culture that encourages collaboration and transparency between departments is critical to breaking down internal silos and advancing Industry 4.0 adoption. When introducing new technologies into a manufacturing organization, distributing an introductory video or requiring a training course may not be enough to galvanize a multi-generational workforce. To combat competing levels of comfort and frustration with new technology, customized efforts may be needed to connect with different generations. Across the board, all members of the workforce need to understand the benefits and the vision for Industry 4.0 initiatives before they are expected to endorse change.
To facilitate employee adoption of Industry 4.0 technologies, more than half of middle market manufacturers are working with external consultants (67%), developing a formal change management strategy (65%), or using third-party outsourcing solutions (63%).
5 / Governance
Traditionally, manufacturers have viewed business governance in a linear, siloed model that separates processes, policies, products, services, and supply chains. In the context of Industry 4.0, manufacturers need to think of governance from a holistic business model perspective that includes all business activities, relationships, resources, and processes that create value. As organizations implement their Industry 4.0 strategies, they need to challenge traditional ways of doing business and look to evolve their business model in a way that fundamentally changes outputs, outcomes, and stakeholder relationships for an increasingly digital economy. Today, manufacturers are prioritizing business model diversification above all else as a means of competitive separation. Seventy-one percent of survey respondents cite business model diversification as their top Industry 4.0 business goal.
One emerging business model worth exploring is that of Product-as-a-Service, in which physical products become a platform for service delivery and vastly expanding the aftermarket opportunity. In its purest form, the service replaces the product. Instead of purchasing a car, the customer pays for the ride. More frequently, manufacturers dip their toes into the water by offering value-added services on top of their traditional products.
Services can be sold using a subscription-based revenue model or a pay-per-use model, or both. A manufacturer may offer supplemental remote diagnostic and maintenance services where customers pay based on how frequently the equipment is used, or instead, allow customers to lease equipment on a subscription basis.
“The power of data cannot be harnessed without strategic intent and foresight.”
6 / Technology
While Industry 4.0 technologies create opportunity and value, they also open doors to new risks. The new cyber threat landscape includes denial-of-service attacks that can result in supply chain disruption, information lost or stolen from the cloud, theft of company-issued devices such as laptops and smartphones, and malicious hacker attacks. Manufacturers can combat these threats through a mix of comprehensive cybersecurity measures such as encrypting data, implementing industrial controls, hiring third-party security services firms, and creating internal systems to proactively identify threats and risks.
Proactively working to identify risks and threats requires clear and accessible channels of communication between teams, careful vetting of new technology, and internal education so that all teams know their role in preventing cyber breaches. Additionally, manufacturers with operations in the EU may also need to ensure that their organization is GDPR compliant or risk facing huge fines. And in the U.S., the new California Consumer Privacy Act (CCPA) goes into effect on January 1, 2020, paving the way for a potential GDPR-equivalent here.
To get started on their Industry 4.0 journey, mid-market manufacturing firms clearly need to understand where they are today. They can do so by embarking on an assessment that allows them to identify where they stand across the six dimensions of Industry 4.0 maturity and help them create a roadmap of steps to progress.
Firms should also consider establishing a formal Industry 4.0 steering committee that brings together cross-functional teams that identify the organizational changes needed to remove silos and support a seamless flow of information throughout the entire enterprise. The committee should also provide input on the cultural changes required to create a more collaborative work environment, one that brings together teams from disparate parts of the business. Once the committee has created their Industry 4.0 strategy, they should empower their teams to evangelize the vision to all levels of the enterprise.
Taking these fundamental steps today will lay the groundwork for a more, diverse, and customer-first mid-market manufacturing business in the future. It’s an opportunity that shouldn’t be missed. M
1 BDO USA commissioned Market Measurement, Inc., an independent market research firm, to conduct the survey of 230 executives in November and December 2018. View the complete 2019 Middle Market Industry 4.0 Benchmarking Survey