Creating value in manufacturing through digital transformation

27 April 2021 10 min. read

Against the backdrop of rapid digitization unfolding across manufacturing, and the benefits that can be unlocked through Industry 4.0 technologies, embracing digital transformation has become a top priority. Nisha Kohli, Managing Director of Nichefin Consulting, walks through how leaders can extract maximum value from their digital transformation endeavors. 

Digital transformation: the why?

There are several drivers of digital transformation in the manufacturing industry. The most notable:

Technology push: With the arrival of Industry 4.0 there has been an increase in research and development which has pushed the technology available to the manufacturing industries across all sectors. 

Demand-pull: Customers these days are more aware and have greater access to free trade, and flow of global information. They continuously demand for better products and services and can easily switch between sellers. Thus, this demand pull becomes a key driver for the companies to adopt digital transformation. 

Creating value in manufacturing through digital transformation

Productivity improvements: One of the reasons for adopting Industry 4.0 technology is to drive up manufacturing productivity. Newer technologies can do it by maximizing asset utilization and minimizing downtime, as well as drive up, directly and indirectly, the labor efficiency, which reinforces the productivity benefit. 

Incremental revenue: Digitalized data helps in deepening customer understanding and provides powerful insights to strengthen customer integration and channels. Companies can determine additional revenue streams and gain insights to retain or extend the life of customers. 

Companies can use data analytics to create new competitive products and offerings for the existing domestic markets as well as international markets and mitigating geographic risks. Data analysis also helps in identifying potential targets for acquisitions if the company adopts the path of inorganic growth.

Risk reduction: Digitalization enables extensive data analysis which in turn helps companies in risk control and reductions. It helps in ensuring raw material availability at reasonable prices by comparing vast amounts of supplier data and analyzing their prices. Inventory management systems can be effectively controlled and lead times can be reduced by monitoring real-time dashboards integrated with real-time tracking solutions. 

Impediments of effective digitalization

In spite of its benefits, adoption of digital technologies remains a challenge due to the significant amount of investments involved, inadequate awareness and knowledge of digital technologies and ineffective strategic design and implementation. An overview of some of the most notable bottlenecks: 

The issue of awareness and commitment: Most of manufacturing leaders are not (adequately) aware of the next-generation technologies out there which can help in sporadic growth of the manufacturing process. Even the commitment from the top management is missing in many companies. 

Budget restrictions/allocations: A substantial investment is required to lead a manufacturing organization through the digital transformation journey. Even if we can make the business owners overcome the lack of commitment arbitrary, unplanned and unorganized investment in inappropriate technology just for the investment itself leads to inefficient utilization of both the resources invested on and as well as finances used for these investments.

Identification of beneficiaries: Beyond the realm of investment statistics and value creation, a very important question various organizations fail to answer is who benefits from the value creation of the business, who all are benefitting from the efficient performance of the business. 

The problem of flexibility and patience: Most of the manufacturing enterprises are not flexible enough to make space for newer technology and are not able to adopt complex supply chains. Business leaders are frustrated by short-termism and pressure from Boards to deliver results on multiyear digital transformation projects. For example, ROI in artificial intelligence is 3 to 5 years after the initial outlay.

Resistance to change: Most employees are comfortable doing their daily duties and when are asked to change their work routines and adopt new systems, they resist.

The expectation of high ROI: Very few organizations can track structural implementation of new technologies and the return on investments on these new systems. Many organizations end up with short-termism and unreasonable expectations from these new investments made.

Legacy of infrastructure: Dependency on legacy infrastructure of Industry 2.0 has led to the high maintenance of infrastructure. Again, storing and maintenance of this data manually is both cost and task intensive.

Transition issues from traditional database management systems: Legacy infrastructure leads to problems of legacy database management systems. Many companies have outdated database management systems which they have been using for the past 20-30 years. 

The major driving force behind digital transformation is cloud computing. It is very difficult to integrate those databases with new tools and platforms. The challenge is that the database needs to be redesigned and developed afresh to make it reliable, consistent, secure, scalable and cloud-ready. 

Highly centralised decision making: One of the biggest problems faced by manufacturers is that they follow a highly centralized system, thereby decision-making process and transparency of these decision outcomes is only centralized in the hands of these few executives and decision-making head managerial staff. The middle-end and lower end supervisors are not aware of how any of these decisions taken will help them to optimally manage the shop floor.

Security: Cybersecurity is a major concern for any digital transformation project since the servers and networks are based on internet and cloud computing. 

Effective strategies for digital transformation

In order to generating a good return on investment (ROI) on digital transformation projects – notorious for their pitfalls – consider the following best strategies and practices: 

Awareness and commitment
Digital transformation is a journey for companies. The strategy should be carefully thought through as huge investments, time and commitment are involved. Improper and ineffective implementations can lead to more destruction than bringing benefits and efficiencies into the companies. 

Thus, company leaders should have full awareness about it and they should begin their digital transformation journey by asking critical questions on performance and profitability and brainstorm ideas to develop an organisation wide strategy. 

The creation and feasibility of a transformation program are highly dependent on regulations and environmental context. External factors lie outside the management’s ability to influence directly, so it requires the enterprise and its management to be adaptive. 

Beyond the government support, another major external influencer is the competition that firms face from in the domestic as well international market. This drives the enterprise in the market to invest in research and development towards adoption and synchronization of Industry 4.0 into their manufacturing systems to improve their manufacturing productivity to gain an upper hand over their market competitors. 

Internal governance
The shift towards Industry 4.0 program also requires internal governance. Digital strategies should be formulated and implemented by top-level executives. Chief Information Officers (CIOs) along with board of directors and CEO should be committed to the implementation of strategies. There should be constant engaging discussions with operational floor levels to minimize their resistance to changes. The benefits should be clearly communicated and their fears should be properly addressed. 

Managers should adopt progressive culture and make sure that there is a stakeholder buy-in. Project managers should be supported to enable them to span and scale technologies across diverse and multiple platforms. A Special Task Force should be formed to lead the transformational strategies.

Value proposition analysis
One thing to remember is that digital transformation involves a re-evaluation of current business model and figuring out how to best deliver value to their customers. Model changes cannot happen without making changes in the value proposition. This may involve discovering new customer segments or new application of the same products. 

A prime example is Netflix, how its digital technologies to transform its movie rental business model to online streaming. The company uses artificial intelligence and data analytics to understand the preferences of the viewers and to help them with their future content creation and selection. 

Transformation entails wider scope changes. To determine the scope and whether value proposition changes are required in short term or long-term businesses can use strategic ideation tools, strategic maps, business model maps and diagnostic tools, disruptive response planner etc. 

Often businesses adapt value proposition without giving due consideration to its effects on business operations and disruption caused by it. But the actual scope of strategies often varies and is sometimes misaligned to the desired transformation. For adapting the value proposition businesses should understand key concepts of market value, reasons for declining market position and should perform internal and external analysis such as SWOT and PESTLE. 

Another issue could be that businesses may sometimes ignore the fact that cross-functional business processes and capabilities are linked with each other throughout the value chain and change in one process can result in rippling effects to the other. Therefore, if the digital transformation strategy ignores these cross-functional relationships and rippling effects and there is focus on just improving one process or capability then businesses tend to lose value instead of creating it.

Companies destroy value when digital strategies are adopted in silos or on piecemeal basis. 

Implementing digital transformation

For successful implementation of digital transformation it is important to have right level of awareness, commitment and communication at the organizational level. External governance factors should be carefully analyzed. A well-developed supportive ecosystem is must for effective implementation for digital transformation. Government and the policymakers should not only contribute to resources, schemes, packages, and subsidies but also must ensure that the impacts of these supporting initiatives are visible and measurable.

It is important for the firms to have a conducive internal governance mechanism and the firms should adopt digital transformation as a corporate wide strategy keeping in mind the changes in value proposition and its rippling effects. Last but not the least, success of strategies can be monitored and assessed by setting up digital KPIs which can be financial as well non-financial.

While financial impacts take a long time to become visible, non-financial impacts can be easily measured by using proxies and impacts are visible faster. Long term impact is expected to be seen in the company’s market value through tangible as well as intangible increments.