As Industry 4.0 develops and the physical and virtual worlds converge, products are increasingly digital, intelligent and connected. For discrete manufacturers (manufacturers of distinct products), this evolution offers a wide range of opportunities for growth and risks of disruption.
To keep up, 68% of CEOs of large global industrial companies planned to increase their digital and technology investments in 2023, according to an EY survey of manufacturing CEOs.
However, simply increasing investment is not enough. Discrete manufacturers must make sure their digital strategy aligns with their overarching business objectives. The next iteration of their digital architecture will need to support their current physical products while giving them a way to develop new bundled solutions that bring hardware, software and services together. Beyond that, they will also need new customer interfaces and greater internal operational efficiency.
Bracing for Disruption
The urgency for discrete manufacturers to digitally reinvent themselves has been building for some time, driven by three megatrends:
Macroeconomic shocks. The fallout of the recent pandemic, rising geopolitical tensions and supply chain disruptions are driving regionalization, which will put high demands on automation and digitalization to maintain competitive production costs.
Staffing shortages. Finding and keeping engineers and skilled workers continues to be difficult due to increasing competition for science, technology, engineering and mathematics (STEM) resources and decreasing interest and time for employees to learn an operation at a hands-on level
Sustainability. Sustainability requirements are putting pressure on manufacturers to know and manage their supply chain for better environmental and social outcomes. These concerns are leading to a higher need for traceability and an additional focus on yield and energy optimization across the supply base.
Discrete manufacturers are struggling with two additional trends of their own as well: first, customers’ access to data is challenging traditional players in the industry, with AI-powered reverse engineering tools unlocking long-standing “trade secrets” and potentially spreading the knowledge between firms much quicker, driving commoditization and standardization.
For example, many successful industrial products companies have built their leading positions on highly skilled application engineers that work on a customer’s site to help them improve their productivity and end-products. Such application engineering knowledge has been largely company-specific. This “institutionalized” product knowledge of the individual engineer makes it more difficult for industrial products companies to maintain a competitive edge over time, compared to the past.
Another example is how new gradually improved robotics and machining software, as well as better metrology products are also able to measure the performance of one component more exactly versus the other making it more difficult to charge a price premium based on perception rather than actual performance. The customers get facts from their production in a better way rather than relying on the perception.
Second, cloud manufacturing platforms are disrupting how small and mid-sized machine shops interact with their customers, whether an original equipment manufacturer (OEM) or an OEM supplier. These platforms are reducing lead time for prototyping and improving customer access to component quotes and alternative sourcing options. But it’s not making anything easier for the maker: instead, it’s spurring even more customer demand for customization, responsiveness and user-friendly service.
Beyond investing in service, digitalizing customer interfaces and managing smaller batch sizes can help smaller manufacturers meet those demands. Connected products provide manufacturers with greater transparency into customer preferences and consumption patterns, which in turn could create new business opportunities, such as preventive maintenance on their products.
Overall, those able to adapt and change their approach to customers quickly have a lot to gain. Incumbents will need to develop new ways to interact with their customers and compete successfully with new software players who want to own as much of the customer process as possible.
Breaking the Project Down
To manage a transformation this sweeping, you will need to break it down into manageable pieces. Besides supporting the hardware business, the company will need to add data capabilities to its product portfolio, such as sensors for data collection. It will need to include a careful analysis of make versus buy, ideally including a separate digital M&A strategy.
More advanced customer interfaces will require developing digital assets and solutions that support new, more scalable ways of interacting and supporting customers. Despite some margin compression, digital strategies should still be able to support profitable revenue growth.
However, not all of this digital work will be customer-facing. Improving internal operational efficiency is an integral but sometimes overlooked part of a comprehensive digital strategy. Well-executed, such a strategy could improve return on capital employed (ROCE) levers, such as reduced costs and improved inventory management. Operational digitalization metrics in regular board reporting can help gain the right traction.
Discrete manufacturers must pursue three paths to achieve a successful digital strategy implementation. First, companies must reimagine the business model to extend the value chain or by shifting parts of the business to a manufacturing-as-a-service or recurring revenue model. Second, they should develop a digital culture that encourages agile and digital-first ways of working by scattering competencies across the enterprise. Third, they will need to establish governance structures that ensure clear ownership and a unified approach to digitalization efforts.
Magnus Ellström is EY-Parthenon EMEIA Industrial Products leader.
