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Here are some ways that manufacturing companies can begin to tap the value-creation opportunities of digital transformation.
A few years back, I explained to my then 10-year-old son that in the 1980’s passengers waited in queues for several hours to buy a train ticket from Mumbai to Hyderabad. Having grown accustomed to spending his allowance online with a click of a button, he responded, “Dad, you must have been born in the Stone Age”!
OK, granted, this was the 1980s—which in some ways was the Stone Age, at least in Internet years. And this was a slow-moving government bureaucracy in a developing economy. But my son’s outburst still rings in my ears as a metaphor for a manual system long overdue for automation.
Unfortunately, I see this all too often—even today, even at private companies, unburdened by public-sector bureaucracy. Organizations continue to miss available opportunities to harness value-creating digital technologies. Large global enterprises continue to sift through file cabinets in order to provide hard copies of invoices and service reports to customers, ones that they could easily make available through online access. We expect profit-motivated enterprises to be at the forefront of automation and innovation, yet even they fail to take advantage of many straightforward technological opportunities.
Various studies, as well as my experience, indicate that, in particular, manufacturing and related field services overlook low-hanging opportunities for technological innovation.
So, why don’t companies in these sectors seize these opportunities? In some cases, the corporate leadership may be unaware of them or not fully appreciate their ROI. Others seem to mistakenly see such technological investments as nothing more than an additional cost burden needed to keep up with the competition. Or I’ll often hear industry executives say that the creation of disruptive technologies is primarily the domain of startups and that they can buy these technologies—or buy the startup itself—if the need arises.
Whatever the reason, companies with large market shares, who are often best equipped to take the lead in technological innovation, often wait and react to changing industry standards rather than strive to set them. And the late adopters risk not only paying more for the technology as time passes but losing market share, temporarily or permanently, to firms that have successfully implemented value-creating technologies.
There are lessons to be learned from companies like tennis racket maker Babolat, which developed digitally connected tennis racquets that provide real-time analytics in order to help players improve their strokes. The innovation won awards and helped propel Babolat's brand recognition among professional players, whose endorsements are key to sales.
This kind of innovation—the adoption of new technology combined with the requisite realignment of business models and processes—not only creates value for customers but can create entirely new markets.
Opportunities for Digital Innovation
So how do manufacturing companies identify value-creating opportunities for digital transformation in their own organizations? It may be helpful to group such opportunities into several categories, based on the business problem to be solved:
Complex distribution channels often leave major gaps in a company’s customer intelligence. Most manufacturers, and especially those that rely heavily on distributors, have little knowledge of where their products go and how they are used after leaving their inventory. These companies usually hear from their end customers only when there are product quality issues.
Cost-effective technologies such as IoT now enable companies to stay connected with their customers and collect a vast amount of data in real time. For example, a chemical manufacturing company could reduce quality correction costs and improve customer satisfaction by tracking its products right up until the point they are incorporated into the final products of its customers. They can use the insights from analyzing this data to predict product quality, take proactive steps to correct quality issues, and accelerate product development. And the view into the customer ecosystem enabled by this connectivity opens up new business opportunities.
Enhanced Service Offerings
I once proposed to the head of a large life-safety organization that she build proactive service capabilities into company products, such as building sprinkler systems. The proactive service model is familiar to everyone who receives requests from smart phone apps to allow them to collect your usage data, which allow app developers to both learn more about the user experience and troubleshoot issues quickly. And it is increasingly incorporated into manufactured goods, from personal computers to cars.
This executive wasn’t convinced. She replied that, because competitors were a long way from producing digitally connected products, she didn’t consider this to be a pressing action item. Hers is a common point of view: Given our market power, why fix what isn’t broken?
But as embedded sensor technology has become cheap, reliable, and secure it should be considered for use in a wide range of manufactured products. Take the case of a company that installs and services a product like building sprinklers. The company must employ armies of inspectors to regularly test them at customer sites. A huge operational cost that would be eliminated if a company were able to test them remotely.
As it stands, around 40% to 50% of the installed base is handled by local service providers, so seeking out such opportunities for differentiation should be a priority for larger producers. Building remote servicing capabilities essentially raises an invisible fence that prevents outsiders from servicing the producing firm’s product. Given the availability of sensor technology at inexpensive cost, the case for making the switch is overwhelmingly strong.
Adoption of Emerging Technologies
Another area of opportunity involves new technologies. These include:
Virtual reality. Field service organizations are always trying to improve their “first-call fix rates,” because failing to solve a customer’s problem with a product on the first visit is a major cause of low customer satisfaction and retention rates. Sometime the problems results from not having enough experienced technicians in the field. But with virtual reality technology, organizations can enable a technician to consult with a pool of company experts, wherever they may be, to solve a problem. This technology can similarly be used in plant engineering to provide a pool of shared expertise.
Predictive maintenance. Maximizing asset utilization in order to reduce production costs, especially in the case of heavy capital-intensive manufacturing plants, is the aspiration of every COO. Yet many plants today still rely on traditional preventive maintenance agreements to minimize machine failures. But the systematic scheduling of maintenance visits doesn’t always reflect the real-time condition of the machines. And many companies struggle to keep up with their PMA schedules, in any case. Manufacturers should migrate from preventive maintenance to predictive maintenance, using Internet of Things and business intelligence technology to monitor machine condition and predict failures. Companies that have made the switch have seen a dramatic drop in unplanned production outages.
Artificial intelligence. Business intelligence, or BI, capabilities provide insights into hidden opportunities for value generation. While many organizations have not invested enough to build these capabilities (most enterprises use their data warehouse for operational reporting), even those that have invested often do not get enough value because of an insufficient analytical mindset in the organization. AI and machine learning can solve this problem, by identifying opportunities automatically and systematically taking the necessary actions.
Technology Isn’t Enough
Digital innovation usually requires a different operating model, one in which digital strategy and organizational alignment must go hand in hand. And that means that organizational change must be part of the technology adoption.
CEOs are hiring digital transformation leaders to push these efforts, in collaboration with the rest of the senior leadership. Such leaders need to be both business and technology savvy. CIOs who have shown their ability to successfully achieve a high degree of business-IT alignment, and thus have created a culture of technology innovation for generating business value, are ideal candidates for such roles. They are well suited to prepare the technology ecosystem to deal with challenges like fragmentation, data quality, and inflexible legacy platforms. However, in organizations where IT is still a reactive function, predominantly focused on operations or cost reduction, a company needs to carefully assess its readiness for digital pursuits.
It is time for manufacturing and field service companies to take seriously the need for digital innovation and to set the required focus to begin the journey. The initiatives can be modest at first. Beginning to show the value potential of the types of innovation I have described can be helpful in garnering the support needed to scale. And the long-term payoff in terms of competitive advantage will ensure sustainability and growth.
Manufacturing companies often overlook low-hanging opportunities for technological innovation, reflecting the widespread view that disruptive technologies are primarily the domain of startups, not established firms.
Digital capabilities can benefit manufacturing companies in some well-defined ways, from improving consumer intelligence to enabling preventive maintenance.
To be effective, adoption of disruptive technology must go hand in hand with organizational realignment.