Don't Depart Without a Strategy for Digital Operations

Leaders in Industry 4.0 establish clear objectives to achieve speed, agility, and efficiency

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Margot Todd

Partner, Singapore

At a Glance

Industry 4.0 leaders set clear goals to achieve speed, agility and efficiency.

Leaders in Industry 4.0 establish clear objectives to achieve speed, agility, and efficiency. 

Digitalizing operations can increase total production efficiency by up to 20%. Leadership teams that integrate digital operations into the firm’s long-term plan are three times more likely to succeed. A greenfield facility is not required for a digital operations transformation; around 80% of it takes place in existing factories. 

With cost pressures growing in the industry, a major automaker opted to invest more than $500 million in a greenfield factory injected with digital technologies. The goal is to achieve massive improvements in operating efficiency, quality, and flexibility. Big data, advanced analytics, collaborative robots, and linked hardware will assist in achieving cost reductions of up to 20% in production and up to 30% in support operations, representing a significant improvement over the typical 2% to 3% yearly targets. In addition, the next-generation factory will serve as a model for the company’s global production network. 

It’s a bold strategy. Most businesses are experimenting with digital technologies in various areas of their operations, but just a handful are moving forward with full-scale deployment. According to research, 66 percent of US manufacturing leaders are making major expenditures to digitalize operations, but only 25 percent are implementing solutions across the enterprise—and nearly half of those we questioned reported disappointing results. 

That’s a squandered chance. Digital tools can help companies reduce time to market, improve agility, and save expenses. They can also change a company’s strategic direction, allowing for more innovation in operations and increasing the company’s competitive edge. Leaders increase total production efficiency by 10% to 20%, resulting in considerable savings in logistics, energy expenses, and human resources. And those gains do not necessitate the construction of a state-of-the-art greenfield factory. Approximately 80% of digital operations reforms take place in existing plants. Companies typically maintain a normal production schedule while introducing simple-to-use digital solutions that provide significant benefits. 

Regardless of the potential benefits, most leadership teams are concerned that digitalizing substantial portions of a supply chain will be complex, costly, and time-consuming. In our experience, the issue isn’t one of technology. Companies face delays and increased costs due to two major factors: a lack of focus and a lack of competence. Outdated management techniques also impede effective implementation. Sixty percent of the executives we polled indicated they didn’t have a clear strategy for digitalizing operations. Four out of five investors who did not have a defined strategy struggled to generate significant value. Companies that invest in pilot’s year after year or without a strategic plan do not see significant returns on their investments. 

On the other hand, leadership teams that combine digital operations with the firm’s long-term strategy are three times more likely to achieve their objectives. Let’s take a closer look at the challenges of executing enterprise-wide digital investments and how leaders are overcoming obstacles to produce significant results. 

The Future of Digital

The torrent of digital technology and solutions flooding the market might make it easy to feel overwhelmed. Which ones are the most important? Big data, analytics, robots, automation, and sensors, according to executives, will enable four important advancements. 

The first is intelligent automation. Robots and other automation systems will speed up operational procedures, boost flexibility, and pave the way for increasing product customisation. Fast retailing in Japan is investing in a two-armed robot that can pick up T-shirts and neatly fold them for distribution to customers—an important step toward automating subsidiary Uniqlo’s flagship warehouse. Automation will also minimize error rates and increase efficiency. 

The second innovation is end-to-end visibility and collaboration across the whole supply chain, including third-party suppliers. A significant improvement in supply chain visibility will boost efficiency and improve the capacity to track products from the point of origin all the way through production and distribution. 

Third, digital technology will enable intelligent supply chains through better R & D management, planning techniques, and forecasting. A shop that incorporates external data into its inventory planning, such as weather forecasts, macroeconomic trends, and partner data, for example, can respond in real time to a cold snap, an economic slowdown, or a supplier supply deficit. The advantages include a faster time to market, tighter inventory, lower stock-out rates, and higher sales. 

Finally, digital technologies will assist next-generation personnel by increasing productivity, skills, and safety. 

The Engine of Propulsion

Digital technology, in addition to improving existing processes, enables new products and business models, blurring the borders between operations and strategy. Two-thirds of companies invest in digital operations to improve existing processes, like automating a car assembly line. But half of the executives we spoke to are also using digital tools for a variety of strategic goals, like inventing new products and services, building new business models, and finding new ways to make money, as well.

That’s a major benefit for businesses dealing with change. Whether or not a disruptive threat is visible, successful leadership teams are beginning to shift their focus from running their core business (today’s engine) as efficiently as possible and continuing to innovate there to creating new products and business models (tomorrow’s engine) based on changing customer needs, new competitors, new economics, or all three. 

During the mid-2000s, Netflix used this Engine 1, Engine 2 method. While continuing to operate its main DVD business, the company introduced a new content-streaming distribution strategy. Netflix’s Engine 2 approach eventually disrupted the DVD rental industry, but it required competing on two fronts until the streaming business took off. Investing in digital technology to automate DVD warehousing was an option for enhancing productivity at the time, but given the strategic change to streaming content, it would have been a terrible investment. 

Getting Going

Companies that get the most out of their investments in digital operations take a strategic approach from the beginning. They connect investments to strategy, prioritize investments that add the most value, adjust their organizational architecture, and move at an uncomfortably rapid pace. 

Integrate operations with strategy. When it comes to digitalizing operations, leadership teams have a tendency to focus on an unduly narrow set of objectives. According to our survey, 80 percent of CEOs are primarily interested in cost savings. Many companies neglect the opportunity to improve the dependability and flexibility of their supply chains as well as to seek strategic opportunities. Leaders aren’t blind to cost savings, but they are more concerned with enhancing quality, speed, reliability, and visibility across the entire supply chain. 

Consider the scenario of a prominent US shop that was trying to meet expanding consumer e-commerce expectations. The management team concluded that it needed to boost its speed and flexibility in inventory management, distribution, and delivery as soon as possible. The most efficient solution was to digitalize operations. The company worked with an autonomous robot company to cut warehouse space and personnel requirements, devised a strategy to reduce retail inventory and enable rapid replenishment, and purchased a same-day delivery company. The results were astounding: a 49 percent increase in digital sales year over year, a 25 percent to 40 percent reduction in warehouse space, and an 80 percent reduction in distribution centre labor expenses.

Invest in large value producers. A highly fragmented technology and vendor ecosystem provides businesses with a plethora of possibilities to test, learn, and invest in. The danger is that the experimentation will continue indefinitely with no benefit. Digital experiments frequently begin as grassroots projects driven by creative department heads eager to improve certain procedures. Their actions make sense on their own, but the resulting jumble of programs scatters investment money and managerial focus, undermining the capacity to focus on essential business results. 

Successful businesses learn to say no to further experimentation. Based on their industry and strategy, they prioritize technologies that will add the most value. This necessitates agreement on strategic priorities as well as a methodical strategy for piloting and developing novel solutions. 

The previously stated global vehicle manufacturer used a strategic strategy in constructing a digital plant. The leadership team evaluated prospective digital solutions and prioritized them based on the value they would provide and the ease with which they might be implemented at scale. The resulting greenfield factory featured the highest-value technology, resulting in efficiency benefits ten times greater than the industry norm. 

Create an intelligent digital organization. Companies that do not expand beyond digital trials wind up with isolated pockets of innovation and limited benefits. The technology itself can be a challenge at times, as many businesses must integrate new systems with legacy infrastructure. Bridge technology can help to solve this problem. Leading equipment manufacturers are equipping manufacturing lines with sensors to collect data for analytics and smart connectivity to provide remote support services. 

Most of the time, however, the ability to scale up digital technology is the key differentiator between champions and laggards. Leaders ensure that the right people are in the proper roles, that there is enough digital talent, that there are strong governance mechanisms in place, and that the executive team is aligned with the digital operations plan. Equally important, they embrace new capabilities, such as Agile methods of working, and engage with start-ups to capitalize on cutting-edge technologies. 

Successful businesses establish robust orchestration and scaling initiatives, as well as specialized teams to supervise the transformation. One multinational industrial corporation, for example, established a centralized team with three primary charters to roll out a digital operations program across numerous sites. It created the overarching digital roadmap and collaborated with initiative teams from across the organization to guarantee successful execution. It also developed important capabilities in Agile management and analytics, embedding knowledge in initiative teams across all sites. Finally, the central team determined the rate of change. In less than a year, the program has provided $50 million in run-rate value across two sites (from a total of around $450 million in recognized value at run rate). 

Moving at a breakneck pace Most businesses are still assessing new technology at a snail’s pace. As innovation accelerates, executive teams must make faster decisions about which pilots to scale. They must also establish explicit criteria for rapidly terminating ineffective investments and redirecting resources. 

According to our research, 80 percent of digital operations leaders have established next-generation organizational competencies to expedite change, such as Agile management, supplier-customer collaboration, and external alliances. Success stories can aid in the spread of promising technologies throughout a company. Leaders also ensure that support areas like procurement and IT are keeping up with the increased cycle times. 

Executive teams accustomed to multiyear plans, extensive business cases, and thorough due diligence may find the needed pace unsettling, but the new method incorporates flexibility into the strategy process. Companies, for example, can identify their digital destination and then use a stepping-stone strategy rather than embark on a full digital transformation. What matters most in this new world is the ability to quickly pivot and change course as necessary. That’s because, as businesses begin their digital journey, the best next step may not be obvious until they’ve taken the first step. 

Investing in digital operations is an exciting journey with enormous potential. As the barriers between strategy and operations become increasingly blurred, getting this transformation right can provide a significant competitive edge. The gap between leaders and laggards is already widening. Our experience has shown that a small number of successful elements can make or break a business. As a result of digital innovation, companies of the future will be tremendously smarter and faster. Those who put it to use will usher in a new era of operations.

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