Digital in industry: From buzzword to value creation
From
supply chains to production to customer experience, digitization is
transforming the way industry functions—and unleashing global opportunities for
value creation.
In the past few years, we have seen digitization
bring its first benefits to the industrial sector, particularly in processing
andmanufacturing, yet enormous untapped potential remains. Digital capabilities
such as e-commerce platforms can significantly improve traditional
customer-supplier experiences. Additional advances in automation, big data and
analytics, and the Internet of Things create additional opportunities for
substantial gains along the entire industry value chain.
Another industrial revolution
Early signs of the
digital revolution are already here. Amazon Business, a B2B e-commerce platform
launched in April 2015, turned over $1 billion in sales in its first year,
growing at an impressive 20 percent per month. B2B
buyers increasingly prefer digital, with 94 percent conducting some form
of online research before purchase.
Further changing the
rules of the game are the decreasing costs of new processing technologies such
as additive manufacturing and advanced robotics. For example, 3-D printing
costs came down by 60 percent between 1990 and 2014, and industrial robot
costs decreased 5 percent annually between 2000 and 2012.
Put concretely, what
does digital bring in terms of performance jump across functions? Let’s start
by looking at operations, where our experts have recently shown that the impact
potential is significant across all functions.
And this is not science
fiction! Pockets of excellence exist across industrial sectors that have proven
it can be done.
In the oil and gas industry, predictive
maintenance is eradicating unplanned downtime and costly repairs.
Connected plants use remote sensors to forecast and report on the condition and
performance of machinery. Early signs of problems are detected and corrected,
maintenance resources are directed at the areas of greatest need, and machinery
availability is maximized.
·
The pulp and paper industry has seen
significant increases in productivity through the use of remote temperature
monitoring. Kiln sensors monitor lime mud temperature, a leading indicator of
calcination. Sophisticated tools aggregate and analyze the temperature readings
and automatically optimize the shape and intensity of the flame driving heat
through the kiln. The process has resulted in fuel savings as high as 6 percent
and a lime throughput increase of 16 percent.
·
In manufacturing, repetitive, strenuous, and
complex tasks are performed by robots working alongside operators on the shop
floor. The operators themselves spend less time waiting for goods or processes
or filling in routine documentation, because information systems optimize
materials flows and track key performance indicators. Real-time analytics
and advanced process control enable errors and quality lapses to be picked up
immediately, minimizing rework and scrap, and automated inventory systems—such
as wireless-connected boxes with cameras that automatically reorder when their
fill level drops below a certain limit—ensure that inventories are accurate,
goods can be easily located, and safety stocks are adequate but not excessive.
Let’s not forget the customer: digital has
the potential to profoundly
reshape the way industrial companies interact with and serve their customers.
Let’s have a closer look:
·
Where customer access was once constrained by
minimum order sizes and the cost to serve in a particular
market, e-commerce and web shops allow companies to reach
customers they could never have reached before; hence cost to serve can be
cut by 50 to 70 percent. Online marketplaces such as Amazon Business and
Alibaba virtually connect unlimited buyers and sellers, and established players
like Grainger are leading the way with their own platforms, capitalizing on
2015’s estimated $1 trillion in B2B digital commerce sales in the United
States.
·
Suppliers who once relied on subjective
analysis and historical knowledge to determine prices can now use faster,
data-driven tools to optimize pricing. For example, a leading technical
gases company with a large and highly fragmented product portfolio used
advanced data analytics and modeling to design a more strategic and logical
approach to pricing. The newly developed value-based pricing led to an
increased return on sales of 5 percentage points. Emerging markets can tap the
potential of digital in the food chain through innovations such as precision
agriculture, supply-chain efficiencies, and agriculture-focused payment
systems.
·
Sales directors can make smarter
resource-allocation decisions based on timely inputs from sales reps,
individual performance data, and automated recommendations from tools. Reps
making sales recommendations no longer have to rely on hunches about what their
customers want, but instead make use of targeted insights about products
to sell, customers’ success stories, and simulations run with the customer
during the sales visit. The ability to attract new customers, improve
cross-selling, and reduce leakage can increase revenues by 5 to 15 percent,
while customer satisfaction can be increased by 20 to 30 percent.
Digital’s disruptive power
But digital is not only
a means to optimize a company’s existing operations. It also gives both
attackers and incumbents the power to disrupt value chains, enter new sectors,
and create innovative business models. Established companies face threats from
new competitors like Amazon Business, which offers millions of products, from
automotive components, industrial lifts, and ramps to lab products, protective
gear, and electrical equipment.
To get ahead of threats
like this, industrial companies can use digital to transform and extend their
own business models before change is imposed on them by attackers reshaping
their industry. Some incumbents are joining digital platforms and B2B
marketplaces to aggregate demand and sell direct to end users. BASF, for
example, was the first chemicals company to sell products online through
Alibaba. Other businesses, such as the 3-D printing start-up Sculpteo, are
selling services rather than products. Still others are offering their
manufacturing capacity as a service to third parties.
But are companies ready?
Compelling though the
opportunities are, our analysis indicates that industrial sectors in general
are lagging behind other sectors in terms of digitization: the MGI
Industry Digitization Index1shows that while
advanced manufacturing and the oil and gas sectors have already gone some way
in their digitization journeys, basic goods manufacturing and chemicals and
pharmaceuticals are still in the early stages.2
Moreover, the
McKinsey Industry 4.0 survey of more than 300 manufacturing experts
in Germany, Japan, and the United States from January 2016 shows that only 16
percent of manufacturers have an overall Industry 4.0 strategy in place, and
just 24 percent have assigned clear responsibilities to implement it.
Five ways to win
Companies that want to
get ahead of the digital pack would be wise to take five key steps:
·
Prioritize and scale up.
Use structural assessments to determine the
customer appetite versus willingness to pay by using mockups to conduct
interviews with potential customers and external experts. In addition, weigh
the potential impact against the ease of implementation by assessing the degree
of innovation or disruption (Is it a substitute? an extension? a
breakthrough?), defining the scalability, studying the feasibility of the pilot
and full solution, and ascertaining the fit with existing assets and capabilities.
·
Adopt a test-and-learn
approach.
As technology-driven change
accelerates, forecasting and planning are becoming less relevant and
reliable. Agility—remaining open to learning and experimentation—is key.
And it is crucial when investing in digital solutions to adopt the mind-set of
a venture capitalist. This includes trying out ideas quickly with target
customers as soon as they exist to check market interest and price points. It
also means being ruthless: if the idea isn’t worth it, kill it immediately. In
addition, successful ventures think about monetization potential as soon as
interactions with potential customers start, and they proudly copy from other
sectors. A focus on scale is also essential, with the ambition being a tenfold
increase.
·
Put foundations in place.
To maintain the efficiency and stability of
existing operations while providing the processing capacity and speed required
by new data-driven activities, smart companies move to a two-speed IT
infrastructure—overlaying a fast, next- generation cloud-based IT system on
their secure, robust, resilient legacy systems. New talent is another priority,
especially data and process experts who can connect up various functions,
systems, and levels of management; draw insights from all the information
generated across the enterprise; and use their knowledge of the whole
production chain to help design new products. Meanwhile, job profiles must be
rethought to meet new needs, such as maintenance staff who oversee predictive
maintenance rather than acting as troubleshooters, and quality specialists who
intercept quality issues online rather than detecting faulty parts after
production.
·
Treat data as a competitive
advantage. Data fuels the algorithms that provide
insights into markets, customers, and business processes, so ensure that data
management has a clear structure and governance. And considering that even tech
giants such as Google have been vulnerable to malicious attacks, be sure to put
cybersecurity high on your management agenda. Physical targets such as
connected machinery and systems installed for remote access could also be
highly susceptible to sabotage by hackers and other attacks.
·
Work across functions, and
manage change in the organization.
Digitization
requires that all departments work together to capture joint benefits for the
whole business. Moreover, because these innovations have a major impact on how
people work, it is essential to anticipate concerns and build a persuasive case
for the employees.
·
When thinking about digital
priorities, identify the technologies and applications that would have the
greatest potential impact. But also make sure
not to ignore possible barriers to adoption: devise a plan for helping
employees use the new technologies and the related new methodologies most
effectively. Remember that no organization achieves a successful digital
transformation without taking a thoughtful approach to change management, and
that it’s the people applying the technology in their daily jobs who will
create the additional value.
Digital’s potential in industry is
massive, not only in operations, but across all functions of the sector, and
the levers that make the most difference to a company’s bottom line vary—from
e-commerce to automation to advanced analytics. But industrial companies must
begin taking advantage of digital opportunities in order to avoid losing the
value to others. A commitment to digitization from top management is critical
to succeeding, as is a systematic method of defining priorities and the ability
to leverage early success to drive change.
By Paul-Louis Caylar, Kedar Naik, and Olivier
Noterdaeme
http://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/digital-in-industry-from-buzzword-to-value-creation?cid=digistrat-eml-alt-mip-mck-oth-1608
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