When should manufacturing organisations embark on digital transformation?

by Jul 3, 2016IT in Manufacturing

Manufacturing organisations are faced with a fast-moving and evolving landscape. Increasing customer demands for speed and quality, combined with strong pressure to operate at lower margins, means little room for error. Increased competition from top performers is challenging executives to take a hard look at where they might gain some competitive advantage. Market uncertainty combined with scarce capital means that big projects are on hold and the short-term emphasis is on competitive differentiation, improving existing operations, and holding out for the market to turn. In this environment, many companies will be unable to make the necessary changes and will simply go out of business. Others will turn to mergers and acquisitions in an attempt to drive down overheads and leverage their customer relationships at a greater scale. Others will dispose of business units that are not performing.

In this environment, manufacturing executives naturally turn their attention from grand expansion plans to keep the lights on. Only essential maintenance is done; staff numbers and budgets are cut. Anything that looks like a nice to have is also cut. The result is that the business finds itself increasingly struggling to fulfill its commitments to customers. Escalations become more prevalent and non-conformances increase.

IT as a business partner

With this as a background, why would business leaders even consider a digital transformation strategy at this time, other than as a final act of desperation to keep the lights on? It may be interesting to learn that three out of four executives surveyed by McKinsey (‘Partnering to shape the future – IT’s new imperative, May 2016’) believe that IT should be increasing its role as a business partner. The same analysis found that most executives believed that IT was not currently fulfilling this role. This was largely attributed to a weakness in IT’s operating model and lack of clarity on IT’s priorities and organisational role. While IT leadership is focused on cost reduction and improved efficiency of business processes, non-IT executives believe that effectiveness (not efficiency) is far more important. Surprisingly IT cost reduction is no longer the top priority of non-IT executives.

Aberdeen ran a study with process manufacturing executives, around the same time (Upgrading enterprise systems for success in process manufacturing, November 2015). In many respects, the pressures to respond more effectively to customer demands, reduce prices, find competitive differentiators, and launch new products faster are the same in the process industry as manufacturing in general. Aberdeen was able to classify process manufacturing companies into two groups: the leaders who made up the top 33%, and the followers. This ranking was based on production compliance, overall equipment effectiveness, on-time complete shipments, and response time to non-conformances. What was interesting was there was a stark difference between the leaders and the followers. For example, leading process manufacturers (the top third) responded within an average of 3.9 hours to non-conforming shipments while followers (the rest) responded on average in 24.2 hours. This difference in ranking will make all the difference when the leaders could, in theory, reduce their average price by (say) 5% (still profitable for them) to a level below the cost of production of the followers.

The same analysis found that the process manufacturing leaders were more current in terms of the ERP version deployed within the business. In general, the leading companies had ERP implemented on the latest version or one release behind. Most followers were two or more releases behind, with 20% of followers still in the process of actually implementing an ERP system.

The correlation between good IT and business performance is not always top of mind for executives focused on survival. Yet it should be argued that the best time to implement a comprehensive overhaul of weak IT as part of a strategic digital transformation program is right now. Many manufacturing executives have recognised the permanent structural changes in their industry and see a digital transformation program as a viable way to address current performance and being better positioned for when the market turns.

Initiating a digital transformation program

Embarking on a digital transformation program needs to be a top-level strategic initiative led by business executives who have a shared vision on the role of IT in the necessary business change. However, until there is clarity on IT’s priorities and the role of IT in the organisation, and until the weaknesses in IT’s operating model are addressed, achieving any tangible results from a digital transformation is unlikely. Executives will ask some tough questions around the appropriateness of the IT organisational model, its leadership, and the exact nature of its contribution to the business.

As the leader of the IT organisation embarking on a digital transformation program the successful CIO has an opportunity to be a significant contributor and change agent in this process. The data from McKinsey is encouraging in that it shows that business executives are openly inviting IT to play a more significant role. I predict that many IT organisations will simply let this opportunity pass. They will continue to focus on business as usual, i.e. reducing costs, improving governance, and effectively entrenching their role as a utility service. A few however will see the business imperative and embrace a digital transformation program that will serve to position the business for future success. Expect to read some good case studies in this regard in the future.

This article was first published on SA Instrumentation and Control.

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