To take advantage of digitization, industrial manufacturers need new operating models, aggressive hiring, smart partnerships, and targeted investments.
By Marian Mueller, Robert Bono, Steve Pillsbury, and Barry Misthal
Industrial manufacturers inhabit a world littered with uneasiness. Global demand for manufactured products is growing at a snail’s pace, with output expected to increase just 3.1 per cent in 2016 and 3.4 per cent in 2017, according to the International Monetary Fund. Growth is dampened by political uncertainties, as well as historically low foreign trade levels. Although oil prices have recovered a bit recently, they are not rising enough to undo the collapse in drilling and concomitant retraction in the rest of the energy supply chain.
Yet while traditional revenue might be on the decline, pressure to increase productivity in a slow-growth environment presents new opportunities for industrial manufacturers. By designing tools and equipment that improve the efficiency, costs and performance of factories and other capital projects, companies can drive significant profitability gains. However, doing so requires industrial manufacturers to embrace, develop and invest in new technology platforms that enable connected products and services, and that integrate their customers’ operations.
Of course, new investments alone aren’t enough. Below are six additional actions that can bolster industrial manufacturers’ bottom lines in 2017.
1. Leverage data and analytics in a new business model
By upgrading their technical capabilities, industrial manufacturers can bundle a variety of services enabled by connectivity and data, replacing the increasingly outmoded model of selling one big complex machine under warranty and a service agreement for maintenance and repair. These new services can include condition-based maintenance, which involves ongoing real-time monitoring of equipment to determine its maintenance needs; collaboration with customers on a day-to-day basis to customize asset optimization; and predictive performance management for large and small projects and equipment. With this approach, the breadth and value of the services provided by the industrial manufacturer can enhance customer retention and lead to deeper and more lucrative commercial engagements.
2. Innovate pricing
As technology begins to alter the relationship between industrial manufacturers and their customers, the traditional pricing model for the service contract must change as well: from pay-for-product to pay-for-performance. Instead of basing equipment pricing on products and fixed maintenance or warranty costs, industrial manufacturers should establish fee structures tied to outcomes. For example, the industrial manufacturer may be paid more if equipment downtime is reduced or if an upgrade improves productivity.
3. Develop strategic partnerships — carefully
Industrial manufacturers must become more active players in the technology ecosystem, seeking expertise outside the industry in order to develop equipment connectivity, data analysis, and software that stretch beyond their current abilities. At least one major industrial company, for instance, has already aligned with a wide range of technology firms to create a dedicated cloud-based platform that can run industrial workplaces. But these alliances are not without risk. Leaders have to balance the practice of close collaboration with strategic partners against the need to stay flexible in contracting and partner selection, all while maintaining their hold on their markets.
4. Mine operational data
If connected machines — the primary components of the Internet of Things (IoT) — are to be the backbone of industry in the near future, industrial manufacturers will have to figure out how to manage the data coming from an avalanche of sensors, integrated equipment and platforms and information processing systems. There is a critical need to hire people who can mine this information and work more closely with customers to use the data to improve equipment performance and open new revenue streams. Indeed, the anticipated efficiency returns from digitization over the next five years across all major industrial sectors are substantial: nearly three per cent in additional revenue and 3.6 per cent in reduced costs per year, according to a recent PwC survey of companies. By proactively leading the digitization effort, industrial manufacturers can earn a growing portion of these gains.
Facing a climate of depressed prices, oil and gas companies are good illustrators of the potential for these improved returns. Instead of building a new well — not viable in the current market — they can squeeze greater production out of existing sites by using more efficient digital control systems and sensor-fed data (such as data on pressure, temperature, and flow rates) to manage the wells more effectively. New technology makes it easier than ever to safely capture, monitor, and analyze this constantly changing data in real time, enabling oil and gas companies to save millions by reducing the number of unforeseen outages by half, and increasing crude output by as much as ten per cent.
5. Decide what intellectual property to share and what to develop
Many industrial manufacturers find it difficult to manage digitization and big data analytics because their internal IT systems are so unwieldy. As company operations have grown more complex, expanding into new global markets and product lines and integrating newly acquired firms over many years, the old enterprise resource planning (ERP) systems that were meant to drive efficiency and co-ordination have proliferated into a tangled mass of disparate networks. In this landscape, it is difficult for IT to respond quickly or adequately to business and market demands.
As such, industrial manufacturers must begin the process of overhauling their IT systems — allowing them to communicate throughout the organization with standardized protocols that can manage data from thousands of varied pieces of equipment in the field, support visibility into supply chains, and produce customized analytical reports to immediately serve business needs.
6. Create strategies for talent development and retention
In the digitization sweepstakes, industrial manufacturers often find themselves at a disadvantage when trying to attract and retain talent. For example, in the US many of the best and brightest STEM (science, technology, engineering, and math) students would rather work in Silicon Valley than in the stodgier old-world locales where many industrial manufacturers have their plants and headquarters.
Complaining about this bias accomplishes nothing; instead, industrial manufacturers must purposefully map out an exciting technology strategy with specific benchmarks and achievements anticipated for the next 18 to 36 months — and then communicate this story clearly to job candidates. In developing this recruitment program, don’t just advertise for someone who can read data, only to find out she can’t understand how a giant turbine works. Balanced capabilities are important, allowing the machine maker to use smart operational data and sensor analysis in a real-time context to gain insight into how the equipment is used — and ultimately drive innovation that improves the functions and performance of the equipment. Diversity of expertise and skill sets will help shorten the learning curve in the organization.
Taking these actions might seem overwhelming — but if industrial manufacturers want to survive in today’s changing business climate, they must be willing to take risks and embrace the power of digitization.
After all, in a recent PwC survey, only 30 per cent of US-based industrial manufacturing senior executives said that their companies were planning to increase spending on information technology in the subsequent 12 months. The remaining companies are likely to fall behind — will yours?
This piece is adapted from Strategy &’s 2017 Industrial Manufacturing Trends. You can read the full article at: https://www.strategyand.pwc.com/trend/2017-industrial-manufacturing-trends
Marian H. Mueller is a Principal and an advisor to executives in the industrial and automotive sectors for Strategy&, PwC’s strategy consulting business.
Robert Bono is PwC’s US Industrial Manufacturing leader. He has served a variety of clients from international, publicly-traded companies to emerging, development stage companies.
Steve Pillsbury is the digital operations leader at PwC, leading operations and strategy engagements for manufacturers.
Barry Misthal is PwC’s global leader of the Industrial Manufacturing group.