H Checklist

The five actions that must be on every manufacturer’s checklist this year

March 2, 2023
With supply-chain disruptions and increases in operational costs, the current global business landscape can challenge even the most secure businesses.

By Maggie Slowik and Andrew Burton, IFS global industry directors of manufacturing

Resilience is no longer just an industry buzzword, but a philosophy that manufacturers should be actively implementing. There are five unique ways for manufacturers to build operational flexibility, and they will be key differentiators to attract buyers and maintain market gains as 2023’s challenges come thick and fast.

1: The short-term outlook is murky with macroeconomic instability, but digitalization can cut through the gloom

Global supply-chain shortages, price inflation and recession are increasingly pointing to digitalization as an enabler for companies to withstand geopolitical and macroeconomic disruptions, as most manufacturers plan to scale up digital investments beyond pilot purgatory to drive business value. 

But the question remains—digitalization is not new and to what extent have manufacturers been able to make use of their technologies to protect their business performance? We have seen the basics covered. With reduce costs, improved operational efficiency, and shortened time to market among the main benefits, have manufacturers really made the most of their digital-transformation investments?

In a recent IFS/IDC study, we asked manufacturers to self-assess their digital maturity. The study found that 75% consider themselves as digitally mature. A study by McKinsey highlights that many manufacturers have not been able to move beyond “pilot purgatory”, meaning that they have not been able to scale successful pilots programs or fully leverage new tools and technology to see meaningful returns or business outcomes. The differences between the two studies point out a shortfall in devising a true long-term and business-wide vision on the value digital transformation can bring.

The widespread toe-dipping pilots have created a “try before we buy” mentality that has isolated digital technology away from business-as-usual. Other reasons include a lack of leadership and strategy, siloed implementation, and a technology-first (vs. business-first) approach. These findings are compounded by the fact that 62% of manufacturers are struggling to articulate digital-technology ROI which, if deployed in siloes, is to be expected.  

2023 is the continuation of unpredictable market dynamics and manufacturers must start re-evaluating their digital-transformation strategies to prevent further depletion of their investments and efforts. This will require focusing on real business needs, use cases and challenges, and integrating pilots into their mainstream business processes that get rolled out across the wider manufacturing network. 

The additional drawback of pilots is the fallout on talent. Digital skills remain locked away and to realize the full value of their digital transformation, manufacturers must focus on accelerating their people-enablement plans when it comes to digital skills. Without this, projects get postponed, resulting in a slower time to deliver ROI, which undermines support from executives. As well as building up internal skills, manufacturers need to attract, build, and retain digital skills from industries that have been faster at transforming.

The IFS/IDC study showed that digital transformation, if successfully envisioned and executed, has a strong impact on an organization’s revenue and profit performance. It’s time to get into the details by re-setting the focus on business (not technology) first!

2: As ESG goals become critical, automated technology can optimize efficiency in reporting

ESG, as a measurement of a company's environmental, social and governance initiatives, has become an essential component of how organizations are assessed and valued—by investors, partners, customers, and employees alike. 

By 2024, ESG will have shaped the extent to which 70% of manufacturers are tracking their ESG scope 1 and 2 emissions using digital technology and improving the accuracy of their scope 3 metrics, per our study.

For manufacturers, the primary focus is on the environmental, or “E” aspect of ESG, with the ultimate mandate to show real progress toward decarbonization. Back in January 2022, we predicted that 75% of manufacturers would prioritize decarbonization as part of their sustainability efforts.

Manufacturers voluntarily comply with reporting even when this means dealing with a complex set of regulations, ratings and disclosure frameworks. In a recent IFS sustainability-focused customer day, attendees indicated that they typically adhere to three main reporting standards and frameworks: the Global Reporting Initiative (GRI), the EU’s Corporate Sustainability Reporting Directive (CSRD), and the CDP Climate Change Program. In addition, we also see commitment to the Science-Based Target Initiative, and the Corporate Net-Zero Standard.

The ESG landscape is ever evolving, and we are already seeing regulatory frameworks emerging to standardize the reporting and disclosure of ESG metrics around the world and across jurisdictions.

In the US, the Securities and Exchange Commission (SEC) is in the process of finalizing its Mandatory Climate Risk Disclosures legislation, requiring SEC registrants to disclose climate-related information in annual filings. The SEC will require emissions to be reported, and as these (along with other ESG-disclosure requirements) tighten up between 2023 and 2024, all manufacturers must prepare for reporting readiness.

At present we see most manufacturers lacking the capabilities to track scope 1, 2 and 3 emissions. This is mostly due to the fact they are still manually collecting these metrics from within their organization across entities and different systems while using Excel as a repository and analysis tool.

2023 will see manufacturers investing in technology in earnest, to help automate and ingest consistent, comparable and reliable carbon metrics as part of their enhanced ESG disclosures.

While this will be easier for scope 1 and scope 2 emissions, which are from emission sources owned and controlled by organizations, scope 3 emissions will remain a challenge for most, but will not be lesser of a priority. This is because scope 3 emissions—all the emissions indirectly generated by a business—account for the largest share of most companies’ greenhouse-gas (GHG) emissions. This can account for up to 75% of companies’ greenhouse gas emissions on average, representing a large proportion of climate-related risk.

3: Factor digital twins into your long-term strategy to futureproof operations

By 2024, a high proportion of manufacturers will appoint resources to roles in digital science to support the development of their digital-twin strategies. As the integration of applications and machines progresses, the amount of data being collected is exponentially increasing.

Not all newly connected machines are being used in manufacturing, but machines and devices being connected to the internet and each other will generate huge amounts of data. This data must be understood, controlled, managed and checked for accuracy, as this data will form the basis of real-time decision making. This will require new skills that are not currently found in many manufacturing companies.

Manufacturers are realizing the importance of their data—in fact, new positions are being created for data scientists, or chief data officers, whose role is to understand the data and how it is used. They will be responsible for the accuracy of the data, understanding where the data comes from, and its impact on the day-to-day running of the business. Manufacturers who include this role will be able to move through the data-transformation journey and harness the full power of digital twins.

4: Improved productivity goes hand-in-hand with enhanced connectivity New production machinery is considerably easier to connect to business systems. Manufacturers who have been able to invest in modern machinery and connect them to their business-enterprise systems are seeing impressive results that are boosting business performance.

However, not all manufacturers are in this fortunate situation and many still rely on large, expensive production machinery that was built before computer integration was the norm. These manufacturing companies risk being left behind those that are far along in their digital-transformation journey. These companies must take action to modernize their operations and integrate their assets into their broader systems by adding sensors throughout to achieve real-time visibility of assets’ performance, all while taking advantage of predictive-maintenance capabilities.

This asset-modernization approach is often more cost-effective, as capex investments are not required and the ramp-up to digital transformation can be smoother without compromising on value delivery. The increased demand for sensors for legacy machinery highlights a renewed focus on MES roll-out in the next couple of years.

5: AI is tech’s hottest new property—and it has transformative potential for decision-making

As manufacturers continue their digital-transformation journeys, the amount of data that is now available has increased exponentially. Contributing to this journey and aiding the interpretation of this data is artificial intelligence (AI)—what was once only conceived as science fiction has become a reality for many manufacturers.

Beyond the physical world of robotics, drones and autonomous vehicles, it is what we can’t see that is really changing and influencing global manufacturers to think and act differently. AI and machine learning are enabling manufacturers to make smarter, more accurate and actionable decisions— essentially developing a standard production line to become more autonomous, as each moving part can think independently and act on future information such as weather forecasts and consumer-spending habits. It’s this smart way of thinking that is enabling manufacturers to become leaner and more agile—and crucially hone in on their customer-centricity strategy.

The scale of AI growth is clear to see. It has been reported that by 2027 the AI market will be worth $16.3 billion US, with this growth likely to lead to 40% of manufacturers using AI to contribute to crucial decision-making processes. But is this really just the tip of the iceberg? We expect to see AI go much deeper to vastly improve factory efficiency, staff training, and for meeting sustainability goals.

For many that are on the AI journey, benefits are already visible; for those that are just starting out it can be a daunting task knowing where to begin. Do you make your legacy factory smart? Do you add sensors to warehouses or look at using algorithms to predict consumer habits?

Don’t just prepare for the future, be proactive in the present

Current levels of uncertainty created by emerging technologies like those mentioned above, geopolitical events, local and global supply-chain disruptions, and reactive consumer behavior are forcing manufacturers to rethink operations.

This is a good thing.

Adaptability, agility, flexibility and resilience are not just desirable, but necessary for businesses to navigate the unknown—and stay profitable and relevant.

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