Re-imagining Manufacturing: The Sector's Magic Moment— Industry 4.0—has Arrived

Two trends all but assure this impact will sustain, notes Vladimir Lukić, a Boston Consulting Group Partner and Managing Director who is a member of the firm's industrial goods, operations, and people and organization practices: decreasing costs and increasing accessibility. 

A shop floor robot that cost six figures a few years ago can now be had for less than $25,000. Production-grade 3D printers now cost as little as a fancy Apple desktop did a few years ago. And, Lukić emphasizes, employees at all levels of manufacturing companies are eager to bring to their work the speed, convenience and power of the technologies they routinely use at home. "One of our supply chain experts likes to say that our customers expect their five-to-nine experience to become their nine-to-five experience," says EY Americas Advisory Industrial Products Leader Jerry Gootee. 

Lukić agrees, noting that a growing number of manufacturing employees are seeing "the art of the possible" manifested elsewhere and are itching to use it in their work. "I can't tell you," he adds, "how many times I've heard comments like, 'Listen, even my kid can do this with an app.'"

An unavoidable journey toward an Industry 4.0-enabled future does not mean it will be a smooth ride. Consulting leaders indicate that manufacturing executives across all sectors are calling for help with a comprehensive set of challenges related to technological advancements and disruptions—including assistance with strategy, operations, trading partners, talent, and security. 

Growth and Government Influence

As is currently the case in many realms, the short-term prognosis for manufacturers is a bit volatile. The positive news is very good: U.S. economic growth is helping many manufacturing companies. This growth, says Grant Thornton Manufacturing industry leader Jeff French, allows manufacturers to resume looking forward while increasing their growth investments. "Activity really began picking up last September and growth was very strong through the Fall," he says. "Although it flattened out a bit over the winter, it has picked up significantly since then." While growth is welcome, it brings challenges, such as increases in raw material and transportation costs. "Those increases can pose real challenges to profit margins," French adds. 

As can the fallout of a trade war, if a full-blown conflict materializes from the protection policies of the Trump administration and recent rounds of tariff levying. While that type of government influence is unwelcome to most manufacturers, the U.S. Tax Cuts and Jobs Act is anticipated by most manufacturers to have a positive long-term effect on the industry, according to Schreiber. "Lower tax rates, along with changes to bonus depreciation, will free up capital to invest in technology, hiring and retention, expansion, acquisitions, and more," he adds. "In addition, the one-time transition tax on deferred foreign income, paired with the corporate rate deduction, will likely make the United States a more attractive base for manufacturers and encourage some to repatriate their foreign assets."

Yet Schreiber and his counterparts at other firms stress that the impact of cyclical economic growth and government influence tend to exert shorter-term impacts on the industry. And they stress that the technological advancement rippling through supply chains promise to deliver more fundamental changes over the long haul.

Dot-com Redux?

Pervasive Industry 4.0 interest and investments are inspiring heady comparisons. 

Tom Mayor, the KPMG Partner who serves as the Global Leader of his firm's supply chain center of excellence, points to the dot-com era as a useful comparison. In addition to the massive number of dot-com experiments that were driven by the information technology (IT) function back at the turn of the century, Mayor notes that a smaller group of manufacturers "got bigger teams into the room." As a result of taking a more strategic perspective, these companies wound up deploying Internet capabilities to achieve tangible, and extremely valuable, results—such as more real-time and accurate advance ship notices, and dramatic inventory management improvements. "Those companies," he notes, "unlocked huge value because they focused on the connections that the internet could deliver," as opposed to limiting their activities to creating e-commerce sites that competed with existing channels. 

Industry 4.0 capabilities promise similarly outsized benefits while posing Webvan-esque risks. A recent Infosys report on 3D printing held up Amazon's iconic "Add to Cart" button as an example of the powerful prototyping process that more manufacturers can conduct with the right technology: "The dramatic removal of barriers to small-scale production will allow—and likely require—manufacturers to act more like software companies in the way they approach design," the report indicates. "Instead of mass producing the design they believe is the correct one, companies will release several variants of a design and allow customers to choose the varieties that are ultimately produced at scale."  

These and other dramatic changes have manufacturers asking consulting firms for help integrating Industry 4.0 into numerous manufacturing processes and also into their overall strategy, reports Peter Hanbury, a Bain & Company partner and the leader of the firm's manufacturing excellence practice in the Americas.

Five Client Questions

In addition to all things 4.0, manufacturers are seeking a broad range of help from their consulting partners. 

The current growth environment is translating into more consolidation. "M&A is really strong right now," says French, "so we're doing a lot of due diligence work as well as a lot of integration after the deals close. We expect that to continue." French also reports that Grant Thornton is busy advising manufacturing clients on topics as diverse as cybersecurity, new accounting standards, cloud migrations, business intelligence implementations, and a range of supply chain improvements. 

The most common forms of manufacturing engagements stem from the following big questions clients are asking amid rampant technological change: 

What should our business(es) look like?

As economic growth and capital spending increase, more manufacturers are requesting a range of strategic guidance from their consulting partners. "We're being asked a set of fundamental strategy questions by our most sophisticated clients," Mayor reports, noting that these questions relate to driving growth via new technologies and new business models. Hanbury reports similar interest. He says that clients want to figure out how to turn their approach into a "competitive weapon" by distinguishing themselves on the basis of cost, speed, flexibility, quality or another characteristic that the competition cannot match. Given the major changes that emerging technologies can help deliver, manufacturers are also seeking guidance on their Industry 4.0 and digital transformation road maps as well as related issues concerning supply chains and, especially, talent management. Lukić and his colleagues are helping clients design how their workforce of the future should look and then implementing the activities (which includes major re-training efforts) needed to execute that plan. 

How do we respond to rapidly changing customer expectations?

Changing customer expectations is the first industry disruption that both EY's Gootee and Bain's Hanbury mention in conversation. "Increasing customer expectations are tied to some of what we're seeing on the B2C side—the 'Amazon-ization' of how people think about customer service," Hanbury explains. "Faster turnaround time, the ability to track your product as it goes through the manufacturing process, increasing customization—all of these capabilities are raising the bar of what's expected from a manufacturing organization." Customer expectations around the technological capabilities of products and related services are soaring, reports Gootee. 

"When you or I buy a car, we expect a lot of technology to be embedded in that vehicle," he says. "Those same expectations are increasing across the entire industrial landscape. Equipment needs to have embedded sensors. Passenger trains need to have the latest and greatest automation for passengers. Even fork lifts need to have all the bells and whistles." And, he adds, customers expect to be able to communicate with manufacturers conveniently through whichever channel they prefer. 

Where will we find the talent we need?

Most manufacturers are scrambling to retool sizeable portions of their workforce with the skills needed to optimize the benefits of new technology investments. In areas of low unemployment, which is currently the case throughout much of the U.S., the talent management challenge is more severe. "It is very difficult for many of our clients to find the right artificial intelligence folks and data scientists to help them stand up a predictive maintenance capability, or to help them determine how IoT technologies can deliver a better consumer experience with their end product," Mayor says. "These companies have a broad set of high-skilled labor needs, and they're competing with Silicon Valley companies for these people." Hanbury points out that the aging workforce also represents a growing challenge for manufacturers in many regions of the world, including the U.S. "Industry 4.0 tools require a different set of talent and skills," he continues. "Manufacturers are trying to hire the next generation of talent while figuring out what their skill sets should be. That's a major talent management issue." Lukić notes that while Industry 4.0 tools and processes require specific expertise, they also require related integration and infrastructure work as well as a huge amount of process changes, retraining, new incentive systems and even cultural changes. "If a manufacturer is surgical and very thoughtful," he adds, "it can obtain the new [technical] skills it needs, but the company also needs to address those other changes if it is going to get the most out of its new technological capabilities."

How will our supply chain of the future operate?

"Resiliently" is a key part of the answer to this question. Hanbury says that manufacturing clients are asking his group "what the manufacturing network of the future should look like and how can we make it resilient to counter at least some of the uncertainty in the world." Many supply chains are currently undergoing significant makeovers for a couple of reasons. First, most of the service and customer-experience related changes manufacturers are implementing require a ripple effect of related changes among supply partners and vendors, Gootee notes. Embedding sensors in a piece of machinery to enable predictive maintenance that delights customers with better/faster/cheaper performance requires integrations with maintenance vendors and, potentially, trading partners, for example. Second, manufacturing networks are welcoming new trading partners—especially new technology suppliers, some of which have little if any experience working with traditional industrial companies. KPMG's Mayor reports that low-clock-speed businesses (traditional manufacturers) and high-clock-speed businesses (high-tech product manufacturers and suppliers accustomed to much shorter product cycles) need help understanding each other's requirements and approaches and working together. This work extends beyond supply chain into engineering and product development. 

Can you help us with what you've always helped us with?

"There are still a very broad range of traditional manufacturing activities that need to be performed, in addition to Industry 4.0 work," Hanbury notes, pointing to lean implementations and manufacturing network improvements. "A lot of companies would be better off applying lean principles first, and then figuring out what to automate and digitize, as opposed to just throwing a bunch of industry 4.0 applications at a manufacturing process." Enterprise resource planning (ERP) systems, which many manufacturers tend to significantly customize, always need attention and will need even more to integrate with new Industry 4.0 technologies and data. "A lot of clients have recently upgraded their ERP systems," French reports. "Regardless of whether they put in a completely new system or upgraded to a new version, they're all looking to figure out how to generate and access better data on the business to maximize returns on all of the new technology they're investing in."

Barring extreme external volatility, these investments should continue for a long time—and take a long time for manufacturers and their consulting partners to optimize. "There is a lot of pressure to move quickly," Hanbury adds, "but you can't just flip a switch." 

Beyond the Buzzword: Four Industry 4.0 Challenges

As "Industry 4.0" achieves buzzword status, many companies are making Industry 4.0 investments in the form of pilots spearheaded by CIOs and manufacturing executives, notes Tom Mayor, the KPMG partner who serves as the global leader of his firm's supply chain center of excellence. Mayor suggests that companies can generate greater value from Industry 4.0 investments by treating it as a more comprehensive and strategic opportunity supported by C-suite planning first, and then designing a portfolio of initiatives to pursue. This is just one of several common challenges manufacturing consultants are helping clients address; others include:

1. Thinking small: A new 3D printer can lead to incremental improvements in inventory carrying cost; it can also enable a supplier to build a better fuel inlet nozzle that reduces the amount of fuel and airline engine burns, Mayor points out.

2. Individual business cases:Rather than treating Industry 4.0 as a portfolio of investments, companies tend to rely on traditional ROI measures and payback schedules typically associated with one-off projects. Yet, insights gained from one failed technology pilot can drive the success of a much more valuable initiative down the road. Many manufacturers "need a new way to evaluate these projects," says Vladimir Lukić, a Boston Consulting Group partner and managing director who is a member of the firm's industrial goods, operations, and people and organization practices.

3. Analysis paralysis:Manufacturers are confronted with a staggering number of Industry 4.0 choices. "There are an overwhelming number of use cases," says Peter Hanbury, a Bain and & Company partner and the leader of the firm's manufacturing excellencepractice in the Americas. The same holds true for technology vendors. "Take any category [of technology[ and you'll find 50-plus vendors that can do it decently," says Lukić. "That can create a little bit of analysis paralysis… companies can get stuck in time-consuming exercises figuring out the right vendor."

4. Scaling:Many Industry 4.0 pilots can be conducted quickly and inexpensively. Lukić recalls a project integrating sensors and related technology into 20 machines that took two weeks. Happy with the results, the client requested the same work on 1,000 machines—an effort that would take roughly 500 days unless significant changes were made.

Q&A with BDO's Rick Schreiber 

"When" not "if." That's how Rick Schreiber, the National Leader of BDO's Manufacturing and Distribution Practice, characterizes the manufacturing industry's adoption of Industry 4.0. Of course, the journey to digitization is pockmarked with challenges and competing priorities. Schreiber recently took time to participate in an email exchange with Consulting, and his insights illuminate how manufacturing companies are treating digital transformation and related technological disruptions as a "continuous evolution."

Consulting: What are the most noteworthy external forces enacting on manufacturers right now?

Schreiber: The obvious answer is changes to U.S. trade and foreign policy. The current administration's views on trade diverge pretty significantly from its predecessors', and there is a lot of concern from manufacturers and economists alike about the potential ramifications of more protectionist policies and global trade wars. The bigger story, however, is that of technology disruption—what many in the industry are hailing as the fourth industrial revolution, or Industry 4.0. The convergence of innovations in the cloud, analytics, robotics, 3D printing, artificial intelligence, virtual reality, blockchain and other emerging areas will usher in a new chapter for manufacturing. From the supply chain to the factory floor, these technologies are changing every aspect of manufacturers' operations, in which plants, processes, products and people come together in an entirely new way, blurring the line between the digital and the physical. Forget about tit-for-tat trade wars—global manufacturing dominance will be decided by the race to innovate.

Consulting: How are the adoption and use of emerging technologies (e.g., AI, robotics, RPA, IoT, etc.) progressing throughout the industry? And what are some of the most promising applications of these advancements?

Schreiber: Last month, I attended Hanover Messe—the world's largest industrial fair hosted annually in Germany—and was inspired and impressed by what I saw. There were over 20 exhibit halls the size of city blocks with 200,000+ attendees – showing off the latest innovations in IoT, AI, robotics, 3D printing and other Industry 4.0 technologies. One of the most promising applications is 3D printing, especially now that the technology is no longer so cost prohibitive and able to work with a much wider variety of materials. 3D printing has the potential to restructure supply chains, as manufacturers and even their customers switch to using on-premise additive manufacturing capabilities. We're also going to see an evolution in product design to smaller parts, less waste and more options for customization. But remember, Industry 4.0 is an umbrella term for the technological disruption happening in manufacturing today—it can refer to something as small as sensors that collect data on machine efficiency. Industry 4.0 isn't an endpoint—it's a continuous evolution that looks different for every manufacturer.

Consulting: What common challenges do manufacturers face when investing in these emerging technologies?

Schreiber: There are a few main hurdles: cost, figuring out where to start, and perhaps feeling that you're so far behind technologically that you'll never be able to catch up. As consultants, we need to be focusing on the practical use cases and ROI of Industry 4.0 investments instead of overwhelming our clients with flashy technology projects they aren't ready for.  We believe Industry 4.0 offers real value for every manufacturer – you just have to know where to start. This involves assessing your Industry 4.0 readiness and determining where you can make investments that drive immediate value.

Consulting: Is there anything else that manufacturers should keep in mind regarding Industry 4.0 investments?

Schreiber: Manufacturers—especially those that have a comfortable lead in the market—may have trouble convincing all their relevant stakeholders of the necessity to invest in Industry 4.0. Manufacturers may find that they have to fight for short pilot projects that demonstrate Industry 4.0's potential to bring real, immediate value to their company. But cost, readiness, and leadership approval aside, you can't forget about your workforce. Industry 4.0 isn't about replacing people with technology—it's about man and machine working together like never before. That said, many manufacturers will need to retrain and hire new workers to wield new technologies to their fullest potential. This too, takes significant time and resources, but it's better to get started now.