Manufacturers are no strangers to dealing with turbulent market conditions, complex customer demands, and tightening regulation. However, the current global landscape is a sea of uncertainty that can sink even the most buoyant manufacturer.
New technologies, improved planning, and better use of data have created huge opportunities for manufacturers to adapt. Analyzing key market insights, IFS has uncovered five factors outlining how manufacturers can become more resilient.
As a measurement of a company’s environmental, social, and governance initiatives, ESG 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.
For manufacturers, the primary focus at present is on the environmental, or “E” aspect of ESG, with the ultimate mandate to show progress towards 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 reporting 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 European Union’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 evolving, and we already see regulatory frameworks emerging to standardize the reporting and disclosure of ESG metrics around the world and jurisdictions.
In the United States, 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 on, and with these, along with other ESG disclosure requirements, tightening up between 2023 and 2024, all manufacturers must prepare for reporting readiness.
However, 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.
This year 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 less of a priority.
This is because Scope 3 emissions—all the emissions indirectly generated by a business—can account for up to 75% of a companies’ total greenhouse gas (GHG) emissions on average, and therefore represent a large proportion of climate-related risk.
By 2024, a high proportion of manufacturers will appoint resources to roles in digital science to support the development of their digital twin strategy. As the integration of applications and machines progresses, the amount of data being collected is increasing, exponentially.
An estimated 127 new devices are connected to the internet every second, which will lead to 79.4 zettabytes of data by 2025.
Not all these new connected machines are being used in manufacturing. However, it does show that 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.
Manufacturers are realizing the importance of data. In fact, new positions are being created for data scientists, or chief data officers, whose role is to understand 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 that include this role will be able to move through the data transformation journey and harness the power of digital twin in their business.
Global supply chain shortages, price inflation, and recession are increasingly pointing to digitalization as an enabler for companies to withstand geopolitical and macroeconomic disruptions—60% of manufacturers plan to scale up digital investments beyond “pilot purgatory” to drive business value.
To what extent have manufacturers been able to make use of technology to protect business performance? We have seen the basics covered. Reduced costs, improved operational efficiency, and shortened time to market are among the main benefits. But 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 & Company highlights that many manufacturers have not been able to move beyond pilot purgatory, meaning that they have not been able to scale successful pilot 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 and 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 findings that 62% of manufacturers are struggling to articulate digital technology ROI which, if deployed in siloes, is to be expected.
This year is a continuation of unpredictable market dynamics, and manufacturers must start reevaluating 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 and rolled out across the wider manufacturing network.
The additional drawback of pilots is the impact on talent. Digital skills remain locked away and to realize the full value of their digital transformation, manufacturers must also focus on accelerating their people enablement plans when it comes to digital skills. Without this, projects will likely need to be postponed, resulting in a slower time to deliver ROI and risk the loss of 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 and help them create a competitive advantage.
The IFS/IDC study also 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 resetting the focus on business, not technology, first.
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 impacting business performance. By 2025, two out of three manufacturers will have digitally enhanced their legacy assets, enabling them to be connected to their Manufacturing Execution System (MES) systems and improve productivity.
However, not all manufacturers are in this fortunate situation. Many still own large expensive production machinery built before computer integration came as standard. These manufacturers 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 system by adding sensors throughout and achieve real-time visibility of the asset’s performance.
This asset modernization approach is more cost effective in a lot of cases as Capital expenditure (CapEx) investments are not required and the ramp up to digital transformation can be made smoother without compromising on value delivered.
The increased demand for sensors for legacy machinery points to a renewed focus on MES rollout in the next couple of years.
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 cinema fiction has become a modern-day reality for many manufacturers. By 2025, 40% of manufacturers will use AI to bolster business decision making.
Beyond the physical world of robotics, drones, and autonomous vehicles, it is what we can’t see that is really changing and influencing manufacturers globally to think and act differently. AI and machine learning are allowing manufacturers to make smarter, more accurate and actionable decisions—essentially enabling 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 allows manufacturers to become leaner and more agile.
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, with this growth likely to lead to 40% of manufacturers using AI to contribute to crucial decision-making processes. But is this just the tip of the iceberg? We expect to see AI go much deeper to vastly improve factory efficiency, staff training, and 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? There may be an opportunity to first consider AI to help guide the decision.
Manufacturers of all kinds are being forced to rethink how they operate. The reality is that the current levels of uncertainty created by geopolitical events, supply chain disruptions, and the ensuing reactive consumer behavior are not making this a question of “if?” but of “when?” A clear certainty is that resilience, agility, and adaptability are technology dependent to allow companies to stay relevant and profitable.
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