Digital supply chains and digital operating systems: Why it’s vital to persevere through the hype
Manufacturing is on a path towards digital. Early adoption of digital operating systems technologies, and perseverance, will pay off and pave the way, ultimately, towards full-scale digital supply chains.
Peering into the future, how long will it be before supply chains are entirely digital, when manufacturers plan, produce, distribute and sell in a fully digitized system?
By 2025, a fifth of all manufactured products will have no human processing input, and will only be physically touched by the end-user or consumer. Another example, with implications for the next generation of computing and communications devices, and mobile technologies: Moore’s Law – that the processing power of silicon transistor chips doubles every two years – will imminently be obsolete; the dawn of quantum computing means that infinitesimally small microchips will carry immense data capabilities.
Indeed, next-generation value networks will be powered by what global advisory firm Gartner calls ‘digital operating systems’ (DOS). These blend the established, crucial lean pillars of production and continuous improvement with advanced technologies to create a more intelligent, agile, connected and predictive digital supply chain of which the manufacturing operation is one part of a synchronized, end-to-end modality.
Pivoting to digital systems and technologies enhances business and financial performance
Digital supply chains have, for some time, been touted for their potential to drive improvements and lever competitiveness. Three years ago, the Centre for Global Enterprise estimated a 10% revenue boost and a 20% cut in procurement costs by adopting transformative digitization tools and processes.
This is one of many assessments which conclude that digital systems and applications enable an enterprise to redesign for step-change initiatives in production processes, customer satisfaction, demand shaping, and innovation. Cost-efficient manufacturing and standardized product excellence remain foundational, but digital can forge new all-round value.
Improved data gathering and analysis steers better strategy and decision-making; a redesigned ecosystem across infrastructure, talent architecture and workflows creates customer service improvements and production efficiencies. Benchmarked against industry averages, 45% of companies at mature stages of digital progression report achieving higher revenue growth, and 43% improve their net profit margins. And organizations with advanced capability are three times more likely than those at early-stage digital progression to outperform the industry average.
Digital transformation is accelerating
In 2019, the number of companies investing in digital transformation doubled versus the previous year. A new report by market research firm International Data Corporation (IDC) calculates that, despite the pandemic, digital transformation expenditures are expanding. IDC projects such investments to grow at a compound annual growth rate (CAGR) of 15.5% between 2020 and 2023, with a cumulative investment in these three years of $6.8 trillion.
Evidently, the leaders of most companies with large revenues, global footprints or competitive outlooks grasp the digital promise – if not, always, its agenda.
But the uptake of new technologies is often followed by a phase of sub-optimal application, even a backsliding. And this characterizes even some world-class companies. Gartner has plotted a discernible pattern, noting a bell-shaped ‘hype cycle’ whereby technologies are quickly embraced and reach a peak of adoption, with inflated expectations, before dropping into what the consultancy calls a ‘trough of disillusionment’. These concepts, technologies or methods then rise again, this time gradually, towards more standardized, productive, industry-wide implementation.
This pattern or trend reflects a combination of pitfalls
Strategies are not holistically and realistically planned, nor comprehensively implemented. Investment decisions are weighted to easier projects or lower capital costs rather than prioritized, business-enhancing modalities. The appeal of the new is not balanced with the need to retain, and indeed solidify, foundations of lean best practices.
Psychological biases play a role
Even hard-nosed and experienced business leaders are generally hard-wired with an optimism bias. Studies by behavioral economists and cognitive scientists show we are too optimistic in the short term, and make decisions without thinking clearly, consistently and thoroughly about the possible longer-term benefits. Impatient and impulsive thinking is exacerbated in the context of today’s Internet-of-Things which is pushing humankind’s knowledge curve to an extraordinary gradient, projected soon to represent a doubling every twelve hours. The past is becoming a poorer guide to predicting the future.
Pessimism, even disillusionment, in uncertain times
Equally faulty is a negativity bias which prevails in the context of major recent news events. This can skew perspectives and decisions, such as the pandemic, the uncertainties of Brexit or the geopolitical volatility of the important economic region of Hong Kong.
Conducted even before the full effects of COVID-19 unraveled, a survey of nearly 1,600 CEOs in more than 80 countries reflects a 10-year low-point in sentiments surrounding global economic outlook and GDP growth.
So, whilst CEOs, CSCOs and CTOs understand the benefits of, and the need for, new technologies, there remains a degree of apprehension in implementing them, especially those involving AI, amongst many manufacturing and supply chain organizations.
This hesitancy may be understandable. But consider Winston Churchill’s belief that a crisis “should never be allowed to go to waste”. Smart manufacturing, digital factories, DOS: These offer huge potential. And volatility and ambiguity inherent in business today is precisely one of the contextual challenges digital systems can help navigate.
How to transition towards full-scale DOS
Transformation comes with challenges; however, companies with an existing foundation of best practice across people, process and technology are well-positioned to succeed as they move towards full-scale DOS.
In addition to having a solid best practice foundation, organizations must also ensure their DOS implementation strategy matches their current state of maturity. Determining a company’s existing maturity level should be the first step in plotting out a DOS implementation. A maturity assessment will reveal the company’s current baseline state and highlight key focus areas, which will assist in mapping out a DOS implementation process which focuses on adopting new technologies and processes at the right pace.
DOS implementation focus areas
Effectively implementing a DOS requires a synchronized approach to people, process and technology, underpinned by best practice. However, for many organizations, the challenge is determining where to start.
Organizations should focus on these seven areas to steer the course of their DOS implementation:
|1. Leadership’s strategy, goals and objectives.||The pace of change requires constant projection of technological and systems capabilities next year; the possibilities in five years’ time; and blue-sky predictions a decade ahead. This three-gear strategic planning through the trough allows a focus on current requirements for competitiveness, what could soon generate first-mover advantage, and innovations carrying the possibility to catalyze game-changing revenue generators. “The sagacious businessman is constantly forecasting,” asserted the eminent 20th-century economist and mathematician Irving Fisher.|
|2. Organizational capability, skills and culture.||A successful DOS implementation is largely dependent on the digital capability of those within the organization. As such, companies should refocus organizational structures for inclusive decision-making, as well as actively drive a culture change by promoting new behaviors and competencies.|
|3. Manage the manufacturing network.||Supported by modern technology, manufacturing capacity should be managed across the entire organization (including outsourced and external partners) to ensure client needs are consistently met and exceeded.|
|4. Redesign the ecosystem, focus on metrics.||A digital ecosystem primes the ability to leverage external partnerships for enhanced value-generation, customer responsiveness, and innovation. For example, Volkswagen’s Industrial Cloud is the manufacturer’s open platform, in development since 2019 with Amazon Web Services, aggregating data from all plant, equipment and machinery across the 122 factories in the Group. The vision is to connect, too, with its global supplier network of some 1,500 companies in over 30,000 locations. Partnerships of this ambition help to maintain momentum for iterative digital progressions.|
|5. Promote operational visibility.||For organizations to harness the full benefits of collecting and measuring plant, equipment and machinery data, they also need to ensure the processes and capabilities to share this information across the organization is in place. Implementing a DOS means sharing data across the global organization to drive performance improvements at each individual site.|
|6. Process improvement.||Organizations should consistently focus on process improvement to ensure the production of defect-free products that meet client needs. This can be achieved by focusing on redefined standard work and standardizing processes to replicate successes across the global organization.|
|7. Technology.||Technology adoption and optimization forms the base of any successful DOS implementation, enabling an organization to optimize day-to-day manufacturing activities and implement global improvement initiatives.|
Procrastination is the thief of time
Don’t be distracted by short-term shifts in systems surrogates or technology preferences; nor by the diminishing marginal returns – or even capex with a disappointing, unfulfilled payback period – as automation or applications such as 3D printing, drones, and digital twinning become less immediately innovative. Be cognizant of what behavioral economics and psychology tell us about our biases. Nobel Prize winner Daniel Kahneman coined the phrase ‘loss aversion’ in his 2013 book Thinking, Fast and Slow: our minds reflexively respond to potential loss more powerfully than to a corresponding gain.
Leaders who are slow to make the transformation to digital – whether this is due to an aversion to change or uncertainty about where to start – may see their organizations suffer in terms of competitive advantage in the three-to-five-year progression of manufacturing advancements.
To avoid the potential pitfall of not transforming quickly enough, organizations should allocate investments to the key problems and scalable opportunities. Stick to the three-to-five-year plan, but remember that perseverance should not mean rigid adherence. Reassess at least annually within the context of a longer-term horizon, as well as a review of the competitive and industry landscape. Fluidity is an advantageous aspect of a robust DOS and related ecosystem.
Understand the ‘hype cycle’ and act dispassionately
Just like established best practices and improvement methods, the journey towards the company’s DOS, within a next-generation value network, requires diligent planning, iterative initiatives and creative implementation. Smart manufacturing is going to get smarter. The leaders will be those with a solid best-practice foundation who engage with the transformation holistically – and timeously.
‘Uncovering the connection between digital maturity and financial performance’, Deloitte Insights, 2020
‘Accelerating smart manufacturing: The value of an ecosystem approach’, Deloitte Insights and the Manufacturers Alliance for Productivity Innovation (MAPI), 2020
‘Digital Supply Chains Increase Revenues and Halve Costs (V2)’, The Centre for Global Enterprise, January 2017
‘Now. Next. Beyond. If you don’t plan in three dimensions, will you be left behind?’, EY, 15 May 2019
‘Hype Cycle for Manufacturing Operations Strategy, 2020’, Gartner, 6 August 2020
‘FutureScape: Worldwide Digital Transformation 2021 Predictions’, International Data Corporation (IDC), 29 October 2020
‘The Risks and Rewards of Digital Maturity’, MIT-Sloan Management Review, 3 June 2019
PwC’s 23rd Annual Global CEO Survey: Navigating the rising tide of uncertainty, 2020
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