Is your digital strategy fit for the manufacturing future? – EY
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EY-Parthenon Nordics, Advanced Manufacturing & Mobility, Strategy and Transactions Leader
Combines strategy and transaction consulting with entrepreneurship in digital technology. Favorite hobby is downhill skiing.
EY-Parthenon Director, Advanced Manufacturing & Mobility, Strategy and Transactions, Ernst & Young AB
Passionate strategy consultant. Team builder. Skiing enthusiast.
EY-Parthenon Partner, Strategy and Transactions, Ernst & Young LLP
Experienced strategic advisor. Has worked with institutional investors and senior management across the industrial tech landscape.
In brief
As physical and virtual worlds collide, discrete manufacturing, or the manufacturing of individual products and components, is undergoing a seismic shift. Discrete manufacturers are discovering new ways of operating, but they are challenged by evolving customer expectations and a redefined competitive landscape. As products become more digital, intelligent and connected there are increased opportunities for business growth as well as increased risk for business disruption. In fact, 68% of CEOs of some of the largest global industrial products companies are increasing digital/technology investments this year, according to a 2022 EY survey of manufacturing CEOs1. These CEOs also cite business disruption by non-traditional players as one of their top three risks.
Tech investment
of CEOs of some of the largest global industrial products companies are increasing digital/technology investments this year.
Discrete manufacturers need to devise a digital strategy that provides the necessary analytical framework to understand and respond to the megatrends impacting automation and digitalization, as well as the digital trends that directly impact the organization’s competitive position.
This strategy is often integral but distinct from the company’s purpose and overarching business objectives. It needs to outline how digital technologies can support the current hardware business while simultaneously developing new bundled hardware, software and services solutions; enable new customer interfaces; and improve internal operational efficiency.
The size and complexity of a digital strategy can be daunting. However, by breaking it down into three more manageable categories – reimagining the business model, digital assets and solutions, and digital operations – discrete manufacturers can more ably bring their digital strategy to life.
A chart showing how digital trends (megatrends, customer demands and competition) inform digital strategy across core hardware business, bundled solutions, customer interfaces and internal efficiency. This impacts key digital transformation drivers such as business model changes, assets and solutions and digital operations.
Chapter 1
Megatrends, new competition and evolving customer expectations demand a digital response.
The latest EY Megatrends identifies a number of cascading risks driving a range of cross-sector disruptions with varying impacts on discrete manufacturers. However, three trends in particular stand out as highest-impact propellants toward digitalization.
After macroeconomic shocks like the COVID-19 pandemic, rising geopolitical tensions with the war in Ukraine and tensions between the US and China, and material shortages and supply chain disruptions, manufacturing companies are accelerating an ongoing trend toward regionalization. In a 2022 EY study, 53% of US and European manufacturing companies say they have near-shored or re-shored operations in the last 24 months. Relocating or increasing existing production in Europe and the US will put high demands on automation and digitalization to maintain competitive production costs.
Coming home
of US and European manufacturing companies say they have near-shored or re-shored operations in the last 24 months.
For manufacturers, finding and keeping both engineers and blue-collar workers continues to be difficult.
Manufacturing industries face increasing competition for scarce science, technology, engineering and math (STEM) resources, and decreasing interest and time available for engineers to learn at a hands-on level as previous generations did. New generations of engineers expect simplified user interfaces, enabled by low- or no-code solutions, rather than the more complex interfaces used on many factory floors.
There is a similar problem in the availability of skilled blue-collar workers. In one Danish machine shop with roughly 70 machine operators, every worker was recruited from abroad.
The challenge is compounded when companies seek to build blended teams that include engineers and specialists from fields, such as data science, cybersecurity and product design and usability.
These skills shortages are driving discrete manufacturers to digitalize activities both in product development and production to reduce the need for scarce manpower. In the EY CEO Outlook Survey, manufacturing CEOs identified technology and automation investments to reduce labor costs as the leading strategic driver in improving margins.
Scope 3 greenhouse gas emissions are the result of activities from assets not owned or controlled by the reporting organization itself, but from separate operations within the organization’s value chain. These emissions significantly increase the demands on manufacturing companies to know and manage their supply chain and customers. This will lead to a higher need for traceability, as well as additional focus on yield and energy optimization across the supply base, which manufacturers will need to monitor. At the same time, manufacturers will want to encourage both suppliers and customers to automate, either on their own or with the manufacturer’s support, for greater transparency throughout the supply chain. Once manufacturers can see where the emissions are, they have more opportunities to improve efficiency and apply solutions that reduce their CO2 emissions.
Often overlooked or underestimated is the profound shift digital technologies can have on how discrete manufacturers do business and what this means for existing players in the industry. Two trends having an impact are the increasing access customers have to data and cloud manufacturing solutions.
Discrete manufacturing customers are gaining access to more data from other organizations within their value chains. This expanded data access is presenting a growing challenge to value chain participants such as CAD and computer-aided manufacturing (CAM) providers, machine tool manufacturers, and cutting tool providers. These suppliers have historically focused on their own markets while cooperating with other players in the ecosystem. Improved digital solutions will increase data availability and transparency, which in turn will drive commoditization and standardization. This will benefit manufacturing companies’ supply of equipment, consumables, software and services. However, traditional hardware suppliers will likely face increased competition as their application knowledge advantage gradually becomes available digitally. This could open the opportunity for tech companies to introduce more value into the value chain and tap into some of the available profit pools.
Similarly, the boom in data availability will increase demands on software suppliers in the industry. Customers are increasingly demanding seamless data flow across applications, which will force players in the industry to cooperate to solve customer problems.
Since the early- to mid-2010s, cloud manufacturing platforms have introduced new ways for companies to order components and assemblies. Through cloud manufacturing platforms, customers can receive instant quotes for parts and components, reducing lead time for prototyping and improving customer access to component quotes and alternative sourcing options.
The jury is still out for the mid- to long-term impact of these solutions. However, it is clear they have the potential to significantly disrupt the way small and mid-sized machine shops, other component manufacturers and assembly shops interact with their OEM or Tier 1/n customers. By significantly reducing the CAD to quote lead-time and accumulating know-how across manufacturing processes, methods, machinery and tools, these players have the potential to disrupt existing customer-supplier relationships in the industrial products sector in general, and specifically in component manufacturing. The next question will be to what extent they can move beyond prototyping and pre-series to series production.
Digital solutions are changing customer demands. Just as in consumer industries, industrial product companies’ customers are demanding customization, responsiveness and user-friendliness from their suppliers.
Given the often long and complicated processes of changing product offerings and employee behaviors, the stakes are high. Those able to quickly adapt and change their approach to customers have a lot to gain, while laggards could face deteriorating sales in the medium term.
There are three main ways discrete manufacturers can address increasing customer demands.
Discrete manufacturers often receive information about end customer demands as it makes its way through the supply chain, which creates delays in response time for manufacturers. This leads to a need to improve demand transparency and own responsiveness. Connected products can provide discrete manufacturers with greater transparency into demand, thus enabling them to become more responsive to customers. With deeper insights into customer behavior, manufacturers can offer proactive services including through preventive maintenance and remote customer support.
A generation of highly skilled engineers will retire over the next five to 10 years. Skills such as numerical control (NC) coding and manual pre-setting of machining tools will become increasingly scarce as new generations of engineers and operators expect easier user interfaces. This opens new opportunities for native software solutions providers such as product lifecycle management companies to play a more important role.
As a result, there will be a race where existing and new software players who want to own as much of the customer process as possible will compete with incumbent industrial product companies, which will need to develop new ways to interact with their customers so as not to lose relevance.
Higher levels of end-product customization invariably result in smaller batch sizes, as well as greater complexity. These challenges put increasing demand on manufacturing companies to manage optimal line and machine use, predictable lead times and high quality.
Chapter 2
If developing a comprehensive digital strategy seems overwhelming, break it down into manageable pieces.
An enterprise-wide digital transformation can be a mammoth undertaking. By breaking it down into bite-size chunks, discrete manufacturers can more easily identify the digital strategy’s purpose and vision, as well as develop an execution plan that drives to the desired outcomes.
For most industrial product companies, the legacy hardware business and its associated aftermarket services make up almost all revenues. It’s therefore crucial to understand how digital and new technologies can protect and grow the hardware sales as well as the often more profitable aftermarket services. This is often done by adding data capabilities to the product portfolio, such as sensors for data collection. A good and well-executed strategy maintains or increases profitability levels, which in turn can finance new digital assets and solutions.
New digital assets and solutions are either stand-alone, refined or repackaged solutions of existing hardware, services and software. One key question the strategy needs to answer is how to prioritize the plethora of opportunities that exist.
Most leading global discrete manufacturers are highly innovative companies that spend a significant share of turnover on research and development – often in the range of 5% to 10%. This provides a strong foundation from which to be successful. At the same time, it’s important to recognize the different requirements between hardware and software product development and sales. Some industrial product companies underestimate the industrialization and product lifecycle management of software, including training, upgrades and patches, as well as online support. Any digital strategy needs to include a careful analysis of make versus buy, ideally including a separate digital M&A strategy.
To protect and improve access to customers’ buying process and decision-making, it is critical that digital assets and solutions support new ways of interacting and supporting customers, and possibly entirely new business models.
This is often a challenging part of the strategy since it requires not only the innovation and development of new solutions, but also a solid connection to the rest of the company to sell, deliver, service, and invoice for such solutions.
Digital strategies can also facilitate in a more cost-efficient way revenue growth from smaller customers, a market segment where margins are more likely to be compressed.
An integral but sometimes overlooked part of a comprehensive digital strategy is the digital operations strategy. Well-executed, such a strategy could lead to significant financial benefits by improving return on capital employed (ROCE) levers, such as reduced costs and improved inventory management.
During the transformation process, discrete manufacturers should include operations digitalization metrics in all regular board reporting. Ideally, reporting should include the manufacturer’s performance versus key competitors and leading practices among industrial peers. To be effective, these digitalization metrics should logically tie to well-known performance metrics, such as overall equipment effectiveness (OEE), to gain the right traction.
We focus on strategies to originate, build, and scale corporate ventures and reimagine your core business for growth.
Chapter 3
Three steps can help discrete manufacturers reach their digital transformation destination with confidence.
Understanding digital trends and developing a good digital strategy require thorough analysis and close cooperation across the company. The most difficult and important part of a digital transformation journey is repositioning the organization as a digital-first company. Some of the digitalization constraints often encountered include:
To overcome these constraints, we offer three ways discrete manufacturers can achieve a successful digital strategy implementation.
The two main drivers for changing existing business models or developing new ones are to keep or improve the customer interfaces, and to respond to customer demands for new ways of doing business. The following are the most common examples of business model reinvention discrete manufacturers consider.
Discrete manufacturers need ways to influence their customers’ decision-making process as early as possible. One approach is vertical integration of various production and engineering services.
Organizations can extend the value chain through both backward and forward vertical integration. Examples of the former include robotics and line automation builders acquiring automation engineering consultancies. Through these acquisitions, discrete manufacturers can gain access to automotive and other OEM businesses; scarce customer manufacturing understanding and implementation capabilities; and proprietary custom-made software solutions. Examples of the latter include OEMs acquiring distributors and consultancies to gain closer customer access, secure brand loyalty, or even gain access to competitors’ distribution and aftermarket customer base with the potential to gradually replace them with the OEMs’ own spare and wear parts.
By combining such production and engineering services or software solutions with the legacy hardware business, discrete manufacturers can develop new business models for their customers in ways that also raise the entry barriers for competitors.
Smaller batch sizes, requirements on reduced lead times, and skills shortages are creating a growing demand for manufacturing-as-a-service (MaaS) business models. MaaS will reduce the execution risk by letting suppliers (e.g., of machinery or tools) decide the manufacturing solution setup as well as executing the actual production.
The customer and the supplier both can benefit by shifting the focus from cost to productivity. Such business models are designed either as a pay-per-part model or a pay-per-use model. The former is most suitable for high-volume situations, while the latter is most suited for high-mix/low-volume situations.
Tightly linked to MaaS is the payment, which invariably will be a recurring revenue type of model. This is attractive for discrete manufacturing customers as well as suppliers. A rental model for equipment, or a consumption or usage-based model for consumables, will lead to a smoother revenue intake. The component manufacturing industry has always had relatively high demand volatility; recurring revenue contracts can smooth this out.
Digital assets and solutions will look different depending on the market of the individual discrete manufacturer. The key is to make sure the company’s chosen digital assets and solutions support the strategy both in terms of protecting the current core hardware business and finding new ways of interacting with the customer to generate new revenue streams.
Consider the following technologies as part of the digital asset and solution transformation.
Reimagined digital operations should include tailored digital KPIs that make sense to the organization across functions, from sales and aftermarket to operations and support functions. By emphasizing and improving digital KPIs, performance metrics will also improve, which eventually should result in increased revenues, reduced costs and improved working capital.
For example, one large global discrete manufacturer made a company-wide analysis of the financial benefits digitalization could bring. All major processes, such as sales, aftermarket and production, were analyzed across all business units. Digital performance KPIs were agreed and benchmarked against peers. Business units and functions set three-year targets and then translated through performance KPIs into financial impact. The result was a gross ROCE improvement of 6 percentage points.
Discrete manufacturers need to assess the full extent of digital possibilities when re-designing internal operations to avoid getting stuck in the old ways of running the business while simultaneously striving for incremental and short-term improvements.
Discrete manufacturers will want to improve KPIs so that the outcome and not the technology is the focus. However, when there is a need for a technology upgrade, discrete manufacturers need to look beyond the latest ERP version. They need to assess the full extent of digital possibilities when re-designing internal operations to avoid getting stuck in the old ways of running the business while simultaneously striving for incremental and short-term improvements. This is often a difficult tradeoff. One way to approach this tradeoff is to have a clear and bold long-term vision, or objective, of what is possible, and make sure short-term improvements align with the vision and don’t unnecessarily delay the mid-to-long-term objectives.
Two examples of such visions within production are lights-out and closed-loop manufacturing:
While there are still technical and economic restrictions to realizing visions like these, it is prudent to gradually move toward these strategies while reaping financial benefits along the way.
Another example is automating all forecasting. While a lack of supporting systems and data sources means this isn’t possible in the short- to mid-term, one way to prepare for the long-term vision would be to start working with data-driven systems rather than spending time and money on implementing process-driven forecasting systems.
To summarize, a digital strategy needs to take both a long-term “art of the possible” approach while leveraging digital to reap short-term financial benefits.
Chapter 4
The answers will help inform and guide a more effective digital transformation.
While many industry analysts have limited their view of digital transformation in the manufacturing industry to automation possibilities and the capabilities of one or several individual technologies, we believe these benefits are just the tip of the iceberg in terms of the total impact digitalization will have on the discrete manufacturing industry over the coming decades.
As discrete manufacturers develop their digital strategies and embark on an enterprise-wide digital transformation, they should ask the following questions:
The discrete manufacturing industry is undergoing significant change as the physical and virtual worlds meet. This will lead to new ways of operating. It will also challenge the way customers want to do business, and how the competitive landscape is defined. A robust and manageable digital strategy will help discrete manufacturers from digital-optional to digital first.
About this article
EY-Parthenon Nordics, Advanced Manufacturing & Mobility, Strategy and Transactions Leader
Combines strategy and transaction consulting with entrepreneurship in digital technology. Favorite hobby is downhill skiing.
EY-Parthenon Director, Advanced Manufacturing & Mobility, Strategy and Transactions, Ernst & Young AB
Passionate strategy consultant. Team builder. Skiing enthusiast.
EY-Parthenon Partner, Strategy and Transactions, Ernst & Young LLP
Experienced strategic advisor. Has worked with institutional investors and senior management across the industrial tech landscape.
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EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.
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How GenAI strategy can transform innovation
Select your location
No search results have been found
Local sites
EY-Parthenon Nordics, Advanced Manufacturing & Mobility, Strategy and Transactions Leader
Combines strategy and transaction consulting with entrepreneurship in digital technology. Favorite hobby is downhill skiing.
EY-Parthenon Director, Advanced Manufacturing & Mobility, Strategy and Transactions, Ernst & Young AB
Passionate strategy consultant. Team builder. Skiing enthusiast.
EY-Parthenon Partner, Strategy and Transactions, Ernst & Young LLP
Experienced strategic advisor. Has worked with institutional investors and senior management across the industrial tech landscape.
In brief
As physical and virtual worlds collide, discrete manufacturing, or the manufacturing of individual products and components, is undergoing a seismic shift. Discrete manufacturers are discovering new ways of operating, but they are challenged by evolving customer expectations and a redefined competitive landscape. As products become more digital, intelligent and connected there are increased opportunities for business growth as well as increased risk for business disruption. In fact, 68% of CEOs of some of the largest global industrial products companies are increasing digital/technology investments this year, according to a 2022 EY survey of manufacturing CEOs1. These CEOs also cite business disruption by non-traditional players as one of their top three risks.
Tech investment
of CEOs of some of the largest global industrial products companies are increasing digital/technology investments this year.
Discrete manufacturers need to devise a digital strategy that provides the necessary analytical framework to understand and respond to the megatrends impacting automation and digitalization, as well as the digital trends that directly impact the organization’s competitive position.
This strategy is often integral but distinct from the company’s purpose and overarching business objectives. It needs to outline how digital technologies can support the current hardware business while simultaneously developing new bundled hardware, software and services solutions; enable new customer interfaces; and improve internal operational efficiency.
The size and complexity of a digital strategy can be daunting. However, by breaking it down into three more manageable categories – reimagining the business model, digital assets and solutions, and digital operations – discrete manufacturers can more ably bring their digital strategy to life.
A chart showing how digital trends (megatrends, customer demands and competition) inform digital strategy across core hardware business, bundled solutions, customer interfaces and internal efficiency. This impacts key digital transformation drivers such as business model changes, assets and solutions and digital operations.
Chapter 1
Megatrends, new competition and evolving customer expectations demand a digital response.
The latest EY Megatrends identifies a number of cascading risks driving a range of cross-sector disruptions with varying impacts on discrete manufacturers. However, three trends in particular stand out as highest-impact propellants toward digitalization.
After macroeconomic shocks like the COVID-19 pandemic, rising geopolitical tensions with the war in Ukraine and tensions between the US and China, and material shortages and supply chain disruptions, manufacturing companies are accelerating an ongoing trend toward regionalization. In a 2022 EY study, 53% of US and European manufacturing companies say they have near-shored or re-shored operations in the last 24 months. Relocating or increasing existing production in Europe and the US will put high demands on automation and digitalization to maintain competitive production costs.
Coming home
of US and European manufacturing companies say they have near-shored or re-shored operations in the last 24 months.
For manufacturers, finding and keeping both engineers and blue-collar workers continues to be difficult.
Manufacturing industries face increasing competition for scarce science, technology, engineering and math (STEM) resources, and decreasing interest and time available for engineers to learn at a hands-on level as previous generations did. New generations of engineers expect simplified user interfaces, enabled by low- or no-code solutions, rather than the more complex interfaces used on many factory floors.
There is a similar problem in the availability of skilled blue-collar workers. In one Danish machine shop with roughly 70 machine operators, every worker was recruited from abroad.
The challenge is compounded when companies seek to build blended teams that include engineers and specialists from fields, such as data science, cybersecurity and product design and usability.
These skills shortages are driving discrete manufacturers to digitalize activities both in product development and production to reduce the need for scarce manpower. In the EY CEO Outlook Survey, manufacturing CEOs identified technology and automation investments to reduce labor costs as the leading strategic driver in improving margins.
Scope 3 greenhouse gas emissions are the result of activities from assets not owned or controlled by the reporting organization itself, but from separate operations within the organization’s value chain. These emissions significantly increase the demands on manufacturing companies to know and manage their supply chain and customers. This will lead to a higher need for traceability, as well as additional focus on yield and energy optimization across the supply base, which manufacturers will need to monitor. At the same time, manufacturers will want to encourage both suppliers and customers to automate, either on their own or with the manufacturer’s support, for greater transparency throughout the supply chain. Once manufacturers can see where the emissions are, they have more opportunities to improve efficiency and apply solutions that reduce their CO2 emissions.
Often overlooked or underestimated is the profound shift digital technologies can have on how discrete manufacturers do business and what this means for existing players in the industry. Two trends having an impact are the increasing access customers have to data and cloud manufacturing solutions.
Discrete manufacturing customers are gaining access to more data from other organizations within their value chains. This expanded data access is presenting a growing challenge to value chain participants such as CAD and computer-aided manufacturing (CAM) providers, machine tool manufacturers, and cutting tool providers. These suppliers have historically focused on their own markets while cooperating with other players in the ecosystem. Improved digital solutions will increase data availability and transparency, which in turn will drive commoditization and standardization. This will benefit manufacturing companies’ supply of equipment, consumables, software and services. However, traditional hardware suppliers will likely face increased competition as their application knowledge advantage gradually becomes available digitally. This could open the opportunity for tech companies to introduce more value into the value chain and tap into some of the available profit pools.
Similarly, the boom in data availability will increase demands on software suppliers in the industry. Customers are increasingly demanding seamless data flow across applications, which will force players in the industry to cooperate to solve customer problems.
Since the early- to mid-2010s, cloud manufacturing platforms have introduced new ways for companies to order components and assemblies. Through cloud manufacturing platforms, customers can receive instant quotes for parts and components, reducing lead time for prototyping and improving customer access to component quotes and alternative sourcing options.
The jury is still out for the mid- to long-term impact of these solutions. However, it is clear they have the potential to significantly disrupt the way small and mid-sized machine shops, other component manufacturers and assembly shops interact with their OEM or Tier 1/n customers. By significantly reducing the CAD to quote lead-time and accumulating know-how across manufacturing processes, methods, machinery and tools, these players have the potential to disrupt existing customer-supplier relationships in the industrial products sector in general, and specifically in component manufacturing. The next question will be to what extent they can move beyond prototyping and pre-series to series production.
Digital solutions are changing customer demands. Just as in consumer industries, industrial product companies’ customers are demanding customization, responsiveness and user-friendliness from their suppliers.
Given the often long and complicated processes of changing product offerings and employee behaviors, the stakes are high. Those able to quickly adapt and change their approach to customers have a lot to gain, while laggards could face deteriorating sales in the medium term.
There are three main ways discrete manufacturers can address increasing customer demands.
Discrete manufacturers often receive information about end customer demands as it makes its way through the supply chain, which creates delays in response time for manufacturers. This leads to a need to improve demand transparency and own responsiveness. Connected products can provide discrete manufacturers with greater transparency into demand, thus enabling them to become more responsive to customers. With deeper insights into customer behavior, manufacturers can offer proactive services including through preventive maintenance and remote customer support.
A generation of highly skilled engineers will retire over the next five to 10 years. Skills such as numerical control (NC) coding and manual pre-setting of machining tools will become increasingly scarce as new generations of engineers and operators expect easier user interfaces. This opens new opportunities for native software solutions providers such as product lifecycle management companies to play a more important role.
As a result, there will be a race where existing and new software players who want to own as much of the customer process as possible will compete with incumbent industrial product companies, which will need to develop new ways to interact with their customers so as not to lose relevance.
Higher levels of end-product customization invariably result in smaller batch sizes, as well as greater complexity. These challenges put increasing demand on manufacturing companies to manage optimal line and machine use, predictable lead times and high quality.
Chapter 2
If developing a comprehensive digital strategy seems overwhelming, break it down into manageable pieces.
An enterprise-wide digital transformation can be a mammoth undertaking. By breaking it down into bite-size chunks, discrete manufacturers can more easily identify the digital strategy’s purpose and vision, as well as develop an execution plan that drives to the desired outcomes.
For most industrial product companies, the legacy hardware business and its associated aftermarket services make up almost all revenues. It’s therefore crucial to understand how digital and new technologies can protect and grow the hardware sales as well as the often more profitable aftermarket services. This is often done by adding data capabilities to the product portfolio, such as sensors for data collection. A good and well-executed strategy maintains or increases profitability levels, which in turn can finance new digital assets and solutions.
New digital assets and solutions are either stand-alone, refined or repackaged solutions of existing hardware, services and software. One key question the strategy needs to answer is how to prioritize the plethora of opportunities that exist.
Most leading global discrete manufacturers are highly innovative companies that spend a significant share of turnover on research and development – often in the range of 5% to 10%. This provides a strong foundation from which to be successful. At the same time, it’s important to recognize the different requirements between hardware and software product development and sales. Some industrial product companies underestimate the industrialization and product lifecycle management of software, including training, upgrades and patches, as well as online support. Any digital strategy needs to include a careful analysis of make versus buy, ideally including a separate digital M&A strategy.
To protect and improve access to customers’ buying process and decision-making, it is critical that digital assets and solutions support new ways of interacting and supporting customers, and possibly entirely new business models.
This is often a challenging part of the strategy since it requires not only the innovation and development of new solutions, but also a solid connection to the rest of the company to sell, deliver, service, and invoice for such solutions.
Digital strategies can also facilitate in a more cost-efficient way revenue growth from smaller customers, a market segment where margins are more likely to be compressed.
An integral but sometimes overlooked part of a comprehensive digital strategy is the digital operations strategy. Well-executed, such a strategy could lead to significant financial benefits by improving return on capital employed (ROCE) levers, such as reduced costs and improved inventory management.
During the transformation process, discrete manufacturers should include operations digitalization metrics in all regular board reporting. Ideally, reporting should include the manufacturer’s performance versus key competitors and leading practices among industrial peers. To be effective, these digitalization metrics should logically tie to well-known performance metrics, such as overall equipment effectiveness (OEE), to gain the right traction.
We focus on strategies to originate, build, and scale corporate ventures and reimagine your core business for growth.
Chapter 3
Three steps can help discrete manufacturers reach their digital transformation destination with confidence.
Understanding digital trends and developing a good digital strategy require thorough analysis and close cooperation across the company. The most difficult and important part of a digital transformation journey is repositioning the organization as a digital-first company. Some of the digitalization constraints often encountered include:
To overcome these constraints, we offer three ways discrete manufacturers can achieve a successful digital strategy implementation.
The two main drivers for changing existing business models or developing new ones are to keep or improve the customer interfaces, and to respond to customer demands for new ways of doing business. The following are the most common examples of business model reinvention discrete manufacturers consider.
Discrete manufacturers need ways to influence their customers’ decision-making process as early as possible. One approach is vertical integration of various production and engineering services.
Organizations can extend the value chain through both backward and forward vertical integration. Examples of the former include robotics and line automation builders acquiring automation engineering consultancies. Through these acquisitions, discrete manufacturers can gain access to automotive and other OEM businesses; scarce customer manufacturing understanding and implementation capabilities; and proprietary custom-made software solutions. Examples of the latter include OEMs acquiring distributors and consultancies to gain closer customer access, secure brand loyalty, or even gain access to competitors’ distribution and aftermarket customer base with the potential to gradually replace them with the OEMs’ own spare and wear parts.
By combining such production and engineering services or software solutions with the legacy hardware business, discrete manufacturers can develop new business models for their customers in ways that also raise the entry barriers for competitors.
Smaller batch sizes, requirements on reduced lead times, and skills shortages are creating a growing demand for manufacturing-as-a-service (MaaS) business models. MaaS will reduce the execution risk by letting suppliers (e.g., of machinery or tools) decide the manufacturing solution setup as well as executing the actual production.
The customer and the supplier both can benefit by shifting the focus from cost to productivity. Such business models are designed either as a pay-per-part model or a pay-per-use model. The former is most suitable for high-volume situations, while the latter is most suited for high-mix/low-volume situations.
Tightly linked to MaaS is the payment, which invariably will be a recurring revenue type of model. This is attractive for discrete manufacturing customers as well as suppliers. A rental model for equipment, or a consumption or usage-based model for consumables, will lead to a smoother revenue intake. The component manufacturing industry has always had relatively high demand volatility; recurring revenue contracts can smooth this out.
Digital assets and solutions will look different depending on the market of the individual discrete manufacturer. The key is to make sure the company’s chosen digital assets and solutions support the strategy both in terms of protecting the current core hardware business and finding new ways of interacting with the customer to generate new revenue streams.
Consider the following technologies as part of the digital asset and solution transformation.
Reimagined digital operations should include tailored digital KPIs that make sense to the organization across functions, from sales and aftermarket to operations and support functions. By emphasizing and improving digital KPIs, performance metrics will also improve, which eventually should result in increased revenues, reduced costs and improved working capital.
For example, one large global discrete manufacturer made a company-wide analysis of the financial benefits digitalization could bring. All major processes, such as sales, aftermarket and production, were analyzed across all business units. Digital performance KPIs were agreed and benchmarked against peers. Business units and functions set three-year targets and then translated through performance KPIs into financial impact. The result was a gross ROCE improvement of 6 percentage points.
Discrete manufacturers need to assess the full extent of digital possibilities when re-designing internal operations to avoid getting stuck in the old ways of running the business while simultaneously striving for incremental and short-term improvements.
Discrete manufacturers will want to improve KPIs so that the outcome and not the technology is the focus. However, when there is a need for a technology upgrade, discrete manufacturers need to look beyond the latest ERP version. They need to assess the full extent of digital possibilities when re-designing internal operations to avoid getting stuck in the old ways of running the business while simultaneously striving for incremental and short-term improvements. This is often a difficult tradeoff. One way to approach this tradeoff is to have a clear and bold long-term vision, or objective, of what is possible, and make sure short-term improvements align with the vision and don’t unnecessarily delay the mid-to-long-term objectives.
Two examples of such visions within production are lights-out and closed-loop manufacturing:
While there are still technical and economic restrictions to realizing visions like these, it is prudent to gradually move toward these strategies while reaping financial benefits along the way.
Another example is automating all forecasting. While a lack of supporting systems and data sources means this isn’t possible in the short- to mid-term, one way to prepare for the long-term vision would be to start working with data-driven systems rather than spending time and money on implementing process-driven forecasting systems.
To summarize, a digital strategy needs to take both a long-term “art of the possible” approach while leveraging digital to reap short-term financial benefits.
Chapter 4
The answers will help inform and guide a more effective digital transformation.
While many industry analysts have limited their view of digital transformation in the manufacturing industry to automation possibilities and the capabilities of one or several individual technologies, we believe these benefits are just the tip of the iceberg in terms of the total impact digitalization will have on the discrete manufacturing industry over the coming decades.
As discrete manufacturers develop their digital strategies and embark on an enterprise-wide digital transformation, they should ask the following questions:
The discrete manufacturing industry is undergoing significant change as the physical and virtual worlds meet. This will lead to new ways of operating. It will also challenge the way customers want to do business, and how the competitive landscape is defined. A robust and manageable digital strategy will help discrete manufacturers from digital-optional to digital first.
About this article
EY-Parthenon Nordics, Advanced Manufacturing & Mobility, Strategy and Transactions Leader
Combines strategy and transaction consulting with entrepreneurship in digital technology. Favorite hobby is downhill skiing.
EY-Parthenon Director, Advanced Manufacturing & Mobility, Strategy and Transactions, Ernst & Young AB
Passionate strategy consultant. Team builder. Skiing enthusiast.
EY-Parthenon Partner, Strategy and Transactions, Ernst & Young LLP
Experienced strategic advisor. Has worked with institutional investors and senior management across the industrial tech landscape.
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