New technologies, improved planning, and better use of data have created huge opportunities for companies to adapt and become more resilient. Here are five unique predictions that outline how manufacturers can become more resilient in an uncertain landscape.
1. Getting Smart on ESG
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 Governance will have shaped the extent to which 70 percent 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. 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 EU’s Corporate Sustainability Reporting Directive (CSRD)
- The CDP Climate Change Program.
- 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 jurisdictions. In the U.S., 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 as 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.
2023 will see manufacturers investing in technology 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 percent of companies’ greenhouse gas emissions on average, and therefore representing a large proportion of climate-related risk.
2: Digital Twins Play a Major Part
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.
It is estimated that there will be 41.6 billion devices connected to the internet by 2025, with 127 new devices being connected to the internet every second. This 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 that are not currently employed 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 power of digital twins in their business.
3: Weathering the Macroeconomic Turbulence Ahead
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 percent of manufacturers plan to scale up digital investments beyond pilot purgatory to drive business value.
But the question remains - to what extent have manufacturers been able to make use of their technologies to protect their 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 percent consider themselves 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 and 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 findings that 62 percent of manufacturers are struggling to articulate digital technology ROI.
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 and rolled out across the wider manufacturing network.
The additional drawback of pilots is the impact this has 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 re-setting the focus on business, not technology, first!
4: Enhanced Connectivity Means Improved Productivity
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. By 2025, two out of three manufacturers will have digitally enhanced their legacy assets, enabling them to be connected to their MES systems to improve productivity.
However, not all manufacturers are in this situation and many still own large, expensive production machinery built before computer integration became standard. These manufacturing companies risk being left behind, and must take action to modernize their operations and integrate their assets into their broader system by adding sensors and achieving real-time visibility of the asset’s performance and predictive maintenance capabilities.
This asset modernization approach is more cost effective in a lot of cases as 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 roll-out in the next couple of years.
5: AI Will Continue to Increase in Importance
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). By 2025, 40 percent 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. It’s this smart way of thinking that is allowing manufacturers to become leaner and more agile—and crucially hone in on their customer centricity strategy.
It has been reported that by 2027 the AI market will be worth $16.3 billion, with this growth likely to lead to 40 percent 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 meeting sustainability goals.
Process or discrete manufacturers, or a hybrid of both, are being forced to rethink how they operate. The reality is that the current levels of uncertainty created by geopolitical events, supply chain disruptions locally and globally and the ensuing reactive consumer behavior are not making this a question of “if” but “when”. A clear certainty is that resilience, agility, and adaptability are technology dependent to allow companies to stay relevant and profitable.