Summary. Too often, smaller companies are intimidated by the high costs, complexity, and long installation times that high-end smart factory systems can require. This is short-sighted. Companies can see big financial benefits by utilizing existing data and simpler technologies to reduce waste, labor costs, overhead, and utility expenses.
It's possible to turn a factory into a smart factory much faster and cheaper than most executives think.
When many people imagine a smart factory, they envision something complicated and expensive — the kind of massive "manufacturing execution system," or MES, that can take more than a year and millions of dollars to implement. If you're Elon Musk, you can pour money into advanced automation and robotics — and keep pouring. But you don't need to be Elon Musk. Many of the greatest benefits of intelligent manufacturing require much less time and money.
Many smart factory proponents, bedazzled by technology, overlook the biggest potential sources of value creation. We've seen this in visits to hundreds of manufacturing sites over the last five years: that most manufacturers make far too little use of readily available data. Labor hours, for instance; those numbers are collected for payroll, but rarely extracted from clock-in/out systems and analyzed to discover ways to operate more efficiently. Similarly, off-the-shelf RFID technology can trace scrap origins, and simple Internet of Things (IoT) sensors can deliver real-time insights into utility usage. The ability to see, analyze, and act on information immediately can have as much impact on factory profitability as advanced robotics, at much lower cost.
The low-tech, low-cost path to a smart factory works for companies of any size and is especially well suited to the appetites and abilities of midsized companies. Middle market executives report being daunted by disruption, especially in technology. In an unpublished survey conducted by AlixPartners this summer, 55% of companies with revenues under $500 million a year said technological change is happening too fast for them to keep up; just 24% of larger companies said the same. They don't need to be scared. Instead, the middle market can be the prime beneficiary of the revolutionary democratization of the digital realm. In recent years, cloud computing platforms have brought sophisticated capabilities within reach of almost every company, and sensors and cameras that once needed to be custom-built can now be acquired and adapted inexpensively. These changes empower enterprises of all sizes with state-of-the-art tools for smart factories.
When properly designed and deployed, a smart-factory strategy can accelerate efforts to solve the worker shortage, bridge the skills gap, decarbonize operations, shorten lead times, or nearshore. The key is knowing where to begin.
Start by identifying the business issue you are trying to solve. Companies should focus on the factory P&L and identify KPIs and metrics that directly impact on it. The next step is to figure out how to apply smart-factory concepts and tools to improve performance on those specific benchmarks, which typically include overall equipment effectiveness, machine/asset utilization, productivity, and throughput.
Take, for example, a commercial bakery in the northeast United States with annual revenues of about $200 million.
The company realized $1.5 million in annual savings, which increased EBITDA by 4.8%, through targeted smart factory solutions centered on three business issues: reducing scrap and other waste, improving labor costs, and cutting energy use. The company was able to address all three issues with relatively simple technology.
A major cause of waste, for example, was baked goods that came off the line underweight (which had to be discarded) or overweight (which used more dough than necessary). By installing digital scales and sensors on the existing manufacturing line, the company caught that waste before it was (literally) baked in — reducing scrap by 25%. A homemade labor visibility and utilization dashboard provided a similar real-time view of labor presence on the factory floor, revealing that a significant number of workers were staying on after their shifts; without a real-time way to track the behavior, managers had been unable to enforce shift times; with the tool, overtime dropped 50%.
Finally, by installing IoT sensors and connecting data feed with existing systems to monitor utilities consumption, annual utilities spend was cut by 5% because, among other things, it revealed when equipment was being run unnecessarily.
What made these gains — which took less than six months — possible? In our work with manufacturers, we have identified four best practices that help make smart factory projects affordable and successful.
Make the plant's P&L your focus.
Most practitioners define "smart factory" in terms of software technologies (such as AI, machine learning, and warehouse management systems) or intelligent hardware (like connected devices and computer vision). Any or all of these can be part of a smart factory — but a focus on tools or technologies runs the risk of not seeing the opportunity. In our experience, an approach that defines a smart factory with the lens of plant P&L brings pragmatism that is required for success on the plant floor.
Identify all the cost drivers.
Most smart factory initiatives look only at the operations inside a factory's four walls — and especially at production lines themselves. A program that looks only at overall equipment effectiveness (OEE) addresses less than a quarter of the factory's full costs, which are spread out across company departments. In a typical consumer goods operation, ingredients are about 45% of cost and packaging 20%; direct labor, indirect labor, and overhead are about 10% each (each managed by different teams); and utilities account for about 5%. All of those can be sources of digitally-driven value creation.
Leverage existing plant assets.
You don't need to replace existing equipment with a monolithic digital platform. Adding digital capabilities to existing equipment will get most of the benefits of a rebuild for less money, in less time, and with less need to fix the problems new platforms always have.
Put manufacturing leaders in charge.
The best leaders for smart factory projects are experienced executives who combine manufacturing pragmatism with digital savvy. Too many balance sheets show write-offs for factory modernizations that didn't deliver the goods — sometimes literally. In this respect, many middle market companies have an advantage over larger rivals, in that their senior leaders are closer to operations both experientially and physically.
We have seen this combination of capabilities work time and again. A couple of years ago, we worked with a east coast metal products manufacturer in the U.S. with roughly $100 million in revenue that was overwhelmed by orders when Covid disrupted its overseas competitors' supply chains. With no time for a major factory overhaul — and no way of knowing how long the surge would continue — the company installed IoT counters and displays costing about $100 apiece on cutting machines, which allowed plant supervisors to monitor and assist operators in real time. At the same time, data from the counters was integrated with the ordering system, so that orders could be instantly fed into production scheduling, tracked, and matched with shipping, which significantly streamlined the order-taking and fulfilment process.
This example of a practical digital solution drove a doubling of production and revenue within one year without any capital investment or physical factory expansion. Two years later, though global supply chains were back to normal, the company's sales had grown another 15% because its increased efficiency made them better able to meet global prices and benefit from "buy American" policy changes.
When a company's smart factory approach is laid out according to business priorities and leaders look for the simplest solution, inexpensive, quick-strike tactics can improve yield and quality, boost productivity of both labor and machinery, deliver savings in energy and materials used, reduce receive-store-pick-pack-ship lead times, and more.
Moves like these are a better fit for the capital constraints midsized and smaller manufacturers face. They deliver results faster and fit with the ability of midsized companies to move quickly, unencumbered by corporate bureaucracy.
And they provide something else. Big multinationals — with many divisions and factories in many locations — are better able to set up pilot projects, experiments, or Skunk Works. They can try, fail, learn, and adapt with less danger than a company that has just one or two plants and P&Ls.
A low-tech, low-cost approach to smart factories provides middle market companies with low-risk gains while at the same time providing valuable learning and experience — for executives, managers, and production workers — that can pave the way to bigger, more technologically-advanced investments later.
Originally published by Harvard Business Review.
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