Digital Transformation is no Longer an Optional Extra

For a smaller manufacturer looking to survive and prosper in this changing world, the question should be not ‘Can we afford this?’, but ‘Can we afford not to embrace the digitization of our core business processes?’

You can also listen to this article:

Can a smaller manufacturer looking to survive and prosper in this changing world afford not to embrace the digitalization of the business process?

As manufacturing businesses prepare for life after COVID-19, it should be clear that automation and digitalization, both of production and of business processes, can no longer be regarded as ‘nice to have’ innovation: they will be central to many firms’ survival.

Notoriously, most small business failures occur, not during a recession when the hatches are battened down, but when they are overstretched during the recovery. That is true even if the activity is reverting to the status quo ante, but nobody believes that the new normal will be business as a before. Manufacturing and supply chain philosophies and strategies will change, even reverse, unpredictably but very quickly, and a company’s core business systems must be able to identify, adapt to, and even drive these transformations.

Even if it were allowed, this can’t be done in a huddle around spreadsheets.

Business will be more complex, more volatile, and, unless action is taken, much more costly. The idea that there is an infinite and reliable supply of inexpensive parts and materials from distant parts of the world no longer has traction – vulnerabilities have been exposed. While not many foresaw the pandemic, few now discount the possibility of another. At the first sign of a ‘second wave’ of infection or an epidemic of any other infectious disease, consumers and governments alike may reach for the lockdown playbook again.

So, retailers, resellers and manufacturers are fundamentally reassessing their supply chains. Reshoring of supply offers opportunities for smaller manufacturers, but only if they are set up to take advantage. Retail and industrial customers will demand that suppliers demonstrate increased supply chain resilience: multiple sources, shorter (in time and distance) supply channels, increased inventory for critical components so that Just in Time manufacture and fulfillment can be preserved as far as possible.

In return, major customers will be offering shorter contracts, and probably longer payment terms. They will assert the right to alter the volumes they commit to and reschedule deliveries at short or no notice while demanding deep and detailed visibility of their suppliers’ operations and supply chains. Customers are looking to capitalize on fleeting opportunities in an uncertain world and for their own suppliers to be similarly agile.

Meanwhile, many small manufacturers’ own channels to market are changing as the crisis has accelerated moves towards Direct to Consumer/ Direct to Business selling. There is the possibility to capture more value, but at the expense of replacing a few large, long term, fairly stable contracts with a myriad of urgent individual orders, in an environment where demand forecasting is even more uncertain than usual and the ability to create and regulate demand through promotion, pricing or even innovation may be seriously impaired.

An advantage of being a smaller manufacturer is the ability to offer the flexibility and agility that customers require. But in the new environment that cannot be achieved economically from the back of an envelope. Systems based on manual operations and simple spreadsheets cannot cope with the increased numbers of orders and transactions, wider supply base, more frequent revisions to order quantities and delivery schedules, let alone spot the opportunities for increased efficiencies. They certainly can’t offer major customers or suppliers the visibility and confidence they expect. Only automation and digitalization of business processes can do this.

The spine of business process automation, for most manufacturers, will be an MRP system. Small firms have historically seen MRP as expensive, inflexible, hard to use, and, especially in make to order manufacturing, largely unnecessary, and there was some truth in this. That is no longer the case.

A competent MRP system offers much more than the planning of materials requirements to inform purchasing. Accurate production planning and scheduling and, especially in these volatile times, dynamic rescheduling, taking into account machine capacity and labor availability, and working forwards (‘What delivery can we offer the customer?’) or backward (‘How do we meet this due date?’) works together with Customer Relations Management to create quotes for price and delivery based on real product costs and performance possibilities. Inventory is managed and allocated, stock levels optimized and reoptimized (as, for example, customers’ expectations of what constitutes ‘safety stock’ alter). MRP can take in real-time reporting from the shop floor and elsewhere, helping to provide end to end tracking of orders from quote to delivery, and thus the visibility that customers require. And, critically, it all works with accounting – the Holy Trinity of cash flow, balance sheet, and Profit and Loss account. 

MRP has to be readily useable – small firms have neither time nor budget for extensive training. The operation needs to be intuitive and tailored to reflect real life, not a theoretical model of manufacturing. As far as possible that tailoring should be achievable by users on site, not by remote and expensive consultants.

Cloud-based MRP is the way to go. The firm is not continually paying to increase its server capacity, and making the system, or parts of it, visible to customers, suppliers (and home workers?) is simplified. Maintenance and upgrades are the vendor’s responsibility, and because an upgrade only has to be applied once it is easier for the vendor to offer improvements developed by or for one customer to the wider user community.

A digitized MRP system should also provide a base to which other productivity and agility enhancing forms of digitalization (transport management, warehouse management, shop floor data capture, as examples) can be attached and integrated to full advantage. No more ‘islands of automation’.

Small firms need readily scaleable systems both in terms of user numbers and in terms of functionality. But costs too have to be scalable. A good offer for a small firm would be a charge per user per month by functionality, to be varied up or down at minimal or no notice (no lock-in to long term inappropriate contracts). The systems cost of the business is to a large extent converted from a fixed to a variable cost.

For a smaller manufacturer looking to survive and prosper in this changing world, the question should be not ‘Can we afford this?’, but ‘Can we afford not to embrace the digitization of our core business processes?’

First published in Smart Machines & Factories.