Bottom Line Impacts of Industry 4.0

Introduction

Industry 4.0 solutions can have a dramatic impact on the bottom line for companies – when it is implemented correctly and broadly adopted within the organization. At Visual Decisions, we have been working with smart factory solutions for many years now and have seen the tremendous impact that it can have on the bottom line. We have seen scrap reductions of 50% and overall equipment effectiveness (OEE) increases of up to 30%. How those operational improvements translate to the bottom-line financial impact is the main point of this article.

Impacts to Operational Performance

Now we will dive down into the actual impacts to the operational and financial performance.

This chart from the World Economic Forum shows the potential impact on operational performance for “Lighthouse” implementations of smart factory solutions. There are massive improvements in factory output and OEE, along with significant decreases in costs of quality and product.

There are also significant, positive impacts to manufacturing agility. There are possible reductions to lot size, along with associated reductions to change over time, inventory, and lead time. Additionally, there can be reductions in the time to market for new products. All these improvements allow companies to rapidly respond to the dynamic world we find ourselves in today. Each of these changes is a significant help in responding to rapid changes in demand, supply chain constraints and personnel issues.

Finally, smart factory solutions can have a large impact on sustainability issues such as waste reduction and energy efficiency increases. Most large corporations produce a “green report card” or sustainability reports. Smart factory initiatives can be one key in helping to improve on many of those metrics.

Results from Another Authority Study

Back in 2017, McKinsey put a out a graphic looking at many of the levers these solutions provide to improve your operations. They broke these potential value drivers into eight separate areas. At VDI, we believe there are several additional ways to impact performance that will be highlighted in the next sections.

Starting from the 12 o’clock of the graphic, smart factory solutions can impact resource productivity through intelligent lots and real-time yield optimization.

Availability of manufacturing assets can be optimized through routing and machine flexibility, remote monitoring, predictive maintenance, and augmented reality capabilities for MRO.

Labor productivity can be increased through human-robot collaboration, remote monitoring of assets, digital performance management and automation of knowledge work through solutions such as robotic process automation.

Inventories can be reduced by reducing lot sizes and moving manufacturing closer to demand through technologies such as 3D printing, real-time supply chain optimization and single piece flow.

Costs of quality can be reduced through initiatives like Statistical Process Control, advanced process control, and digital quality management.

The agility of the organization can be impacted, as well. Supply/Demand matching can be impacted by projects like data-driven demand prediction and data-driven design to value.

Time to market can also be impacted through open innovation initiatives, concurrent engineering and rapid experimentation and simulation.

Finally, the after-sales service costs of the organization can be greatly reduced, as well. Here the initiatives include predictive maintenance, remote maintenance, and AR-guided customer self-service.

Translating Operational Gains to Financial Improvement

In this section, we will take a quick look at how operational gains translate to financial improvements. We’ll take a deeper dive into this topic in a future article, but we will touch on the basics here through an example using Overall Equipment Effectiveness, or OEE.

Most Factories Operate Below Potential Capacity

One way to look at how to translate operational improvements to financial performance is to take the example of OEE. Typical OEE levels can vary significantly by industry. For many industries, though, the best in class is around 85% OEE. However, typical performance in those industries has companies operating at 40 to 60%. Some companies that I've been to are significantly below that.

Obviously if you're losing that much capacity, you’re running with more people and equipment than necessary. If you can increase that effectiveness by reducing your OEE losses, there are many ways to recoup financial benefits from that increase in efficiency.

What Might a Productivity Increase be Worth?

Given an increase in OEE, how do we go about monetizing that?

One way would be where a company is capacity constrained. In that case, if they can make more, they can sell more and get a revenue increase. Since the fixed costs would remain nearly the same in this case, the additional revenue would be highly profitable for the company.

Another way to improve financials with increased efficiency is to reduce the hours of operation required to produce the same output for the factory. This could lead to reductions in overtime spend, overall labor costs, utilities such as electricity or gas and more.

The final example for now is to take that additional time with the factory and perform additional changeovers and cycle through different produced items more rapidly. This will lead to reductions in finished goods inventory, more responsiveness within manufacturing to changing demand, and other benefits.

There are many additional financial benefits that can be created from implementing smart factory solutions and improving operational performance. The next section details how many line items on typical income statements or balance sheets can be improved with these initiatives.

Impacts to Financial Performance

To see the broad impacts of Industry 4.0 on financial performance, we will take a look at the primary financial statements and discuss the impacts on many of the typical line items. We will start with the Income Statement / P&L. Then we’ll take a quick look at the balance sheet, as well.

Income Statement / Profit and Loss

Increased Revenue

There are many impacts that Smart Factory solutions can have on revenues. The most direct and obvious impact is for companies that are capacity constrained. In those cases, more product can be shipped when digital transformation in the factory helps to create additional capacity. It is in these cases where if the company can make more they can sell more where you have the most traditional impact on revenue.

However, there are many other potential impacts on revenue. For example, there are many beneficial impacts to B2B (business to business) company sales of increased performance. If a company is losing sales or discounting price due to a reputation for poor on-time performance or quality issues, then there is a significant opportunity to increase revenues by addressing those performance problems. With better quality and delivery, the company can gain new customers, avoid customer churn, avoid discounting, and perhaps even charge a premium. If the company gets charged back for late deliveries or quality issues, these penalties can be avoided.

Altogether, this could lead to higher sales and profits on the same number of units produced. While this is an indirect impact from improvement, it can often be quite significant. When working with customers to estimate the impact of Industry 4.0, I will often include the sales team in my conversations to find out how much friction in the sales process is present due to manufacturing performance issues.

For product lines that are primarily make-to-order, the manufacturing lead time can have an enormous impact on whether a sale is made or if the customer balks and goes to another provider. By identifying and eliminating waste from the process, lead times can be reduced, and these additional sales can captured.

While we have primarily been speaking of B2B companies so far, the same logic applies to companies that are selling through retail or direct to consumers. In these cases, the reputation a company has for quality in the marketplace can make a tremendous difference in both sales volume and in the pricing. Also, delivery issues can have a direct impact on lost sales when retail shelves are empty.

Smart factory solutions can have a significant impact on new product introduction, as well. By decreasing ramp-up time and getting manufacturing up to speed on new products more rapidly, production can reach scale for new products much more rapidly. In addition, companies can speed up new product introduction even further by facilitating Design for Manufacturing, Design for Six Sigma, or VA/VE processes by more efficient information sharing between engineering and production.

Finally, there is also a significant opportunity for new “smart products” or support revenue streams for many companies. By building intelligence into the products, there are competitive advantages to those products in the market to drive new sales. In some cases, entire new markets can be created or penetrated by adding IoT, predictive analytics and cloud capabilities into the products. From a service perspective, having sensors built into the products creates additional revenue stream opportunities through value-add services and support.

In summary, here are some of the many ways revenues can be increased through digital initiatives:

Reduce Material Cost

There are several ways to reduce material costs using smart factory solutions. The first is by improving quality. If a company must produce 110 items to get 100 good ones, then they are buying 10% more of everything in that bill of material or recipe than is necessary. By utilizing Industry 4.0 solutions to reduce process variability, enforce standard work and more, companies can significantly reduce this waste.

Another area of opportunity for some companies is in overages. An example of an overage is in industries such as food and beverage where you're filling a 12-ounce container and you *must* have 12 ounces in the container every single time. Usually, there is some level of variation with each fill. In this case, then you have to set the target fill to something like 12.5 ounces. If you can tighten up that variability, then you can reduce the overage and give less product away for free.

When issues with raw materials are discovered in manufacturing, there may be a desire to hold the supplier accountable for those issues through direct charge backs or during future negotiations. But many manufacturers cannot identify when quality issues were due to raw material defects on a regular basis. Or they may not have the lot traceability to determine which vendor supplied the defective materials. By implementing smart factory solutions, this traceability can be established.

Finally, large savings are available for many companies in replacement parts for warranty. We will cover the additional costs associated with warranty later, but for now we are just looking at the materials themselves. Warranty repairs and replacement part shipments can be impacted several different ways. By reducing the variability in the manufacturing process in improving testing and inspection, there should be fewer items that end up in warranty. Also, by tracking the items that show up in warranty repair, companies can find factors within manufacturing that correlate to those units. Finally, smart products promise to send information back to engineering that help to design out product defects using that telematics data.

In Summary, here are some of the ways to impact direct material cost:

Reduced Labor Cost

The first impact here is like the first impact for materials. If 10% extra units must be manufactured because of poor quality, then there will generally be an extra 10% labor being consumed, as well.

But there are many other impacts these initiatives must reduce labor. Let’s look at overtime next.

There are several causes of overtime in manufacturing. Some of the factors leading to overtime are seasonality, absenteeism, surge demand, unexpected downtime, quality issues, and other variations in production. The last three items in that list can be heavily improved by smart factory initiatives.

Then there are the regular time direct labor reductions. I strongly prefer to create value propositions on other factors, but there are times when there is more labor than the manufacturing process requires. One factor that causes labor inefficiency is waiting – it could be waiting for materials, for machine downtime, or stations being blocked or starved.

Another cause of excess direct labor expense is due to quality issues being addressed at the manufacturing station. This could be testing or inspections required due to excessive variation. That same variation will often lead to inline rework. For many companies, it is hard to even measure how much time is being spent on these tasks, let alone make improvements. By implementing advanced data collection, companies can make progress on mitigating or eliminating all these sources of labor inefficiency.

Here is a summary of these areas of impact:

Reduced Outsourcing Cost

One of the most typical impacts of a smart factory implementation is increasing OEE and factory capacity. If a company is outsourcing because of capacity reasons, then that production can be brought back in house. There is generally a significant cost savings associated with that move.

Many of the ways that capacity is increased are listed below:

Reduced Indirect Labor Cost - Plant

How much labor is spent on tasks such as rework, non-conforming material disposition, testing, and inspection? There is no need for these jobs if materials are made right the first time, every time. While that may be an unrealistic goal, there are certainly improvements to be made if first pass quality can be improved.

What percentage of time for your maintenance personnel is spent on unexpected downtime instead of preventive or predictive maintenance activities? The less unexpected downtime companies have in their facilities, the less maintenance labor is required. In particular, overtime expense for maintenance can be reduced since planned maintenance activities rarely drive overtime in manufacturing. In addition, preventive maintenance tasks can be greatly optimized by a shift to condition-based or predictive maintenance using I-IoT and machine learning capabilities.

Finally, how much time does manufacturing engineering, quality engineering and the continuous improvement team spend fighting fires instead of working on value-add activities? If the process is running effectively, there may not be a need for as many support personnel to keep the plant functioning. Alternatively (and preferably in most cases), these valuable personnel can be shifted to perform tasks that add to the capabilities of the plant.

Summary of savings opportunities:

Reduced Indirect Labor Cost - Corporate

Improvements to these expenses are more of an indirect impact from the digital manufacturing efforts. As such, these might just be listed on a business case as a potential soft benefit. However, there should be some level of impact on these costs from significant improvements in the plants.

Starting with Customer Service, Call Center, Warranty Repair, and Field Service personnel – we talked earlier about potential impacts in reduction of materials for warranty repairs or replacement part shipments. The same logic applies to each of these categories. If the quality of build in production and the quality of design can be impacted through smart factory solutions and smart products, it should certainly be possible to reduce the number of calls received for defective products in the field, the number of field repairs, and the amount of warranty repairs required. Sometimes even moderate improvements in internal quality can yield significant improvements in these costs.

For research and development / product engineering purposes, there is the possibility to streamline design through integration with manufacturing, supply chain and field data. Sometimes these programs are used to improve the quality of the product design, or the number of new products being introduced. It is also possible to reduce the number of engineers required for new product introduction.

Finally, if marketplace reputation is significantly improved through better quality, on-time performance and reduced lead times, there may not be as much friction in the marketplace to selling and marketing the products as there is today.

Summary of Savings (or reallocation) Opportunities:

Reduced Indirect Material Cost

In upcoming articles, I will explain in detail how to overhaul the approach to maintenance using Industry 4.0. At a high level, the cost of maintenance spares can be reduced by moving maintenance away from reacting when things fail. Performing condition-based or predictive maintenance allows companies to lower their expenses related to equipment failure. In addition, these policies also allow companies to move away from replacing parts after a set amount of production based on preventive maintenance timing. This means that parts are only replaced when it is necessary…but no later.

In addition, this same approach helps companies solve the tooling dilemma. That dilemma is when companies must decide when to replace tooling on machines – if you leave the tooling on too long, you will probably create quality or even safety issues. If you take the tooling off too soon, then you are spending too much money on refurbishment or replacement. By using sensors and predictive approaches, the tooling can be removed only when it is required…but no later.

Summary of Opportunities:

Reduced Logistics Cost

Logistics costs are another area where there can be significant savings from implementing Industry 4.0 solutions. The first area of logistics costs that can be impacted is expediting – inbound and outbound. Expediting is often a very large expense for manufacturers, especially when there is a lot of variation or disruption in the process. Reducing the unanticipated events can lead to very large improvements in expediting costs.

As discussed previously, warranty-related expenses can be reduced by improving quality at the plant and through connected product initiatives. This also means that reverse logistics costs and shipping costs for replacement parts can be minimized, as well.

Summary of Opportunities:

Reduced Utilities Cost

This primarily ties back to increases in efficiency. If my plant has to make 110 pieces to get 100 good, then they are consuming roughly 10% more utilities than is required. If they can shift their OEE from 30%->45%, then they can reduce their energy consumption from those assets by a large quantity, as well. Quite simply, the more efficient manufacturing is when producing parts, the fewer utilities they will consume.

Then there are also some additional benefits on the margins. When monitoring machine status or power consumption at the machine level, some of our customers have found that there is “vampire” usage of electricity because the machines don't get shut off during off shifts.

Summary of Opportunities:

Balance Sheet

Reduced Inventory

Shifting over to the balance sheet perspective on all of this, we've talked about being able to do shorter changeovers. In fact, VDI ran an entire webinar in January on reducing setup times with Industry 4.0. I will get that published here soon as an article. The bottom line is that shorter changeovers allow plants to run with less inventory at both the raw material and WIP state. In addition, DC’s can be stocked with less finished goods inventory when setups are reduced because it also reduces the amount of time between restocking on any given product.

There are several other impacts on inventory, as well. Fundamentally, the purpose of inventory is to battle uncertainty and account for differences in raw material delivery, consumption, production, and sales patterns. Any changes made in manufacturing or the supply chain to reduce those uncertainties or better align the timings will reduce the amount of required inventory at all three stages.

Reduced Plant, Property and Equipment

This one is very simple – how efficiently can the plant produce output given the equipment in the plant (or across the company). Raising the OEE from 30->45% means that the same number of finished goods can be produced with roughly 50% less equipment. While companies may not be in a hurry to sell off equipment (instead using that extra capacity to increase revenues), there are often options to avoid CAPEX spending.

In addition, if there is a large decrease in the amount of rework, testing and inspection that is required, then there can be opportunities to avoid CAPEX spending in these areas.

Summary

As can be seen from this (non-comprehensive!) look at potential financial impacts from smart factory solutions, there are myriad opportunities for improvements from digital factory transformations. We would love to talk to you about how to see these benefits at your company, too.??