BDO 26 Nov 2018 10:09am

Manufacturing in the next industrial age

SPONSORED CONTENT: The transformation of the global business environment from longstanding brands based on physical infrastructure to companies that incorporate greater flexibility in their physical, intangible and commercial operations is one of the greatest pressures for change in the manufacturing sector

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Caption: Over 80% of business leaders are developing a strategy for future-proofing based on innovation

Change has become a survival imperative, with innovation vital to future-proofing manufacturing businesses.

In BDO’s recent survey on global risk, over 80% of business leaders reported that they were developing a strategy for future-proofing based on innovation, with the aim of ensuring that their organisation has a sustainable business and operational model and has invested in the right technology to ensure long-term success. A real risk to manufacturing businesses that do not innovate is that competitors’ defter responses in the face of the changing environment and risks over resources will leave them standing.

A number of manufacturing companies are leading the way down the innovation route. Sector leaders are using the challenges posed by the evolving environment to drive change by starting to concentrate on the upside of risks their businesses face. They are looking at how they can address their challenges more creatively, responding nimbly to construct a competitive advantage through tough operating conditions.

By concentrating on the leading sectoral risks, such as climate change and supply chain risk, they are future-proofing their businesses by making them more agile and responsive.

For example, Apple is taking the climate-change challenge head on by shifting its energy use away from fossil fuels. In 2018, the company stated that all the energy used in its offices, retail stores and data centres now comes from renewable sources. Apple’s response was not only a purchasing decision; it has become more agile in its energy sourcing, with the company developing its own solar, water, wind and biogas fuel cell projects.

The interrelationship and more immediate pressures of the different risks that manufacturers face – and the opportunities they bring – is leading many UK businesses to start investing earlier in Industry 4.0, the fourth industrial revolution, with its emphasis on automation, 3D printing, cloud computing, and artificial intelligence. This is harnessing the greater availability of data and increased connectivity to transform manufacturing, making supply chains and businesses more nimble – and more productive.

Consider the example of global engineering manufacturer Meggitt plc. The firm is one of few UK-headquartered companies to develop a digital factory to bridge the physical and digital world. This strategy breaks manufacturing away from dedicated product lines into specialist technology areas. Exchanging information with suppliers on secure portals incorporates flexibility into all parts of the supply and production chain, unlocking the factory’s full potential.

Meggitt is unusual in having already committed to this strategy as many companies have sought to defer the large-scale investment required by Industry 4.0, says Tim Foster, Partner in BDO’s Risk Advisory Practice. “A number are still holding fire to see the direction of travel with ongoing trade talks, Brexit, and the skills situation. But those who are thinking ahead of the curve have decided to bite the bullet and invest now.”

Those who postpone revising their strategy and making the investment needed risk getting left behind. “If they don’t move now, they risk no longer being responsive enough to continue with business as usual, never mind business of the future,” says Foster.

Manufacturers unable to demonstrate the agility needed will face the added challenge of enticing the next generation of the workforce into what is sometimes (and wrongly) considered a low-prospect work environment. Firms need people who can meet tomorrow’s technology challenges, and who can deal with continuous innovation and new techniques.

The biggest risks lie with companies that do not follow through on a comprehensive investment strategy for change. “A half-way house on technological investment could turn out to be very expensive if there are not the right controls and skills to operate within the new environments,” says Foster.

For instance, the technology required for the next phase in the industrial revolution creates new cyber issues for operational and manufacturing systems. While many manufacturers already consider cyber security a high priority, this tends to be from the corporate systems and financial theft viewpoints. The greater reliance on new technologies, such as robotics, creates the potential for damaging exploitation of operational systems, and of theft of intellectual property and data that is collected from manufacturing systems.

Manufacturers are starting to be aware of this, Foster thinks. “This new, technological variation of industrial espionage is being taken more seriously,” he says. “Manufacturers are becoming more aware of the risks but need to be reminded to think harder about them. The very innovation and agility they need to demonstrate will pose their own risks around the openness of their systems.”

Despite these risks, firms need to be bold, he says. “They are going to have to be agile and innovative to succeed in an increasingly competitive and fast-changing market. They need to challenge their thinking, understand what the barriers might be and review how to overcome them to operate effectively in an evolving environment.”

To find out more about the survey findings and BDO’s insights into their implications for risk management, download the full Global Risk Landscape 2018 report here