How are trailblazing manufacturers successfully implementing smart factories? In this episode of The Kula Ring, Paul Wellener, Vice Chairman of U.S. Industrial Products for Deloitte, shares insights into Deloitte and the Manufacturers Alliance’s collaborative research on digital transformation in manufacturing. He shares how leveraging ecosystems is key to developing smart capabilities, and discusses how manufacturers are prioritizing different digital practices and relationships.
How Manufacturing Ecosystems Accelerate Digital Transformation Transcript:
Announcer: You’re listening to The Kula Ring, a podcast made for manufacturing marketers. Here are Carman Pirie and Jeff White.
Jeff White: Welcome to The Kula Ring, a podcast for manufacturing marketers brought to you by Kula Partners. My name is Jeff White and joining me today is Carman Pirie. Carman, how you doing, mate?
Carman Pirie: I am doing well. I’m doing well, Jeff. Thanks for asking.
Jeff White: Yeah. You know, people don’t know when we publish these things, but we’re recording this one the day after the U.S. presidential election, so we’re still a little in the dark here.
Carman Pirie: Yeah. It’s one of those days when it’s the one thing that’s being talked about. But look, when we publish this it’ll be a while from now.
Jeff White: It should be decided. Yeah.
Carman Pirie: And the issue will be decided. Everything will be fine.
Jeff White: Exactly. Exactly. So, looking forward to our guest, a repeat guest that we’ve had on the show and has provided a lot of really interesting perspectives on manufacturing, and the digital side of things.
Carman Pirie: The digital transformation of manufacturers, basically, and smart factories, and I’m excited for today’s guest. I think it’s a nice opportunity for our listeners to step from the marketing silo, if you will, and become a bit more synchronized with the broader conversations about digital transformation that are happening within manufacturing, and just help them potentially even place their work in that context. I think it’s helpful.
Jeff White: Absolutely.
Carman Pirie: And it’s always fun to talk with a smart guy and Paul, joining us today, certainly meets that definition, so please introduce, Jeff.
Jeff White: Sure. So, joining us today is Paul Wellener from Deloitte. Paul is the Vice Chairman of U.S. Industrial Products. Welcome to The Kula Ring, Paul.
Paul Wellener: Well, Jeff and Carman, glad to be back, and look forward to the conversation today, and getting a chance to talk about digital and smart and all things manufacturing for your group.
Carman Pirie: Yeah, and look, the last time we chatted I think… I don’t know if we recorded in person in Chicago?
Jeff White: We did. Yeah.
Paul Wellener: Yeah we did. Right. Yep.
Carman Pirie: Obviously, we live in a different world these days, and so we don’t get to eat the Chicago deep dish as we interview, but this is part of our ongoing partnership with MAPI, and which we should highlight, and I know Paul, Deloitte has a longstanding relationship with MAPI, and part of that is that you’ve on an annual basis now for a few years have been really digging into more research and insights around smart factories and digital transformation of manufacturers. Can you kind of introduce us to that work and this year’s study?
Paul Wellener: Yeah. Glad to. Taking a little bit of a step back in history, this is our fourth study that we’ve done with MAPI. Even going back a few years ago, our research that we did with them that may not have culminated in a study was all around kind of things smart and digital. If we just go back to last year’s study that you mentioned when we were together at the ManufacturED event in Chicago, I don’t remember the deep dish pizza, but I do remember sitting in the backroom behind the scenes and having the series of podcasts that we all did.
We had a study that was focused on the smart factory, and in that study, we introduced the notion of what we called the eight great use cases and how these use cases were being implemented by a set of manufacturers, who we called trailblazers. They were the leading manufacturers across the 600 or so respondents that we had last year on a global basis in the study that we did jointly with MAPI. And we talked about some of the characteristics of those trailblazers and how they approached smart manufacturing. How they organized around it, how they thought about it, how they connected it strategically to business objectives, et cetera. There was a lot of kind of nuance in how programs were structured.
This year, we planned the study ahead of the pandemic, and obviously, then we launched the study this summer in the midst of COVID-19 and the pandemic. And I think the topic that we picked, which was focused around ecosystems, and ecosystems as an accelerator inside of a smart factory or a digital organization, really was fortuitous, because I think in the world of the pandemic, our respondents shared this as well, that it’s even more important to be a connected organization, and it’s more important to be connected to your partners, these ecosystems that take place. Whether they’re inside the four walls of your organization or they extend outside the four walls of your organization. And how to leverage those ecosystems across the use cases.
It’s another step, as you guys have had a partnership with MAPI for a number of years, as have we, it’s another step in the process as we continue to define for our clients the notion of smart factories and what it means to be successful in implementing them.
Carman Pirie: And let’s just highlight maybe one of the eight great use cases, just to give our listeners to grab onto there and make sure everybody’s on the same page. When you say the eight great use cases of smart factory, for smart factory adoption. Maybe just an example.
Paul Wellener: Yeah, so I’ll give you a couple of examples, Carman. One might be asset intelligence, so the connectedness of devices inside the factory and how they communicate with each other and how they communicate with control towers, how they might communicate with the supply base, or how they might communicate with ecosystem partners on the customer side of things. Factory asset intelligence and connected devices is one set of use cases.
Another set of use cases might be around energy management and the consumption of energy inside of a plant. Energy has become, as we’ve continued to focus on greening our manufacturing facilities, whether it’s zero waste landfills, or utilizing less energy, or utilizing energy in a more efficient fashion, that’s become another use case. This notion of plant energy consumption and energy management as a use case.
And then there’s others that go down the product path, or the quality path, or material handling or other dimensions, but these eight have really bubbled up to be the ones that really resonated with people in last year’s study. We probably identified 40 or 50 different capabilities last year, and as we kind of got the respondents to identify which ones of those were most important, that’s what drove us down the path of eight great use cases that defined for us and Deloitte what smart manufacturing was.
Jeff White: And in prepping the new study that you did, you really saw that there were four primary ecosystems in terms of the smart factories and smart manufacturing, and that really helped to support those eight great use cases that you’re just talking about. Can you dive into what those are and how they’re interconnected?
Paul Wellener: Sure. And I guess I would start with maybe two things. One, a little bit definitionally on ecosystems.
Jeff White: Good idea.
Paul Wellener: You know, the listeners may not have a common definition of what an ecosystem is. For us, it’s formed when different entities come together in meaningful ways to solve shared challenges and meet shared objectives. Shared is a word that we emphasize there across both the challenges and the objectives, and it’s when entities from different places come together. It’s not different business units inside the same organization. It really is different external parties coming together to focus on those shared challenges and shared objectives.
What we learned in the study in August is that 90% of the manufacturers surveyed, and that was now over 850 manufacturers this year, so we had many more responses this year than we did last year, talked about the growing importance of ecosystems in solving their business challenges. Maybe back to the four archetypes, if you will, of ecosystems, there’s absolutely a manufacturing ecosystem. Focused inside the four walls of the facility. There’s a supply chain oriented ecosystem, so how do you extend beyond the four walls of the facility kind of out into your supply base? And that can take on a lot of different either IT, operational technology, or cloud, or analytics kinds of approaches, but it pulls into the supply base.
There’s a talent ecosystem that supports both the supply, as well as the manufacturing ecosystem, and because we as manufacturing organizations, frankly we as a professional services organization, none of us can hire all of the right people to have them at the right time, where we need them, at the point of attack. It’s almost like back in the days of lean manufacturing, it was right part, right place, right time. Now, we have to think about how do we get talent to the right place at the right time? And many times, manufacturers aren’t able to do that with their own talent, but they can use an ecosystem partner’s talent, as well. We think about talent as an ecosystem.
And lastly, and maybe interesting to your group is the customer-facing ecosystem. How do these manufacturers and their smart factories connect into the aftermarket, connect into user groups, connect into dealer-distributor networks, even connect into the retail channels to be able to provide feedback back into manufacturing and the supply chain that could be helpful to continuing to develop smart capabilities?
Jeff White: I think it’s really interesting because it helps to break down the different components that make up all of modern manufacturing. You have all these different components that are coming together, and they’re all beginning to be connected in some way, shape, or form, and people are starting to see the benefit of connecting those things and connecting the organizations that support them, and that they support in turn. Which of the four ecosystems in working with the respondents that you had is the most… Where are we seeing the most gain, I guess, and-
Carman Pirie: Or perhaps even just the most focus or activity at this point, I wonder.
Jeff White: Yeah.
Paul Wellener: Yeah. Well, let me deal with the focus part first, Carman, and you know, when we did a polling question two weeks ago with the MAPI group at ManufacturED, 54% of the respondents focused on the production or manufacturing ecosystem as the place where there was the most activity. The customer-facing side was just under a quarter, so 23% of the respondents focused on the customer side of things. 15% on supply chain and 10% on talent.
I think that adds close to 100, but frankly surprising to me was how low talent rated with that group. I don’t know if that was because the audience was very much a manufacturing-oriented audience, and they were all very focused on how do I get things to connect inside the four walls of the factory, but I personally think as you become, like the words we used in 2019, a trailblazer, you begin to see the importance of talent and the ever-increasing importance of talent to make your ecosystem, particularly enabling the other three ecosystems with the talent ecosystem.
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Carman Pirie: I agree with you, because of course talent challenges has been a key focus in a number of areas of manufacturing, and actually as you described it Paul, it almost sounded a bit like almost like the Hollywood studio model, if you will. Like you call in the… When you talk about the right talent at the right time. Anyway, I don’t know if that-
Jeff White: And obviously, the talent has a role to play in every single other part of the other three ecosystems.
Carman Pirie: Yeah. The one, the other part that surprised me of that, Paul, was the lack of emphasis on supply chain, just given the year of COVID-19 and a number of-
Jeff White: Subsequent challenges.
Carman Pirie: … significant supply chain disruptions as a result. I just would have thought that might have been more on people’s minds, as well.
Paul Wellener: You know, that’s a good observation. I think the counter to that is that because of the year of COVID, people have spent so much time in their own factories, thinking about social distancing, thinking about kind of re-laying out facilities to be able to make people safe, because safety has remained a number one priority for manufacturers across the world, so it might have been a little bit of that, where they were focused on their own safety, and their own worker health, and getting their own house in order before kind of pushing out into the supply chain. Again, this was the July-August survey, so if you put yourself in the mindset of the respondents, they may have been very focused on that.
We know longer term, the supply chain is absolutely where the action is going to be because of the connectedness to the smart factories, and one of the things that we’re seeing as a macro-level trend, and this is frankly before China and before COVID, we’ve seen a macro-level trend of more supply chains becoming aligned I’ll say geographically with their customers. Instead of a manufacturer in the U.S. with U.S. customers having component parts coming from Southeast Asia or China, they’re thinking much more about America’s supply chain. Just like in Europe, they’re thinking about… and cost is always important, but they’re thinking about how can I have low-cost components that I’m not flying around the world or shipping around the world? How can I get them aligned with a North Africa supply chain, an Eastern Europe supply chain, whatever it might be?
So, we’re seeing more of that taking place kind of across the board.
Carman Pirie: Yeah. It’s interesting to think about that in the context of the evolving China situation. A previous guest that we had on-
Jeff White: Robert Atkinson. Yeah.
Carman Pirie: Yeah, who I believe also spoke at MAPI.
Jeff White: He did. Yeah. Specifically, around the Chinese supply chain model and how a lot of North American manufacturers were moving those goods to Mexico, to get them closer to America even if they weren’t going to be bringing them into the country.
Carman Pirie: Yeah. I was also reminded of a more local Canadian manufacturer we interviewed on the show, who talked about getting one component of fenders, I think, for trailers that they manufactured, and he used to get them out of China. And now they’re getting them out of the U.K. for less money. Like 70% of the cost. It’s just you wouldn’t think that you’re gonna go to the U.K. for low-cost supply chain, but so there’s reduced risk there, especially if you’re a Canadian, trading with the U.K. Part of the commonwealth, et cetera.
Jeff White: Yeah. It also does kind of speak to this idea of expanding the other entities that you interact with within that ecosystem to not just all be coming from one place.
Carman Pirie: Yeah.
Jeff White: You know, and you’re having more and more people come together to bring that together. It’s very interesting.
Paul Wellener: Yeah. It’s an interesting kind of risk-based element of ecosystems. It’s the don’t put all your eggs in one basket approach to an ecosystem. Think about how you get ecosystem partners that balance a lot of the needs that you have, including a potential geographic risk component.
Carman Pirie: And Paul, speaking of risk, as you’ve looked at this and you’ve looked at the adoption of ecosystem approaches as being key to driving competitive advantage and accelerating the success of these trailblazers that you’ve identified, as the evidence I guess piles up in favor of that, I’d be curious. What risks are out there for manufacturers and investing in these ecosystems? What is either holding them back or what risks ought they maybe be cognizant of as they move forward?
Paul Wellener: Well, I think if you think about risks, they can come across in a couple of different ways. It’s more difficult to coordinate an ecosystem than it is to do everything yourself. If we go back to the days of the Model T and the complete verticalization that was going on in the automotive industry, owning steel manufacturing, owning glass, owning everything else, Henry Ford focused on owning all of that to minimize the challenges associated with an ecosystem.
I don’t think he was necessarily thinking it that way, but that is truly an element of today’s ecosystems, because they’re not just in one geography. They are global. They take people from all different parts of the economy. Again, we get back to the shared benefits that we’re looking for that help keep the ecosystem together. But coordination is definitely a risk and a challenge.
In today’s world data protection and cybersecurity are also top of mind. How do you keep the data associated with the ecosystem safe and secure? And keep it away from the bad guys? And how do you get yourself connected to partners that feel the same way about things? That data protection and cybersecurity is definitely a challenge.
A third challenge is just getting comfortable around the sharing of intellectual property with your ecosystem partners. Or not sharing but understanding that you’re not sharing certain aspects of intellectual property that are important to you. Different from data protection and cybersecurity, that IP associated with your product or your processes and the theft of that, or loss of that, is a concern for many of the survey respondents.
And finally, there’s a challenge and a risk associated with just the skills and capabilities across your footprint. You may need different ecosystem partners in Slovenia than you do in Mexico, or in China, because of the capabilities of your organization. But you also may need a set of ecosystem players that are gonna be part of your team in all locations, so your cloud provider might be the key ecosystem partner for all of your manufacturing facilities, but if you think about the talent ecosystem, it might be very different in different marketplaces. I think you have to think about where your needs are in each of your geographic locations, as well.
Jeff White: Paul, before we… I’d really like to get into some examples that’ll help crystallize the idea of how these ecosystems work for connected manufacturers, but before we do that, I’d like to dive in. You identified five typical characteristics when you have a connected ecosystem approach. Can you talk a little bit about that and let our listeners know what they might be able to expect if they do move towards this model?
Paul Wellener: I think the things that people need to think about in those characteristics are there’s a deliberate set of coordinating elements that need to take place. There’s the shared business objectives that we’ve talked about earlier. There’s how do you measure the results and measure the impacts and how do you then have accountability for your portion of those results? You have to also come to grips with the value of the convener. Who is the person who pulls the ecosystems together and that they’re able to get value, get paid, if you will, for being the convener? It may not be the manufacturer who actually convenes. It might be one of the experts associated with one of those eight great use cases that convenes people to help solve a problem for a manufacturer as they go on their path to a smart and digital factory.
And then it’s gotta be that again, and maybe we’ve used shared too many times, but in addition to shared business objectives, there has to be shared outcomes, as well. I’d say those are the hallmarks of a deliberately coordinated and balanced ecosystem.
Carman Pirie: I find increasingly as we talk about the risk or the challenge around just… the challenge of coordination, the complexity of dealing with that versus having that more command and control, and we talk about shared objectives, shared opportunities, shared challenges. In some way, for many, or some manufacturers at least, I feel like that’s the biggest shift is the mindset shift is what we’re talking about. I mean, I don’t know if that makes sense, Paul.
Paul Wellener: No, I think the mindset… Easy for me to say. The mindset shift, think about it in terms of change management, may be an overused word, but managing change is really important and it starts with that mindset shift of executives or of leaders of the organization that begin to think about how do I maximize or optimize the assets that I own by coupling them with assets that I don’t own to be able to provide value to my customers, my employees, my communities, and my shareholders.
Carman Pirie: Yeah. And again, and without the mindset shift, nothing else can happen. You know?
Jeff White: You’re not gonna move down this path otherwise. Yeah.
Paul Wellener: No, you’re right. I mean, right. It’s not a bottom-up initiative, right? This is something that clearly starts at the top, starts with a mindset change, and then migrates throughout the organization.
Jeff White: Yeah. So, who’s doing it and who’s doing it well and interestingly?
Paul Wellener: Well, I’m not able to talk about the names of different organizations, as you might expect. Our clients don’t like to have their names divulged. But there are definitely lots of organizations that are doing this. Again, as we saw in the survey results, the 90% interest in ecosystems and seeing it as a key differentiator here in the future, other results again across the 850 organizations that we surveyed, we saw companies really proclaiming great benefits in the area of new product introductions, in the ability to expand their capacity of innovation, so thinking about how do I innovate just with my own people, but versus getting the ecosystem to weigh in and help on innovation. And that could be product innovation, process innovation, channel innovation, lots of different innovation topics are accelerated with ecosystems.
The overall digital maturity of a company. If you think about some of the old-line manufacturers that sit inside of the industrial portfolio at Deloitte, we have many clients right now that are hiring “chief digital officers.” And they’re people generally with a differentiated set of experiences that are very… They’re digitally native, and they are really jumping into old-line manufacturing organizations to help drive digital change. And they know they can’t get it done themselves, and they see ecosystem partners as a key way to get some of that digital maturity and digital acceleration to take place inside of organizations. And to do it at scale and at pace.
The other thing, the other benefit we see is an opportunity to reduce costs. I mean, we are in a pandemic-driven downturn, and we’re still bouncing out of it. We’re not back up to the levels of economic performance even of last fall, but we’re definitely making progress from Q2 and Q3 this year, but we’ve got a ways to go and there’s still a focus on costs in organizations, and ecosystems can help manufacturers reduce costs, as well.
We’re seeing it not in any particular vertical. We’re not seeing it at any particular geography. We’re seeing leading companies embracing these capabilities and driving forward with their vision to transform their organizations.
Carman Pirie: Paul, thank you so much for just sharing the expertise and insight that you have with our listeners today. It’s just been a pleasure to chat this through. And I think we just live in a very interesting time, and I can’t help but think that so much of what we’re seeing is going to be accelerated coming out of COVID.
Jeff White: In new ways that we don’t even necessarily know yet.
Paul Wellener: Yeah. I think you’re both right.
Carman Pirie: So, it’s just timely to have you on the show, and again, thank you for sharing your insights.
Paul Wellener: Yeah. Glad to be here.
Jeff White: Awesome, and we’ll link up the report from Deloitte that you presented at the MAPI ManufacturED Summit as part of the podcast, as well, so our listeners can check it out. Thanks again.
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Paul WellenerVice Chairman, Deloitte LLP, and U.S. Industrial Products and Construction Leader, Deloitte Consulting LLP
Paul is a Vice Chairman, Deloitte LLP, and the leader of the US Industrial Products & Construction practice with Deloitte Consulting LLP. He has more than three decades of experience in the industrial products and automotive sectors and has focused on helping organizations address major transformations. Paul drives key sector industry initiatives to help companies adapt to an environment of rapid change and uncertainty—globalization, exponential technologies, the skills gap, and the evolution of Industry 4.0. Based in Cleveland, Paul also serves as the managing principal of Northeast Ohio.