Digital transformations hold the promise of improved efficiency, enhanced customer experiences, and increased competitiveness in the manufacturing industry. However, they don't always go as planned. A key reason for failure lies in the challenges associated with obtaining a satisfactory Return on Investment (ROI). In this article, we will explore four ways mid-size manufacturers can combat these challenges and successfully implement digital transformation initiatives.
Understanding the ROI challenge
Industry 4.0 and IoT (Internet of Things) programs often require significant investments in hardware, software, and consulting. These investments, when viewed individually, may not yield impressive returns. Consequently, it's crucial to review the business case on a portfolio basis and determine the Return on Portfolio rather than focusing solely on individual IoT investments. This approach, while somewhat counterintuitive to traditional business practices, allows organizations to avoid having their transformation visions rendered dead on arrival.
4 ways to combat challenges with ROI
Capex: embracing new models and partnerships
To address the initial capital expenditure (Capex) associated with digital transformation, mid-size manufacturers should anticipate upfront costs related to hardware, software, and consulting. One way to mitigate these costs is by exploring Software as a Service (SaaS) models, which transfer costs from Capex to Operational Expenditure (Opex). Additionally, manufacturers can form outcome-based partnerships with vendors, sharing both risks and rewards.
For example, consider a mid-size manufacturer looking to implement an IoT-based predictive maintenance system. Instead of purchasing expensive software and equipment, they could partner with a technology vendor that offers a subscription-based model, aligning costs with the actual use and outcomes of the system.
Opex: understanding the full scope of ongoing costs
Once a digital transformation project is underway, organizations must account for the ongoing operational costs (Opex) to maintain and optimize their "smarter" factory. These costs can include infrastructure (servers, hardware, etc.), subscription and license fees (SaaS, etc.), contracted services, and internal team costs. By understanding these expenses from the outset, manufacturers can make more informed decisions about the feasibility and potential ROI of their digital initiatives.
Opportunity cost: minimizing impact on existing operations
Digital transformations often require asset downtime and resource allocation that could be spent on other projects. To combat this opportunity cost, manufacturers must evaluate the potential impact of downtime and resource allocation and seek ways to minimize disruptions to their operations. This might involve scheduling downtime during periods of low demand or leveraging external resources to reduce the burden on internal teams.
Return on Investment vs Return on Portfolio
Finally, it's essential to shift the focus from the ROI of individual investments to the Return on Portfolio. Manufacturers can take advantage of "no-regrets" investments—automation projects with reasonable individual ROI—while also bundling connectivity investments with multiple end-use cases to justify foundational costs. Developing a case for strategic platform programs that enable scalable automation can also help mid-size manufacturers build a more resilient and future-proof organization.
For instance, a mid-size manufacturer may invest in robotics for assembly line automation, yielding immediate ROI through reduced labor costs and increased efficiency. Simultaneously, they can invest in a comprehensive IoT platform that connects not only their assembly line but also other areas of the business. This approach allows them to realize the full potential of their digital transformation initiatives.
Successfully navigating ROI challenges in digital transformation requires a strategic, portfolio-based approach that considers the complete spectrum of costs and benefits. By addressing Capex, Opex, opportunity costs, and taking a holistic view of ROI, mid-size manufacturers can overcome common obstacles and fully leverage the potential of Industry 4.0 and IoT technologies.