The digitisation of manufacturing is transforming this capital-intensive industry. There is a drive for greater efficiency and productivity, and pressure to embrace new technologies like Artificial Intelligence (AI) and robotics. This transition is so compelling that it is being called “Industry 4.0” to represent the fourth revolution in manufacturing.
The first industrial revolution (mechanisation through water and steam power) was replaced by assembly lines and mass production using electricity in the second. The third revolution saw the adoption of computers and automation. This is now being enhanced by the fourth revolution through smart and autonomous systems, fuelled by data and machine learning.
Industry 4.0 has been talked about for several years and whilst it’s easy to dismiss the term as a buzzword, it’s hard to deny the advances made by forward-thinking manufacturing businesses. They are embracing new technology and incorporating the advances possible thanks to AI, the Internet of Things, robotics, big data and connectivity.
There are numerous industry examples to demonstrate how applying new technology to manufacturing and logistical challenges, has improved productivity and efficiency.
The African gold mine that found ways to capture more data from its sensors for example. The new data showed some unsuspected fluctuations in oxygen levels during a key process and fixing this increased yield by 3.7 %, worth up to $20m annually (source: McKinsey). Similarly, logistics company Knapp AG developed a picking technology using augmented reality, which has reduced their error rate by more than 40% (source: McKinsey)
European manufacturers are well ahead of their US competitors when it comes to business automation. A study by the consulting firm Bain & Company shows that many European businesses have gained an edge over the US by investing in new technologies early on and advancing digitisation projects three times as fast (source: Bain).
These changes and many others like them are sure to be far reaching, affecting every corner of the factory and supply chain. But, in the drive for greater efficiency and productivity, why is it that European manufactures are coming out on top?
One reason may be their willingness to invest at an early stage. This in turn tracks back to the way many European manufacturers’ approach business liquidity. They use tools such as supply chain finance to improve the manufacturing cash cycle, and release working capital from their supply chain to invest in the innovations necessary to drive competitive advantage.
Manufacturing is a capital-intensive business, and such a huge shift in technologies inevitably will impact the financial health of any business.
For this reason, the pace of change will be relatively slow.
A 2015 McKinsey survey of 300 top manufacturing executives estimated that 40 to 50% of today’s machines would need upgrading or replacing (source: McKinsey).
A large manufacturing firm in the oil and gas sector operates internationally. They have many “big ticket” expenditure items such as equipment and inventory. These significant purchases can create a cashflow bottleneck, which in turn means that the business needs to extend creditor days to improve business liquidity.
If the business’ cash gap is sufficiently large, they will not be able to release working capital to invest in new equipment that drives automation. An inability to invest in line with competitors, causing a relative drop in efficiency of 3% over that period, could result in a significant drop in the value of the business.
In this way, previously strong manufacturing businesses won’t be able to realise market value if others come to the table.
To plan for such a wholesale change in manufacturing processes is challenging.
For most, it will be a case of evolution rather than revolution – automating small processes and building intelligence into systems as they become outdated, rather than shifting overnight from one mode of manufacturing to another.
Manufacturing businesses typically have a significant amount of working capital tied up in stock at different stages of its lifecycle.
To free up working capital to invest in new technologies, supply chain finance could be the answer. Supply chain finance is a form of typically unsecured working capital finance, providing liquidity by introducing more flexible options to pay suppliers and bridge any gaps related to customer payments.
For stable manufacturers looking to invest in the future, supply chain finance can release the working capital needed to finance these new technologies. This is especially true for those that are reliant on a small number of much larger suppliers and for whom invoice discounting may not be appropriate.
The businesses we speak to (and those that have become our clients) are strong, stable businesses that are asset rich with stable liquidity – but without access to the additional working capital to innovate and grow in the way they would like.
As technology moves forward apace, businesses will need to quickly assess their working capital agility and fitness for the market ahead. If their manufacturing cash cycle is inefficient, they will get left behind.
The move towards automation is real and will not stop to wait for businesses to catch up.