Automation and digitalization. Undoubtedly, these two topics have been at the top of the agendas for many companies for quite some time. While some are already well advanced and fully exploiting the benefits of these technologies, others are just at the beginning of their journey toward a digital transformation. Change can be difficult, and without an appropriate sense of urgency, modernization can take a backseat to other needs. 

In recent years, however, a variety of factors—from rising interest rates and changing regulatory requirements to unpredictable market conditions—have given automation and digitalization new importance. For a company to succeed, especially in regions with high labor costs, automation and digitalization need to be essential pieces of corporate strategy.

So where exactly are today’s companies on their transformation journeys? As part of the 32nd Factory of the Year Congress, Kearney conducted a study to assess the current situation. To create our study, Automation and digitalization: shaping future-proof manufacturing with innovation, we considered data provided by more than 200 managers from manufacturing companies across a variety of sectors. Participants were mostly former entrants in the Factory of the Year competition, an annual benchmark competition recognized as the toughest challenge for manufacturing companies since 1992. The results are therefore primarily representative of industry pioneers characterized by their outstanding performance in terms of efficiency, innovation, and use of technology. Despite their pioneering roles, however, these companies also report a wide range of challenges in their transformations toward automation and digitalization. Their experiences offer valuable insights into the current trends and challenges in the transformation process. 

Objectives of automation and digitalization 

The goals for developing and implementing projects in the area of automation and digitalization are diverse. They mainly depend on the specific challenges of the products and the respective industry. Traditionally, the focus of such projects has been both on direct areas—that is, the core processes and activities—and on cost reduction. This trend is also confirmed by our latest study, in which more than 60 percent of companies confirm that cost reduction is their main objective. This is often accompanied by internal process optimizations and an increase in output performance. There was also a clear focus on direct or primary areas of manufacturing processes. With rising energy prices and a growing focus on sustainability, digitalization plays an important role in creating transparency, identifying optimization opportunities, and fulfilling legal documentation requirements.

According to our study, companies focus the least on skilled labor shortages and energy efficiency (see figure 1). However, these areas are expected to gain importance in the coming years. As the urgency of these objectives becomes self-evident, automation will help companies increase their productivity and deploy their skilled workers more efficiently. Additionally, the possibility of remote work expands access to a broader talent pool, mitigating the labor shortage problem by enabling companies to hire skilled professionals regardless of their location. Digital learning platforms and e-learning tools will help support continuing education and training to prepare employees for new roles and innovations. Furthermore, the automation of simple tasks will enable more effective employee deployment, allowing qualified specialists to focus on complex tasks  instead of routine activities.

Where does the industry stand today? 

When it comes to implementing automation and digitalization solutions, companies are at various stages of adoption. Notably, only around 8 percent of those surveyed have fully integrated digitalization into their DNA and are consistently relying on digital technologies and processes in all areas. These pioneers show a high affinity for innovation and are already at an advanced stage of development.

Around 10 percent of companies are only just beginning to develop strategies for digitalization and automation. However, they do recognize the urgency and the benefits associated with these measures, and they are taking steps to define their direction. 

Almost half of the companies are still at the experimental stage and are testing various digital solutions and technologies. These companies are actively seeking suitable approaches to automation and digitalization to strengthen their competitiveness. 

In terms of cost reduction—the primary goal of many of the companies we surveyed—progress varies (see figure 2). Only around 20 percent have reduced their unit costs by 5 to 20 percent. More than half are in the process of realizing initial reductions of up to 5 percent. In terms of expected reduction in unit costs over the next three years (2024 to 2026), the picture is different. Around a quarter of companies are aiming for a reduction of 2 to 5 percent, while roughly 30 percent are targeting a unit cost reduction of 5 to 20 percent.

Projects are also ongoing in indirect areas (the supporting functions and activities not directly involved in the core manufacturing processes), but there is room for expansion improvements. For example, only 8 percent of companies have successfully implemented generative AI on shop floors. Although all of the companies we surveyed recognize the benefits, fewer than half have taken concrete steps to implement GenAI. The remaining are in the process of identifying their first use cases for deployment and undertaking initial prototypes and implementations.

It is noticeable that different companies are at different developmental stages in terms of digitalization and automation. While some have already made progress and recognize the benefits, others are still at the beginning or in the experimental phase. However, our study also shows that pioneers in the industry can strengthen their competitiveness and counteract the disadvantages in countries with high factor costs through certain targeted measures.

Challenges of transformation 

So if the benefits of digitalization and automation can be clearly identified and if implementation is at the top of company’s list of priorities, what’s hindering the implementation? Our study shows that companies are well aware of the challenges in their transformation process. The top three challenges are implementation costs, skilled labor shortages, and legacy systems (see figure 3).

Although cost reduction is still the main goal, implementation costs are the biggest hurdle. This is because many companies favor high-end solutions that are both time-consuming and costly rather than solutions that are local, require less of an investment, and are quick-to-implement. Industry pioneers that have realized improvements tend to focus on fast and pragmatic solutions. Instead of acquiring an expensive new high-end robot, for example, a company might cost-effectively automate its existing systems using smart devices.

The second biggest challenge was the shortage of skilled workers, both during implementation and in operations. There was remarkably little variance in our survey results among respondents regarding the assessment of this challenge. A previous Kearney study, Focus on resilience—the right team for success, also identified a shortage of skilled workers as an issue, especially in certain functions. More than 90 percent of respondents confirmed they had been experiencing an ongoing shortage of workers, particularly in the areas of manufacturing, research and development, and IT.

Legacy systems were seen as a third obstacle. Older outdated systems and infrastructure, which may have grown organically over the years, tend to be incompatible with modern technologies. Companies are faced with either modernizing their legacy systems or replacing them with new, future-proof solutions, often with considerable investment and risk. This delays the transformation process and increases costs. Nevertheless, a thorough examination of the legacy systems is essential to pave the way for a successful transformation and ensure the flexibility and agility required in a dynamic business environment. Modernizing an infrastructure can be simpler than some business leaders might think: some companies have already bypassed their legacy systems with simpler, less costly, and more pragmatic solutions.

What do the most successful companies know that others do not?

The pioneers in adopting automation and digitalization technologies stand out for their progressive approaches and their ability to implement change. They go beyond conventional strategies to embrace ideas that can meet the demands of the transformation journey ahead. Key factors that set them apart include their differentiated assessment of transformation projects and their ability to strike a balance between short-term and medium-term strategic goals.

Innovation leaders of digital and automated technologies are typically willing to accept a return on investment (ROI) over a period of more than two years, which is the common time period expected in the industry. In contrast to companies that tend to focus on short-term results, the early adopters recognize the long-term value of transformation initiatives and are therefore prepared to make corresponding investments. This strategic focus makes it possible to achieve long-term competitive advantages and successfully prepare for the future. This is also reflected in our study: only 20 percent of the companies surveyed anticipated an ROI of less than two years. Among companies that had already realized a reduction in unit costs, 90 percent had a differentiated ROI assessment of more than two years for investments involving digitalization and automation. Some even allow an ROI period of up to 10 years on a case-by-case basis, for example, for investments in energy efficiency or updated infrastructure. These differentiated approaches underly the importance of long-term goals over immediate financial benefits. 

The pioneers also tend to foster an open and supportive culture of idea generation in their organization. They create organizational structures that encourage collaboration and enable employees to pursue creative solutions. Some go even further by creating dedicated team structures where employees collaboratively work on solution development and are actively supported. This may involve providing resources such as time and money for research and development as well as promoting incentive systems. By prioritizing innovation and creativity, the pioneers create an environment in which employees are encouraged to break new ground and disrupt traditional ways of thinking. In this way, they not only overcome current challenges but also identify new opportunities to prepare for a successful future.

Five factors for a successful transformation 

The benefits of automation and digitalization are undeniable, as are the challenges. But how well-prepared is the manufacturing industry for these challenges? More than half of the companies we surveyed feel well- to very well-prepared for the challenges outlined and are satisfied with their progress. However, a different picture emerges for the remaining 41 percent (see figure 4). Here, there is an urgent need for action. 

Compared with the pioneering companies, these companies are not satisfied or only moderately satisfied with their transformation so far toward digitalization and automation. Although they recognize the need for a transformation, there is a clear discrepancy in terms of implementation, particularly concerning the definition and operationalization of their strategies.

The successful implementation of digitalization and automation requires a clear strategy and a set of guidelines to help companies achieve their goals effectively.

Here are five essential guidelines to help master the challenges:

A clear road map and measurable success. A clear road map with defined key performance indicators (KPIs), paired with a robust governance structure, is essential. This road map should set priorities and show dependencies to enable a targeted implementation. A robust governance structure is crucial to ensure that the company stays on track and can achieve the set goals. This clear structure, along with measurable KPIs, allows for the assignment of responsibilities and effective monitoring of progress to ensure successful implementation.

Differentiated ROI consideration. When making investments in and strategic decisions about automation and digitalization, it is important to think beyond the usual ROI metrics. Some projects may require a more differentiated view. Their value cannot be measured through a financial lens alone. Some projects, such as those involving investments in infrastructure and enablers, should not be deprioritized only for profitability reasons. Waiting could result in losing competitiveness or being unable to afford the investments later, either financially or because of the overwhelming nature of addressing too many changes at once. 

Balancing local, smart solutions with innovation. This crucial move involves developing pragmatic tools and use cases that enable short-term successes while ensuring a balanced approach with medium to long-term, integrated solutions. 

Encourage employees and teams to develop solutions. Involving employees and teams in the solution-generation process is essential. Fostering a culture in which employees are empowered to develop solutions themselves, whether through drag-and-drop tools, apps, or other innovative approaches, can not only increase the acceptance of new technologies but also boost employee motivation and improve the quality of the solutions.

Employee development and retention. Skilled workers play a crucial role in the implementation and operation of digital solutions. There are a wide range of measures to attract and retain qualified employees in companies. A supportive corporate culture, continuous technological advancement, comprehensive development opportunities, and attractive compensation play a decisive role.

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Authors

Marc Lakner

Partner

Meltem Kandemir

Consultant

Daniel Stengel

Director