Connecting the dots: Increasing operational efficiency
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Through the ups and downs of economic cycles, the focus on operational efficiency has been one constant theme, maximizing return on existing investments. Our experience across industries suggests that companies can achieve an increase of up to 20% in profitability by boosting the operational efficacy of their manufacturing set-up and beyond-the-factory-gate supply chain. Typically, this involves increased focus on throughput and yield improvement, asset utilization, manpower productivity, waste reduction, superior planning and optimal sourcing.
However, even today, about 10-15% value is left on the table due to inefficient collaboration in the broader ecosystem and our inability to effectively harness existing technology.
Across industries, asset productivity can be enhanced by three-five times, through utilization of better technology, disciplined process adherence and improved planning. Stranded assets, underutilized equipment and inefficient manufacturing plants lock in vast sums of capital, leading to larger implications for the broader economy.
Similarly, logistics systems are notoriously inefficient in India and this is only partly due to the complex (and hopefully obsolete in a few months’ time) taxation system. Fragmented ownership of freight vehicles and the absence of a formal industry-wide platform for demand aggregation result in up to 25-33% underutilization of loads in the industry. By plugging this gap in utilization, companies can reduce freight costs by 15%, apart from significantly reducing the amount of working capital stuck in inventory across various stocking points.
These technologies are enabling changes in operations, dramatically reducing cost while driving higher levels of asset and manpower productivity. For example, 3D printing has been used by an aerospace firm to reduce weight of select components by up to 55%, and by an automotive company to drive down tooling costs for some prototypes by over 90%. The use of Big Data and advanced analytics is allowing manufacturing operations to establish cause and effect relationships, hitherto impossible, thereby cutting costs by 5-7%. Roughly 8% of manufacturing tasks worldwide are currently performed by robots. This is expected to increase to over 20% over the next 10 years.
BCG’s analysis shows that robotics alone could reduce India’s relative cost advantage over developed economies by 4-5% over the next 10 years. Add to this the effect of other components of Industry 4.0, and the cumulative impact on our competitiveness in the global arena could be significant. Companies thus need to start running faster, just to stay where they are in terms of competitiveness. Status quo is not an option.
We believe the Indian industry needs to focus on the following four areas.
First, invest judiciously in technology and harness its power effectively. Second, leverage technology to collaborate across companies and reduce the cost of operations collectively. Third, agree on common standards of technology to allow for interoperability. Finally, invest in reskilling manpower to obtain the social licence to operate in this new “science-fiction-like” world of industrial operations.
Though Industry 4.0 and the use of digital technologies are actively being discussed across corporate boardrooms in India, we are cautiously optimistic about this euphoria. Our experience shows that the effective adoption of technology by companies is quite dismal. While investments are made on the back of large expected benefits, managers fail to harness the power of the technology due to ineffective training and on-ground deployment. For instance, a large manufacturing company is struggling to reduce its maintenance costs due to corrupt master data in its enterprise resource planning system. The problem has compounded over more than a decade, rendering the platform ineffective in maintenance planning. This proves that investment in new technology has to be accompanied by management oversight of its sustained and correct usage in day-to-day operations till such technology becomes a way of life for managers.
The inability to reap the rewards of new technology will make today’s excited boardrooms adopt a more cautious stance with regard to innovation in the future—an outcome that will be disastrous for India in the long run.
We also believe that new technologies are now allowing for industry-wide collaboration. Companies across the spectrum have invested in spare capacity—core manufacturing equipment, material handling equipment, office space, inventory of insurance spares, and direct and indirect material. New technologies such as digital platforms help “uberize” these assets and make them available on-tap, across companies. For instance, typically 10-15% of insurance spares are held in inventory by companies, often locking in significant capital, in non-productive areas. Industrial clusters can seamlessly aggregate and fulfil requirements for such spares and create a common reserve by leveraging digital platforms that connect to multiple supply chains. But to enable this, companies must create common standards of interoperability. For instance, industrial consumables such as anthracite are required in small lots by companies. However, the economically viable quantity for import is significantly higher, causing high levels of inventory. If a common platform can build interconnects with the material requirement planning process of multiple companies, it can pool in demand and reduce the cost of carrying inventory, potentially lowering prices through scale benefits.
The most significant long-term implication of embracing technology to drive operational efficiency will be on human resources. Planned adoption of technology will automate a large number of manual jobs, leading to redundancies. If so, this is a non-starter. As we have seen across multiple industries and geographies, the social licence to operate is of paramount importance. Government and industry need to work together to develop a plan to reskill existing and new entrants to the workforce, to make them truly employable in this vision of the future. A myopic vision on this long lead activity, will make us incompetent over the long run.
The days of incremental improvements in operations are numbered. The tectonic shifts that lie ahead of us will redefine the world of industrial operations as we know it. Fortunately, unlike in the previous Industrial Revolutions, India will have near-concurrent access to disruptive technologies this time around. The ball is now in our court.
Ravi Srivastava is a senior partner and director, and Amit Ganeriwalla is a partner and leads the supply chain practice globally and transformation in Asia-Pacific at The Boston Consulting Group.