The Industry 4.0 revolution can’t happen without funding. Investments in sensor-based technology, modern ERP solutions, Big Data analytics, and cloud deployment are among the essential technologies manufacturers need in order to jump into the arena.

Can the CFO Predict ROI of Digitalization in Manufacturing?

Oct. 12, 2016
The digital transformation hitting manufacturing is still in its early stages, with chief financial officers being asked to make investments in new technologies without the data-rich projections on ROI they are used to. This first installment of a three-part series on how digitalization is impacting specific roles in manufacturing starts with the CFO.

Asking the manufacturing CFO to authorize major spending for a digital transformation project without ROI predictions is like asking a pilot to jump from a plane without a parachute. It’s crazy. And not going to happen easily.

Yet this is exactly what is happening in manufacturing plants today. The visionaries of the enterprise, often in the corner executive office, are turning to their financial departments for support of major investments in technology, sometimes both hardware and software. The facts to back promises of Return on Investment, in many cases, just aren’t there yet. The digital transformation that we know will hit manufacturing is still in early stages, generating plenty of optimism but dribbles of documented use-case data.

So, today, when the CFO says, “Show me the proof. Show me what we will gain and how long it will take us to recover our initial investment,” the response is often a shrug of shoulders or a collection of articles by industry experts making projections. Volumes of forecasts are published on this topic as industry pundits predict everything from how many devices will be Internet-connected to how much will be saved by keeping internal assets running without unscheduled shutdowns.

Is that good enough for today’s CFO who is accustomed to dealing in fact-based decisions and relying on strong historical evidence, data-rich projections on ROI, and detailed risk analysis before cracking open the hermetically sealed company wallet? After the Great Recession, manufacturers have been reluctant to dip into capital reserves and invest heavily, especially on long-range projects. A 2016 article in Fortune says, “Companies cutting or flat-lining their capital expenditures in 2016 outpace those that say they will increase spending by a factor of more than two to one.”

At the same time, as McKinsey reports, “Industry and academic leaders agree that digital-manufacturing technologies will transform every link in the manufacturing value chain, from research and development, supply chain, and factory operations to marketing, sales, and service. Digital connectivity among designers, managers, workers, consumers, and physical industrial assets will unlock enormous value and change the manufacturing landscape forever.”

This revolution can’t happen without funding. Investments in sensor-based technology, modern ERP solutions, Big Data analytics, and cloud deployment are among the essential technologies manufacturers need in order to jump into the arena.

Early adopters are making bold assumptions and willing to bear risks in exchange for being first to own a market or claim a target market. “While this digital transformation of the $10-trillion-plus global manufacturing sector will play out over a decade or more, pioneers are moving to drive bottom-line and top-line impact in the near term,” says a McKinsey report

CFOs can find the success stories they need in order to invest confidently. Sometimes, they have to look to related industries or the massive companies with deep pockets, but the results are there.  For example, Boeing developed its two most recent airframes, for the 777 and 787, using all-virtual design, reducing time to market by more than 50%. And, at innovative fashion retailer, Zara, 10 staff members can now update a store’s inventory in a couple of hours—work that used to take 40 employees more than 5 hours.

Saving time is just the beginning. Creating loyalty among customers through better service, forging a competitive edge through innovated product launches, and devising new revenue streams around data and services will also bring value to the organization. Indeed, some factors, such as customer loyalty, are hard to assign a dollar value to. This leads to hard-to-verify facts with sky-high projections.

“The World Economic Forum estimates that “the combined value—to society and industry—of digital transformation across industries is upwards of $100 trillion over the next 10 years.”

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Will the CFO of a manufacturing plant ever be totally at ease with investing in disruptive technologies that promise to shake up the enterprises’ financial and IT world? Perhaps not. Perhaps, yes. For those trying to persuade the company’s CFO to take a leap of faith, the example of Uber is persuasive.  

Uber didn’t have a lot of historical, ROI data to back up its initial launch, because there was no company exactly like it. The New York Times in December, 2015 reported that privately owned Uber's valuation was $62.5 billion.

Sometimes a leap of faith pays off.

Mark Humphlett is the director of Industry and Solution Strategy responsible for Infor manufacturing. With 17 years of experience in technology and more than 25 years in the manufacturing and distribution industry, Humphlett joined the Infor team through an acquisition in 2006. He earned a bachelor’s degree in Industrial Engineering from the Georgia Institute of Technology.

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