Industry predictions 2022: manufacturing
Continued uncertainty, data security, connectivity and shortages…
First published at www.blog.ifs.com, January 25th 2022.
Looking back – The ripple effect
After the turbulence caused by the COVID-19 pandemic in 2020 – which shook up the manufacturing industry and exposed many of its vulnerabilities – 2021 was not the year many had hoped for. Even though the much anticipated and extensive vaccine rollout across Europe and North America led to the easing of restrictions and rebounding of manufacturing activities, the optimism was suppressed by concerns about ongoing risks, further disruptive events and their possible ripple effect.
Over 2021, we witnessed disruptions that lead to a true supply chain crisis. From product shortages, cost pressures and rising inflation, to commodity prices surging as a result. Manufacturers have been forced to review their sourcing strategies and increase their inventories to prevent similar shortages from happening again. Added to this were risks from COVID variants, cyberattacks, environmental challenges, higher tax rates, soaring energy prices, staff shortages and of course efforts to recover and catch up from the losses suffered during the pandemic.
Given the speed, depth and breadth of the pandemic, manufacturers had to adapt quickly and find new ways to operate in order to survive. A contrasting positive emerged from all this: “sudden change” was possible and the “old ways” of operating were no longer sustainable. One of the biggest operational shifts, was the move to working from home which carried with it increased system vulnerability. Organizations had to update and increase cyber security levels more frequently to keep pace with the threats. But moving business processes into a “virtual” environment has also opened up opportunities: in the cloud manufacturers have been able to connect more of their applications and systems, linking data across functions and therefore eliminating operational silos.
So, what will 2022 look like for the manufacturing industry? Here are just a few predictions from us, but we’d love to know what you think.
Prediction 1: 65% of Manufacturing companies will move to a single instance
Software and applications are developing and improving at a rapid rate – with the speed of change increasing, so is the threat of malicious attacks. Organizations must constantly maintain and update their security. Naturally manufacturers want the latest features and enhancements to stay competitive. But with so many software platforms involved in running the business, this is complex, labour intensive and costly – making it difficult to adhere to a ‘Best of Breed’ approach to business systems. Manufacturers should look for providers and partners who can offer a solution for all their business processes in one place, with security updates and innovation embedded into the core product. Having users in one database simplifies control of permissions and access. Improved system security is one of the main advantages of cloud computing.
Prediction 2: 40% of Manufacturing companies will connect to production machines and critical systems
Manufacturers know that their production machines and systems generate vast quantities of data. But creating a “single source of the truth”, so they can access, interpret, and make informed business decisions, remains a serious challenge. Working with solution providers who can help join up the disparate systems will be key. Next year more manufacturers will be linking manufacturing machines and connected tools into their business systems, so they’ll be able analyze the data within their business solution software. This will give parts of the business access to machine data that they couldn’t see before. Robot orders increasing 67% in Q2 2021 is an indication that connectivity to productions machines is high on manufacturers’ agenda.
Prediction 3: 50% of Manufacturing companies will move away from “just in time” to remain agile
The supply chain has been hit hard and manufacturers who relied on critical single sourced raw materials have been forced to change their business models to cope and remain in business. If they’re working to Just in Time (JIT), they’ll have to consider buffering inventory critical components to cover erratic supply. This must be done carefully as the size of the buffer needs to move with forecast and demand, to minimize the impact on cashflow where margins are tight. The use of safety stocks and reorder point planning are now not flexible enough to cope, so manufacturers will need more advanced calculations based on predicted demand and proven capacity. Manufacturers need to look at their supply chains to make them more resilient with all the tools they have at their disposal.
Prediction 4: 80% of Manufacturers will reduce their dependence on long-haul container shipping
The once fast, efficient, reliable and cheap shipping network (accounting for 90% of global trade, 70% of it in containers) was thrown into disarray in 2021. This led to “container-geddon” pushing freight rates to a record high and prompting some exporters to raise prices or simply cancel shipments altogether. In 2022 manufacturers will look for greater diversity and flexibility in supplier partnerships, as well as where, and perhaps more importantly, how they source materials, goods and services. For example, setting up new clusters of national and regional production, also known as “proximity sourcing”, which is an approach clothing retailer Zara is known for. In food and beverage, we’ll see manufacturers focus on building stronger relationships with more local suppliers and those specializing in fresh foods, where shelf-life is particularly short, will invest in small-print vertical farming. Technology and automation will also play a big part. In some cases, additive manufacturing (AM) will help gain independence from China and therefore long-haul container shipping. During the pandemic, AM has already started filling some of the supply chain gaps globally, as highlighted by Industry Week. In fact, the ease at which 3D printers can switch from producing one component or product to producing something completely different makes it easy for manufacturers to address at least a portion of their supply chain bottlenecks. But hardware and material innovation have outpaced software development, so software will have to catch up if it’s to appeal to a wider range of manufacturers. In essence, we will see a shift towards shortening supply chains to counteract container-geddon.
Prediction 5: 60% of Manufacturers will prioritize carbon footprint reduction as part of their overall sustainability efforts and speed up their reporting capabilities
2022 will be the year of decarbonization and sustainability will gain a new sense of urgency. Regulatory pressures, customers’ demands, investors and other stakeholders have forced sustainability to the top of business priorities and made it an operating principle going forward. Governments and the financial community are making significant investments into combatting climate change – The European Commission for instance, has set a ‘net zero emission by 2050’ goal, putting legally binding pressure on companies to reduce their carbon footprint.
To meet these requirements, data will be paramount. What does this mean? Manufacturers will require access to more accurate, detailed and timely data, not only looking at organization-level emissions, but also granular emissions associated with manufacturing processes, the transport of raw materials and product, and the usage and disposal of products as they come to their end of life.
Being able to report on granular data will be part of doing business going forward, and technology will be a key enabler in capturing, cataloguing and sharing this data across the value chain. Some manufacturers are already making use of technologies such as IoT, Big Data, and AI today, but technologies are advancing at immense speed, and we can expect more potential in helping address sustainability issues going forward.
One thing is for sure, sustainability will require measurability, both up and downstream, and manufacturers will need to leverage technology strategically, to not only drive end-to-end data transparency but also report on it as and when needed.
Prediction 6: 70% of Manufacturers will regain control of their forecasting, building on 2020 and 2021 data, and increase their resilience
Some manufacturers think that 2020 and 2021 data is too skewed to be of much use in 2022. If they struggled during that period, they might consider ignoring it and argue that it was simply too “random” to include. Conversely, if they saw orders skyrocket (as in food & beverage) they may choose to disregard the unusual data patterns, so they don’t produce overly optimistic, and therefore unreliable forecasts for the upcoming 18 to 24 months. Both courses of action would be a mistake. Previous supply chain disruptions, such as the 2011 floods in Thailand, were much more localized, lasted a relatively short amount of time, mostly impacting supply, not demand. COVID-19 however has been a truly global event, affecting demand as well as supply. There’s still an opportunity for manufacturers to learn from their experiences over the past two years – the pandemic is by no means over, and the next disruptive event could be just as unforecastable and sudden.
To this end, in order to make the most of their 2020/21 data lessons learned, manufacturers should:
- Differentiate between seasonal and external events, including the one-off impact of the COVID-19 pandemic. Whilst the cleansing of historical data is necessary to improve forecasting accuracy, ensure you retain data related to the pandemic, as it will prove helpful in the future when a similar disruption strikes your supply chain.
- Apply context, what-if scenarios, analysis of comparable events and simulations to help quantify the likely impact of a potential event on company revenue, and overall performance, as well as the wider supply chain.
- Focus on the business impact (across regions, channels and customer profiles) rather than the event itself.
- Use machine learning to improve forecasting accuracy, minimize human error, and disregard irrelevant data to begin with.
To sum up…
There’s no other way to put it, today’s manufacturers still face disruption from all angles. And yet there’s optimism that the industry finished 2021 in a substantially stronger position compared to the start of 2020, when the turmoil began. Digital transformation and data consolidation in manufacturing will continue to accelerate, but technology investments will not just serve as crisis navigation tools. They will play a vital role in helping organizations remain resilient, become more agile, respond quickly to market forces and embrace new opportunities.