2016 - 06 - German Manufacturing Is Leading A Digital Industrial Revolution

Digital
Article
Manufacturing
German
Manufacturing Is
Leading a Digital
Industrial Revolution
by Thomas Kautzsch
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HBR / Digital Article / German Manufacturing Is Leading a Digital Industrial Revolution
German Manufacturing Is
Leading a Digital Industrial
Revolution
by Thomas Kautzsch
Published on HBR.org / June 01, 2016 / Reprint H02X3X
Germany’s automakers, auto suppliers, machinery companies, and

machine tool builders have long been considered the world’s leaders in
manufacturing in large part because of their ability to unlock the potential
of software, sensors, networks, and electronic devices on their assembly
lines. Now, they are pioneering a new phase of global digital
manufacturing that will transform the key processes surrounding the
manufacturing of everything from automobiles to trains, planes,
machinery, and even kitchens.
Copyright © 2016 Harvard Business School Publishing Corporation. All rights reserved. 1
By digitizing the processes that govern how a new idea is brought to

production (such as R&D, product launch, and testing), sales to delivery
(pricing, demand forecasting, order fulfillment), and factory maintenance
(including the inventorying of spare parts), German manufacturers in the
auto industry and elsewhere are already beginning to significantly improve
their margins. By 2030, we estimate there is the potential for
manufacturers worldwide to realize an estimated $1.4 trillion upside by
taking a page from leading German manufacturers’ playbooks.
The majority of these gains will be realized from better management of

pre- and post-production processes – the rest will continue to be derived
from the actual manufacturing or production. What follows describes how
German manufacturers in particular are rewriting the rules for industry
globally on several fronts:
Idea to production: It used to be that every new car model required 20

extra hours of work driven by quality issues or purely unplanned changes
that its designers and engineers required. Each new car costs the
automotive OEM anywhere from a few to several hundred dollars in extra
cost. With German automakers launching several new models in huge
volumes every year these costs quickly add up to billions of dollars.
But digital technologies now being deployed by German automakers

promise to save them $100 million per new car launch on average by
integrating design and change data more closely with the production
process. By simulating the production of a new car on the car’s structural
force field using as few as 100 prototype or validation models, engineers
can now estimate what each change might do to the overall performance
of the car and how much it would cost to make the change before cutting a
single sheet of metal or forming a piece of carbon fiber or any other
composite material.
Sales to delivery: By relying more on big data demand forecasting

techniques now being pioneered by German manufacturers, we estimate
that manufacturers globally could boost their margins by $600 billion over
the next 14 years. Today, about 75% of global automotive production now
follows a built-to-stock logic based on dealers’ judgments. Showcased cars
rarely match the preferences of customers, who are reluctant to pay for
options they do not require. And built-to-stock cars have extended
turnover times, making dealers hesitate to order expensive options only to
be forced to sell cars at discounts.
Some German automakers have already begun to boost their profit per
vehicle by several hundred dollars by more systematically analyzing dealer
information, customers’ online configurations, and current and past take
rates to determine their built-to-stock cars to display. Soon, many will
take this analysis to an even higher level by incorporating even more real-
time information from sources such as third-party research data,
customer-relationship managements systems, competitor information, and
online forums. By doing so, they can forecast the effective demand for
models and options at individual dealers even more precisely and sell cars
more quickly with fewer discounts.
At the same time, other types of manufacturers can improve their

assembly lines’ utilization in spite of shorter term variations by developing
real-time simulation and feedback loops between their shop floor and
engineering. Take high-end kitchen and cabinetry manufacturing, for
example . Known for their straight line looks, expensive wood veneer
finishes, gleaming stainless steel fronts, and use of granite counter tops,
German kitchens have traditionally taken a long time to be delivered
because their production was based on taking standardized, modular
pieces, and then incorporating customer-specific elements by hand.
The process used to be labor-intensive and slow – frustrating homeowners

with 3-4 month waits. But kitchen manufacturers are cutting the time
required to deliver seamless German kitchens to the end consumer by
automating “lot size one” manufacturing, with digital representation of
every choice that the homeowner has made. Everything from the faucet to
the dishwasher is integrated into the design, and all cutting, forming, and
fabricating is done in collaboration with all the various suppliers of the
individual pieces.
Smart maintenance and equipment performance: German

manufacturers are now deploying 3D printing and modeling techniques
that will eventually completely change the way manufacturers maintain
their factories. Malfunctioning software used to be a major cause for
delays, on-site reworks, and cost overruns at plant engineering companies.
Now, plant maintenance is being conducted faster, more reliably, and at

lower cost thanks to 3D digital mocks-ups of entire factories and lines –
including the modules that go into them. These mock-ups simulate
processes in real-time and are developed upfront. So new software can
now be commissioned and deployed without software engineering experts
ever setting foot on the factory floor.
With real-time monitoring and improved analytics, German machine

operators are also increasingly avoiding replacing parts too early or too
late. Instead, they can bring their stock levels more in line with actual
needs. By using 3D printing to obtain parts “on demand” with very short
lead times, many are avoiding keeping a large stock of spare parts on hand.
A new generation of manufacturing innovations is already underway in

Germany and elsewhere around the globe. But the greatest gains in what
amounts to the next phase of a global industrial revolution will actually
come from how algorithm-based decision making will enable
manufacturers to conduct everything from pricing to product planning to
supply chain management and research and development more efficiently.
Armed with real-time information with customer demand, production

capacity, operational performance and product quality, German
manufacturers offer a glimpse at how what product managers do in the
future could change almost beyond recognition. Already, these
manufacturers are making significant gains in figuring out new ways to

provide customers more choices while raising the level of their products’
quality at a lower cost and a much faster pace. New digital approaches are
appearing every day. If they’re not already, soon, manufacturers globally
will likely follow in their footsteps.
Thomas Kautzsch is a Munich-based partner and global leader of

TK Oliver Wyman’s Automotive and Manufacturing Industries practice.

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Digital

Germany’s automakers, auto suppliers, machinery companies, and

By digitizing the processes that govern how a new idea is brought to

The majority of these gains will be realized from better management of

Idea to production: It used to be that every new car model required 20

But digital technologies now being deployed by German automakers

Sales to delivery: By relying more on big data demand forecasting

At the same time, other types of manufacturers can improve their

The process used to be labor-intensive and slow – frustrating homeowners

Smart maintenance and equipment performance: German

Now, plant maintenance is being conducted faster, more reliably, and at

With real-time monitoring and improved analytics, German machine

A new generation of manufacturing innovations is already underway in

Armed with real-time information with customer demand, production

manufacturers are making significant gains in figuring out new ways to

Thomas Kautzsch is a Munich-based partner and global leader of

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