Operations Practice

Transforming advanced
manufacturing through
Industry 4.0
Manufacturers in industries such as automotive and electronics,
nearing the tipping point of digital adoption, are achieving even faster
and more sustainable change through Industry 4.0.

This article is a collaborative effort by Enno de Boer, Yorgos Friligos, Yves Giraud, David Liang,
Yogesh Malik, Nick Mellors, Rahul Shahani, and James Wallace, representing views from McKinsey’s
Operations Practice.

© Gorodenkoff/Getty Images

June 2022
 The last decade has seen companies operating
under increasing levels of disruption. Quickly
changing customer preferences, as well as
demand uncertainty and disruptions, are
challenging planning systems to unprecedented
degrees. National security interests, trade
barriers, and logistics disruptions are pushing
businesses to find alternatives to globalized
supply chains. Major swings in demand are
calling for drastic operational and capital cost
reduction in some areas and rapid growth in others.
Physical distancing and remote work are forcing
manufacturers to reconfigure manufacturing
flows and management. Meanwhile, increased
global concern for the environmental impact of
human activities has forced companies to rethink
manufacturing strategies.
To address these disruptions, successful
advanced industry (AI) companies are leveraging
Industry 4.0 to achieve faster, more sustainable
change, shown most dramatically at “lighthouse”
manufacturers that have led the way in Industry 4.0
implementation. Through the Global Lighthouse
Network (GLN), a research collaboration between
the World Economic Forum and McKinsey on the
future of production and the Fourth Industrial
Revolution, 103 sites around the world have been
identified as lighthouses, having successfully
transformed their factories through Industry 4.0.
These companies are leveraging digital technology
to build more agile and customer-focused
organizations. This approach lets manufacturers
look beyond productivity in order to focus on
improving their sustainability, agility, speed to
market, customization, and customer satisfaction:
a total of five areas of impact.
Challenges to overcome
The lighthouse sites are exceptional in their ability
to overcome the obstacles that stand between
many companies and digital transformation. A
2020 Industry 4.0 survey by McKinsey of more
than 800 businesses globally revealed three major
challenge areas: financial hurdles, organizational
problems, and technology roadblocks.
2 Transforming advanced manufacturing through Industry 4.0
Financial hurdles typically include the high costs
associated with scaling digital deployments
that don’t provide short-term benefits to the
organization, and therefore don’t provide a
strong incentive for investment. Use cases that
don’t provide a clear, quantifiable value to the
organization can also yield an unclear road map to
digital success.
Organizational problems often involve low buy-in
and a lack of concentration from leadership as a
business attempts to see a digital transformation
through. That hampers the effort’s potential success
and long-term viability. Inadequate knowledge of
digital capabilities and a lack of organizational talent
can prevent broader buy-in and properly scaled
transformative efforts.
Technology roadblocks commonly include low
support from partners in scaling deployment while
facing multiple platform choices, which hinders
an organization’s ability to move quickly into new
territory. The transformation’s starting point can
also stall when leaders aren’t convinced of their
ability to increase the size and scope of the digital
architecture they choose for implementation.
AI companies have tried many approaches to
overcome these barriers and realize improved
performance through digital manufacturing
transformations. An examination of advanced
manufacturing lighthouses reveals two critical
reasons that their transformations succeeded:
first, they chose the right use cases; second,
they looked for ways that those use cases could
reinforce one another.
Increasing Industry 4.0 adoption
and impact among advanced
industry companies
Beginning with 16 sites in 2018, the GLN has grown
to 103 sites as of 2022. Nearly 60 percent of the
current lighthouses are companies in AI (Exhibit 1).
Industry 4.0 has helped these companies make
strides across KPIs that drive growth. These
Web <2022>
<Advanced manufacturing Industry 4.0 lighthouse>
Exhibit
Exhibit <1>1 of <3>
As
As of
of May
May 2022,
2022, the Global Lighthouse
the Global Lighthouse Network
Network has
has identified
identified 59 advanced
industry lighthouses, out of 103 total.
industry lighthouses, out of 103 total.
Evaluation process of potential Global Lighthouse Network members
~10,000
companies assessed for
Fourth Industrial Revolution
lighthouse potential
KPIs span all five areas of impact and include
sustainability KPIs, such as greenhouse-gas
emissions; productivity KPIs, such as factory
output; agility KPIs, such as lead-time reduction;
other speed-to-market KPIs; and customization
(Exhibit 2).
Companies that successfully created lighthouses
focused on the use cases that had material impact
on these five areas, allowing them to succeed
where previous efforts failed. Although there are
many possible Industry 4.0 use cases, four are
significantly more popular in AI companies than in
non-AI companies. We see examples of these use
cases in three automobile manufacturers (a luxury-
vehicle manufacturer in Europe and two automobile
manufacturers, one in Europe and one in Asia), and
in a European white-goods company.
Flexible automation. Companies use intelligent
robotics to precisely automate previously manual
jobs. For instance, the European automobile
manufacturer connected robots to efficiently
manage process flow and collect the data necessary
Transforming advanced manufacturing through Industry 4.0
59 advanced
500+ 103 59
companies contacted current advanced
in multiple waves lighthouse industry
of outreach sites for 2022 lighthouses
to monitor the process, optimize production flow,
and reduce losses. The luxury-vehicle manufacturer
used robust automation with collaboration between
people and machines to improve efficiency, quality,
and ergonomics.
Digital performance management. Firms use
data to monitor and improve performance by
driving operational decision making. The European
automotive company uses real-time, accurate
data to power decision making, resulting in
better reaction speed and direction plus stronger
competitiveness: the firm’s cost per unit shrank by
3.5 percent. The luxury-automobile manufacturer
uses smart data analytics to enable predictive
maintenance, reducing a critical asset’s unplanned
downtime by 25 percent.
The white-goods factory increased overall
equipment effectiveness (OEE) by 11 percent
through machine alarm aggregation, prioritization,
and analytics-enabled problem solving. The
company puts specific machine and custom alarms
on operators’ and managers’ smart watches and
3
 Web <2022>
<Advanced manufacturing Industry 4.0 lighthouse>
Exhibit 2 of <3>
Exhibit <2>

Lighthouses have
Lighthouses have used
useddigital
digital technology
technology to
togenerate
generateimpact
impactacross
acrossa awide
wide
range of KPIs.
range of KPIs.
KPI improvements Sustainability Factory End-to-end/beyond manufacturing

Impact range observed, %

0 100 200 300 400
Sustainability Greenhouse-gas emissions
Waste reduction
Water consumption reduction
Energy efficiency
Productivity Factory output increase
Productivity increase
OEE1 increase
Product cost reduction
Operating cost reduction
Quality cost reduction
Agility Inventory reduction
Lead-time reduction
Changeover shortening
On-time delivery increase
Speed to Speed-to-market reduction
market
Design-iteration time reduction
Customization Lot-size reduction

1
Overall equipment effectiveness.
Source: World Economic Forum Global Lighthouse Network

other interactive displays. The same company uses
digital dashboards to monitor production resources
and collect real-time production data, including
reasons for stoppages.
The Asian automotive company reduced its die
manufacturing time by 47 percent by using a
real-time production monitoring and scheduling
system, with integrated workflows and tablets
replacing paper-based processes for operators.
It also increased production output by 6 percent
by connecting all its production machinery to a
single manufacturing information system that
tracks performance metrics and automatically
detects bottlenecks.
Quality analytics. Companies use advanced
analytics to identify and remediate the root causes
of quality defects. The European automobile
maker installed a touch device with apps at each
workstation to guide real-time problem solving,
automatic identification and steering for parts
and vehicles, and unit traceability. The result:
a 40 percent increase in accomplishing tasks
correctly on the first pass.
The luxury-automobile company is using smart
maintenance and assistance, employing wireless-
sensor technology to let maintenance employees
constantly monitor production lines. Rework has
dropped by 5 percent.

4 Transforming advanced manufacturing through Industry 4.0

AI-based inspections. Firms use vision systems to
inspect products and leverage artificial intelligence/
machine learning to identify defects. The white-
goods company uses cost modeling to help it decide
what to make and what to buy. It also monitors its
grid, power, and asset status in real time to control
and adjust consumption.
The same company also reduces its time to market
with rapid design prototyping through three-
dimensional additive manufacturing. It makes mock-
ups and functional prototypes of new products in
smart materials.
Between 13 and 19 percent more AI lighthouses
cited one of four use cases as one of their
highest-impact use cases, compared with non-AI
lighthouses (Exhibit 3). Flexible automation, digital
performance management, and quality analytics
were universally popular among AI and non-AI
companies: as many as 69 percent of companies
cited one as the use case with the greatest effect.
Similarly, AI inspection was also much more
prevalent in AI companies than in their non-AI peers.

Web <2022>
<Advanced manufacturing Industry 4.0 lighthouse>
Exhibit 3of <3>
Exhibit <3>

Four
Four use
use cases accountfor
cases account forsignificantly
significantly more
moreimpact
impactin
in advanced
advancedindustry
industry
lighthouses than in other lighthouses.
lighthouses than in other lighthouses.
Prevalence of high-impact1 use cases by industry, % of lighthouses
Advanced industry (AI) lighthouses (n = 59) Lighthouses from other sectors (n = 44)

0 20 40 60 80 100

Flexible automation

Digital performance management 4 use cases are

significantly more
Quality analytics popular among
advanced industry
Advanced analytics–based process control
lighthouses
AI inspections

Connected workforce

Smart planning

Energy management

Digital-product development

Digital twin

End-to-end supply chain visibility

Predictive maintenance

Quality management system

Condition-based monitoring

Digital thread

0 20 40 60 80 100

1
Use case cited by lighthouse as one of the four highest-impact use cases implemented.

Transforming advanced manufacturing through Industry 4.0 5

 Synergistic use cases yield
bigger impacts
The automobile manufacturers and white-
goods company employed multiple use cases
in their businesses. Though the use cases are
individually effective, the synergies between
them in combination yield still better results.
These synergies allowed the companies to take
advantage of their one-time investment in a
technology stack to pursue multiple use cases
instead of just one or two, resulting in even greater
impact that can build over time (see sidebar, “Track
the progress of digital transformation”).
For example, consider the European automotive
factory, which is now one of the best-performing
commercial-vehicle plants in Europe. This plant
implemented a digitally enabled right-first-time
tool, a touch device with apps at each workstation
to ensure better performance through real-time
support to fix problems, automatic identification
to guide parts and vehicles, and unit traceability to
ensure a quality process.
on accurate information that’s provided in real time
and contributes to decision making, reactivity, and
competitiveness. The company used digital track
and trace, a flexible logistic flow developed to
ensure that parts and vehicles are traceable and
conform to standards. The system includes radio-
frequency-identification (RFID) tags on parts and
packaging, blockchain part traceability from end
to end, packaging task management automation
for forklift operators, and synchronization of kitting
parts with the assembly line.
That wasn’t all. The factory also optimized robot
cycle time through data analytics on programmable
logic controllers (PLCs). It connected robots
to efficiently manage process flow and collect
data necessary to monitor processes, optimize
production flow, and reduce losses. The firm
implemented digital solutions that improve
sustainability by driving energy consumption. For
example, it uses a digital platform and a drone
equipped with a thermal camera to find and control
temperature leaks in the roof.

At the same time, the factory connected people Taken together, those changes helped the
to drive performance by enabling digital daily- plant reduce warranty incidents by 50 percent,
management solutions. These solutions are based increase its flexibility to deal with its many vehicle

Track the progress of digital transformation

To keep tabs on digital-transformation
efforts, companies need to establish
metrics that leaders can track effectively.
Metrics should be transparent and
accountable across the stakeholder
groups implementing the transformation.
The Global Lighthouse Network
demonstrates that leaders should follow
the following key metrics.
Return on digital investment. Are the
monetary returns realized across the
total lifetime of investments in digital
capabilities aligned with internal company
metrics such as internal rate of return (IRR)
and ROI?
Percentage of annual technology budget
spent on bold digital initiatives. How
much of its technology budget is the
organization spending on digital initiatives
that drive value?
Digital app time to market. What’s the
timeline for deploying applications into
transformation initiatives and externally
facing sources?
Percentage of leader initiatives linked
to digital. How motivated are leaders to
support digital-transformation initiatives?
Attraction, promotion, and retention
metrics for top technical talent. Does
the company have a pipeline of workers
who will contribute to digital capabilities
and performance?

6 Transforming advanced manufacturing through Industry 4.0


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configurations, and reduce manufacturing costs by
more than 10 percent.
The luxury-automobile factory also saw substantial
benefits from deploying multiple use cases. It
used smart data analytics to control predictive
maintenance and collect data that let machines
self-service within minutes, pairing that with reliable
material supply and autonomous transportation
systems that increased efficiency.
The firm then added a smart maintenance and
assistance program that has maintenance
employees constantly monitoring the production
line at every place, using wireless-sensor
technology in the quality-assurance process. It
combined robust automation with worker–machine
collaboration to increase efficiency, quality,
and ergonomics.
This mix of digital manufacturing and lean, strategy-
oriented processes yielded improved quality, lower
costs, and higher productivity. It reduced a critical
asset’s unplanned down time by 25 percent.
Embarking on the Industry 4.0 journey
AI organizations looking to embark on their Industry
4.0 journeys can use lessons from these successful
lighthouse sites. By leveraging digital technology
across the most effective use cases, more and more
companies can drive outsize impact across several
different KPIs. Companies that can deploy Industry
4.0 at scale are transforming their organizations to
not only address the toughest disruptions of today
but also prepare themselves for the new disruptions
of tomorrow.

Enno de Boer is a senior partner in McKinsey’s New Jersey office; Yorgos Friligos is an associate partner in the Miami office;
Yves Giraud is a senior expert in the Geneva office; David Liang is an associate partner in the Bay Area office; Yogesh Malik
is a senior partner in the Washington, DC, office; Nick Mellors is a partner in the Seattle office; Rahul Shahani is an associate
partner in the New York office; and James Wallace is a consultant in the Chicago office.

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