The Digitalization
Productivity Bonus in Dairy
Products Manufacturing
What value does digitalization offer the
Dairy Products industry?
www.siemens.co.uk/food-beverage-industry
Contents
1. Automation and digitalization: 4
The new imperative
2. The starting point for a business case: 6
The Digitalization Productivity Bonus
3. Financing Industry 4.0 7
4. Sector focus: Dairy Products 8
Siemens Financial Services | Summer | The Digitalization Productivity Bonus: Sector Insights
Management Summary
· Digital transformation – or Industry . - is a widely
recognised imperative in manufacturing. Manufacturing
CFOs, however, require measurable outcomes on which
to base their investment in digital transformation
· Research from Siemens Financial Services has shown
that measurable improvements in manufacturing
productivity are the most reliable starting point for the
digital transformation business case
· In this paper, productivity gains from digitalization and
automation – known as the Digitalization Productivity
Bonus – has been estimated for the Dairy Products
industry in the UK
· Creating an automated, digitized manufacturing
environment requires major investment. Specialist
financing tools – Finance . - are being developed by
expert financiers to enable affordable and sustainable
transition to the smart, digitalized factory
· Industry . Financing is now employing that new mindset to offer techniques which range across:
- Pay to access/use equipment and technology
finance so that precious capital is not tied up
in depreciating equipment
- Technology upgrade and update to take advantage
of the latest innovations
- Software finance to embrace all aspects of an
Industry . solution
- Pay for outcomes to align rate of benefit with rate
of payment
- Transition finance to minimise disruption in the
move to automation and digitization
- Working capital solutions to manage cash-flow
in a digital world
3
Automation and
digitalization:
The new imperative
There is no longer debate about whether the Fourth
Industrial Revolution – Industry . – is under way; the
conversation has moved on to address where, how much
and how quickly it is being implemented. Digitalization
of the manufacturing environment and its processes forms
the foundation of Industry ., adoption of which varies
from country to country and economy to economy. In some
parts of the world and in certain industries, the emphasis
is placed on automating previously manual processes.
Automated systems are, by definition, programmed and
controlled through digital systems; and where automation
is already widespread, further digitalization is taking the
form of the Internet of Things. This development involves
the widespread installation of sensors in the physical
environment and the ability to rapidly enhance production
economics through real-time performance data analysis.
Some digitalization pioneers are using digital controls and
digital data analyses to improve a wide range of processes,
including production capacity, job setup and turnaround,
uptime maximisation, predictive maintenance, supply-chain
logistics and just-in-time distribution. There are even
instances of manufacturers – including those in the Food
& Beverage sector - improving their competitive capabilities
edge through mass customisation, a technique where
tailored products are offered with much the same
economies formerly associated with mass production.
For manufacturers that want to remain competitive in
increasingly aggressive markets, the move to greater
automation and Industry . is not an option – it is a
necessity. But seizing the competitive advantages of
automation and digitalization that lie at the heart of Industry
. requires a substantial investment in new-generation
automated and digital platforms. Responsible business
leaders will therefore need a solid business case that justifies
this kind of significant investment to stakeholders and
shareholders, one that paints a credible picture of the
revenue, margin and growth benefits an investment in
automation and digitalization technology will bring.
Early movers in the manufacturing community (see figure
) are already enjoying many Industry . benefits, yet the
precise commercial gain from each of these benefits can
sometimes be challenging to calculate. To help establish
a more precise starting point for manufacturers embarking
on the automation and digitalization journey, Siemens
Financial Services commissioned research to understand
which of these benefits could be most reliably estimated
and used by most manufacturers to formulate a business
case for investing in Industry . technology.
4
Figure
Siemens Financial Services | Summer | The Digitalization Productivity Bonus: Sector Insights
Shorter setup and
changeover times
Reduced
downtime
Reduced energy
consumption
Improved
financial
sustainability
Improved
competitive capabilities
Increased manufacturing
productivity
Digitalization
& Automation:
Drivers of Value
Improved
product quality
Reduced waste
Improved
planning and
forecasting
Reduced inventory
holding
Reduced
time to market
5
The starting point
for a business case:
The Digitalization
Productivity Bonus
The vast majority of manufacturers and expert consultants
interviewed for the research confirmed that the ability
to increase manufacturing productivity is a universal
starting point for determining measurable value from
digitalization. The ability to manufacture the same product
volume at less cost, or manufacture more products for little
or no increase in costs, resonates with manufacturers
considering digital technology investment as a competitive
enabler. This was felt to be the case for both manufacturers
taking their first steps into automation and those looking
to install the latest sensor-based technology to fully
digitalize their production environment.
The research revealed that by automating and digitalizing
their production systems, manufacturers were set to make
production productivity gains equivalent to between
.% and .% of their annual revenues. Termed the
Digitalization Productivity Bonus, this gain was
identified by respondents as the most reliable starting
point to make a business case for investing in Industry .
technology upgrades.
Global Digitalization Productivity Bonus:
reduced production costs resulting from
conversion to digitalized technology
6.3%–9.8%
Bonus (production cost reduction expressed as % of total revenues)
Figure
6
Siemens Financial Services | Summer | The Digitalization Productivity Bonus: Sector Insights
Financing Industry .
Manufacturers around the world, however, still face the challenge of having to make a major initial investment to acquire
Industry . automation and/or digitalization technology in the first place. To overcome this obstacle, specialist financiers
have developed a set of financing tools called “Finance .” These tools enable the transition to new-generation digital
technology in a way that is affordable, sustainable and designed to alleviate the manufacturer’s cash-flow and workingcapital pressures.
These specialist Finance . tools can be summarized as follows::
Pay to access/use
equipment &
technology finance
This enables the acquisition of a system or piece of
equipment. Technology, service and maintenance are all
included in a single agreement. Periods can be adjusted to
match payments to the financial benefits gained. Master
agreements can be established that help speed up future
technology acquisitions.
Technology
upgrade & update
Manufacturers want to access technology innovations as
they appear (and digital innovation cycles are shortening).
Finance can also offer options to upgrade during the
financing period, whether to replace with a newer model
or retrofit enhancements to the main technology platform.
Pay for outcomes
These arrangements base payments on the expected
business benefits, or “outcomes”, that automation or
digitalization technology makes possible. Actual financial
savings, such as reduced electricity consumption, are used
to subsidise or even completely fund monthly payments,
making the technology cost neutral for the manufacturer.
Transition finance
Manufacturers do not want to start paying for their Industry
. technology platform until it is installed, tested and
operational. Finance . recognises the challenges of
transition and offers financing arrangements that defer
payment for a new system until it is reliably up and
running, eliminating any period of cost duplication for
the manufacturer.
Working capital
Software finance
By definition, most Industry . technology solutions
involve both hardware and software. Because specialist
financiers understand how the software is implemented
and likely benefits in practice, they can understand the
associated risks and include the software as an element
in the total financing package.
solutions
Finance can be optimised in more areas than technology
acquisition. Improved competitiveness can lead to sudden
growth, which exerts pressures on supplies, inventory and
overall cash flow. Financing services such as ‘extended
payment terms’ – usually based on some form of invoice
finance – are available to help manage the broader financial
challenges that success through digitalization brings.
7
Sector focus:
Dairy Products Industry
The Dairy Products Industry is well known for its product
innovation and brand promotion skills. However, the advent
of Industry . is now opening the doors to a series of new
ways of working that offer the potential for substantial
competitive advantage – the imperative commercial
payback needed from digital transformation.
Within the factory environment digital technology is
enabling automated restocking of material, automated
quality control, augmented reality remote support, and
predictive maintenance
automatically process ingredient, consumables and
packaging re-orders, the data coming off the production
line can be integrated with historical demand trend
information to predict demand and allow stocks to be
ordered in advance of consumption. Really sophisticated
big data analysis can also embrace weather and crop yield
data to optimise when supplies are acquired to gain the
optimum pricing. The result is less waste, improved
customer service and the ability to flex for spikes in
demand. Waste management and peak production
capabilities are key productivity and cost-control factors in
any food business.
Factory floor productivity is also dependent on production
and packing line uptime. With dairy products
manufacturers using increasingly complicated equipment
in order to ensure consistent food safety and quality,
machine performance can be remotely monitored and likely
breakdown predicted. Such predictive analysis allows
. Not only do stock usage sensors
engineers to be triggered to visit a site and maintain
equipment in advance of breakdown, maximising uptime
and minimising disruption. Often – using augmented/
virtual reality, engineers can perform maintenance
remotely during quiet periods, reducing cost and disruption
futher still. Moreover, VR is also being used in the smart
factory to help train staff in key hands-on skills without
have to interrupt the production environment or build
parallel training ‘twin’ production lines.
Most of the smart factory discussion has focused on the
manufacturing shop floor. Yet, smart sensing technologies
are also being applied to improvements in other areas of
the industry, particularly for food safety and track and
trace, improved packaging and new product opportunities.
Product recalls
several reasons: microbial contamination; errors in
labelling; contamination from inorganic foreign matter
(e.g. glass); chemical contamination; non-compliant
allergens; packaging faults; etc.
Quite apart from the regulatory pressure to detect where in
the supply chain or production process the problem lies, the
quicker such incidents are dealt with, the quicker public
confidence is restored and revenues returned to normal.
Complete food traceability involves the tracking of a product
history through data points along the entire processing
(field-to-fork) path. Industry . smart sensing technology
– such as RFID – is clearly a major factor in streamlining the
entire supply chain to make accurate identification and
traceability as rapid and reliable as possible.
are one example. They may occur for
8
Siemens Financial Services | Summer | The Digitalization Productivity Bonus: Sector Insights
Many food businesses have talked about the ‘batch of ’
(or ‘mass customisation’), where the consumer specifies
their product, but production still runs at near massproduction efficiencies. This may be a little fanciful.
One manifestation of this approach which is really being
implemented is where speciality yoghurt manufacturers
are using real-time data and predictive analytics to deliver
outlet-specific quantities, and to match daily production
runs better to likely demand.
Another area of mass customisation that is bearing fruit
is customisable packaging
. An example is equipment that
can pack cheese combinations for special occasions – even
those of different sizes – on a single system using smart
sensor detection with automatic format adjustment.
Product and packaging variations are implemented
automatically and the system does not require line
shutdowns to change batches.
Industry . is also helping to create safer workplaces
.
The Food & Beverage industry, with its hazardous
machinery, clean environments and complicated
manufacturing processes, by definition creates a shop floor
full of hazards. Data flows linking production systems,
safety systems and buildings technology allows
manufacturers to exert more rigorous safety controls on the
factory floor. Real-time analytical systems can help floor
supervisors identify danger times and zones and ensure that
improved safety measures are in place. Machinery can be
programmed to self- trigger when critical limits are reached.
More manual tasks can be automated, improving safety,
reducing errors and minimising legal liabilities.
Even such a highly automated industry is looking to
Industry . digitalization to improve production efficiency
still further, as well as well as leveraging incremental
competitive gains from digital connectivity between
people, machines, systems and locations – within the
factory, down the supply chain and connecting with
distributors and customers. In order to give an idea,
however, of the fundamental financial benefit to be gained
from Industry . in Dairy Products Manufacturing, this
paper has applied its Digitalization Productivity Bonus
model to the Sector in the UK, highlighting a couple of
subsectors. The average ‘Bonus’ percentage range was
applied to the total annual revenue of the Dairy Products
Manufacturers across the country (revenue data derived
from official third party sources). The resulting financial
sums in the table below estimate how much Dairy Products
Manufacturers could gain from improvements in
manufacturing productivity as a direct result of digital
transformation. These efficiencies, although not estimated
here, can also be realised throughout the supply chain.
Estimated Digitalization Productivity Bonus –
reduced production costs resulting from
conversion to digitalized technology for Dairy
Products Manufacturers
COUNTRY Baseline Bonus
(production cost reduction)
Dairy Products £. m
All in all, with changing business models, new competitive
challenges, developing consumer demands and proximity,
and innovative manufacturing possibilities enabled
through digitalization, further production efficiencies
are an imperative for an industry undergoing such
major disruption.
Yoghurt £. m
Cheese £. m
The Digitalization Productivity Bonus, is only one aspect
of value that digitalization is delivering in the Dairy
Products industry. However, it provides industry players
with a reliable starting point from which to build a digital
transformation business case. These gains from conversion
to an Industry . environment might then be returned to
shareholders, invested in R&D, or used to fund a sharper
competitive position in a company’s key marketplaces.
9
“Digitalized technology has allowed us to see what is
happening in detail within our production environment
in real-time throughout each day. We have full insight
into downtime detail and production rates, which is
helping us to continuously introduce improvement
adjustments in each of our lines. Overall, we’re seeing
average productivity improvements of around 13%.”
Operations management, major dairy products group
10
Siemens Financial Services | Summer | The Digitalization Productivity Bonus: Sector Insights
Key references
1
See, for instance: IBM, A framework for Industry 4.0, 10 Feb 2017; PwC, Industry 4.0 – Building the Digital Enterprise, 2016; McKinsey, Industry 4.0 (2015);
Strategy&, Industry 4.0 (2014); McKinsey, “Manufacturing’s next act” (2015); Control Engineering Asia, “The dawn of the new industrial era with the Smart
Factory” (January 2017); ABB, “The new age of industrial production” (2016); Assembly Magazine, Industry 4.0 (2016); Accenture, “The Growth GameChanger: How the Industrial Internet of Things can drive progress and prosperity” (2015); Roland Berger, Industry 4.0 (2016); VDMA and McKinsey, “The
future of German mechanical engineering” (2014); Oliver Wyman, “Digital Industry” (2015); Manufacturing Technology Center, Industry 4.0 (2016).
2
Methodology: Over 60 international manufacturers, international management consultants and specialist academics were interviewed in January and
February 2017. Respondents gave their expert estimate of financial gain from increased manufacturing productivity resulting from implementation of the
new generation of digitalized and/or automated manufacturing technology and equipment classified under the title of Industry 4.0 or The Fourth Industrial
Revolution. Respondents expressed their estimates of this financial gain as a percentage of total revenues, using their knowledge of gains calculated as a
proportion of total operating costs (total operating costs for manufacturing companies varies between 75% of revenues in Europe to 85%+ in China,
according to official statistics). This model was then applied to total revenue data of the manufacturing sector in different countries and manufacturing
subsegments around the world to estimate the financial gain from increased manufacturing productivity resulting from implementation of digitalization
and automation in each of these geographies and segments.
3
Research from Siemens Financial Services published in “Investing in Success" (2016) indicated that 67% of manufacturing respondents observed that
technology replacement/upgrade cycles are shortening.
4
This whole subject is discussed in the Siemens Financial Services research paper “Opportunities and Outcomes” (February 2017).
5
Food Engineering, Industry 4.0’s impact on the food & beverage industry, 27 Apr 2018
6
Techcrunch, How augmented and virtual reality will reshape the food industry, 25 Dec 2017
7
Strategy&, Industry 4.0 - Opportunities and challenges for consumer product and retail companies, 2017; Food Manufacture, Food manufacturers plan for
Industry 4.0, 15 Jun 2016
8
J Simon, M Tojanova, J Zbihlej, J Sarosi, Advances in Mechanical Engineering, Mass customisation model in food industry, 27 Mar 2018
9
Tetra Pak Foodnavigator, Industry 4.0: Impact on food and beverage manufacturers, 17 Apr 2018
10
Specpage, Food Industry 4.0 – Revolution or Evolution, 27 Oct 2017
11
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