Can Smart Manufacturing Initiatives Fuel U.S. Productivity?

Ted Doheny, CEO of Joy Global and John Rothenbueler, CEO of Kwik-Lok
Ted Doheny, CEO of Joy Global and John Rothenbueler, CEO of Kwik-Lok

While the U.S. economy is in far better shape than it was in the aftermath of the financial crisis of 2007, the nation’s productivity has yet to recuperate. That unhappy reality raises questions about just what needs to happen to boost efficiency and eliminate waste, noted leaders participating in a roundtable discussion at Chief Executive’s 2016 Smart Manufacturing Summit.

“Total-factor productivity in the U.S. economy has been sliding since 2007,” pointed out Lee Swindall, vice president of business development at the Wisconsin Economic Development Corporation, which co-sponsored the discussion. “And there’s clearly a strong correlation between that slump and the low GDP growth we’re been registering during that period. This phenomenon is a serious issue that we’re going to have to address.”

Tech to the Rescue
Smart manufacturing practices, which use technology like embedded sensors and integrated software to collect and analyze supply-chain data and drive real-time improvements in production, are obvious solutions. Historically, the adoption of information technology advances has fueled increases in productivity. By driving efficiency across processes, smart manufacturing has the potential to do the same. Connected machines can use predictive analytics to boost production by reducing downtime, improving worker safety, streamlining operations and eliminating waste.

“Total-factor productivity in the U.S. economy has been sliding since 2007…this phenomenon is a serious issue that we’re going to have to address.” —LEE SWINDALL, WEDC

Yet, despite this powerful potential, most manufacturing companies have yet to join the smart manufacturing revolution. In fact, just 13% of participants in the American Society for Quality’s 2014 Manufacturing Outlook Survey reported having at least partially implemented smart manufacturing. The good news? The majority of those who did so (82%) reported increased efficiency.

Given that impressive success rate, why haven’t more U.S. companies sought to harness the power of smart manufacturing? Reasons range from cost barriers and management resistance to security risks and the prospect of workforce disruption. “The risks need to be known and fully managed before we capture the true promise and potential of this evolution,” noted Swindall. “These include linear risks like data integrity, network integrity, privacy, data storage capacity and standards integration, as well as things like displacement of the existing workforce and social disruption.”

Cost was cited as a major barrier by CEOs participating in the roundtable. Several reported struggling to sell their companies on making the investment necessary to spur productivity. “I have a board telling me that I need a two-year payback period on any idea we present,” said John Rothenbueler, CEO of Kwik-Lok. “Whereas in my mind, three to five years is a good payback on increasing productivity.”

Wisconsin Economic Development Corporation's Lee Swindall and Kohler’s John Brickner
Wisconsin Economic Development Corporation’s Lee Swindall and Kohler’s John Brickner

That point resonated with Ted Doheny, CEO of Joy Global, which manufactures and services heavy machinery used in underground and surface mining. With his company under pressure from customers reeling from commodity price cuts, Doheny is also grappling with demand for a rapid payback on technology investments. At the same time, such a burning platform can help drive change, he noted. “In 1999, there was a huge investment in new technology since all the computers were going to blow up because of Y2K,” he pointed out. “What happened? In 2001, productivity shot up because they had to use all the technology they put in place. So adversity defined that change.”

Yet, even those who recognize the need to invest in manufacturing-technology advances often hesitate, afraid they will choose the wrong technology. This is particularly true for companies burned by IT investments in the past, reported Swindall. “Over-investment in the preceding generational technologies from which they have yet to reap a full return causes a natural hesitation to adopt new platforms,” he said.

People Pros and Cons
Workforce considerations also weigh heavily on both sides of the smart manufacturing adoption equation. Hampered by the perception that facilities are dirty and jobs are low-paid with limited prospects for advancement, today’s manufacturing companies have a tough time attracting new hires. As a result, CEOs like Elizabeth Feldman of and do manual jobs. Young people want to work in new systems. If we don’t put this system in, I will continue to lose people and I won’t be able to service my customers.”

In a similar vein, John Brickner, director of operations at Kohler, is looking for ways to automate jobs as 30- and 40-year veterans leave the power systems manufacturing company. “I think part of the denigration of productivity has been the attrition of the workforce,” he said. “The custom side of our business is more difficult to automate because those jobs are more complicated; but on the more commoditized consumer-product world, where there’s more task repetition, I see application for robotics.”

Ideally, technology will enable manufacturers to capture the institutional knowledge of experienced workers and systemize it, added Randy Hauser, president of Chicago Metal Fabricators. “Since we’re a custom builder, 80 percent of what we build is from other people’s prints, so the key intellectual property for us is really our estimators, They can take a blueprint of something that has to be cut, laser-welded and machined and come up with a number. brazing materials manufacturer Lucas Milhaupt, are looking to automation and robotics as a solution to thinning ranks of workers.

Smart 3“Our system is so old that we still do a lot of things manually, but we don’t have as many people coming into the company to fill our ranks,” she explained, noting that the company is in the midst of an ERP implementation. “I looked at the new technology and said, ‘We need to be there to compete,’ because I’m not going to be able to find as many employees who want to come in We need to get to the point where we can put that knowledge base into software and integrate it into our current systems.”

That’s a formidable challenge for a mid-size company that doesn’t have its own IT department, he acknowledges. “Bringing someone in from outside to do that is more costly, plus adoption is never as good when an outsider is trying to implement something. So we don’t really have the resources, plus this thing is moving so fast that you think, ‘What if I spend $50,000 to put this system in here and by the time I implement it everybody has moved over there?’”

Seeking Skilled Workers
However, even as they look to automation as a solution to a dearth of manufacturing workers, CEOs are well aware that finding skilled workers to operate the more complex machinery in smart factories will be problematic. “With the advent of new technologies, we can bring jobs back to the U.S.,” said Chris Bopp, CFO of Standard Textile, which manufactures towels for customers like Marriott International in its facilities in Georgia and North Carolina. “But we have a huge skills gap when it comes to people to take care of the management, monitoring and maintenance of machines with the latest technologies—ERP, robotics, IoT. Then we talk about the ability to take the information collected by these machines and make use of it—it’s very difficult to train people to be able to do that.” To overcome that challenge, Standard Textile has created alliances with local colleges that now recruit and train for its U.S.-based facilities, Bopp noted.

As demand for workers with specific skill sets continues to increase, more and more companies and universities may find themselves teaming up to train and educate prospective employees about new technologies, added Chicago Metal Fabricators’ Hauser. “The only way we are going to solve this [gap] is by having a much closer collaboration between the industry sector and the education sector in making sure the skills are there,” he said.

Over time, methods of educating future workers will evolve with the nation’s workforce, asserted Michael Lovell, president of Wisconsin’s Marquette University. “I’m a believer that higher education is going to actually reform itself in the next 15 years and you’ll see a huge change in the way we educate students,” he said. “We can’t rely on lectures—one-way [dissemination of] information—because teaching information isn’t all that important in an economy where you always have it at your fingertips. Our students need to be able to creatively problem solve.”

A Burning Platform
Despite the clear challenges of investing in both new equipment and technology, as well as the talent necessary to operate them, CEOs agreed that making the transition is a competitive imperative. Smart manufacturing initiatives are widely expected to usher in the next wave of innovation and productivity in the industrial domain. In fact, McKinsey Global Institute has forecasted that the financial impact of the Internet of Things alone will be between $3.9 trillion to $11.1 trillion by 2025.

Clearly, adapting to the tectonic shifts under way—regardless of the risk that entails—is no longer optional, noted several CEOs. “First, it’s not all about return on investment made, it’s about survival,” said Kwik-Lok’s Rothenbueler. “Second, the longer that you defer it, the harder and more expensive it becomes to make whatever change is required.”
“The way I would fully factor this is: If the tsunami is coming, the chance that you are not going to get wet is nearly nil, and in my judgment, all the evidence suggests the tsunami is coming,” summed up Swindall. “So you either have a craft that will float and you will survive, or you will be washed over and you’ll perish. Not reacting doesn’t seem to me a reasonable option.”

Jennifer Pellet
As editor-at-large at Chief Executive magazine, Jennifer Pellet writes feature stories and CEO roundtable coverage and also edits various sections of the publication.

PARTNER CENTER