How Digital Is Manufacturing?

By Matt LaWell

So, just how digital is manufacturing? And how digital are you? A new paper whose title asks that exact question aims to answer it with hard numbers — and the outlook is mixed, at best.

How Digital Are You?: Middle Market Digitization Trends and How Your Firm Measures Up considers the 3% of American companies whose annual revenues rest somewhere between $10 million and $1 billion, and surveyed 500 middle market C-level executives during a week in early October to cull the data.

“An increasing portion of middle market digital spending is being directed toward innovation, analytics, and business strategy development,” writes the National Center for the Middle Market, which authored the paper in collaboration with the Fisher College of Business at Ohio State University, the digital commerce platform company Magneto, and the research and platform company Nextrade Group.

“Already, companies invest about one in every five digitization dollars on projects in these areas, such as e-commerce platforms, computer-aided design, open innovation platforms, and digital tools for new product and service development. … (And) future digitization spending is likely to increase most in these same areas, making digitization a key component in future business growth, in addition to a capability that enhances current business operations and practices.”

According to the paper, more than one-third of all middle market companies consider themselves “digital leaders,” which seems high, especially with a corresponding self-assessed Digitization GPA of 2.8 on a 4.0 scale.

Some facts and figures, from and for manufacturers:

Few industries consider digitization more important than manufacturing. Among the six industries surveyed, only business and technology services considered digitization to be “extremely important” more than manufacturing, with reported figures of 24% and 19%, respectively. (19% of health products and services also reported it to be “extremely important”, along with 13% of financial, insurance and real estate companies, 8% of retailers and wholesalers, and 15% of “all others”.) Just 36% of manufacturers said digitization was “very important”, which ranked last among the six industries, while 38% said it was “somewhat important” (first) and just 6% said it was “not very important” (the lowest figure of the bunch).

And manufacturers haven’t been spending as much on digitization as other industries. While 45% of manufacturers report spending between 3 and 10% of their revenue on digitization projects during the last year, the field as a whole has spent less, on average, than any other industry — just 7.8%. That number is barely half of what health products and services companies have spent (15.5% of revenues), and pales next to business services and technology (14.3%), retailers and wholesalers (12.6%), and financial, insurance and real estate (11.4%). Extend the timeline back a few years, though, and that percentage might bump.

At least 90% of all middle markets companies expect to spend at least as much on digitization efforts this year as they did last year. The breakdown: 31% expect to spend more in 2016, 59% expect to maintain spending, just 5% expect a decrease, and 5% didn’t know when asked.

The average increase in annual spending across the board? 16.6%. The average increase in annual spending for manufacturers? Just 5.6%. No other industry was lower than 16.4%.

Maybe manufacturers aren’t spending because they don’t think they’re digitally ready. Just 26% of manufacturers responded that their digital readiness was “very advanced” compared to other companies. That ranked just ahead of retailers and wholesalers (20%) and far behind every other industry (the next-closest: 35%). More than half of the manufacturers surveyed said they were “average” (53%), with a little more than one of every five saying they’re “somewhat behind or far behind” (21%).

Or maybe it’s because the pace of digitization is just … slower. Just 13% of manufacturers said their field was moving forward rapidly, ahead of only retailers and wholesalers, an indication that change is still somewhat glacial, despite all the new tech tools and toys out on the market and in development. In step, 24% said the digitization pace is just slow.

Still, ROI is modest and attainable. Across all industries, nearly seven of eight companies (87%) considered their latest digitization effort to be a success. Realistic return on investment expectations probably played the biggest part there: the average expected ROI is 30.3%, with an achieved ROI of 27.5%. Those companies that roll out a rapid rate of digitization, though, can expect more: closer to 38% ROI expected and accomplished.

We really shouldn’t need to write this, but we’re going to hit you over the head with it again and again: Cybersecurity is really important. Perhaps no surprise here, but cybersecurity is the most popular type of digitization in use among all middle market companies, with almost three of every four (73%) either fully deploying a program or working on one in the pilot stages. (Check out new feature stories about cybersecurity next week on both IndustryWeek.com and NewEquipmentDigest.com.)

“How are your customers handled?” the NCMM asks. “How do you view them? Do you have constant feedback from customers on their experience? And what are you doing to improve or maintain that experience?

“Digital tools exist to aid in this quest.”

Now, how many manufacturers will put them to good use?

Article was originally published on IndustryWeek.