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Digital Manufacturing: How to Forecast Financial Implications

Digital Manufacturing: How to Forecast Financial Implications


Dec 06, 2017
Manufacturing and Distribution

Forecasting Financial Implications 

Industry Week calls the digitalization of manufacturing the fourth industrial revolution. Implementation of advanced software and equipment will undoubtedly position many companies to meet the challenges of a changing technological landscape, and forward-thinking manufacturers are leveraging these emerging technologies and the power of the Industrial Internet of Things (IIoT) to gain a competitive advantage.

These organizations recognize the advantages of digital manufacturing: greater efficiencies, increased speed and productivity, predictive maintenance, improved speed to market and, in time, the resulting ROI. The technology comes with a pricetag, however, and many organizations are struggling to overcome the immediate financial implications of paying for it. 

The Financial Dilemma of Manufacturers
The high cost of emerging technology is not the only financial pressure facing the manufacturing sector. Manufacturing employs 12.3 million in the U.S. alone, with an average salary paying 12 percent more than all other industries. According to the National Association of Manufacturers, more than 600,000 jobs are still waiting for qualified workers. Many of these positions require workers with sophisticated computer skills and the ability to manage robotics. The skilled labor shortage is a real threat to many discrete manufacturers, and attracting qualified candidates is requiring many to offer even more substantial benefit and salary packages, bringing their labor costs to all-time highs. 

Globalization is also placing financial pressures on organizations, resulting in downward pressure on good prices. And potential regulatory and tax requirements could constrain budgets even further. On average, manufacturers pay nearly double the cost per employee to comply with federal regulations versus all other firms.

Financial pressures are nothing new, but the concept of investing in the IIoT that relies heavily on real-time data and predictive analytics—something that can appear intangible on the surface—rather than people, products, or tooling equipment that take up space on the production floor, may require a mindshift for those with a more traditional approach. Leading enterprises are realizing that these assets and the latest technology cannot be viewed independent of each other; rather, they all work together to drive results and improve overall performance, quality, and satisfaction among workers. Understanding the payback of adopting emerging technologies will help manufacturers view it as a strategic initiative that helps sustain and scale long-term growth. Failure to upgrade will inevitably result in a competitive disadvantage and potential losses for most.

Creative Financing Solutions
All this technology comes at a price. The digital revolution is not reserved for Fortune 500 companies with significant budgets. The bulk of manufacturers can be categorized as small and medium-sized enterprises, and the implementation of such technology must be part of their strategic initiatives moving forward if they want to remain competitive. 

With substantial assets tied up in equipment, people, and various capital expenditures, financing the digitalization of manufacturing may require a non-standard approach to maintain an acceptable level of working capital. While traditional bank loans remain a perennial option, they can take time to acquire and offer little flexibility. An outright purchase of some digital solutions can be untenable as it relates to traditional financing. Since technology is constantly evolving, the prospect of taking out a 10-year loan, for example, on a system that may be outdated in a few years is a bitter pill to swallow. 

Various forms of asset financing can allow manufacturers to implement technology more quickly and gain a competitive advantage, while remaining flexible as newer technologies emerge. Leasing options generally achieve similar results and can even out cash flow by providing a fixed monthly cost. Unlike traditional financing, borrowing terms won’t be subject to change based on interest rate or market volatility. Most asset financing solutions also include service options as an added benefit, helping ensure that maintenance and updates are completed in a timely manner, minimizing potential downtime, and data security threats. Leasing options usually account for upgrades in the future, assuring that a facility has the latest technology available.

Many providers integrate financing as part of any recommended technology solution, making it feasible for enterprises to experience the benefits of a digital transformation without a significant outlay of up-front cash. Managing all these technologies and integrating necessary existing processes and internal information requires a strategic approach, and an Enterprise Resource Planning solution should be part of the mix for those wishing to reap the greatest potential rewards. 

Author(s)

Suzanne Koss
Suzanne Koss, CPIM
Partner
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