Operational Excellence and Digital Transformation

As manufacturers look ahead to 2018, many are focused squarely on digital transformation. This “fourth industrial revolution” is moving forward rapidly under various names—Smart Manufacturing in the U.S., Industry 4.0 in Germany, and Made in China 2025—as companies look to leverage an array of digital technologies from the Internet and Industrial Internet of Things (IoT and IIoT), cloud computing, big data and analytics, and mobility. In an increasingly interconnected and digital ecosystem, these tools enable manufacturers to compete faster, more efficiently, and sustainably in markets that demand rapid and ongoing innovation.

Digital Transformation Means Opportunity for Operational Excellence

In a recent post, LNS Research calls out Operational Excellence as one of the major stepping-stones to successful digital transformation. In most of the analyst’s core practice areas, it emerges as a key driver for companies’ investment in their programs for business process improvement.

LNS envisions Operational Excellence as a multidimensional approach that requires balancing a number of factors, including:

  • Asset Performance Management
  • Enterprise Quality Management
  • Environment, Health and Safety
  • Industrial Energy Management
  • Internet of Things
  • Manufacturing Operations Management
  • New Product Design and Introduction
  • Supply Chain Management

They note: “Since Operational Excellence encapsulates so many business elements, it is no wonder why management views any project that can demonstrably improve operational performance as a reasonable investment. So, when you tie digital transformation and Operational Excellence together, you are on the way to achieving that buy-in.”

Digital Operational Excellence Fosters Business Agility

This perspective is supported in a recent Forrester report that concludes that digital Operational Excellence increases business agility: “Digital business isn’t just about customer experience—it’s also a way to drive operational agility. Digital operations can increase speed-to-market, make employees more productive, promote leaner processes, and maximize asset utilization.” The report has eight recommendations for those embarking on digital transformation efforts that are worthy of close consideration:

  • Establish a clear digital vision. Digital business transformation is so fundamental to a firm’s future success that the CEO must inspire employees to pursue a vision of the company as a digital business.
  • Establish a digital-first culture. Collaboration, agility, and digital innovation are second nature to employees in digital businesses. Fuel the digital-first mindset in your firm by educating, training, and inspiring your employees with digital seminars, roadshows, education programs, and partner days.
  • Link inside-out and outside-in thinking. Map your customer journeys from the outside in. Don’t start with your products and services; begin with the outcome that your customers seek. Understand the customer experience ecosystem that your firm has created to serve your customers, and then connect this outside-in view of your customers to the business capabilities that you need to help your customers achieve their outcome.
  • Create a cross-functional, customer-centric organizational model. Start by forming temporary cross-functional teams that can drive change using customer-focused metrics to help guide actions before progressing to full-scale reorganization to create a truly customer-obsessed enterprise.
  • Empower the technology group to focus on systems of engagement. Technology management teams must play a pivotal role in enabling digital transformation. These teams must hire for digital skills and help drive enterprise-wide transformation. This means that CIOs must champion a business technology agenda—investments in technology, systems, and processes—to win, serve, and retain customers.
  • Protect your customers’ trust. When customers hear daily about government surveillance and data breaches at major retailers, only companies that treat people’s data with care will earn consumers’ trust. In a world of fluid ecosystems forming and reforming partnerships, treating data with care is crucial.
  • Think big, start small, and act swiftly. No matter what your situation is, the journey to business success in the age of the customer is a radical overhaul of culture, organizational structures, technology, measurement frameworks, and operating models. What’s more, it’s ongoing. Executives must approach digital business as more than a single program of activity to wrap up and put to bed. This isn’t about creating a standalone digital strategy. Digital business must become the new way of being for your firm.
  • Learn to experiment and co-create. Building tangible prototypes is a proven way to demonstrate the potential of digital within your organization. Your existing change process isn’t the place for such rapid, tactical delivery. Instead of trying to overhaul your entire development life cycle, go around it. Build an external test-and-learn capability on a cloud platform. Leverage a partner’s lab. Work with a university. Sponsor a few summer students.

Embracing Change Means Investing in Technology

All these recommendations point to the willingness to invest in the technologies driving digital transformation and embracing the change the transformation journey will require. As noted in a recent column on ComputerWeekly.com:

“For companies looking at digital transformation projects, there are a number of strands that have to be brought together to make their initiatives successful. Just as cloud computing led to CIOs having to flex new muscles around SLA management and integration across different platforms, so digital transformation will require the development of new skills and knowledge.”

That development may prove to be the most difficult barrier companies will face in reaching for Operational Excellence and Digital Transformation.

New Call-to-action

MRO and OEMs: A New Revenue Stream

The digital transformation is shifting Maintenance, Repair and Overhaul (MRO) from the periphery of operations to an emerging role as a profit center. Especially in the context of complex manufacturing, MRO is emerging as a revenue stream, rather than its historical place as a “cost of doing business.” MRO is now a competitive differentiator in terms of market position and customer satisfaction.

OEM-Owned MRO Mean New Profit Opportunity

MRO-Network notes that the industry is in transition, with non-OEM-owned MRO companies under particular pressure. They cite a significant push by OEMs to capture more aftermarket business, with the trend particularly pronounced on the aircraft component and engine side of the business.

Especially in the aerospace industry, the MRO market is booming. AVM Mag summarizes the MRO boom, “Low fuel prices and anticipated higher interest rates will spur MRO growth over the long term by allowing middle-aged and mature aircraft to fly longer, producing more maintenance, repair, and overhaul business for their engines, components, and airframes.”

MRO Market Growth According to AVM Mag

  • The global air transport MRO market is expected to expand from $62.1 billion in 2014 to $90 billion in 2024, a compound annual growth rate of approximately 3.8 percent.
  • Asia-Pacific and China remain the major drivers of growth, expected to spend $29 billion in 2024, up from $16.9 billion in 2014.
  • U.S. wide-bodied carriers are coming back to North America, a development driven by higher labor rates in Asia, currency valuations, and more sophisticated analysis of the costs of outsourcing.

Engine OEMs Face Particular Benefit from the MRO Boom

Engine OEMs, in particular, are dominant in their aftermarket sector. Three prime examples of this trend, according to estimates from global consultant ICF International:

  • Rolls-Royce has an estimated 80 to 90 percent share of the total MRO spend on its engines.
  • GE Aviation has an estimated 50 to 60 percent share of its aftermarket.
  • Pratt & Whitney has an estimated 30 to 40 percent share of its aftermarket.

Such percentages are indicative of significant revenue potential. For example, in 2014, GE’s commercial service revenues were $8.9 billion. As of Q4 2016, they estimated a $106 billion backlog for long-term engine services and material agreements on their products.

MRO as a New OEM Profit Center

As the industry pursues digital transformation, the position of OEMs in MRO is likely to get stronger. According to industry analyst Oliver Wyman, the global airline fleet could generate upwards of 98 million terabytes of data by 2026. Wyman notes, “This surge of data, in the hands of a new breed of data scientists and innovative management teams, could lead to major changes in how modern aircraft are cared for and perform.”

According to Wyman’s 2016 MRO Survey:

“Big data in commercial aviation already has moved past the early adopter phase for some applications, with a majority reporting implementation of AHM and PM on at least a modest scale. We also discovered that airlines and MROs are beginning to see the first tangible impacts of these initiatives: measurable gains in reliability and reduced maintenance costs, particularly on engines, where OEMs lead the industry in development and deployment of these technologies.”

As the digital transformation proceeds, OEMs see the wisdom in investing in MRO rapidly becoming a very important revenue stream for their ongoing operations.

MRO Whitepaper