Companies that invest in digitizing operations can deliver efficiency gains of up to 15%–20% and spark supply chain innovation. Those benefits have prompted many companies to rush into a digital operations makeover. After all, no one wants to be the last to benefit from new technologies.
Leadership teams are discovering, however, that the journey is more complicated than they initially thought. For large companies, a digital transformation can involve replacing hundreds of millions of dollars in assets and can take between four and six years to complete. In our experience, two-thirds of companies that tackle a digital transformation go over budget or fail to deliver the expected benefits.
The most common mistake leadership teams make is to start investing before laying the foundations required for a digital transformation to succeed. Specifically, they neglect two important steps: devising an efficient manufacturing strategy and putting in place the right processes and people for a digital operations model.
Companies that skip those steps in haste are likely to suffer from higher costs and undermine the benefits of their investments. Why? Once companies start investing in digital operations, it becomes increasingly difficult to go back to square one and rejigger the organization or the strategy without triggering extra costs. As a result, they end up in a digital operations “doom loop” of spiraling costs.
Leadership teams that reap the biggest gains from a shift to digital operations start by managing complexity within their operations and modernizing the manufacturing strategy. For example, they rethink what components they should be making as opposed to buying. They also assess which products the company is likely to eliminate in the near future, based on market trends. Those critical decisions help streamline manufacturing and determine where it makes sense to produce a product, how many plants the network needs and the best location for the company’s strategic supply base.
One consumer products company planning a major digital operations investment identified $250 million in potential annual savings—5% of the costs of sales—by overhauling its supply chain first. Following a strategic review of manufacturing, the management team decided to cut production volume at inefficient plants by 50% and outsource 29% of the product portfolio to external producers. Those moves ensured that the company’s investment to digitize operations would support the most efficient plants and future growth products.
A global beverage company facing stiff price pressure from competitors wielded a similar approach to cut costs dramatically and regain cost leadership. Before they invested in digital tools, senior executives reviewed the company’s manufacturing footprint and product line to make sure they invested in the right assets. A rigorous assessment showed the company’s plants were underutilized and the manufacturing footprint was suboptimal. As a result, 30% of its products traveled more than 1,000 miles to reach the end customer.
The leadership team streamlined the company’s product portfolio, cut the number of distribution centers by 50%, increased scale and integration in sourcing and simplified the planning process. That paved the way for investment in smart connected factories, predictive forecasting and automated distribution centers. A huge increase in efficiency allowed the company to radically shrink its manufacturing footprint by 70%, including a 35% reduction in manufacturing lines. Reinventing the supply chain before investing in automation and plant consolidation helped the company reduce complexity and radically reduce costs in a way competitors couldn’t match. The program cut unit costs by 20% and delivered more than $250 million in annual savings.
It may sound obvious, but successful companies also prepare for the digital journey by creating a digital operating model with the right processes and people to support the transformation. That includes establishing new roles in the organization to oversee digital processes and ensuring individuals have the right digital skills. Companies that race to invest without changing their operating model risk ending up in the digital operations doom loop.
Digital transformations can deliver a quantum leap in performance, but there’s no shortcut to achieving those gains. Winners invest in creating a lean and efficient supply chain and a manufacturing footprint linked to the company’s strategy. Companies that combine digital technology with highly efficient operations are hard to catch.
Amit Nagar is an expert principal with Bain & Company in the firm’s Performance Improvement practice and is based in Chicago. Joe Terino is a partner in the Performance Improvement practice and is based in Boston.