Value chain transformation, competitive revitalization, and impact on the labor force

Emerging technologies, such as artificial intelligence, industrial robotics and 3D printing, will increasingly impact the competitiveness of manufacturing and supply chain activities, and possibly of national economies. These technologies not only can support greater productivity, they can also enable companies to reinvent their entire production and supply chain processes. Leaders across multiple industries need to critically reflect on the impact of disruptive technologies and on the ongoing digital transformation.

Although still uncertain, the economics supporting the digitization of manufacturing and supply chains seem attractive and are in flux at this early stages of the process. For instance, the Boston Consulting Group estimates that a welder today earns about $25 per hour, including benefits, while the equivalent operating cost per hour for a robotic welder system is about $8. In the U.S. automotive industry, the total cost of procuring and utilizing a robotic welding system has decreased from an average $182,000 in 2005 to $133,000 in 2014 (not adjusted for inflation). By 2025, the total cost is projected to decrease to a little over $100,000. The cost of systems engineering for robot welding (installing, programming, and integrating robotic systems into a manufacturing plant) has decreased from $81,000 to an average of about $46,000. According to Boston Consulting estimates, a manufacturing facility should amortize the costs of robotic systems over a five-year period. As we move forward, the expectation is that the payback period will continue to decrease.

A justified concern, and a point of important debate, is the relation between manufacturing-supply chain digitization and employment. In this regard, an interesting observation is that countries that have invested in automation more intensely do not seem to have experienced greater decline in manufacturing employment. Let’s consider Germany, for instance. It utilizes three times more robots per hour worked than the U.S., mostly due to its vigorous automotive sector, which employs about ten times more robots per worker than the average industry. However, while Germany installed significantly more industrial robots between 1993 and 2007, the country lost only 19% of its manufacturing jobs between 1996 and 2012, compared to 33% in the U.S. According to the Brookings Institution, if the decline in manufacturing employment was proportional to the increase in robotic systems, the U.S. would have lost one-third more manufacturing jobs than it did and Germany would have lost 50% more. A noteworthy cautionary tale in this context is that countries like the U.K., which invested less in industrial robots, but experienced faster declines in the manufacturing sector, lost five times more jobs than it should have.

In the supply chain side, a place that illustrates nicely the physical-digital convergence are the floors of Amazon warehouses. Amazon employees over 120,000 workers in its U.S. warehouses and this year it brought online its 100,000th robot. Robotic palletizers are transforming the physically challenging jobs of front-line workers into more stimulating, mentally challenging positions. And, at least for the moment, this has not eliminated jobs at Amazon. The even better news is that the use of disruptive technologies is not poised to only eliminate some jobs; but also create new, better paying ones.

The caveat of jobs created through the digital transformation of manufacturing and supply chains is that the workforce may not be prepared to fill them. A recent report indicates that cities with strong demand for manufacturing skills, and that are gaining most workers, such as Seattle and Los Angeles, are attracting talent predominantly from across the country. Meanwhile, traditional manufacturing bases, such as Pittsburgh, are attracting workers predominantly from nearby cities. This is rightfully pointed out as very concerning, as geographic locations that are losing portion of its labor force will likely face difficulties to attract new businesses and to retain the existing top talent.

There is some urgency in preparing the workforce for the rise of the machines and in assisting traditional companies in making the transition. New technologies complement worker’s skills, enable greater productivity, allowing companies to produce and deliver products at a price point that is competitive globally, and create more challenging and satisfying jobs. One of the keys for the transition, however, will be better education and training.

For regions more heavily associated to traditional industries, such as West Virginia for instance, a strategic, long-term view of how new technologies can potentially raise the competitiveness of existing sectors and support the diversification of the local economy, as well as steps to prepare the workforce for the transition and to create new technology-driven businesses, are of great importance. In that regard, the focus of some emerging economies, such as China, may be instructive.

According to the International Federation of Robotics, China had a meager 36 robots per manufacturing worker in 2014, compared to the world average of 66 and 478 in the Republic of Korea. However, the central government and Chinese companies are focused in eliminating the gap. The Made in China 2025 plan aims at transforming the country into one of the world’s strongest modern technology-driven economies. Many Chinese regions, where economies are similar to either the rust belts or the depressed areas based on traditional industries in the U.S., are attempting to leverage new technologies to stimulate growth, development and competitiveness. Of course, we cannot discard the differences in the role and type of government between the two economies.

Connecting industry, academia, government, and centers of excellence to create an ecosystem supportive of new businesses and small manufacturers enabled by, or that can thrive assisted with, new technologies should prove very fruitful. Better alignment of education to produce graduates with the skills and knowledge to take advantage of and foster the transformations should be equally fruitful. In educational settings, it will become increasingly important to assess and rethink knowledge areas that are in the verge to be profoundly transformed by disruptive technologies.

Retraining programs to support more skilled jobs and knowledge transfer to support business transition will likely become increasingly necessary. Leaders should have a holistic view of the digital challenges and opportunities facing the various parts of their value chain. Such approach will assist in identifying capabilities that need most attention and in prioritizing where to focus investment. This suggests that digital transformation will affect not only front-line workers in manufacturing and supply chains, but the nature and scope of managerial and leadership positions will shift as well. Entrepreneurship, innovation and change management skills will be important, as well as appropriate holistic managerial frameworks, tools and mindset to manage the complexity of networked environments.

Building a culture of innovation in the manufacturing and supply chain organizations will assist leaders in harnessing talent and fostering transformation. As the title of a joint report released by the MIT Sloan Management Review and Deloitte a few years back suggests, “Strategy, [ and perhaps even more importantly, and talented people, which I am adding to the original title ] not technology, drives digital transformation”, or any business or value chain transformation for that matter.

What is your take? How manufacturing and supply chains could change? What skills should we focus on to prepare the workforce and leaders? What has to happen first for traditional businesses and economies to leverage technological developments for competitiveness?