News & Views

The Digital Transformation of the Process Manufacturing Industry

18 June 2019

Authors: Samuli Pirinen, Erkko Korhonen and Jesper Nevalainen

The digital transformation of the process manufacturing industry is opening up new opportunities at an incredible pace. In order to keep up and stay competitive, many industrial organisations have been investing funds, skills and capabilities to adjust their businesses. In this blog post, our experts discuss essential topics on what to keep in mind when industrial business leaders are adjusting their organisations to keep up with the recent development in the market.

Part I: Digital Factories

Adapting to a Changing World

The process manufacturing industry has constantly been adapting to a changing world and has made continued investments in process control and optimisation. For example, over the past decades, many organisations have gone through enterprise resource planning (ERP) and manufacturing execution systems (MES) implementation projects to improve their productivity and to automate their planning, scheduling, inventory management, and logistic processes.

Today, the new era of digital transformation of the process manufacturing industry, also referred to as the Industrie 4.0, is reshaping the world. One of the initial drivers for the digitalisation of the process manufacturing industry was to implement new technologies to manufacturing processes that allow constant monitoring and predictive maintenance of the machines.  However, the ultimate goal of the Industrie 4.0 has always been to connect the digitised machines across a manufacturing process to digitise the overall process performance. These totally integrated digital factories leverage digital solutions such as artificial intelligence, big data analytics, real time planning and connectivity, autonomous systems, and digital twinning, to name a few.

The above-described development in the market, the digital factories, and the need for new capabilities is at the top of just about every industrial business leader’s mind. But what does this actually mean for your organisation? Below, our experts discuss the essential topics on what to keep in mind when industrial organisations are moving beyond pilot digitalisation projects and are ready to invest in digital solutions.

From Equipment Performance to Process Performance

Outcome-based business models, also referred to as “as-a-service” models are becoming popular within the process manufacturing equipment suppliers.

Traditionally, the process manufacturing organisations have owned and operated the equipment forming the production line. The shift to outcome-based business models, where a service provider usually owns and maintains (and sometimes also operates) the equipment, usually comes with new strategic and contractual topics to be thought trough.

In essence, in an outcome-based business transaction a customer acquires outcomes (results of the use of the equipment) and the compensation of a supplier is linked to how well the outcome fulfils the agreed targets. In this business model, the equipment usually acts as its own collateral and is not owned by the customer until the service fees are paid in full. Take, for example, a manufacturer of industrial equipment that designs, manufactures, and sells equipment, and makes money from the service contracts. The launch of an outcome-based business model could mean providing the right of use, and maintaining the equipment for free and charging customers based on the added value generated by the equipment tracked by IoT (Internet of Things) sensors.

IoT Platforms and Data

An IoT platform enables management and automation of the digitised equipment within the IoT universe. It basically connects your equipment to the cloud by using flexible connectivity options. The above-discussed trend of the digitised equipment has brought countless new connected devices and machines to networks and the trend will most likely continue in the future. No matter the scope of a digitalisation project, the IoT platform and IoT device and machine security issues must be carefully considered.

The digitised devices and machines generate massive amounts of data. The truth is that everyone wants some value out of this data. For example, an equipment manufacturer usually wants to use the generated data e.g. to improve its equipment maintenance services. The generated data could be also linked to its revenue generation. The process manufacturing company needs the data for its own operations.

In addition, a number of digitised devices and machines are transmitting personal data. The risk around privacy and IoT will increase, with more data breaches likely to become public after the GDPR. The compliance of data privacy requirements is also something that must be carefully considered when carrying out digitalisation projects.

The level of access to and rights over data is a controversial topic that even the experts are still debating. Who is the owner of the data? Is it the person who created it, the equipment manufacturer whose sensors collected it, or the company whose platforms analysed it? Apart from the personal data and the GDPR, there is no general “data law” that would answer to these question. Thus, the data related topics can often only be addressed properly in the contractual arrangements between the parties involved in the digitalisation project. Consequently, and as with any digitalisation project and any data driven business, well-formulated and well-structured contracts becomes extremely important for value creation and enabling the desired business and strategic outcomes.

Going Beyond Pilot Digitalisation Projects

A full digital transformation of a company is a complex undertaking. In broad terms, the digital transformation process requires a strong relationship between the parties, transparency, good governance, and a genuine risk and reward sharing structure. The challenge lies in the fact that each digitalisation project and contractual relationship between the parties is unique and reflects the commercial objectives and the mutual goals of the parties.

For a process manufacturing business, the flawless operation and maintenance of a production line is of the essence. Usually this is the number one driver for any project with respect to a company’s manufacturing process. To secure this objective, the organisations must carefully consider their operational requirements and capabilities of their contracting parties. With technology shifting so quickly, it is impossible to predict the future. Therefore, some level of flexibility of the contract terms is also usually required, i.e. with respect to exiting a contract and changing the terms without heavy contractual penalties.

A digitalisation project may also require substantial capital investments in the IoT platform, automation and new digitised equipment. The financing of a capital-intensive project can be challenging. This also applies to the industrial equipment and service providers and their performance-based services, which usually require a great deal of up-front capital.

We believe that the digitalisation of the process manufacturing industry will continue, however the shift from a pilot digitalization project to a totally integrated digitised factory usually comes with a cultural change. As industrial organisations implement digitalisation projects, also the processes and work roles of a transforming business will generally change. According to e.g. the Brookings report, this change is at the heart of the digital transformation.

If you wish to discuss the topic further, join our free seminar on the digital transformation of the process manufacturing industry in the autumn. In the seminar, we will share our insights on the topic from the legal perspective and would be excited to hear your views and experiences, too! For the upcoming blog posts, please subscribe to our blog here or follow us on LinkedIn.

Read more about the topic:

“Digital transformation”, VTT

“Why Manufacturing Digitalization Matters and How Countries Are Supporting It”, Information Technology & Innovation Foundation

“Digitalization and the American workforce”, Brookings