How U.S. manufacturers can become technological front-runners.
● The future of manufacturing is digital, yet despite the influx of capital investment in U.S. manufacturing recently, many U.S. manufacturers still struggle with breaking through the performance ceiling of analog operations to achieve industry-leading operational performance.
● One big barrier for U.S. advanced manufacturing is limited operational scale. For U.S. companies to compete, they need to begin with scale in mind.
● There’s much U.S. manufacturers can learn from how “Lighthouses” are deploying transformative technologies to transform their own factories into Lighthouse-level powerhouses — including network-level thinking that must be called for by CxO leaders.
Adopting and scaling digital technology in manufacturing has become increasingly urgent in today’s dynamic and highly competitive manufacturing landscape. Five years ago, the struggle for factories scaling digital lay in getting out of the gate. In 2019, 70% of manufacturing companies we surveyed named “pilot purgatory” as their biggest barrier to realizing the benefits of digital. Today, the Global Lighthouse Network — a World Economic Forum initiative co-founded with McKinsey & Company — has identified 132 global factories, representing 80 companies, that have escaped pilot purgatory and achieved industry-leading operational performance.
These plants, in industries ranging from aerospace and medical devices to food and car manufacturing, show us that at least 80 companies have figured out the “lean + digital” blueprint needed to break through the performance ceiling of analog operations. On average, site-level improvements achieved by these Lighthouses include 10-25% reductions in production cost, 20-50% increases in productivity, and 30-70% reductions in lead time. Now, these same 80 companies are well underway in scaling these benefits across their full production networks.
With such levels of savings and productivity gains on offer, and as more manufacturers see peers like those in the Global Lighthouse Network accelerating digital transformation efforts, it’s no surprise that 89% of respondents to the NAM’s 2022 transformative technologies survey expected their company’s rate of adoption of M4.0 technologies to increase over the following two years.
Five years ago, the challenge was in getting from pilot to factory. Today, the goalposts have moved: companies across the globe, including many within the Global Lighthouse Network, are focused on scaling transformative technologies from factory to network.
U.S. Manufacturers Need Advanced Manufacturing
The U.S. is experiencing an unprecedented manufacturing boom on the back of favorable domestic policy incentives and geopolitical trends. In the past year alone more than 100 new factories have been announced in the U.S., including more than 50 semiconductor and electric vehicle factories and more than 60 greenfield announcements across other clean technology verticals. Together, these represent a doubling in planned capital investments since 2022, including $166 billion in announced investment in semiconductor and electronics manufacturing. Often, policy incentives are a core part of the business case for these new factories.
“Five years ago, the challenge was in getting from pilot to factory. Today companies across the globe are focused on scaling transformative technologies from factory to network.”
Policy incentives won’t last forever. According to McKinsey analysis, for U.S. manufacturers to be competitive in the long term across new or near-shored goods, manufacturing cost reductions of 30-40% will be needed, likely through strategic deployment of advanced manufacturing technologies. And with such technology critical to the long-term competitiveness of the U.S. manufacturing base, it’s concerning that only 11 out of the 132 sites in the Global Lighthouse Network are in the U.S.—a number which underrepresents U.S. contribution to global manufacturing GDP by a factor of two.
Why Are so Few Among the Technological Elite?
First, talent — and especially digital talent — is expensive. The most talented technologists are those likely to be capable of the biggest and most transformative impact, and they are also likely to be well aware of their skills’ market value. Against big-city tech and finance companies able to offer high pay, rapid advancement, and flexible working models, manufacturers will need creative solutions. Their traditional hiring approaches, evolved in a different talent environment, often require in-person work in smaller towns — with unclear career paths because the existing base of digital roles has been so small.
Furthermore, upskilling workers for the challenges and opportunities offered by digital transformation is a muscle few manufacturers now have. Building it will be increasingly critical as more U.S. manufacturers find themselves without enough — or the right — skills to grow or digitalize. This will only be amplified by 2030, as manufacturers face:
- An increasing shortage of workers. As of January 2023, there were 803,000 openings for manufacturing roles – a number projected to swell to more than 2 million + by 2030.
- A rapid loss of industry knowledge. Over a quarter of the U.S. manufacturing labor base is composed of workers over the age of 55, and attrition rates remain as high as 40%.
- An accelerating skills shift. Digital manufacturing requires a different set of skills than analog approaches. According to analysis by the McKinsey Global Institute, by 2030 the U.S. manufacturing sector will require 259,000 more engineers, but 479,000 fewer production workers—resulting in transitions for around 1 million workers, or roughly 8% of the workforce.
Finally, the deployment of U.S. advanced manufacturing is limited by operational scale. US factories tend to be smaller, both in physical and workforce size, than at comparable sites in China, for example, with far fewer employees per U.S. factory. Digitalizing a facility carries several one-time costs that are incurred whether a facility is large or small, such as setting up cloud infrastructure. In the U.S., there are smaller economies of scale to overcome these fixed costs of site-specific digitalization programs — it is less economical to embed the tech teams needed to support transformation at smaller, more numerous sites.
“We can learn from how Lighthouses are deploying transformative technologies, which primarily focus on business needs.”
Together, these points help to explain why the U.S. has comparatively few manufacturing Lighthouses. At the same time, we can learn from how Lighthouses are deploying transformative technologies, which primarily focus on business needs such as productivity via workforce augmentation, matrix manufacturing via cross-site scheduling, and throughput maximization via digital twins and predictive maintenance.
Focus on Network-Level Strategy
If scale is part of the challenge for transformative technologies in U.S. manufacturing, then the solution must be to start with scale in mind. Siemens Digital Industries provides a good example of the possibilities. Its two Lighthouse factories serve as anchors for a network-level digital implementation strategy. Like every other factory in the Siemens network, each of these two sites maintains its own strategic posture for digital innovation. That allows some sites to prioritize factory operations improvements, for example, while others can focus on end-to-end connectivity.
Yet at the same time, common resources mean that use cases, once proven, can be rapidly deployed across the network. All sites use a modular reference architecture that lets use cases plug in easily, with central digital teams providing expertise for local implementation. This approach to scale can make the economics more palatable than the one-factory-at-a-time transformation model — which in the U.S. too often simply can’t be done.
A Role for Leaders
CEOs and their CXO colleagues are the ones who can elevate the vision to network levels, rather than dwelling on site-specific plans, delivering real-world benefits of better customer experiences, lower costs, and accelerated innovation. And they have the playbooks to help them do it, built from evidence, data, and analysis from hundreds of digital transformations. They are the ones to get the board on board with such long-term, capital-intensive journeys, and to dedicate time and resources to making the necessary talent and capability upgrades.
“CEOs and their CXO colleagues are the ones who can elevate the vision to network levels, rather than dwelling on site-specific plans.”
- Invest in capabilities with a longer time horizon. Our analysis finds that the best-performing digital manufacturing sites are those that “go slow to scale fast,” spending a year or two strategically building a data and technology foundation for deploying use cases and training analytics models. Once established, some Lighthouses deploy a dozen or more use cases in weeks, not months or years. Four years into its digital transformation, one Lighthouse company deployed a standard operating procedures (SOP)-interfacing chatbot for workers in just 1.5 weeks.
- Cultivate a tech-forward workspace for eager technologists. Attracting and keeping the right profiles will require innovative workspace models that exemplify the tech-forward future of work — providing fast-paced, problem-solving heavy environments with significant real-world impact and clear pathways to learn and advance. Because this talent can be expensive, the economics may work only by keeping network scale in mind.
- Build scale into the business case from day one. Though most use cases will need to be piloted within a specific site, this is just the first step in a plan to achieve end-to-end value. Such solutions are most effective when they address critical bottlenecks across the production network, such as cross-site production scheduling for matrix manufacturing. Likewise, factory-specific use cases, such as vision systems, can be designed to address business needs that a majority of the production network also faces. Think too small, and the ROI dwindles.
The future of manufacturing is digital. To compete, U.S. manufacturers can start with scale in mind. This requires network-level thinking that must be called for by CxO leaders. M
About the authors:
Rahul Shahani co-leads McKinsey’s Industry 4.0 efforts in North America including the Innovation & Learning Centers and focuses on digital manufacturing transformation design and execution. He is a partner in McKinsey’s Operations Practice, based in New York.
Dan Swan co-leads McKinsey’s Operations Practice globally, and helps manufacturing and service companies transform their operations performance and capabilities.
Henry Bristol focuses on Industry 4.0 technology adoption strategies for industrials, electronics, and new energy manufacturers. He is a Fellow with the World Economic Forum and an Engagement Manager in McKinsey’s Operations practice.