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The Transformation of Manufacturing: ROI for Addressing Worker Challenges in Industry 4.0

This article is based on the findings in the report, Understanding the Impacts of Industry 4.0 on Manufacturing Organizations and Workers, prepared for the Smart Factory Institute and written by Chris Cunningham, PhD, UC Foundation Professor of Psychology, and Scott Meyers, Graduate Assistant, Psychology Department & Smart Factory Institute, from the Industrial and Organizational Psychology Department at the University of Tennessee at Chattanooga.


The ability to communicate the value of human capital investments is critical. Using return on investment (ROI) calculations and attaching a physical and measurable value to new workforce initiatives in Industry 4.0 is required to convey the importance of these technology and workforce investments to high-level decision makers (BizLibrary, n.d.). Industry 4.0 ROI may seem less tangible and more difficult to calculate than ROI in other contexts, as many of the associated improvements concern better usage of information and data (Ghio, 2021). The potential challenges in estimating ROI, though, need to be overcome so that all involved stakeholders can appreciate the very large potential ROI to be expected from Industry 4.0 adoption. In a general sense, the integration of Industry 4.0 technology solutions generates operational savings through reduction of downtime, personnel costs, Capital Expenditure (CAPEX), and miscellaneous Operating Expenditure (OPEX) and the overall improvement in output quality.


In a general sense, a 2016 global survey conducted by PWC found that from a $907 billion annual investment in Industry 4.0 digital technology upgrades within industrial sectors was an associated $493 billion in digital revenue gains and $421 billion in cost and efficiency gains. They identified annual digital revenue increases of 2.9% and cost reductions of 3.6%; industrial manufacturing echoed these total benefit trends (Geissbauer et al., 2016). More than 4.7 billion wireless modules are projected to be integrated into smart factories by 2030; this is projected to create more than $1 trillion in production value (Bonte et al., 2020; Josefsson, 2020). Implementation and use of more cellular networks instead of wifi-based systems (that rely on fixed locations and equipment) can support various technologies such as asset tracking, condition-based monitoring (CBM), provisioning connected products, mobile robots, and augmented reality (AR). The ABI researchers examined each of these cellular technology use cases and calculated projected ROI by comparing technology integrations to an original “status-quo” factory and measuring operational cost savings (Bonte et al., 2020). This ROI varied by type of manufacturing site. In a Tier 1 German automotive factory, efficiencies brought from asset tracking and abilities to locate various equipment/tools generated $60.1 million, which was 0.8% of the total cost of ownership (TCO). Augmented reality (AR) technology generated another $37 million or 0.5% in operational cost savings. Condition-based monitoring and predictive maintenance applications was linked to $90.5 million or 1.2% in operational cost savings attributed to reduced machine downtime and support. Mobile robots that use predefined paths generated $136 million or 1.95% in operational cost savings (Bonte et al., 2020). This analysis emphasizes the immense impact various Industry 4.0 technology integrations will have on manufacturing and ROI.


The promise of positive ROI associated with Industry 4.0 adoption is real, but there are also very real costs to organizations that take such steps. A more damaging type of cost that manufacturing organizations face in this time of Industry 4.0 and which has no upside is the cost of inaction (COI; Ghio, 2021). Inaction and the failure to innovate production processes, products, and technology will lead to lost opportunity. These COI can rapidly build if and when smaller manufacturing organizations fail to adopt Industry 4.0 technologies, essentially having an anchoring effect on other, often larger manufacturing operations they support as suppliers. Now and over the next few years is one of those times where failure to get everyone (i.e., all manufacturing organizations) on board with Industry 4.0 advancements will mean that everyone loses.


Many of the costs and benefits associated with Industry 4.0 will be associated with technology implementations. This makes sense given the focus of Industry 4.0. However, it is important to emphasize again here, that that positive impact of various technologies on manufacturing productivity and more general operations will also depend on the extent to which the manufacturing workforce is properly trained and present in sufficient numbers to enable manufacturing organizations to operate. In other words, maximum ROI for Industry 4.0 adoption will require not only advanced smart technologies, but a similarly advanced smart workforce.



When it comes to talent acquisition, issues with labor management and labor skills shortage are creating real challenges for manufacturers. Outside of Industry 4.0, manufacturing organizations are noting difficulties in hiring and a consistent cycle of labor turnover (ISM, 2021). In a September 2021 PMI® report: less than 5% of survey comments noted any improvements in their organization’s employment situation, 85% of survey of employment index comments involved companies seeking additional staffing and attempting to hire, and 47% respondents noted difficulty in filling positions. A trend in America at least of increases in turnover and retirement began in August 2021 (ISM, 2021). These data points underscore the need and likely high ROI of implementing various recruitment and retention strategies to attract emerging talent and retain and upskill existing talent for Industry 4.0.


The average cost-per-hire in the U.S. manufacturing industry is relatively high compared to other industries and estimated to be $5,159 (Websurge, 2019; RecruiterBox, n.d.). Costs associated with this include the number of jobs being hired for and the recruitment method used. Industry 4.0 brings new recruitment demands to bring in top talent that is more technical and requires new methods to tap into the emerging workforce, likely creating greater recruitment costs.


Turnover costs also strongly affect the industry. Turnover costs can be as high as 1.5-2x the employee’s salary (Heinz, 2020). For hourly workers, this cost has also been estimated at $1,500 per person on average (Heinz, 2020), so there can be quite a range in the possible costs associated with losing and replacing workers. For more technical positions, such as those that will be increasingly needed to support Industry 4.0 advancements, this cost can be 100-150% of the employee’s annual salary (Heinz, 2020). To illustrate these costs in a more tangible way, NAM (2020b) notes that in the American state of Tennessee, there are approximately 357,000 manufacturing employees, with an average compensation of around $70,500. With recent turnover rates in manufacturing of around 44% (as noted earlier in Table 1), a rough estimate of costs to keep these positions filled is astronomical: Manufacturing organizations just in this one state would potentially need to replace more than 150,000 workers.


The challenges and costs associated with manufacturing worker turnover are already serious and could become more serious as organizations adopt Industry 4.0 and need to invest in recruiting, training, and developing a higher skilled workforce than in the past. As manufacturing work becomes more advanced, the costs associated with retention and failure to retain competent talent will also increase. Many of these costs are very difficult to estimate with concrete numbers, such as those associated with lost productivity, lost or inaccessible knowledge, and residual negative effects on the attitudes and workload managed by remaining workers (Heinz, 2020).


Numerous benefits can be anticipated from addressing worker related challenges and investing in the Industry 4.0 workforce. Although information involving associated costs is more readily available right now, associated benefits and ROI information will become more available as Industry 4.0 is more widely adopted. Some such benefits are already being noted. For example, there is growing evidence of ROI associated with efforts to build and maintain positive organizational learning environments and a continuous learning culture. These are characteristics associated with “High Impact Learning Organizations” that have been shown to outperform other organizations (Bersin & Associates, 2010; BizLibrary, n.d.). These organizations had stronger learning foundations and had established continual learning programs. These types of organizations had 37% greater employee productivity and were 58% more likely to have the skills within their workforces to meet future demands. Furthermore, these organizations were 32% more likely to be first to market and 17% more likely to be market share leaders, indicating the holistic benefits of this learning concept to the entire company (Bersin & Associates, 2010). Evidence for these types of benefits will likely become stronger as lifelong learning associated with Industry 4.0 becomes a necessary reality within the workforce.


Additional examples of ROI associated with training and developing workers comes from a variety of sources. One of the more challenging forms of ROI to calculate is that associated with efforts to improve soft skills. Even this can be done, however, as illustrated in a pilot study conducted at Garret Engine Division that manufactures jet engines, Pine and Tingley (1993) calculated the ROI for a two-day team building training intervention for work groups. That program focused on developing multiple soft skills associated with the core competency domains described earlier in this report, such as communication, team synergy, teamwork, and problem-solving. Four weeks post-training, Pine and Tingley found a 125% ROI that they broke down into the following component parts: $55 (average savings per job) x 55 (jobs per week) x 4 (number of weeks) = $12,100 (training benefits) - $5,355 (cost of training) = $6,745. Compared to initial investment of $5,355 (cost of training) = .25 x 100 = 125 percent ROI. This example is highlighted in detail as an illustration of how it is possible to approach ROI calculation even for less tangible forms of investment in workforce development. Other studies have shown ROI up to 250% from soft-skill trainings (BlueOceanBrain, n.d.).


The broad and ongoing changes promised by Industry 4.0 will likely challenge organizations at times to calculate ROI in new ways for various types of technology and human capital investments. The general process organizations will need to follow to identify various ROI starts with a planning phase that must occur to identify objectives and how to measure/evaluate outcomes. During this type of planning, Ghio (2021) highlights three main considerations to process:

  1. Identify key performance indicators (KPI’s) relevant to the firm; these may be dependent and vary by firm characteristics such as size of manufacturer and complexity of production processes or they may be more commonly used KPI that apply throughout a particular manufacturing sector. Product quality, machine availability, production efficiency, and energy consumption are all major KPI’s associated with Industry 4.0. These KPI’s need to be evaluated and measured before and after implementation of Industry 4.0 technologies and systems.

  2. Identify weakness areas in production systems and processes where inefficiencies and lost costs occur, such as in recruitment challenges or training programs. Ghio (2021) recommends using short periods around 100 days to measure effects of changes in these specific weakness areas, as opposed to implementing enterprise level shifts.

  3. Consider how Industry 4.0 will affect the workforce and improve the employee experience. Although not as easy to connect to financial impact, evaluating the effect of changes on worker attitudes, absenteeism/turnover behaviors, and perceptions of support and ability to do their jobs well provides additional important evidence for understanding ROI associated with Industry 4.0 changes.

After identifying key objectives or targets for specific Industry 4.0 changes, data gathering must occur. Ideally data pertaining to the targeted KPI can be gathered before, during, and after implementation of the new technology or training, to provide the clearest and most comprehensive picture of impact or effect. These data can then eventually be analyzed and interpreted against the original business objectives for the change.


There are a variety of resources available to manufacturing organization decision makers and industry partners that can help in understanding and calculating ROI associated with Industry 4.0 efforts. BizLibrary provides a simple ROI formula for analyzing and measuring ROI of training programs and other workforce investments. By estimating net program benefits, dividing by net program costs, and multiplying by 100, ROI can be calculated.


Measuring reduced downtime is also important. Unplanned shutdowns are tremendously damaging to productivity metrics and downstream customer relationship management. Downtime can be caused by many factors, especially lack of qualified operators, operator error or poor setup, and machine repair (BizLibrary, n.d.).


Once ROI estimates are calculated, the next step is to report this information to key stakeholders. This is usually done within the context of a broader business case to help justify the investments that were made in a particular technology, training initiative (BizLibrary, n.d.). It is too early in the adoption of Industry 4.0 to highlight or even discuss industry benchmarks or other shared metrics or data sources that might eventually support even more meaningful ROI estimation efforts in the future. Although it is fairly simple to explore ways to calculate ROI, figuring out investment and program benefits and costs can be challenging (Sears, n.d.). Joint efforts from various organizations and associations to examine specific Industry 4.0 workforce investments and ROI calculations will be required in the future to provide a more comprehensive and data-driven justification to address worker challenges.


 

If you are in the process of implementing Industry 4.0 in your operations or thinking about it, you don't want to miss our upcoming 11th Annual Global Robotics Congress, on March 3rd. By unifying software, artificial intelligence and robotics, manufacturers will be able to optimize the workplace leading to more efficient management of material flows, better asset utilization and increased savings. Attendees of the Global Robotics Congress will learn what new affordable options are available in the robotics and automation space. Join us virtually and hear from robotics and technology professionals from Lincoln Electric, Roper, KENCO Group, Universal Robotics, Senswork GmbH, Stäubli, Phoenix Contact, Igus, and SICK AG. View full agenda here.



Purchase tickets by this Thursday to receive a Conference Box delivered to you prior to the event.

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