The Importance of Digital Technologies for Manufacturers
A world ruled by agility and innovation has made digital technologies indispensable to manufacturers. The adoption of these technologies is like a fundamental change that lets manufacturers stay competitive and responsive to rapidly changing market demands.
By integrating digital tools and platforms into their operations, manufacturers can now enjoy numerous benefits – streamlining processes, enhancing efficiency, and making significant savings. As a result, these advancements pave the way for faster growth, improve the ability to scale operations, and help manufacturers enter new markets more effectively.
Furthermore, such technologies facilitate a deeper understanding of customer needs, allow for more precise tailoring of offers, and enable faster and more accurate response to customer requirements.
And let’s not forget that digitalization helps you gain a competitive edge and keep up with any changes, whether economic or regulatory. If you have the right tools at your disposal and make effective use of them, you will be able to achieve stability and sustainable production.
In essence, digital transformation opportunities support a more dynamic, innovative, and customer-centric approach to manufacturing.
ROI Uncertainties of Digital Innovations
If digital technologies are so beneficial, why are some producers afraid to implement them? Among their possible doubts is uncertainty surrounding digital transformation ROI.
Companies grapple with questions about when and how the benefits of digital products will translate into measurable financial gains. A MakeUK survey showed that 42% of manufacturers perceive investing in digital technologies as too high-risk, with no guaranteed successful outcome. This uncertainty makes it challenging to undertake the upfront investment, particularly when budgets are tight.
Also, the speed of technological evolution fuels apprehension about the longevity of investments. There’s a pervasive fear that the digital systems implemented today may quickly become outdated.
As a result, manufacturers worry about being caught in a continuous cycle of investment. The need to upgrade or replace technologies to stay current can be highly expensive, so they delay introducing and developing digital products.
However, if business leaders decide not to adopt digital systems, their budgets, employee productivity, customer experience, and overall goals and objectives could suffer in the long run, including their ability to remain competitive.
The “Digital Adoption: The Missing Link in Productivity Growth” report underscores this, revealing that nearly three-quarters (73%) of respondents believe failing to invest in new digital technologies would result in them falling behind their competitors. Moreover, half of the respondents attribute their ability to maintain a five-year lead over their competition to investments in new digital technology.
As you can see, there are many reasons to take the digital transformation initiative. But embarking on this digital journey alone is not enough – you also need to know how to measure it.
Why Should You Calculate Digital Technology ROI in Manufacturing?
If you adopt digital technologies and want to see the impact of digital transformation, one of the basic steps you can take is to calculate its ROI. Why? Because this strategic indicator helps measure success, provides justification for investment, aids decision-making, and facilitates management of expectations.
Justifying investments
First, measuring all digital transformation efforts demonstrates the improvements made and therefore justifies the investment made. Meticulous comparison of the costs of digital initiatives against the anticipated benefits can reveal the potential for significant cost savings, improved operational efficiency, and enhanced product quality.
This analysis underscores the value of digital transformation investments and encourages stakeholders to proceed with more confidence.
Digital solutions, from automation tools to data analytics platforms, promise to optimize current processes and redefine what’s possible in manufacturing. Thus, you can emphasize the expected productivity gains and the payback period to further justify the investment. An emphasis on savings and productivity highlights the direct impact on the company’s bottom line, making a compelling case for digital investment.
Strategic decision-making
ROI calculation aids business leaders in making strategic decisions about technological investments. This process involves a deep dive into how digital initiatives align with the company’s broader goals and objectives.
Companies that understand the ROI of digital transformation can prioritize projects with the highest potential impact, allocate resources more effectively, and navigate the digital transformation journey with strategic intent. They can also ensure that every digital investment contributes to the overarching digital strategy, improves the customer experience, and, ultimately, increases the market value of the business.
Further, this analytical approach allows for adjustments in strategy as new data and outcomes are evaluated. As a result, digital transformation efforts will remain aligned with business goals.
Managing expectations
The outcomes of measuring ROI also help set and manage future expectations and predictions. Establishing clear benchmarks and key performance indicators allows companies to monitor the progress of digital transformation projects against predefined expectations such that they can track the success of individual initiatives and better understand the overall impact of newly adopted digital products.
Moreover, managing expectations through ROI calculations prevents disillusionment and contributes to a culture of continuous improvement and adaptation. It also ensures that the narrative around digital transformation is grounded in data and keeps the focus on achieving success through tangible value metrics.
How to Calculate Digital Technology ROI in Manufacturing?
Measuring the ROI of digital technologies in manufacturing involves calculating the benefits derived from the technology relative to its cost. The process aims to evaluate the financial return on investments made in digital strategies, platforms, or systems that enhance manufacturing processes.
Let’s see a simplified step-by-step formula you can use to measure the ROI in this regard.
#1 Identify costs
Start by identifying all costs associated with the new digital technology implementation. This includes:
- initial purchase or development costs
- installation and setup costs
- training costs for staff
- maintenance and operational costs
- any other costs directly related to the technology deployment
#2 Identify benefits
The digital ROI framework includes not only the identification of costs, but also the identification of benefits that digital technology brings to the manufacturing process. For example:
- increased production efficiency
- reduced downtime
- lower operational costs
- improved product quality
- enhanced customer satisfaction
- increased sales or revenue
It’s important to quantify these benefits in financial terms to compare them directly with the costs.
#3 Calculate net benefits
Now, subtract the total costs identified in step #1 from the total benefits identified in step #2. This will give you the net benefits of the technological implementation:
net benefits = total benefits – total costs
Digital Technology ROI Formula
The ROI can then be calculated using the formula:
ROI = (net benefits – total costs)/total Costs * 100%
This calculation will give you the percentage of profit or loss you generate from your digital transformation projects. Based on this, you can see the digital transformation value and determine whether it has worked to the company’s advantage or disadvantage and by how much.
What Else to Keep in Mind when Measuring Digital Transformation ROI?
Non–financial factors
While ROI is primarily a financial metric, that doesn’t mean you can forget about the non-financial benefits such as improved worker safety, enhanced brand reputation, and better compliance with regulatory standards. These factors can also play a significant role in the decision to invest in digital technologies, even if they are not directly quantifiable in financial terms.
Careful analysis
Don’t forget about carefully analysing the return on investment for digital technologies. Since the future outcomes of the digital transformation process can vary, you must be vigilant and not assume the results in advance. You can also calculate the ROI under different scenarios (e.g., best-case, worst-case, and most-likely case scenarios) to understand how changes in costs and benefits may affect the overall ROI.
Data quality
The accuracy of the ROI calculation depends on the quality of the data and assumptions made during the analysis. Thus, it’s crucial to use realistic and well-substantiated figures to make the calculation as reliable as possible.
How to Increase Digital Technology ROI in Manufacturing
If you want to enhance the return on digital technology in the manufacturing sector even more, take a look at these strategies:
- Choose automation – implement automation technologies that can reduce manual processes, lead to huge cost savings, and streamline operations.
- Optimize business processes – by optimizing business processes, you can achieve greater efficiency and elevate revenue.
- Manage labor efficiency and resources – look at workforce and resource utilization, as maybe these are the areas slowing down successful digital transformation.
- Maintain your equipment with advanced digital systems – they allow for predictive maintenance, reduce downtime, and lower maintenance costs.
- Enrich your team – collaborate with external specialists who can more effectively achieve your goals and make better use of available resources.
- Check supply chains – ensure you have real-time access to them, and use available digital tools to elevate business transformation in this regard.
- Implement energy-efficient solutions – you can also try these to increase ROI, as they contribute to sustainability goals and reduce operational costs.
- Prepare for responding quickly to market changes – this will improve your responsiveness, bring you closer to potential customers, and help navigate evolving market dynamics and regulatory environments.
- Promote stronger customer engagement – nurture relationships with customers and improve their satisfaction levels.
- Be flexible – greater adaptability allows you to react quickly to customer and market demands so you can better meet their requirements.
Focusing on these strategies can maximize the ROI of your digital transformation, improve customer satisfaction, streamline internal processes, and increase the value created.
Measure Digital Transformation Success with Inwedo
Digital technologies might well be the element in your company that you’ve been missing for a long time. If you’re running out of ideas on how to improve your organization’s productivity and better meet your customers’ expectations, perhaps it’s time to bet on digital innovations and increase your enterprise value.
It’s easy to talk about digitizing, but it’s hard to implement it. That’s why you should focus on incremental improvements in various aspects of your business, since it’s often the small changes that lead to big improvements.
At Inwedo, we are familiar with integrating new technologies with existing systems and specialize in providing detailed guides to extract the most value from digital transformation. If you, too, have digital transformation goals to achieve but don’t know how to get started, feel free to get in touch with us.
