Abstract

The manufacturing industry has been transforming over the decades through the intensive adoption of automation technologies and philosophies such as Lean.

This transformation has further been fueled by large-scale investments into digitalization of enterprise operations, processes, and products. The pandemic has only accelerated these changes. Manufacturers are, thus, rethinking their operating models, and in turn, their value chains, which have long served as the foundation of their business models and value realization.

The adoption of digital capabilities will help manufacturers reshape their businesses, customer experiences, products, and services. At the same time, several other factors will determine the success of the 21st century value chain: enterprise agility at scale; restructured organizational roles; enhanced workforce skill sets; and evolving on-demand commercial and financial models to work with partners, customers, and even competitors.

We believe that manufacturing enterprises should take notes from biological systems to demonstrate adaptability and resilience. Such biomimicry of the human neural system can lead to creative interventions using artificial intelligence (AI) and other technologies. We refer to this approach as Neural Manufacturing^TM, which will drive value for manufacturers.

To develop a robust 21^st-century neural value chain, investing in digital capabilities and an information fabric can help enterprises better connect and collaborate with their ecosystem partners, thereby allowing them to keep pace with evolving market demands.

Transformation in manufacturing

The manufacturing industry has evolved over distinct phases, each phase more technology intensive than the earlier and arriving at a more accelerated pace (see Figure 1).

This evolution is backed by research, which states that manufacturing enterprises will emerge stronger thanks to the convergence created by all the waves of digital technologies peaking together. The next wave of transformation in manufacturing is being led by several factors:

• High software usage
• Increased focus on sustainability and circularity in businesses
• Usage-based ownership of offerings
• Personalization of services and products
• Widespread adoption of cognitive technologies

Achieving economies of scale through aggregation of demand across products and geographic regions, by leveraging platform models, has further helped enterprises strengthen their market position. Manufacturers have been disrupted by new-age technology-driven business challengers, and COVID-19 has impacted the industry further, thus transforming the conventional value chain structure.

To transform themselves, manufacturers need to ensure the following:

• The demands arising from the emergence of ecosystem-centric businesses
• The shift towards asset-light models (as-a-service, on-demand, and pay-per-use)
• Agile, design anywhere-build anywhere-sell anywhere operating models

Such radical changes to business models require manufacturers to re-evaluate how their traditionally linear value chains must transform to be future-ready. We are already witnessing the rise of niche business ecosystems, with an innovative interplay of adjacent industry services, such as personal mobility, nutrition and wellness, and asset availability, among others. This pattern is accelerating in the business-to-business-to-customer (B2B2C) space, where new products, services, and platforms are personalized per customer journeys and consumption patterns. We believe these business models are only going to increase in the near future.

The operating and business models in manufacturing enterprises are undergoing numerous changes. Two strategic levers driving their transformation are as follows (Figure 2):

1. Ecosystem-centric B2B2C business models
2. Connected, cognitive, and collaborative value chains defining the new operating models

To design these new business ecosystems and models, manufacturers can draw inspiration from the human neural system. This will help them develop the ability to make simultaneous decisions on the edge - both in a decentralized and centrally coordinated manner - such as taking targeted action to achieve a task (purpose-driven). TCS defines these capabilities as Neural Manufacturing – an intensely networked set of partners aligned to a common purpose, where the value chains are responsive, adaptive, and personalized, with intelligence built at the edges of the networks.

Such neural capabilities will help enterprises create value chains that are responsive to digital-first business models.

The pursuit of value

Value chain is a concept from business management that was first described and popularized by Michael Porter in his highly referenced book, published in 1985, Competitive Advantage: Creating and Sustaining Superior Performance.

It defines a value chain as—

• A series of activities for a firm operating in a specific industry
• Products pass through all activities of the chain in order, and at each activity, the product gains some value
• The chain of activities adds more value to products than the sum of the independent activities’ value

For close to three decades, the value chain has been the mainstay model for manufacturing enterprises, helping them define, benchmark, and realize value and competitive advantage by-

• Optimizing operations (systems and processes)
• Eliminating friction between successive steps of the chain through close interlinkages
• Understanding the impact of these processes on long-terms costs and profitability, and identifying sustainable sources

Conventional value chains have been largely linear, and have followed a cost-plus approach, where the value of products and services has been delivered downstream. While this conventional structure served manufacturers well in the past, it is increasingly a challenge to cater to current emerging market and business demands, riding on the conventional value chains.

The emergence of purpose-driven ecosystems

With the emergence of ecosystem-centric businesses, the demands from value chains are now more focused on flexibility, agility, and connectedness.

We studied this emerging landscape of business ecosystems within the manufacturing sector and inferred that many of these networked ecosystems are focused on creating new products or services, experimenting with future technologies in controlled user environments, or nudging customer behavior and consumption patterns (see Table 1).

Our research on the digital investments made in manufacturing showed that enterprises have different styles of creating ecosystems. To illustrate, Embraer, an aerospace manufacturer, has created a subsidiary – EmbraerX. This entity orchestrates niche ecosystems by partnering with other firms that work on futuristic technologies such as urban air mobility. It has also created an accelerator called Eve, to nurture potential startups and support their development, thus creating new revenue streams for itself.

Agricultural companies are not too far away from participating in or creating new business models. Archer Daniels Midland Company (ADM) and Cargill Incorporated, which compete in the same food grains processing space, have joined hands to create GrainBridge LLC. Following a ‘coopetition over competition’ approach, GrainBridge offers a software platform to bring different stakeholders together, and advisory services for the grain industry.

Both ADM and Cargill are conventional players in the food industry: They have a linear value chain and grow through M&As to acquire new markets. However, through GrainBridge, they have brought their suppliers and customers closer, built transparency in operations, and are providing their customers better decision-making capabilities, thereby increasing the chance of achieving higher profitability.

A performance analysis of manufacturing companies by our research team shows that over the last few years, the market capitalization of companies that have invested in new business models has increased significantly. New leaders are emerging, and existing companies are forced to invest or partner towards closing the technological gap.

That said, a key question arises: Will conventional, linear value chains be appropriate and conducive for businesses to grow exponentially?

Value chains in the 21^st century: To be or to transmute?

Value cannot be contained to a specific indicator, as it takes on different meanings based on which perspective is taken.

A product-centric view of value places the product at the core, and a company’s strategy and linear value chain are built around it. On the other hand, a customer-centric value chain views the customer as a profitable asset, and all business decisions and the value chain structure are based on maximizing customer lifetime value.

Our industry insights and deep understanding of adjacent businesses as well as emerging technologies, have helped us put together a new value chain structure, as depicted in Figure 3, which will be relevant for the 21st century. The value chain transformation is anticipated to be a two-step process:

Step 1: Creating the digital spine

The manufacturing enterprise of the future will be powered by technology enablers, which act as an enterprise’s digital spine, helping it participate in multiple, new value chains such as those for design, materials, logistics, customer experience, and circularity. The digital spine will rely on cloud hyperscalers, AI at scale, digital thread, digital twins, platforms, edge computing, low-latency infrastructure, and more such enablers. While the existing value chains will remain important for business as usual, the new value chains will come together as niche ecosystems through which the various needs of the enterprise and customer will be met. While improving its traditional value chain capabilities such as research and innovate, source and produce, distribute and sell, marketing, and product in use, the enterprise will also develop new specialized capabilities that can be provided to other participants in these ecosystems in exchange for different forms of value.

_{Figure 3: New capabilities and business ecosystems for manufacturers in the 21st century}

Step 2: Establishing the multimodal value chains

For the new operating and business models, manufacturers need to choose between designing multimodal value chains with the superlative capabilities of cognition, collaboration, and connectedness, and working on transmuted ones. While establishing a strong digital spine is the foundation, using this spine effectively through a seamless neural fabric should be the next focus area for manufacturers. This fabric ensures that there is a smooth exchange of intelligence through the different systems, processes, and entities within and outside the enterprise. Multimodal value chains utilize the cognitive power from the neural fabric. These multimodal value chains should be designed considering the future manufacturing enterprise’s business strategy for gaining competitive advantage and growth, be it in customer centricity, products and services differentiation, or cost leadership. As a next step, manufacturing enterprises should focus on how to bring forth these capabilities and align them meticulously with their business strategies.

We see the emergence of two constructs of value chains to serve the above-mentioned business strategies:

• Multiple value chains converging around the customer, with the extended manufacturing enterprise playing the part of an orchestrator of customer value – the new avatar of the erstwhile customer-centric value chain. This model, illustrated in Figure 4, has a significant upside from accruing revenues, as it meets all the needs of the customer and secures enhanced lifetime value, increases the net promoter score (NPS), and hence, ensures competitive advantage.

• Manufacturers can use their new value chain capabilities to participate in multiple ecosystems and serve different customer segments, as illustrated in Figure 5. This is closer to the diversification strategy of yesteryears. Here, the manufacturer can still choose between orchestrating the ecosystem as a new line of business and just participating as a player in the ecosystem value chain orchestrated by some other player. Through the new capabilities available in the 21st century value chain, a manufacturing enterprise can participate in multiple new ecosystems with diversified services and offerings.

_{Figure 5: The manufacturing enterprise participating in multiple value chains through different services}

In the medley of changes seen in manufacturing enterprises, the successful transition to a 21st century value chain will depend significantly on numerous factors:

• Remote operations
• Distributed decision making
• End-to-end transparency of company resources and assets
• Personalized and agile product or services development
• Collaboration with customers and partners to drive new opportunities

To meet these demands, value chains need to be designed to exhibit characteristics such as being data driven and intelligent, promoting networked and flexible collaboration with supply chain partners, providing multi-tier visibility for planning and operations, enabling intelligence for autonomous decisions making, and reducing carbon footprint of operations. The conventional linear structure does not lend itself to the networked, data-driven, and agile-focused needs of the enterprise. A quick comparison between the characteristics of a traditional and 21st century neural value chain is shared in Table 2.

A peek into the 21^st century manufacturing enterprise

With the 21^st century neural value chain, a manufacturing enterprise can orchestrate niche ecosystems to serve multiple purposes such as tapping into emerging business opportunities, accessing new markets, and running controlled experiments for futuristic products.

On the people front, the value chain also empowers firms to leverage a skilled workforce on demand, gather direct customer feedback or co-create personalized services, exchange value from their partners to attain group sustainability goals, and many more. Siloed value chain functions may not exist within a manufacturing organization. Its core focus would change from producing a product to managing specific ecosystems that deliver holistic customer needs. The ramifications on organizational design will be far reaching.

The most significant change that we see is the shift away from hard-wired capabilities towards an orchestrated capability model. Enterprises will have an array of digitally enabled capabilities to choose from, configure, or orchestrate to create new operating models for ecosystems. The dynamics of the new market demand the creation of an agile, scalable enterprise. Laying a strong foundation to build the 21st century value chain lies in investing in digital platforms that allow for smooth participation in ecosystems. Investing in an expansive information fabric will also help ecosystem players connect and collaborate. Ensuring that the capabilities of autonomous decision making, connectedness, and collaborative exchange of intelligence are available through these value chains, will be the significant area of focus for the future manufacturing enterprise. Being neural in thinking and operations is the way ahead for manufacturers.