How medium-size manufacturers can boost their digital capabilities

By Malin Fiedler, Christopher Kühn, Kay Poggensee, and Henning Soller

Digitization has gone mainstream at most large companies, significantly disrupting everyday processes throughout their organizations. Digitization increases efficiency and resilience and provides a solid foundation on which to build new products and business models. The most successful digitalization efforts have also substantially increased customer and employee satisfaction.

Many major manufacturers have already undergone extensive digital transformations, including widespread adoption of Industry 4.0 and IoT solutions that embed digital devices and tools directly into work routines. To date, however, progress toward digitization among medium-size manufacturers has been limited. Medium-size manufacturers have traditionally focused on manufacturing and selling products rather than building digital capabilities, except for investments in digital manufacturing equipment.

A path to digitization for medium-size manufacturers is far from clear given the diverse characteristics, needs, and subsegments they represent. Tech vendors frequently try to scale down IT solutions they developed for the large-enterprise market and offer them to medium-size companies looking to unlock new growth or reverse a period of stagnation. Yet companies of this size are likely to lack the multifunctional IT teams and capabilities required to customize these solutions. The approach to digitization for medium-size manufacturers, therefore, must take their scale and scope into account.

Digitization at large enterprises is likely to occur in three phases, although medium-size manufacturers typically engage only in the first two (exhibit).

There are typically three phases of digital transformations.

Elements of digitization for medium-size manufacturers

For medium-size manufacturers, the cornerstones of an effective digitization strategy during phases one and two may include the following:

A software-as-a-service approach to professional tooling. Software-as-a-service (SaaS) vendors offer mature options for tools and platforms that support all manner of nonstrategic work, including everything from a general ledger to project-management software to communications applications. Among the benefits, SaaS products free the manufacturer from having to invest in dedicated infrastructure or directly manage the software.

A data architecture that allows for integration. The manufacturer consolidates all data generated by its machines, IoT devices, and processes into a single location to support analytics and decision making. The data can be used in third-party platforms (for example, for process mining) to identify possible improvements and efficiency measures in the manufacturing process.

A holistic data-protection, safety, and security framework. This protects the manufacturer from data loss resulting from natural hazards or accidents in the manufacturing facility—for example, to meet insurance requirements for documentation after a fire. The framework can also help prevent manufacturing stoppages or leaks of confidential internal product or customer data in the event of a cyberattack.

A regulatory-monitoring function. This function is charged with routinely monitoring regulatory developments at the supranational, federal, and local level to ensure ongoing compliance and take advantage of new opportunities that may arise from regulatory changes. For example, last year Germany instituted the Act on Corporate Due Diligence in Supply Chains (Lieferkettensorgfaltspflichtengesetz, or LkSG). The act requires companies to implement steps to stop human rights violations in supply chains. The act also affects digital implementations because manufacturers are required to enable system integrations and have data readily available for compliance reporting, which necessitates automation to avoid labor-intensive manual reporting, such as using spreadsheets.

Participation in ecosystems. The manufacturer can participate in ecosystems orchestrated by large companies. This allows it to co-create with ecosystem partners and readily integrate into broader digital supply chains and new marketplaces.

Key enablers for successful implementation

Laying the digital foundation described above will require several prerequisites. First, although SaaS models based on operating expenditures facilitate adoption of new technology, manufacturers will still need additional budget for it. Second, the transformation will require a shift in mindset, supported by a change-management initiative, to embed digitization as a key factor for future success throughout the organization. Third, the manufacturer will need talent and expertise to architect new technology solutions, evaluate options based on their suitability for the company, and oversee implementations and ongoing operations.

Fulfilling new technology and change-management roles may pose a significant challenge for medium-size manufacturers because their size, brand, or location make it difficult to attract qualified talent, even in the smaller numbers they require. Thirty-eight percent of medium-size companies in Germany identified lack of personnel with IT skills as a key barrier to digitization.1 Meanwhile, more than 80 percent of medium-size companies reported they require digital skills to run their businesses.

Manufacturers can improve their ability to attract and retain talent by continually monitoring their current and future digital skills needs and defining learning journeys to upskill or reskill staff. Targeted cooperation with selected regional universities can also partly bridge the skill gap, either via dual education programs, part-time degrees, or certificate programs.

Even for smaller companies, where on average just 1 to 2 percent of employees work in IT roles, compared to 3 to 4 percent in larger organizations,2 it is crucial to build the required skills and understand how to efficiently steer cooperation with external providers. Furthermore, to attract the attention of emerging talent, companies can expand their outreach to include regional digital channels that are frequented by students and younger workers.

Companies with aspirations to adopt advanced technologies such as artificial intelligence can identify specific use cases early, assess their capabilities gaps, and take a long-term approach (over multiple years) to investing to close them. For example, a company that hopes to build useful forecasting models must first establish a solid foundation in data architecture and regulatory-compliant data collection at scale.

Call for action

Medium-size manufacturers are at a crossroads with their digitization ambitions. They have ample opportunities today to implement digital solutions that can deliver significant benefits and that have previously been available primarily to only much larger companies. Yet many lack a talent pool with the mindset and skills to lead and execute the transformation. The owners of many medium-size companies need information and education to boost their attention to these issues. In short, for their long-term growth and success, now is the time for medium-size companies to take the steps required to ensure digital adoption at scale and full participation in the digital economy.

Malin Fiedler is a consultant in McKinsey’s Frankfurt office, where Henning Soller is a partner. Christopher Kühn and Kay Poggensee are professors at Kiel University of Applied Sciences.

1 Arne Leifels, “Digital skills shortage is hampering German SMEs’ digital transformation—is upskilling the answer?” KfW Research, February 3, 2020.
2 According to Germany’s Federal Employment Agency (Bundesagentur für Arbeit), April 2022.