United States / Analyst Insights
Digital Disruption in Manufacturing
by Marisa Lifschutz, Lead Industry Analyst
Feb 22 2019

Manufacturing in the digital era has evolved alongside the Fourth Industrial Revolution, in which the successful adoption and integration of cutting-edge technologies has become a critical strategized component of manufacturers’ performance. Overall, this digital environment has led operators in the Manufacturing sector (IBISWorld Report 31-33) to rely less on human input at each stage of production and more on advanced digital tools and processes. Such technological improvements in automation, robotics, IT and other advanced manufacturing techniques over the five years to 2019 have greatly assisted operators' efforts to heighten consistency and streamline operations.  

Key drivers and sector performance 

Manufacturing capacity utilization (MCU), measured as the ratio of actual manufacturing output to potential full capacity output, is anticipated to have grown at an annualized rate of 0.4% over the five years to 2019 to reach 77.7%. Despite some volatility over the past five years, a rising MCU is typically a sign that sector demand is trending upward, preventing manufacturers from cutting production.  Private investment in manufacturing structures, which represents the total annual expenditure by businesses on structures related to manufacturing in the United States, is another indicator of the Manufacturing sector's performance. Despite contracting marginally overall during the same five-year period, private investment in manufacturing structures is anticipated to rise in 2019 amid the reshoring of some highly technical manufacturing operations. Overall, these drivers have produced relatively declines in the Manufacturing sector over the five years to 2019, with revenue contracting slightly at an estimated annualized rate of 0.2% to total $6.2 trillion. However, improving sector labor productivity, represented by a long-term uptick in revenue per employee, has been accomplished by operators through focused investment in research and development, supporting both product and process innovation.  

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Data analytics and artificial intelligence 

One of the most significant ways in which the Manufacturing sector has evolved in the digital era is operators’ use of data analytics and artificial intelligence (AI). Big data analytics are used by operators to optimize manufacturing processes, increase yield and improve supply chain efficiency. For example, predictive maintenance techniques, which rely on analytics to monitor the condition and performance of equipment during normal operations, are being used by operators to pinpoint and reduce the likelihood of machine failures. Furthermore, AI and machine-learning algorithms are increasingly being used by manufacturers to perform a variety of processes, from demand forecasting and inventory management to yield prediction and defect detection. Through these processes, AI and machine learning programs have enabled manufacturers to improve the end-to-end performance of operations while reducing costs associated with maintenance and transportation and warehousing. 

Smart factories and automated production 

Technological advancements have changed the way factories operate, with the rise of the Internet of Things (IoT) enabling manufacturers to seamlessly integrate previously discrete segments of production. These advancements have led to the proliferation of smart factories, in which interconnected automated production processes enable unprecedented levels of optimization and efficiency. By incorporating network connectivity to gather data from their environment, smart factories are able to generate context that ultimately produces a more autonomous, adaptive and flexible response to any changes that occur. 

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Computer-aided design and computer-aided manufacturing  

Manufacturers are increasingly implementing computer-aided design (CAD) and computer-aided manufacturing (CAM) software to assist with the design and manufacture of prototypes and finished products. The conceptual overlap between design and production enables manufacturers to use CAD/CAM systems in tandem, enabling operators to develop an initial concept in days rather than months and drastically reduce the manufacturing life cycle. Through integrating technical drawings with 3D visuals, CAD/CAM interfaces have provided manufacturers with powerful tools for product design and delivery.  

Future challenges 

While revenue for the Manufacturing sector is expected to pick up steam over the five years to 2024, rising at an estimated annualized rate of 1.4% to reach $6.7 trillion, manufacturers will not proceed without hurdles. One of the biggest challenges manufacturers will contend with in the coming years is a shortage of skilled labor, with operators reporting increasing difficulties in filling open positions. According to a study conducted by Deloitte and The Manufacturing Institute, this skilled labor shortage may leave an estimated 2.4 million positions unfilled between 2018 and 2028. The role of technology will play a pivotal role in sector performance over the next five years, as operators must rise to the challenge to deliver the most technologically advanced products amid a dwindling skilled workforce.  

For more commentary on the changing dynamics, with a focus on it relates to credit risk, please see Are You Ready for the Next Recession? Part 3

Edit by Vicky Wolak