AI in manufacturing: Optimizing costs and enabling the workforce

By Anne Zavarella, CPA

Industrial manufacturing leads the way in adopting emerging technologies to optimize costs and drive growth. Ninety-three percent of industrial manufacturing organizations use artificial intelligence (AI) in operations, leading the seven industries surveyed in KPMG LLP's Thriving in an AI World report.

Technologies such as AI enable the workforce to visualize the future, and workers play a critical role in smart manufacturing operations. In an increasingly digital marketplace, leaders should take a new look at cost structures, particularly those of labor, to identify areas where they can use AI to increase efficiencies and drive growth.

Prioritizing talent development drives value and growth

In the United States, industrial manufacturing has the highest multiplier effect of any economic sector — every dollar earned in direct labor income in the manufacturing industry results in $3.14 in labor income earned elsewhere, including direct and induced impacts. The manufacturing sector also stands to lose more than 400,000 jobs during 2019–2029. Leaders may benefit from efforts that balance cost optimization with workforce upskilling and reskilling.

The lack of skilled professionals is a major concern. In 2020, "talent risk" jumped from a minor concern to the No. 1 threat to long-term growth during COVID-19, while less than one-third of manufacturing CEOs were prioritizing investment in workforce skills, according to other KPMG surveys.

In the past year, there has been a dramatic shift in those priorities. Nearly 40% of manufacturing CEOs in the 2021 KPMG CEO Outlook Pulse Survey report that they are "investing in digital training, development and upskilling to ensure employees' skills remain future-focused." For example, in the finance function, data and analytics skills, technical workers who are experienced in business modeling, and process designers will become more prevalent. So will data scientists who can clean the data and use it to derive meaningful insights. Another KPMG report, "Reinventing Work," found that leading organizations are focusing on the digital skills to deploy and manage AI and human skills to live and work with AI. It also cited the case of one global high-tech manufacturer that built "an enterprise-wide capability in workforce shaping to address numerous challenges including the impacts of AI and related technologies atomizing the workplace." To drive growth and value for investors and shareholders, leaders in the manufacturing industry will need to take proactive steps to balance performance enhancements from technology with the need to develop a performance-driven and technologically savvy workforce.

Have the right talent strategy in place

For many manufacturers, both finding new workers and modernizing the current workforce remain challenges even as production increases. Technology is reducing the skills gap, but the majority of the implementations across the sector today are robotic process automation and opportunities to improve efficiencies, not productivity-enhancing technologies.

According to the National Association of Manufacturers, "Manufacturing production is likely to exceed pre-pandemic levels in the third quarter of 2021, with robust sales buoyed by pent-up demand, fiscal and monetary stimulus, and economic recoveries in markets around the world." Meanwhile, the workforce is shrinking. In August of this year, the ISM Manufacturing Employment Index showed contraction in the manufacturing workforce — 4 percentage points lower than the July reading — even on the back of modest growth across the manufacturing sector.

In a collaborative effort to win the competition for talent, CEOs, CFOs, and controllers need to evaluate the cost efficiency and validity of various talent acquisition channels, including recruiting, outsourcing, co-sourcing, and upskilling current employees. Additionally, with a move to hybrid workforces, capital investment may be necessary to develop both the skills of the remote workers and the infrastructure to empower those workers.

Board members should also oversee human capital management issues, especially talent development. As illuminated by the pandemic, successfully executing strategy hinges on a company's talent base. The talent oversight of boards has expanded to include all workers.

Retrain to retain your talent

A recent KPMG survey of manufacturing CEOs in the United States found that 44% plan to invest more in AI, but many lack concrete plans to upskill the current workforce or compete for new talent. This underscores the need to train the current workforce. Talent assessment is an important first step.

Companies must determine which employees have the relevant skill sets, which employees are suitable for new positions, and where recruitment or outsourcing can fill gaps in the talent pool. Areas of assessment should encompass both hard skills in programming and analytics and interpersonal and engagement skills. For example, the centralization of accounting operations has challenged plant controllers with oversight of multiple plants. Successful plant controllers in today's smart plants must master data analytics and aggregate actionable insights.

There are benefits to upskilling the current workforce instead of recruiting or outsourcing:

  • The cost of upskilling employees is lower than recruiting: Existing workers are equipped with institutional knowledge valuable for productivity and organizational culture.
  • Manufacturers in search of new workers well versed in data analytics and problem-solving will face stiff competition from both industry peers and other high-growth sectors.
  • "Reverse mentoring" and the role that younger workers can play in helping older generations develop high-value new skills, especially around digital technologies.

According to a recent McKinsey survey, "in advanced industries and industrial organizations, respondents report less of a focus than others on building basic digital skills — likely because these skills were already present before the pandemic. But … their peers in the public and social sectors, as well as in health care and pharmaceuticals, are nearly twice as likely as those in industrial organizations to say that they have focused on interpersonal skills and empathy." This reinforces the need to flesh out a programmatic approach to skill development.

Consider bottom-line costs of recruiting and outsourcing

Outsourcing and recruiting are both valuable strategies to enhance manufacturing productivity while remaining focused on core business transformations. The manufacturing industry historically has outsourced a lot of shared services and routine transactions. Increasingly, manufacturing companies without the requisite technical skill sets in their workforce choose to outsource or co-source back-office operations such as financial reporting, accounting, and audit.

To kick-start the process, manufacturing leaders should assess wage and investment options when evaluating external recruitment or outsourcing of projects to those with advanced facilities and backgrounds in emerging technologies.

As emerging technologies change the dynamics of the manufacturing workforce, leaders of the industry need to maintain a balance between fostering an employee-focused culture and pursuing cost optimization. Having a sustainable talent strategy and modern workforce will be critical to the long-term success of industrial manufacturing companies, and the industry, in the face of increasing competition as the economy recovers.

To keep their own skills updated, accounting professionals can use the CGMA Competency Framework guide and tools.

— Anne Zavarella, CPA, is a partner and National Audit Industry Leader for Industrial Manufacturing for KPMG LLP in Columbus, Ohio. To comment on this article or to suggest an idea for another article, contact Ken Tysiac, the JofA's editorial director, at Kenneth.Tysiac@aicpa-cima.com.

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