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Digital operating systems:

The next generation of
production systems
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 DIGITAL OPERATING SYSTEMS: THE NEXT GENERATION OF PRODUCTION SYSTEMS

Executive summary

Production systems are evolving rapidly in many aspects. In the first of a series of
white papers, CCi discusses the drivers of change, and the shape and characteristics
of the next generation of production systems.

Henry Ford opted not to listen.

In the early years of the last century, his customers told him what they wanted: better
horse-drawn carriages. But Ford decided to trust his instinct and built a business
on a revolutionary transportation form. A decade later, with demand for his cars at
skyrocketing levels, he introduced the first mass production assembly line at the Ford
motor plant in Highland Park, Michigan.

Fast-forward 50 or 60 years to the development of a different but parallel philosophy

which would become famous as the Toyota Production System (TPS). Based on the
principle that only by eliminating all inefficiencies and wastes can optimum productivity
be achieved, the pursuit of perfection requires continuous improvement in all aspects
of production. TPS and its derivative models have come to represent the 20th century
benchmark in production systems, driving scaled efficiencies and cost reductions for
thousands of organisations.

Today we are seeing the culmination of a new wave of change

Industry 4.0 is changing the face of manufacturing as we know it. The disruption,
complexity and pace of change all represent a challenge to business leaders in meeting
shareholders’ expectations of value creation. But they also present an enormous
opportunity. Enterprises whose business is rooted in production can take advantage
of digital technologies to design systems and supply networks, and scale operations, to
new levels of global productivity and competitiveness.

There are potential problems and pitfalls, but with strategic clarity and the integrated,
incremental implementation of appropriate plans and procedures, a digital operating
system (DOS) will re-gear the corporate production system for the decades ahead.

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 DIGITAL OPERATING SYSTEMS: THE NEXT GENERATION OF PRODUCTION SYSTEMS

The evolution of corporate production systems

A DOS is an emerging approach to production which harmonises lean and continuous
improvement (CI) principles with smart manufacturing. The focus is not only on refining
day-to-day operations, but also on improving the efficiency of the organisation through
advanced analytics and enhanced digital capability.

By capitalising upon leading-edge technologies, a DOS can forge predictive, intelligent

and flexible manufacturing operations, in turn part of an agile, collaborative and
interconnected end-to-end value network. In the sense that these networks are the
modern progression of supply chains, so DOS represents the new shape, the next
generation, of manufacturing or production systems.

The importance of a best practice foundation

With the shift to DOS, manufacturing organisations are increasingly simplifying and
stabilising daily tasks and processes by means of automation. While machines cannot fully
replace human workers, many manufacturing organisations have commenced investing
in AI as part of their migration to a modern production system. And the development
of autonomous systems and operations has been accelerated by the global COVID-19
pandemic, with a resultant increase in remote work and streamlined processes.

However, in their adoption of DOS, many organisations are experiencing problems

related to disruptive change, including fragmented technology implementation, the
disconnect of piecemeal approaches, and employee disengagement.

The right foundations are proving to be important: Best practices, lean principles, and
integrated CI methods remain paramount. A successful transition relies on rigorous
existing disciplines across an organisation’s processes, technology platforms, and its
people – effectively, a CI culture paves the way for transition, and it then maintains
an underpinning for DOS as the system matures. Without this CI, the transformation
to DOS will not deliver the degree of anticipated productivity gains, nor achieve true
competitive advantage.

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 DIGITAL OPERATING SYSTEMS: THE NEXT GENERATION OF PRODUCTION SYSTEMS

Successful digital transformation requires a comprehensive plan

Put differently, successful and sustainable transformations are based on comprehensive

efforts involving the company’s culture, a vision of its future design and operations in a
digital world, a strategy to migrate towards this vision, and the appropriate investments
(budgeted on the blueprinted timeline).

The current state of digital production system maturity among most global companies is
very low. This is reflected in Competitive Capabilities International’s decade-long study
of our European and American clients – corroborated by research conducted in 2019 by
global consultancy, Gartner – which concluded that digital operating systems are still
largely nascent, manifesting in less than a fifth of assessed global industries.1

This ties in with the general under-preparedness of business ahead of a migration to

digitalisation. CEOs and CSCMs grasp the importance of doing so, but the transformation
is not being prioritised. An MIT/Deloitte 2017 survey, refreshed in 2019, is illustrative: In
2017, 61% of senior leaders rated their company’s digital maturity as poor 2; by 2019,
more than two-thirds still judged their progression as either ‘Early’ or ‘Developing’. 3

The capabilities of DOS and digital in general are largely untapped – a situation exposed
by the COVID-19 pandemic’s impact on supply chains: Over 90% of senior supply chain
managers and officers acknowledged a loss of confidence in their network and systems.4
Constrained flexibility, poor responsiveness, and limited end-to-end transparency are
deficiencies correlated to lower degrees of digital maturity across the value chain. DOS
and a genuine digital transformation can address these, and help capitalise on the
opportunities beyond the crisis and into the future.

1
‘Hype Cycle for Manufacturing Operations Strategy, 2020’, Gartner, 6 August 2020. See pp 41, 82.
2
‘Achieving Digital Maturity’, MIT-Sloan Management Review / Deloitte University Press, 2017, p6.
3
‘Innovation, ecosystems, and ethics: The risks and rewards of digital maturity’, Infographic:
https://s3.amazonaws.com/marketing.mitsmr.com/offers/DL2019/MITSMR-Deloitte-Digital-Maturity-Infographic-2019.pdf
4
‘EY.com webcast poll, “Responding to COVID-19: What’s next for supply chains,” April 2020.
.

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 DIGITAL OPERATING SYSTEMS: THE NEXT GENERATION OF PRODUCTION SYSTEMS

The enabling power of integrative improvement

Slow digital migration and a lagging DOS uptake have several causes. Although CEOs and CIOs
claim to understand the need for digital transformation, and multiple surveys reflect their
apparent intention to prioritise this,5 there is also evidence that the potential of manufacturing’s
digital future is not fully grasped. For example, Artificial Intelligence (AI) is projected to unlock
enormous economic value, some US$13 trillion in the decade ahead, boosting global GDP by
14%-16%.6 AI and machine learning will represent the next wave driving Industry 5.0 – the
extrapolation of 4.0 to a new phase of industrial autonomy. Yet in a major recent survey of
1 300 CEOs, only 16% said they are implementing AI to automate processes.7

Reasons for the lagging digital transformation

Low levels of investment in digital transformation can be attributed, at least in part, to

the financial fallout from the pandemic. Leaders may also have a suboptimal conceptual
understanding of DOS, and practical difficulties in implementing a transition from
older systems.

These issues spin out to related problems such as perseverance with outdated
technology platforms to support the production system, and compromised talent buy-
in to a digital culture and a DOS transition.

These and other reasons – not least the breakneck pace of technological change –
are precisely why it is crucial to adopt an integrative improvement approach to
implementing DOS.

The goal is digital maturity

Digital maturity will be transformational in terms of operational capability and business

competitiveness. But maturity implies a journey, carefully navigated. An integrative
improvement philosophy has never been more relevant and necessary. (See also sidebar,
What is integrative improvement, and why is it so important?)

5
‘See for example PwC CEO Panel (September 2020) and Gartner CIO Survey (October 2020):
https://www.pwc.ch/en/insights/ceo-survey-2020/what-ceos-learned-from-the-crisis.html
https://www.gartner.com/en/newsroom/press-releases/2020-10-20-gartner-survey-of-nearly-2000-cios-reveals-top-
performing-enterprises-are-prioritizing-digital-innovation-during-the-pandemic
6
‘Technology firms vie for billions in data-analytics contracts’, The Economist, 5 September 2019, chart 2.
7
‘2019 Global CEO Outlook: Agile or irrelevant’, KMPG, 2019, see p18

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 DIGITAL OPERATING SYSTEMS: THE NEXT GENERATION OF PRODUCTION SYSTEMS

What is integrative
improvement, and why is it
so important?
For organisations to triumph in
the quest for digital dominance,
they will need to take an
integrated approach to continuous
improvement. ‘Integrative
improvement’, as it is termed,
is the next level of continuous
improvement — it integrates all
functions and processes across the
value chain to embed operational
excellence in the very fibre of the Pivoting from a manufacturing system to a DOS
business.
Every journey needs a destination. In designing and strategising
This unique approach to
continuous improvement ensures the entity’s DOS, what should management envisage? What are
that improvements are integrated the primary capabilities and characteristics of cutting-edge digital
across systems, processes networks today, and how will these gear (and keep re-gearing)
and people. In this way, the
change is transformational and tomorrow’s performance?
enduring, and the organisation
itself becomes the true source of
Building on the foundations of the previous generation of
sustainable competitive advantage.
manufacturing systems, a DOS advances the existing application of
Integrative improvement principles, processes and practices to re-engineer the organisation’s
principles are based upon levers of
all-round performance. End-to-end, digital operating systems are
management which strive to:
visible, deliver upon the need for optimum agility, and achieve
• embed a collaborative,
problem-solving culture to improved productivity and competitive advantage.
fulfil clearly identified and
shared goals
The DOS becomes the new heartbeat of the company
• nurture and build capabilities
throughout the organisation, Perhaps the essence of a modern production system is that it is now
using metrics, incentives,
training and knowledge- the heart of the corporation, and the supply chain its pulse. Indeed, a
building DOS facilitates a shift from supply chain to value network, an evolution
• build an organisational model
that broadens the paradigm of what constitutes a production system.
emphasising processes and
value chains, rather than From a process orientation to achieve specific identified goals,
siloed functions manufacturing now shifts to represent its own network, in turn
• standardise work and
connected within a web of collaborative partners and interconnected,
information flows to enable
maturity-based progression visible systems, shaped by empowered, engaged talent, and driven by
• simultaneously run the technologies.
operations and strategically
build the business; instil a
culture of excellence that
requires leaders to empower
and motivate teams and
constantly strive for superior
performance

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 DIGITAL OPERATING SYSTEMS: THE NEXT GENERATION OF PRODUCTION SYSTEMS

An organisation on a path to the new capabilities of a DOS will need to focus on seven
key areas:

1. Corporate objectives
2. Organisational capability and talent
3. The manufacturing network
4. Data and metrics
5. Operations and supply chain visibility
6. Process foundations
7. Technology

As the organisation matures, each of these areas will progress through five stages of
alignment, ultimately creating a holistic, end-to-end and demand-driven value network,
as shown in the image below.

• Goals and objectives

• Organisational
capability and talent
• Manufacturing network
• Data and metrics
• Operations and supply
chain visibility
• Process foundations
Full E2E DDVN
• Technology
Supply Chain Integration
Operations Focus
Demand-driven Value
Siloed Internal Alignment Customer Alignment Extended Alignment Network

STAGE 1 STAGE 2 STAGE 3 STAGE 4 STAGE 5

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 DIGITAL OPERATING SYSTEMS: THE NEXT GENERATION OF PRODUCTION SYSTEMS

Building a modern production system

The blueprint for a rigorous DOS is a holistic strategy and implementation plan involving
the organisation’s ecosystem, its technologies and talent, and the systems and processes
that link these and through which work and production flow.

Assessing maturity

Upfront, it is important to assess and determine the entity’s true state of organisational
maturity – its readiness for progression. Whilst technology has widened the scope and
pace of advancement, of paramount importance is the matching of improvement steps
with the capacity of the business to absorb transformative change without systemic
shocks, and thus to gain the intended benefits.

Organisations should assess their state of maturity in four specific aspects to determine
the appropriate starting point for their DOS implementation:

1. Digital capability. Organisations should be clear on how their business strategies

can best be supported by digital, what digital competencies exist, and the gaps to
optimised levels.
2. Integrative improvement. Successful DOS implementation requires a solid integrative
improvement foundation and an accompanying CI strategy. Understanding the
status of improvement programmes is crucial to the synchronisation and alignment
of processes, people and technologies, across all functions, to underpin the
progression of the organisation’s demand-driven value network (DDVN).
3. Operations alignment. How well are manufacturing operations integrated and
aligned with the rest of the supply chain? Implementing a DOS requires clarity as to
pressure points extending from any aspect of operations.
4. Value chain alignment. Optimising the benefits of DOS requires gauging customer
and value network impacts. Currently, what areas of the network are problematic and
why? Understanding the maturity state across the full DDVN will enable appropriate
planning for the nuances of an organisation’s DOS roll-out.

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Developing an implementation road map
The targeted maturity assessments across the key capabilities highlighted above will
guide the organisation’s DOS strategy, and steer implementation priorities and measu-
rable objectives around five key ambits:
DOS and advanced
analytics
The infrastructural base
for DOS is the technology
and related platforms and
applications of the Internet-
of-Things (IoT), including, but
not limited, to big data and
advanced analytics, cloud
computing, and the integration
of operational equipment and
informational systems in a
vast interconnected industrial
landscape, projected to
comprise 75 billion devices
worldwide by 2030.
Increasingly, automation is part
of the make-up of factory floors
and production facilities. Whilst
‘DOS’ does not equate literally
to autonomous machines or
automated systems, digital is
the pathway to automation
and, in a virtuous circle, a DOS
which incorporates automation
can achieve further levels of
end-to-end capability.
Similarly, digital operating
systems that harness the
benefits of artificial intelligence,
cognitive computing and deep
machine learning will further
enhance the capabilities of
manufacturing organisations
through, for example, the
synthesis of Manufacturing
Execution Systems (MES) and
Enterprise Resource Planning
(ERP), or the sensing and
predictive power of the entire
network.
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DIGITAL OPERATING SYSTEMS: THE NEXT GENERATION OF PRODUCTION SYSTEMS
1. Organisational culture and leadership. A digital operating model
requires a digitally-geared, technologically fluent culture. This implies a
degree of comfort with fast-paced technology changes, acceptance of
disruption and a willingness, in the pursuit of innovation, to fail. Effectively,
a digital culture means scaling agility throughout the enterprise, so that
transformation is embraced and setbacks are viewed simply as minor hurdles.
Throughout any transformation, from its initiation to directional steer and
team-specific implementation, leadership is crucial. At all levels, peoples’
buy-in for the need to transform, and their engagement with the process, is a
prerequisite for its success – and this is a key, ongoing responsibility of skilled
leaders who are able to convey, convincingly, not just why the transition to
DOS is important for manufacturing operations, but why a digital vision is
critical to corporate strategy and the future-proofing of the entire entity.
2. Skills development. A digital culture alone is not enough to drive a
successful DOS implementation. Modernised production systems necessitate
workforce upskilling; the technologically advanced manufacturing environment
can liberate human ingenuity – but only if talent understands how to
leverage its capabilities to capitalise upon the technology. Organisational
structures and human resource processes should be put in place to
support the development of digital capability as well as the capability
to drive CI work within the workforce.
3. Technology advancement. The unleashing of the new powers and
potential of DOS is largely a function of harnessing the right technologies.
The exponential technology curve may be daunting; certainly, choosing
from the plethora of available digital solutions requires a high-level strategic
view, deep-level planning across all divisions and functions of the enterprise,
and an end-to-end analysis which incorporates supplier and customer
network technology integration. The complexity alone conveys the need
for a realistic timeline – a progression rather than rapid, wholesale change.
The starting point for many companies may be to rethink the function and
redesign the architecture of information technology. If IT is still siloed within
the company, the foundations are outdated. For digital progression to move
in synch, digital skills need to be dispersed and embedded throughout.
9
 DIGITAL OPERATING SYSTEMS: THE NEXT GENERATION OF PRODUCTION SYSTEMS

For other companies, the levers of competitiveness may lie in fully digitising,
modernising and configuring the factory for ‘smart’. Assuming lean,
standard work and baseline KPIs are in place, these can be leveraged to new levels
by appropriate, upgraded use of technology such as robotics, augmented reality,
full-scale integration of operational and information technology (IT-OT integration),
and real-time data processed using advanced analytics. (See also the sidebar DOS
and advanced analytics.)

3D printing
Internet Additive manufacturing Social robotics
Conversational computing
Mobile endpoint devices and apps Virtual assistance

Algorithmic automation Virtual reality

Augmented reality Human augmentation
Driverless vehicles Brain-computer interfaces
Big data analytics
Autonomous things
Blockchain, Smart contracts
Cloud computing
Quantum computing
Commercial drones
Social media and digital platforms Artificial intelligence
Cognitive computing
Enterprise systems
Sensors and the Internet of Things

MATURING EMERGING > 10 YEARS

4. Data at the centre. When a smart factory takes shape, its driving characteristic is
the value attached to data. From its harvesting, its seamless or connected IT-OT
integration, the visibility or transparency of key metrics, through to analytical models
which extrapolate the value of data into predictive and autonomous applications,
data has power. At high DOS maturity levels, organisations will benefit from advanced
systems that enable real-time data visibility and seamless data sharing across the
extended supply chain, to support improved decision-making at operational, tactical
and strategic levels.

5. Operational and value chain alignment. As part of a DOS implementation, an

organisation must align its manufacturing operations with the entire supply chain,
with the ultimate aim of facilitating an optimal end-to-end DDVN. Value creation
is maximised when there is cross-functional collaboration and communication,
seamless data sharing, and joint improvement or innovation projects with value
chain partners – entirely aligned with the organisation’s business model and
strategy.

However, alignment will only be possible if best practice operations are embedded
across the manufacturing network, supporting an agile production capability
that is fully attuned to value chain strategies. This involves building a deep
understanding of customer requirements, creating organisational flow and
value-driven processes, promoting cross-functional collaboration and problem-
solving, and linking to KPIs and performance outcomes. All must be calibrated
and form part of the DOS road map, towards consistent, sustainable performance
improvements and the delivery of genuine customer value.

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 DIGITAL OPERATING SYSTEMS: THE NEXT GENERATION OF PRODUCTION SYSTEMS

Perpetual motion: Orchestrating the performance of digital

operating systems
Leadership must plan the transition to digital and navigate progress towards maturity.
In doing so, leaders have at their disposal a range of mechanisms and interventions,
programmes and tools, policies and systems. A DOS is built on a bedrock of best
practices, and these routines, principles and behaviours must continue to apply to the
transition, and serve as the ongoing facilitators of the success of the digital system.

Integrative improvement as enabler

This should be the underlying philosophy when implementing a DOS: It is crucial
to orchestrate its performance consistently and holistically. Integrative, iterative
improvement programmes not only remain relevant, but they hold the key to maximising
the gains and the potential of digital operations.

DOS orchestration systems – discussed in greater detail in an ensuing white paper –

may have different components or weighted priorities. But ultimately, they need to be
structured around three key steps or phases in order to effectively enable organisations
to implement their digital operating systems:

1. Assess. Assessing the current level of organisational maturity should

be the first step in any DOS implementation. Thus, DOS orchestration
systems should have an assessment component to guide organisations in
determining their baseline maturity and informing their transformation plan.

2. Plan. A DOS implementation road map should outline a clear improvement

journey, integrate work across functions, be maturity based, build capability, and
allow for progress to be tracked. To support the creation of such a plan,
your integrative improvement system will itself require a high level of digital
maturity in terms of its design and capability.

3. Sustain. A DOS implementation will only be comprehensively successful if

improvements are replicated across the global business – and sustained.
As such, any DOS enablement solution should also focus on standardising
improvement initiatives and making these visible, in real time, across the
extended value network.

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 DIGITAL OPERATING SYSTEMS: THE NEXT GENERATION OF PRODUCTION SYSTEMS

Conclusion: New frontiers for manufacturing

A vision of the pinnacle of DOS is a predictive, autonomous, end-to-end

CCi’s TRACC is a digital
integrative improvement
solution that enables leading
organisations to design, run
and optimise their end-to-end
digital operating systems (DOS)
to achieve sustainable results,
through maturity-based best
practice implementation.
network in which faults are rare, responsiveness is inbuilt, and resilience
constantly improves because a deep learning AI drives the system. The
vision may be utopian and is most certainly unrealistic in today’s business
context, which is often shrouded in ambiguity, uncertainty and volatility.
But the emergence of digital operating systems and their supporting
orchestration systems position manufacturing companies for a major leap
towards that ideal. As traditional lean transforms into digital lean, new ROI
will be unlocked: Already, digitally mature companies generate almost 50%
better revenue growth and net profit margins than low-maturity companies
in the same industry. Even compared to organisations in the mid-stage of
digital development, the margins of digitally advanced companies reflect, on
average, a one-third outperformance.8

Operations as a hub of value engineering

‘Operations’ used to mean the motions, the functions and actions – in a
manufacturing entity, very much behind the scenes. Now, in the digital age
and in an era of ubiquitous disruption and discovery, operations means,
instead, the decentralised but connected hub of value creation.

Organisations implementing a holistically structured and well-planned

DOS will be poised to capitalise on significant competitive advantages.
Manufacturing improvements and efficiencies will be scaled deeper. The
value network will gain visibility, agility and innovation thrust. For the
business overall, the potential within DOS is transformational.

Sources

‘Digital lean: a guide to manufacturing excellence’, Bain & Company, 2019

‘Industry 4.0: Getting Digital Manufacturing Right’, Bain & Company, 30 August 2019
‘Uncovering the connection between digital maturity and financial performance’, Deloitte Insights, 2020
‘Digital era Technology Operating Models Volume 1 | Digital Technologies, Digital Disruption and Digital Strategy’, and
‘Volume 2 | The 9 big shifts to the Technology Operating Model and how to address them’, Deloitte The Netherlands,
October 2017
‘Using Digital Acceleration to Strengthen Your Business’, Harvard Business Review, 1 December 2020
‘Tech Horizon: Six habits of digital transformation leaders’, EY, 2 March 2020
‘Hype Cycle for Manufacturing Operations Strategy, 2020’, Gartner, 6 August 2020
‘Production Systems 2025: Rewriting the Working Systems for Industry 4.0’, SCM/Gartner, August 2019
‘Supply Chain Brief: Modernize Production Systems to Unlock Manufacturing Operations and Support Agility Imperatives’,
Gartner, 30 October 2019
‘Making smart platforms stick’, McKinsey, 18 August 2020
‘Achieving Digital Maturity’, MIT-Sloan Management Review in collaboration with Deloitte Digital, 13 July 2017
‘The Risks and Rewards of Digital Maturity’, MIT-Sloan Management Review, 3 June 2019
industryweek.com
supplychainbrain.com

8
‘Uncovering the connection between digital maturity and financial performance’, Deloitte Insights, 2020,page 4, figure 2

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