Digital Transformation in Manufacturing: Adversity and Ambition

Hitachi & CADDi: Competing on Social Value

Founded in 1910, Hitachi, Ltd. boasts sales of roughly 10 trillion yen, employing approximately 320,000 people across its operations. As a world-class manufacturer, Hitachi has been leading the way on business development through Digital Transformation (DX) and Green Transformation (GX).

CADDi, meanwhile, is a venture company in its sixth year of operation, aiming to transform the manufacturing supply chain on a global scale.

Although very different in size and history, these two companies are striving to revolutionize Japanese manufacturing and compete on a global stage. Our interview with top leaders from both companies offers hints at the future that Japan’s manufacturers must aim toward.

The Truth About Hitachi’s Core DX Engine, “Lumada”

──Let’s start with “Manufacturing DX,” the phrase that connects your two companies, and some ideas on overcoming some of the difficulties there. Chairman Higashihara, in your CEO message back in 2021, you said that Hitachi was founded with a focus on manufacturing and product development, but with the move to digitization in the 2000s, the company shifted its focus to a more customer-oriented approach. “Lumada” emerged from that context, is that right?

Higashihara That’s right.

──And in Hitachi’s Mid-term Management Plan 2024, Hitachi announced that, with Lumada as its core growth strategy, Hitachi plans to double Lumada business revenues in 2024. First of all, could you give us a brief explanation of what Lumada is?

Higashihara Lumada is really a broad term for all of the solutions, services and technologies that accelerate DX, leveraging Hitachi’s distinctive techniques and know-how. We started using Lumada with a focus on resolving customer issues through co-creation, improving product quality and efficiency. Now our focus is shifting from a customer-oriented point of view to one that’s more focused on social issues.

These social issues are becoming more and more complex, you know, with supply chain disruptions from climate change, COVID-19, and international emergencies. There’s a limit to what Hitachi can accomplish on its own, and we need to partner and collaborate with our customers to find solutions.

Lumada is aimed at extracting new value based on data from society and our customers, to develop social innovations on problem-solving.

Kato I’ve been very interested in Lumada ever since it was launched. During my time working at McKinsey & Company, my previous job, I was researching IoT case studies from around the world. I ran across Lumada, but I never really put together the whole picture. I’d love to have the chance today to hear the secrets behind Lumada.

Higashihara It must have been pretty puzzling! (laughs) Apart from a vague concept, there’s not much you can see from the outside. When we first started, it was really just a collection of tools for analyzing big data and AI.

We launched Lumada top-down in 2016 as a core interface for accessing all Hitachi’s common resources. We’re creating value from three data sources: OT (Operational Technology) based on hardware operations we’ve developed, IT (Information Technology) based on business interactions, and manufacturing know-how from our various products lines. Lumada is the foundation for those.

It now goes much further than that, incorporating things like collaborative creation approaches with customers, but the most important layer to it is the data, that’s the common layer throughout. When we get to layers of the system that are closer to customers, applications and services, there’s a greater degree of flexibility to it. And at the topmost layer, it’s like a set of APIs linking up with the outside world.

Kato Interesting. So while there are common layers to it, the key point is having flexibility at the point of contact with clients.

CADDi is a venture company, but we’re striving to transform the manufacturing supply chain. So while we’re working in different areas, it feels like we’re approaching our goals with a similar philosophy. We aim to enrich the whole industry, rather than confining ourselves to just solving the problems of individual companies. We’re promoting standardization in things that are necessary across manufacturing and the supply chain, including drawings and quality specifications.

Higashihara Standardization, that’s very important.

Kato We offer a service, “CADDi Manufacturing,” which is a one-stop service for procurement and production, where we take technical drawings from our customer manufacturers and collaborate with suppliers around the world as partner manufacturers, enabling all-in-one parts delivery.

In short, we receive thousands of drawings from customers and place orders to partner manufacturers while ensuring quality standards and production control.

We’ve come to realize that standardizing drawings is essential to expanding this business. For one thing, there are a lot of cases where a supplier will produce a product exactly based on the drawing, but the product still gets rejected.

──What do you mean?

Kato Different industries and manufacturers will have different formats for drawings, different ways of writing out specifications, and different quality standards. The result is that suppliers tend to be dependent on just one company. This means that we lose a lot of flexibility across the whole supply chain because of these discrepancies between different companies’ drawing specifications.

In order to expand the number of customers that partner manufacturers can take, we’re developing a conversion system that will take in customer orders in all their various specifications and design data, and build a common, standardized layer for drawings and quality standards. Our translation system can take in a drawing, for example, and automatically fill in missing data that is standard for that one customer, but not actually written into the drawing itself.

──What exactly do you mean by “standardization?”

Kato For example, the definition of “white” in a paint color specification, or what is meant by “no scratches,” different companies will have different definitions. Many things are just tacitly acknowledged as a given, even if they aren’t specified in the drawing. So we take these things and standardize them, saying that Company A’s standard for “no scratches” is at a level 1, and Company B is at a level 2.

Outside of just quality standards, there’s a whole range of other things that can go into this standardized layer, including optimal cost computation algorithms.

We call these systems the “CADDi Factory System.” It’s a whole series of structures that extend the productivity and the possibilities of partner manufacturers. We believe our conversion system and standardized layer, the CADDi Factory System, is going to let them take on orders from more customers, which will add flexibility to the whole supply chain and improve productivity across the entire industry.

Being agile from the start

──They’re both beautiful stories, but in Hitachi’s case, you’re working with more than 300,000 employees. There must have been a lot of hiccups along the way.

Higashihara It was full of hiccups! (laughs) On the global scale, nobody’s going to listen to you if you try to do things top-down. We learned not to do a lot of centralized decision making, and not to try to drop brand new systems on people.

In the case of a railroad control system I was working on, we went through station by station, plugging along and building it up step by step, while paying attention to the issues and needs that sprung up along the way.

When we launched Lumada back in 2016, we had this concept of an engine for social innovation and digitizing our society, but there wasn’t the full range of assets that we have today.

At the outset, we were running our normal operations with the company divided into four processes: consulting, system integration, system development, and maintenance. Along the way, we’re trying to develop our products and services more flexibly, trying to build an upward spiral of improvement and value.

──Can you give us an example of something created through Lumada?

Higashihara Well, in Copenhagen, the capital of Denmark, the metro runs unmanned, 24 hours a day, 365 days a year. But there’s a challenge: whenever there’s an event, say an exhibition at a nearby station, the number of passengers skyrockets.

Kato You get random peak times.

Higashihara Exactly. So we need to know how many people are at the station, wanting to take the metro. By taking in real-time data and linking it up with the traffic control system, we were able to develop a solution that adjusts operations to match with the volume of passengers. We were able to get there because both the vehicles and the system were developed by us, so it was easy to get our hands on the data. This goes back to the point I brought up earlier, of combining data collection from Products, OT, and IT.

The middle layer of the process is putting to work all know-how we’ve cultivated, assets like our railway control system. Then the upper layer is adapting it to the local needs in Copenhagen.

We just steadily built these use cases out of our on-the-ground efforts. We’d gather data, and gradually go from an abstract concept to a concrete application. In the last few years we’ve been opening up Lumada’s business operations, working with more partners and more accelerating the development of social innovations.

Kato For a large company like Hitachi to take this agile approach, not placing all the decision-making up front before going forward, it’s kind of surprising. In a good way. Not to mince words about it, there are a lot of just pie-in-the-sky big ideas and systems. I’ve seen it so many times doing research at my previous job, companies putting systems that are hard to use and that don’t meet any kind of market demand. You see it in venture companies like ours as well.

Building solutions that work on the factory floor, piece by piece, and then having those solutions connect with those customer-facing upper layers, I feel like you need people at the top who have actually been on the ground, working for many years and who can get an overview with a high resolution.

Higashihara I started out at Hitachi at the Omika Works, and then I spent about thirty years on-site working in factories and on railways. Going to the site, seeing the product in action, and tackling with reality, that’s a deeply ingrained set of habits. (laughs)

Common themes from the factory floor

──It’s similar for CADDi, right? You spend five years in the trenches to reach the scale and phase you’re at today.

Kato That’s right. We worked with about six thousand companies in our first year, taking in all types of drawing formats without restricting ourselves to any particular industries. As we went along, some common themes started to emerge. That’s how the translation system I mentioned earlier started to develop.

It’s like Mr. Higashihara says, we “connect” and “adapt.” It was important for us to realize this. We’re building a common layer of specification data that connects to a higher, more flexible layer, and that allows our partner manufacturers to create products that leverage their own technological capabilities.

──It sounds like you’re building the architecture in an adaptable, agile way while maintaining flexibility for clients. Of course, there’s a macro/micro distinction here, but it sounds very similar to what Lumada is doing.

Higashihara I really do think so. Ultimately, the database is going to be different for each customer, so it can’t really be standardized in the truest sense. But you can adapt and convert, as CADDi has been doing. What’s important is that shared aspect, which is just like Lumada. You put together a product concept and a philosophy, and employees who are closest to the customers share those ideas and work together on that basis. That’s the ideal.

Purpose management is all about clearly articulating strategy and purpose, it’s a common philosophy. These are the ideas we need for global management going forward.

Staying the course for the long haul

──Mr. Higashihara, we’d love to hear your thoughts on the future of Japanese manufacturing: where we should be heading, what we should be aiming for, what we need to be cautious about.

Higashihara Up ‘til now, a lot of manufacturers have been very conscious of cost-cutting measures and growing profits from products’ point of view, such as trying to buy parts as cheaply as possible. But now, we need to be focused more on providing value from the customer’s point of view.

I think there are three major points to doing that. We need to be making sure that our products match the ‘values’ of their particular ‘region’, and we need to be thinking of how that changes over ‘time’.

Recycled products are a great example. Especially when it comes to clothing, the price can be higher than a completely new product. But they still sell well. Customers appreciate the ideas behind them. We can think of customers’ needs along these three axes, of region, values, and time. And we need to take it that extra step further, have the initiative and awareness to treat social issues as our own problems.

I’m very interested in venture companies and check up on them often, but I have to say, there are a lot of them that just don’t have any real purpose behind them. They’re focused on short-term results and the pursuit of profit. It’s important to clarify exactly why the company exists, what value they bring to society. Then, when you’ve got people involved in your cause, you have a basis for staying competitive long-term.

I think it’s fantastic that CADDi is focusing on revitalizing the manufacturing industry.

Kato Thank you so much. Unleashing the potential of the manufacturing is CADDi’s starting point, our mission. As part of that mission, “CADDi Manufacturing” creates protocols from the downstream, focusing on manufacturing. And to add onto that, we’ve started “CADDi Drawer”, a cloud service using drawing data to create protocols from upstream (design and procurement). Hitachi High-Tech is considering using this service.

We believe that the data in drawings can be an asset in daily operations, helping to improve quality, cost, and delivery, as well as by supporting digital transformation in management. We feel that this can be the case not just in Japan, but on a global scale. We opened our Vietnam office in March 2022, and just launched our Thailand office in November. We’re continuing to progress our manufacturing business globally, including in the US, where we’re in the process of expanding. As a matter of fact, I’m heading to Vietnam right after today’s interview, then staying in the US for about a month. I’m very glad I had this opportunity to talk to you and broaden my perspective.

Higashihara The future of Japanese manufacturing is going to change in big ways, not just through large companies like us, but through leaders at venture companies who are dedicated to improving Japanese manufacturing and society as a whole. Let’s do it together.