The understanding of Industry 4.0 and its impact on the manufacturing industry is becoming an integral part of operational performance, and manufacturing excellence.
Accortding to HfS research, Industry 4.0 means a fundamental change to the “old way” of manufacturing operations. The change is not only limited to the manufacturing processes but to the organization workforce to oversee and manage the whole operation.
In Industry 4.0, outsourcing is not a just a mere cost advantage by doing the same thing more efficiently – to drive out time, cost, and labor by doing the over and over. But it is a competitive advantage by creating, connecting, monitoring, and managing digital clone of every physical asset in a manufacturing plant in real time.
With the implementation of digital and engineering technologies, the products and business models of the manufacturing enterprises will also be transformed, creating manufacturing operations more data intensive, faster, and flexible. Thus, identifying the scope of Industry 4.0 implementation in the existing business landscape is of paramount importance for manufacturing enterprises.
Service providers continue to invest in technology partnership, talent acquisition, and vertical capability augmentation to meet the continued challenge of Industry 4.0 implementation. Buyers are asking for selected business outcomes for specific business scenarios. This puts additional pressure on service providers to have the most effective solution for a particular business challenge.
Industry 4.0 refers to the combination of digital innovations, robotics and artificial intelligence; sensors; cloud computing; the Internet of Things; data capture and analytics; digital fabrication (including 3D printing); software-as-a-service and other new marketing models; platforms that use algorithms to direct motor vehicles (including navigation tools, ride-sharing apps, delivery and ride services, and autonomous vehicles); and the embedding of all these elements in an interoperable value chain, shared by many, including new ways of tackling today’s most difficult problems: climate change and pollution, energy demand, the pressures of urbanization, and the problems that accompany aging populations. (strategy+business)
These technologies are often thought of separately, but when joined together, they integrate the physical and virtual worldsand this in turn enables a powerful new way of organizing operations, and is already transforming manufacturing.
According to the Economist, the Industry 4.0 movement started in Germany; BASF, Bosch, Daimler, Deutsche Telekom, Klöckner & Co., and Trumpf. Currently Siemens and GE have fully embraced the approach; both companies’ CEOs and senior executives have declared that it is now a core part of their identity.
PwC surveyed more than 2,000 companies from 26 countries in the industrial production sectors, and one-third of the respondents said their company had already achieved advanced levels of integration and digitization, and 72 percent expected to reach that point by 2020.
86 percent of the survey respondents said that on the basis of their experience to date, they expected to see both cost reductions and revenue gains from their advanced digitization efforts. Nearly a quarter expected those improvements, in both cost savings and revenues, to exceed 20 percent over the next five years.
According to an s+b article, ‘A Strategist’s Guide to Industry 4.0,’ cost savings are largely a result of greater efficiency and technological integration. Industry 4.0 replaces redundant legacy systems, such as those for operations management and enterprise resource planning, with a single, enterprise-wide, interoperable whole — which is much less expensive. Because user experience in operational systems has improved in recent years, employees tend to be happier and more productive with Industry 4.0. This lowers costs for training, support, and staff turnover, and raises operations speed. Predictive analytics, when used to support real-time quality control and maintenance, contributes to the savings by smoothing operations and reducing breakdowns.
The revenue gains, for their part, come largely from offering new digital features and products, or from introducing analytics and other new digital services to customers. In addition, the availability of real-time data enables companies to offer more personalized products and customized solutions, which usually generate significantly higher margins than mass-manufactured offerings. The opportunities are promising enough that about 55 percent of survey respondents expected to see their investment returned within two years, a short time considering the amount of capital required.
Illustration by Opto Design
According to a McKinsey survey exploring the progress companies have made in implementing Industry 4.0, the challenges many still face, and the ways to unlock value, Industry 4.0 raised high expectations, but not all have been met.
On the one hand, we still see high uncertainty among manufacturers regarding what implementing Industry 4.0 really requires of them—and many are still struggling to get started (exhibit).
According to McKinsey research, when it comes to implementing Industry 4.0, only 16 percent of companies have a clear strategy in place, and only 24 percent have assigned clear responsibilities regarding Industry 4.0 efforts.
On the other hand, most technology suppliers have moved relatively fast to adjust their portfolios given the potential of these digitization trends.
Overall, companies continue to experience difficulties in several areas: coordinating actions across different organizational units, upholding cybersecurity standards and determining data ownership when working with third-party providers, sustaining courage and support for a radical transformation, and recruiting the necessary talent.
Industry 4.0.= digitally enabled lean
The Productivity Leap
Industry 4.0 is the source of the next horizon of productivity gains
Companies that embrace Industry 4.0 are leading mass customization: the ability to make products in batches of one as inexpensively as they could make a mass-produced product, while tailoring the product to the specifications of the purchaser.
- Manufacturers should focus on a limited number of Industry 4.0 applications, rather than trying to cover all levers at once.
- Manufacturers should build a portfolio of third-party technology providers, as Industry 4.0 is causing a shift from the single-provider model to one that hinges on a set of integrated technology providers.
- To capture value from Industry 4.0, companies need to establish a dedicated cross-functional team that drives innovation based on a culture open to change and experimentation.
- Manufacturers that want to not only reap the immediate rewards of Industry 4.0 but also prepare themselves for future market disruptions should start experimenting with new business models.
Three aspects of Industry 4.0 digitization
• The full digitization of a company’s operations, linking retailers, distribution centers, transporters, manufacturers, and suppliers in the value chain and transferring data among them.
For example, leading-edge inventory management systems, in which each party receives data about the others’ supply levels, places and fulfills orders automatically, and triggers maintenance and upgrades. This smooths out the gluts and shortages of a typical supply chain, and enables to easily test new products and services in particular geographic locations.
• The redesign of products and services to be embedded with custom-designed software, so that they become responsive and interactive, tracking their own activity and how well they are functioning and how they are used.
For example, the equipment used in a shipping port or on a construction site can now detect an impending mechanical breakdown and prevent it. The next generation of this equipment will be able to compare the efficiency of various machines and suggest more efficient deployment. Another example is motor-vehicle software, which is evolving to enable cars, trucks, and other vehicles to be repaired via downloaded software upgrades instead of mechanics.
• Closer interaction with customers, enabled by these new processes, products, and services. Industry 4.0 makes the value chain more responsive, allowing industrial manufacturers to reach end customers more directly and tailor their business models accordingly.
For example, Atlas Copco, a manufacturer of air compressors based in Nacka, Sweden, which is moving away from selling its equipment directly, and, instead, is billing only for the compressed air that is used. The machines installed at customer sites can monitor the flow of compressed air and adjust the output according to customer need.
Industry 4.0 also enables business models that take advantage of the economics of mass customization, where every product is, in effect, created as a batch of one.
The appliance manufacturer Haier, for example, already makes its washing machines and refrigerators in China to order. Customers specify the features they want on their computers or phones, or at kiosks in Haier’s retail stores, and those specs are transmitted directly to the assembly line.
Making Industry 4.0 work requires major shifts in organizational practices and structures.
These shifts include new forms of IT architecture and data management, new approaches to regulatory and tax compliance, new organizational structures, and — most importantly — a new digitally oriented culture, which must embrace data analytics as a core enterprise capability.
In the PwC research survey, the most commonly cited difficulty was the lack of people with the expertise to conduct the analysis.
Other concerns include poor data quality, lack of access to the right data, and lack of top-level support.
Analytics can yield insights that help you reshape your operational designs.
- For example, analysis of your customers’ daily and seasonal use of machinery can help you improve production schedules.
- Data about employee recruiting can help you predict your next talent shortfalls.
- Production data can illuminate opportunities to eliminate downtime or speed up throughput.
- Analytics can identify wasted materials and suggest ways to reclaim them, or to use them as inputs for other industrial processes.
- Analytics can also reveal new markets, or opportunities for growth in existing markets, that were not obvious before.
First Movers and Platforms
Industry 4.0. involves new and unfamiliar ways of organizing production.
Nonetheless, companies that hold back, waiting to see how it all turns out before investing, will fall behind.
As World Economic Forum founder Klaus Schwab put it in his recent book The Fourth Industrial Revolution (World Economic Forum):
“Contrary to the previous industrial revolutions, this one is evolving at an exponential rather than linear pace.… It is not only changing the ‘what’ and the ‘how’ of doing things, but also ‘who’ we are.”
In the PwC research survey, a small group of companies, only 4 percent of the total, have chosen to lead the way. They appear to be finding rapid payoffs in efficiency, cost savings, and opportunities for innovation; more than half are among the group expecting to see rapid business returns on their investments.
If first movers can realize their expected cost savings and revenue gains, they will generate more capital to reinvest in their Industry 4.0 strategies, enabling them to improve their operational performance — and increase their lead over competitors — even further.
The key distinguisher is the platforms that first movers create; a nexus of exchange and interoperable technology that allows a wide range of vendors and customers to seamlessly interact.
The most successful first movers of the software and Internet industries — Amazon, Apple, eBay, Facebook, Google, and Microsoft among them — all cemented their position with powerful and distinctive platforms. Apple and Google, for example, collect 30 percent of the revenue for apps sold in their app stores.
GE and Siemens are already moving to solidify their position as platform providers. Each has developed a cloud-based system for connecting machines, devices, and systems (such as enterprise resource planning systems) from a variety of companies — facilitating transactions, operations, and logistics seamlessly among them, and collecting and analyzing data for use by all.
On an industrial platform of this sort, market intelligence information, gathered from the machinery and the behavior of people in the system, moves into product development and manufacturing. Equipment and software from multiple vendors are connected, with the connections extending beyond the company’s own walls into the value chain to external distributors and suppliers.
The net effect is to bring customers closer to operations, analyzing their data to better forecast their needs, improve products, and develop new offerings, often customized to individuals.
Platforms are successful in the Internet 4.0 context because of the network effect, that reinforces lock-in into an ecosystem. Once a customer commits itself to a technologically comprehensive platform — especially one that offers multiple services, with costs that keep diminishing and an expanding network of users, just as Apple’s iOS and Google’s Android currently divide the smartphone sector, it is increasingly difficult to switch.
Most Industry 4.0 quick wins will be found in improving operational effectiveness.
Priorities, capabilities, and mind-sets
Companies looking to achieve the next level of lean should keep in mind several guidelines:
- Clear priorities, small steps. Instead of spending time on extensive analysis and planning, start with the digital steps that deliver the most impact in your situation, and learn as you go.
- Capabilities. Most companies are eager to fast-track their development by implementing digital technologies on the shop floor but feel unprepared for the change.
- Mind-sets and behaviors. Experience over the past several decades has shown that a transformation fails or succeeds due to the mind-sets and behaviors of leaders and employees.
The strategy+business research team, put forward six initiatives for successful implementation.
1. Map out an Industry 4.0 strategy up front. Evaluate your own digital maturity now, versus where you need to be. Set clear targets for closing the gap. Prioritize the measures that will bring the most value to your business and make sure these are aligned with your overall strategy. Gain commitment to this approach from the full range of top company leadership, and make sure that commitment is evident to people throughout the enterprise, who will base their decisions on what they believe their leaders want and expect.
2. Start with pilot projects. Use them to establish proof of concept and demonstrate business value. Collaborate with digital leaders outside your company’s boundaries; work with startups, universities, or industry organizations to accelerate your digital innovation.
3. Define the capabilities you need. Develop a blueprint for building (or acquiring) those capabilities. Include technological enablers, and strategies for recruiting and developing the right employees and attracting the right companies to work with. Your success with Industry 4.0 will depend on the skills and knowledge you can deploy.
4. Become a virtuoso in data analytics. Establish cross-functional analytics capabilities, tied closely to the strategic priorities of the whole enterprise, drawing on in-house staff and outsourced expertise. Develop ways of combining data from different parts of the business, and apply these methods to as many domains as possible, particularly those that differentiate your company or attract customers.
5. Transform into a digital enterprise. Capturing the full potential of Industry 4.0 will probably entail major changes to your company’s practices and the attitudes underlying them. Set the tone from the top, with clear leadership, commitment, and vision from the C-suite and financial stakeholders. Your company will need to reinvent its capabilities continually, at faster rates than in the past, to stay ahead of the game.
6. Adopt an ecosystem perspective. Develop complete product and services solutions for your customers. The greatest breakthroughs in performance occur when you actively understand consumer behavior and can orchestrate a distinctive role for your company within a complex ecosystem of partners, suppliers, and customers.
Unresolved issues, challenges and risks may come in unfamiliar new forms.
For example, will governments change their customs activities and tax structures to account for a world in which physical goods of all kinds rapidly decrease in value compared with the intangibles — intellectual capital and ongoing support, for example — that distinguish them?
- Will a digital fabrication plant be considered a full-scale manufacturing location?
- Will this type of manufacturing create jobs? Or supplant them with technology?
- As the intellectual property value of software and services increases, will new cybersecurity challenges arise?
- Or make it easier to enforce rules about IP theft, and to trace violations?