A Strategist’s Guide to Industry 4.0
Global
businesses are about to integrate their operations into a seamless digital
whole, and thereby change the world.
Industrial
revolutions are momentous events. By most reckonings, there have been only
three. The first was triggered in the 1700s by the commercial steam engine
and the mechanical loom. The harnessing of electricity and mass production
sparked the second, around the start of the 20th century. The computer set the
third in motion after World War II.
It
might seem too soon to proclaim that the fourth industrial revolution, spurred
by interconnected digital technology, has begun. But Henning Kagermann, the
head of the German National Academy of Science and Engineering (Acatech), did
exactly that in 2011, when he used the term Industrie 4.0 to
describe a proposed government-sponsored industrial initiative.
When you look closely at the rapid pace of
digitization in industry today, the name doesn’t seem hyperbolic at all. It is
a signal of sweeping change that is rapidly transforming many companies and may
catch others by surprise.
The
term Industry 4.0 refers to the combination of several major
innovations in digital technology, all coming to maturity right now, all poised
to transform the energy and manufacturing sectors. These technologies include
advanced robotics and artificial intelligence; sophisticated 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; smartphones and other mobile devices; 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 global value chain, shared by many
companies from many countries.
When
robotics, 3D printing, data analytics, the Internet of Things, and digital
fabrication are joined together, they integrate the physical and virtual
worlds.
These technologies are often thought of
separately. But when they are joined together, they integrate the physical and
virtual worlds. This change enables a powerful new way of organizing global
operations: bringing the fungibility and speed of software to large-scale
machine production. Under the Industry 4.0 model, product design and
development take place in simulated laboratories and utilize digital
fabrication models. The products themselves take tangible form only after most
of the design and engineering problems have been worked out. The networks of
machinery that have engendered industrial society become hyper-aware systems of
highly flexible technology, responding rapidly not just to human commands but
to their own perceptions and self-direction.
This technological infrastructure is still in
its early stages of development. But it is already transforming manufacturing.
Companies that embrace Industry 4.0 are beginning to track everything they
produce from cradle to grave, sending out upgrades for complex products after
they are sold (in the same way that software has come to be updated). These companies
are learning mass customization: the ability to make products in batches of one
as inexpensively as they could make a mass-produced product in the 20th
century, while fully tailoring the product to the specifications of the
purchaser. As the movement develops, these trends will accelerate. So will the
invention of new products and services, 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.
The
Industry 4.0 movement started in Germany, and many of that country’s leading
industrial companies have strong initiatives. According to the Economist, the list includes
BASF, Bosch, Daimler, Deutsche Telekom, Klöckner & Co., and Trumpf. The
momentum is rapidly growing elsewhere as well, particularly in the United
States, Japan, China, the Nordic countries, and the United Kingdom. Such
influential global industrial behemoths as 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.
In
2015, PwC surveyed more than 2,000 companies from 26 countries in the
industrial production sectors, including aerospace and defense; automotive;
chemicals; electronics; engineering and construction; forest products, paper,
and packaging; industrial manufacturing; metals; and transportation and
logistics. In this global Industry 4.0 survey, 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.
This momentum reflects expectations of rapid
payoffs in business results. An overwhelming majority (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.
The
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.
The Web of Technologies
As your company becomes active in Industry
4.0, you’ll find the benefits go far beyond extending your digital reach or
selling new types of products and services. It will establish your company,
your employees, and your entire ecosystem of suppliers, partners, distributors,
and customers as a fully interconnected, integrated digital network, linked to
other networks around the world.
Three aspects of digitization form the heart
of an Industry 4.0 approach.
• The
full digitization of a company’s operations,
integrated vertically (to include every function and the entire hierarchy) and
horizontally (linking the suppliers, partners, and distributors in the value
chain and transferring data among them seamlessly). One example is leading-edge
inventory management systems, which connect retailers, distribution centers,
transporters, manufacturers, and suppliers. Each transparently 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 the chain to compensate for sudden
interruptions (such as those from natural disasters) and to easily test new
products and services in particular geographic locations.
A more advanced example is the design of
flexible fabrication facilities, which use programmable robots to perform most
of the operations. These represent the virtualization of the physical world.
New products — and, indeed, entirely new assembly lines — can be prototyped in
software before being put in place. It is almost effortless to simulate a new
plant design, test it for flaws, and invest in the physical machinery only when
it is clear it will work well. These advances make it much easier and less
expensive to bring new products to market, which in turn makes it easier and
less expensive to test new offerings without a full launch.
•
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 its results, along with the
activity of other products around them. When captured and analyzed, the data
generated by these products and services indicates 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.
Industrial products that track their own
activity will also provide powerful insights into those who use them: how they
operate, where they face delays, and how they work around problems. The
manufacturers can use this data to develop profitable new products and
services. For example, the manufacturers of printing machines have
traditionally made the bulk of their revenues from selling and servicing
presses. When the presses generate usage data, the manufacturers can become
brokers of press time, knowing when customers’ presses are available, and
negotiating printing prices accordingly.
•
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. Products
as diverse as aircraft engines and software are increasingly offered as
services, often on a subscription basis. One of many examples is 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. Currently, digital fabrication is
used primarily for prototyping. But as it becomes more sophisticated, and as
software and robotics are integrated into new types of assembly lines, high
levels of specification will become the norm. 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.
To understand why analytics are so important
to Industry 4.0, consider the last major operational revolution, the quality
and lean production approach that began in the Japanese auto industry and
spread around the world. Exercises such as the “five whys” and statistical
analyses taught manufacturing engineers — and people on the assembly line — to
monitor the variance in their efforts, seek opportunities for improvement, and
attune themselves to the flow of the work. This resulted in unprecedented
levels of quality and reliability. Industry 4.0 brings that same fine-grained
awareness into the machines themselves; it makes the value chain
self-conscious. The machines can be programmed, for example, to detect when
they are wasting material, taking an inefficient supply chain route, or going
awry in some other fashion. They can bring that information to the attention of
company leaders, in the same way that a GPS navigator can relay information
about traffic congestion to help a driver change course en route.
In the PwC study of Industry 4.0, the most
commonly cited difficulty in building an analytical capability was the lack of
people with the expertise to conduct the analysis. Other prominent concerns —
poor data quality, lack of access to the right data, and lack of top-level
support — reinforce what has long been known: Doing analytics is difficult. The
processes of Industry 4.0 provide mountains of data about customer demands and
value chain logistics. But if you can’t make sense of that data and use it to
boost efficiency, grow closer to your supply chain partners, and develop
products and services your customers actually want, much of the effort is
wasted.
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 also help you balance trade-offs: for
instance, the data might help an oil company decide to place a refinery
offshore, even though the costs are higher, because it will yield more uptime
and thus more profits.
Analytics can also help you meet aspirations
that seemed nearly impossible before. For example, many companies struggle to
improve their ecological footprint. 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
There are, of course, many challenges
associated with Industry 4.0. It requires openness with data and collaboration,
to an extent that feels uncomfortable at many companies. The requisite
technological capabilities and human skills are often in short supply. It
involves new and unfamiliar ways of organizing production. And, perhaps most
daunting, it represents a leap of faith; investments must be made today, while
many of the products and processes involved in the approach are still unknown.
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, 2016), “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.”
A small group of companies — 71 of the
respondents to our survey, representing only 4 percent of the total — have
chosen to lead the way. These “first movers” say they have invested 6 percent
or more of their revenues since 2013 in Industry 4.0 efforts, and also claim
high levels of digitization and competitive advantage. 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.
Some of the advantage enjoyed by first movers
has to do with the virtuous circle they kick off when they move more quickly
than competitors. 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. As a result, the
investment required for laggards to catch up will grow. Advanced implementation
of Industry 4.0 may provide enough competitive advantage that it will be seen
by investors as a qualifier for funding.
A still more compelling factor is the
platforms that first movers create. A platform is 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.
First movers on Industry 4.0 will seek a
similar advantage. 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 smoothly 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.
Smaller companies can also establish
themselves through the platform concept. Some solar panel manufacturers, for
example, have built innovative revenue models that are forerunners to Industry
4.0 models. Instead of directly selling panels to their business customers,
they sell the electric power those panels generate. The manufacturer installs
the panels (financing the hefty up-front costs), and maintains and upgrades
them at a compelling price. In exchange, the customer signs a 20- or 30-year
contract. The manufacturer assumes that no matter what happens during the
subsequent decades, its analytic prowess — incorporating weather, financial,
and operational data — will enable it to adopt changing technologies and
deliver energy at low cost. It will keep the panels clean, use sensors to detect
equipment breakdowns (solar panels have few moving parts, so breakdowns are
relatively rare), and upgrade the panels when photovoltaic technologies
improve.
Platforms are successful in the Internet 4.0
context because of a phenomenon known to economists as “lock-in.” 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 — it is increasingly difficult to switch. Every
new customer expects to be able to connect to its own network of businesses, so
new customers sign up as well. This network effect, as it’s called, further
reinforces lock-in.
For example, over the course of 20 or 30
years, a solar panel manufacturer’s platform will probably be linked through
Industry 4.0 relationships to a few other companies’ platforms. These in turn
will influence other choices that solar customers make. As these customers
add interrelated technologies, they will likely find their operations locked
into that ecosystem — while competitors’ customers might be locked into a
different ecosystem. Ultimately, two or three platforms will probably cover
most of the sector, just as Apple’s iOS and Google’s Android currently divide
the smartphone sector. In Industry 4.0, as in other technological fields,
whoever owns a platform owns access to the customer, and can place its own
brand on the aggregated work of many other enterprises.
The Globalization Accelerator
As the
fourth industrial revolution binds companies and countries ever more tightly
together through worldwide supply chains and sensor networks, it will
increasingly promote globalization. At the same time, it will link closely to
local companies. That helps explain why the survey results differed
considerably by region. Asian companies, especially those based in Japan and
China, expected the greatest gains from the digitization of Industry 4.0,
followed by companies in the Americas, and then Europe and the Middle East.
Japanese companies are already the most advanced in this field, followed by
those based in the U.S. and then Europe. Companies in all regions expect to
catch up within five years.
As Industry 4.0 takes hold around the world,
emerging nations probably have the most to gain. They can leverage digitization
to gain efficiency in their horizontal integration, working with the global
manufacturers to whom they supply all manner of raw materials, parts, and
components. The more closely they align with the platforms of Industry 4.0, the
more potential customers they will be able to reach.
This great integrating force is gaining
strength at a time of political fragmentation — when many governments are
considering making international trade more difficult. It may indeed become
harder to move people and products across some national borders. But Industry
4.0 could overcome those barriers by enabling companies to transfer just their
intellectual property, including their software, while letting each nation
maintain its own manufacturing networks. Future advances in 3D printing, for
example, will enable virtually any company to set up shop anywhere, and to
fabricate components, spare parts, and (potentially) industrial equipment
without having to ship the finished pieces. Operations will become more global
and more local at the same time.
Unresolved issues abound. 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
will cradle-to-grave tracking of products make it easier to enforce global
rules about IP theft, and to trace violations? The centuries-long process of
globalization has always presented new challenges and new risks; now, as we
stand on the brink of an entirely new technological way of life, the challenges
and risks may come in unfamiliar new forms.
Your Company’s Path
Digital capabilities are vital to move
forward with Industry 4.0. Developing them takes time and concentration; a
step-by-step approach is important. But you must move with alacrity, so you
don’t forfeit the first-mover advantage to competitors. These six steps have
been critical for the successful companies we’ve seen.
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. Not every project
will succeed, but they will all help you learn the approach that works for your
company. With early successes, you can also gain buy-in from the organization,
and secure funding for a larger rollout. For the early pilots, define a
relatively narrow initial scope, but incorporate the end-to-end concept of
Industry 4.0 — from materials to the customer delivery (and services after the
sale). Design pragmatically to compensate for standards or infrastructure that
doesn’t yet exist. 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.
Building
on the lessons learned in your pilots, map out in detail the capabilities
you need to achieve your goals, and develop a blueprint for building (or
acquiring) those capabilities. Include technological enablers, such as an agile
and highly functional IT infrastructure with well-designed user interfaces,
that can propel your business processes forward. Also include 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.
Success
with Industry 4.0 depends on your prowess in unlocking data possibilities, and
using analytics in creative and effective ways. 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 — for example, your
quality, logistics, and engineering functions (which may have had separate and
incompatible monitoring systems before this) — and apply these methods to as
many domains as possible, particularly those that differentiate your company or
attract customers. Learn to get value out of data through intelligent systems
design, using real-time analytics to tailor products to customers and
continually improve your processes. Think big, but start small, with “proof of
concept” projects.
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. Foster a digital culture: All your employees will need
to think and act like technologically adept natives, willing to experiment,
learn new ways of operating, and adapt everyday processes accordingly. Remember
that change doesn’t stop once you’ve implemented Industry 4.0. 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. Use partnerships or
align with platforms if you cannot develop a comprehensive offering on your
own. You may find it difficult to share knowledge with other companies, and you
may prefer acquisition to collaboration. But look for ways to bridge your own
company’s boundaries — perhaps with technical standards — so that you can
profit from being part of platforms that you don’t fully control. 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.
Finally, don’t buy the hype. Buy the reality.
Industry 4.0 will be a huge boon to companies that fully understand what it
means for them. Change of this nature will transcend your company’s boundaries
— and probably the national boundaries of the countries where you do business.
by Reinhard Geissbauer, Jesper Vedsø, and Stefan Schrauf
http://www.strategy-business.com/article/A-Strategists-Guide-to-Industry-4.0
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