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What is Industry 4.0 – Something New or just “Ground Hog Day”
If you listen to the business media there is a revolution coming to manufacturing. It is called Industry 4.0, a fourth industrial revolution based on emerging technologies such as “the internet of things”, “big data”, advanced automation and additive technologies. What is Industry 4.0? In fact Industry 4.0 is a term developed by German government to describe its high technology strategy for manufacturing. Like all trendy new buzzwords, however it has been quickly grabbed by consultants and the media and turned in to a “catch all” term used to describe, well, whatever people want it to describe!
So what is Industry 4.0? What is new and different about it, what does it change and what should you be doing about it? I would argue that the answer to all three questions is “not much”. The reality is that we have become accustomed to a blistering pace of technological change in manufacturing over the past 20 years. Industries as old and traditional as metalworking and printing have been transformed by the combination of highly automated digitally controlled machinery and highly integrated computer aided digital work flows. This transformation is continuing with, for example, most enlightened metal working companies maintaining a close eye on the progress of 3D printing technologies for metal. I would therefore argue that Industry 4.0 is a term to describe a process of transformation that has been going on for a couple of decades and is only showing moderate signs of acceleration.
The cumulative effect of these changes are, however, quite significant. Firstly, in many sectors of manufacturing, the degree of automation and complexity has increased significantly. As a result, there is far less labor involved in actual production and (frequently) far more labor involved in what I call “pre-production” activities such as sales, design, specification, programming, artwork preparation etc. The “pre-production” labor tends to be highly skilled (often engineers). With manual tasks increasingly replaced with automated machines, the days of manufacturing being an attractive career choice for people without a good education are long over. This also means that increasingly the focus for improvement and efficiency needs to be on these pre-production processes rather than the actual production process. In many advanced manufacturers the combined number of people involved in engineering, procurement, programming, sales, sales support and design far exceeds the number of people on the factory floor. As well, the value delivered to customers is increasingly related to software, after sales support and design rather than the physical product. Therefore an improvement focus solely on productivity in production will miss the largest opportunities to reduce waste and increase value in your business.
Another key change enabled by Industry 4.0 and by the general advance of digital technology is the increase in customization. Technology is enabling businesses to offer customers a “one off” product at comparable cost to a standard “off the shelf” product. The internet allows customers to “design their own” product in many cases. This is already happening in industries such as commercial printing and apparel. Customization means that traditional approaches to lead time, inventory, supply chain and order processing are being stretched and challenged. This is a trend which is highly desirable to customers and it will continue.
In summary, manufacturing businesses need to keep up to date with emerging technologies to stay competitive. Their business improvement focus needs to go beyond the factory floor and encompass all pre-production processes such as sales, design, procurement etc.
So, that is what is changing, how about what is staying the same? Well the answer is that there is a lot that is staying the same! Some of the key lessons I have learned about automation and technology over my years in manufacturing will not change:
- People: No matter how automated your factory or engineering processes are, no matter how much data you collect or how well you analyse it, the performance of your business depends entirely on the performance of the people your business. It is people who develop your technology, people who install and commission it, people who operate it and people who improve it. Therefore, the key to success in Industry 4.0 is the same as it has always been – excellent leadership. You need an effective daily management system to drive the day to day achievement of targets and every day improvement and problem solving. You also need a strategy deployment process to align every level of your organisation with your strategy. Finally, and perhaps most importantly, you as a leader need to demonstrate Lean Leadership behaviours in everything you do. This means things such as always showing respect for people and their work, expecting high standards (and living by those standards yourself) asking questions before you give directions and noticing improvement or problems on your frequent visit to the workplace.
- Complexity Costs: The problem I have always had with automation is that engineers (like me) are very good at quantifying the benefits of automation and technology, but not so good at defining the costs. Increasing automation can increase the complexity of your business. As processes and systems become more interconnected, a risk of a failure at one point can impact the whole process. Therefore, maintenance is critical, as is ensuring that staff have the skills to operate equipment properly. As equipment becomes more complex, problem solving also becomes more difficult. Expensive specialized resources may be required to diagnose and fix problems. This expertise may not always be available (may not even be in your country) and so long delays can result. Likewise, systems to collect and manage data require resources to maintain the integrity of that data and to interpret it. I have seen factories that have become so automated that no-one really understands them. Then when something goes wrong, the consequences can be severe. Often when all these costs are added up, technology which looks superficially attractive, is actually not. More commonly, the factors listed above mean that when the whole business process (value stream) is considered, the investment in automation at one point in the process fails to deliver the expected returns. This is very common with software such as ERP systems and Business Intelligence Systems. Indirect maintenance costs such as data cleansing are not factored in to the investment calculation and savings in areas such as inventory are often based on heroic assumptions on customer forecast accuracy.
- Shareholder value is driven by Return on Assets. In business most managers are very focused on profit and return on sales. However, for banks and shareholders, what matters is the return achieved on the money invested in the business. Businesses usually have choices how to invest that cash. Capital intensive improvements such as automation and software may appear to offer an easy path to cost savings, but they come at a price on the company’s balance sheet. Applying Lean thinking, solving problems every day and engaging your people can create cost savings that are well above what automation has to offer and can delivered at a fraction of the cost.
- Beware Stranded Assets: The very change that is driving the move to Industry 4.0 is also a key risk to investments in new technology. Business is changing and products are changing constantly. The products that you make today may not be what you make tomorrow and the customers you have today, may find an alternative to you tomorrow. Modern automation is flexible, but this flexibility has its limits. In robotics, for example the majority of investment is usually in application specific elements such as grippers, enclosures, programming and fixtures. If your product changes, often this investment is no longer usable. I have seen a lot of dusty robots sitting idle over the years.
- Purchased Technology rarely provides a Sustainable Competitive Advantage. The competitive advantage you gain from new automated equipment or systems only lasts as long as it takes for your competitor to buy the same piece of equipment. The only know-how that will deliver sustainable competitive advantage is the know-how your business owns exclusively, which usually means know-how you have developed yourself. I have worked in many industries where competitors have engaged in an “arms race” to purchase and install the best, fastest and most automated equipment. Competition then means that cost savings from these investments are inevitably passed on to customers as lower prices. The winners are the customers and the technology suppliers, never the companies installing the technology. You may be forced to invest in technology to stay in the game, but don’t expect purchased technology to keep you ahead of the game.
So what is Industry 4.0? To summarize, I would argue that “Industry 4.0” is not new, but simply a continuation of technology driven change that has been occurring for more than two decades. If your business does not understand the new technologies entering your market and is not ready to invest in the right technology at the right time, then you will struggle to stay competitive.
However, remember the five basic rules:
- People are the real driver of the success of your business, not machines or software.
- Recognize the true cost of any technology you install as well as the benefits.
- Process improvement through Lean will often deliver equal or better business performance improvements than automation, without the massive investment.
- Make sure that your technology investment will not be “stranded” if your products or customers change.
- Recognize that competitive advantage comes from know-how you develop yourself, not know-how you buy. Your competitor can (and often will) buy the same automated technology and match what you can offer.