Industry 4.0, the Smart Factory & the Digital Supply Chain

Digitized Supply Chain: Transformation from Physical to Cyber

What is Industry 4.0?

Over the course of human history, mankind has experienced an evolution in industry.  Each major disruption caused torrents of changes to existing operations and proved to be transformational.

The first industrial revolution began in the 1780s with the introduction of water and steam-powered mechanical production facilities.  Approximately thirty years later, the first electricity-powered assembly line was constructed in 1870, heralding the second industrial revolution.  This facilitated the development of mass production, a revolution responsible for bringing development of the many products on which we rely on in our daily lives.

In the late 1960s, the first programmable logistics controller (PLC) Modicon 084 was developed.  This device enabled production automation through the use of electronic and Information systems and initiated the third industrial revolution.

Industry 4.0

We are witnessing the birth of the fourth industrial revolution, commonly referred to as Industry 4.0 in our time, the advent of digital transformation.

Today’s technology innovation impact is pervasive and creating massive change.  Today, physical systems such as robotics and machines are able to be controlled by automation systems that utilize machine learning algorithms, requiring only minimal input from human operators.  Industry 4.0 utilizes the principles of interoperability (cyber-physical systems that are connected and in communication), virtualization, decentralization, real-time capabilities, service orientation and modularity.

Industry 4.0 is an ongoing evolution in the revolutionary processes that have changed and shaped the world enabling greater sharing of information in real time and collaboration. The concept of Industry 4.0 brings together the digital and physical worlds.  Using information technology and operations technology, it is increasingly possible that not just industrial manufacturing will be affected.  Next, the supply chain can be transformed from a sequential system to an open, interconnected system (a digital supply chain).

First, let’s take a look at how Industry 4.0 is impacting the industrial manufacturing world.


Industry 4.0:  Industrial Manufacturing and the Rise of the Smart Factory

By linking sensor data from systems used to monitor physical processes with simulation models and virtual plant models, a virtual copy of the Smart Factory can be created.  The Smart Factory uses technology to collect data that is then analyzed and used to provide immediate insight.  Smart Factories are by their nature, flexible and open to adaptation for the changing requirements of individual modules.  As a cyber-physical system (CPS), the Smart Factory is engineered so that its operations can be monitored, coordinated, controlled and integrated via a computing, communication core.  The CPS is designed to enable the addition of new capabilities to physical systems by merging computing and communication with physical processes.

Cyber-physical systems have tremendous benefits.  Safer and more efficient, these systems can be built and operated at reduced cost, as compared to that of other factories.  New capabilities can be added on continually to form increasingly complex systems that have a lower cost of computation, networking and sensing.

Creating a true “Smart Factory” would mean that the most value could be derived from inside the industrial manufacturing facility as well as across the entire supply chain network.  In order to unlock the full potential of the digital supply chain, it is necessary to have horizontal integration through operational systems that power organizations as well as vertical integration through manufacturing systems that are connected and an end-to-end integration that permeates the entire value chain.

The primary reasons for investing in a Smart Factory include:

  • Asset efficiency: translates into reduced asset downtime, optimized production capacity and decreased changeover time
  • Better quality product with lower rates of defects and product recalls
  • Lower cost due to more cost efficient processes, better quality products (which tends to reduce warranty, maintenance and product recall and return costs)
  • Improvement in workforce safety due to decreased incidence of industrial accidents and the reduced need for activities that require repetitive, fatiguing motion
  • Enhanced sustainability due to optimized resources and a smaller environmental footprint
The technological development of Industry 4.0 involves cyber-physical systems, namely the Internet of Things (IoT) and the Internet of Services (IoS) to form the Smart Factory.  Cyber-physical systems (Smart Factories) can monitor physical processes, create a virtual copy of the physical world and use available information to make decentralized decisions.

The trends that have accelerated the drive towards adoption of the Smart Factory are:

  • Dramatic and rapid advancement of technological capabilities
  • Increase in complexity of the supply chain
  • Global fragmentation of demand and production
  • Increased pressure from competitors and unexpected sources
  • Continual labor challenges
  • Realignments in organizations due to the merger of IoT and IoS
The Smart Factory is more than simply another automated production facility that executes the performance of single, discrete tasks or processes.  It has greater capabilities than simply making and executing on “decisions” such as opening a valve or turning on and off a pump.  Smart Factories utilize Artificial Intelligence (AI) in concert with cyber-physical systems.  This enables them to operate with increasingly higher degrees of sophistication and to optimize complex decisions that are typically relegated to humans.

The increase in computing power and analytical capabilities, new ecosystems of “smart” connected assets, cloud technology and other advances in information technology systems have enabled the ability of the Smart Factory to adjust to and learn from data in real time.  This empowers the Smart Factory to operate in a more responsive, pro-active, predictive manner so that the organization can reduce or eliminate operational downtime and other productivity problems.

Although systems and production facilities have long been automated and connected, the power of the Smart Factory is its ability to continually evolve to meet the changing needs of the organization as it dynamically shifts to meet customer demands, market expansion needs, development of new products and services and much more.

Although today’s factories utilize automation and have evolved tremendously, the Smart Factory concept represents a dramatic leap forward in the evolution of manufacturing companies and their position in the supply chain.  A Smart Factory is a completely connected, flexible system that relies on a constant flow of data from connected operations and production systems-essential to enabling the Smart Factory to learn and adapt to new and changing demands.

With seamless connectivity, a Smart Factory is able to continuously capture data using sensor and location-based datasets and use this to collaborate with suppliers, customers and departments within the facility.  The Smart Factory operates in a manner that continually optimizes performance to enable predictable, reliable production capacity emphasizing manufacturing efficiency and increased asset uptime with minimal human interaction.

Live metrics and resources support consistent, rapid decision making.  The Smart Factory relies on real time data regarding customer demand forecasts as well as transparency of customer order tracking. 

The system acts proactively identifying and resolving anomalies.  Restocking and replenishment are handled automatically.  Monitoring in real time helps monitor safety issues and identify supplier quality issues.

Using a highly flexible, agile scheduling and changeover methodology, the Smart Factory is able to implement product changes so that the impact can be experienced in real time. In addition, manufacturing facility layouts and equipment are readily configurable.

Industrial manufacturing Smart Factories extend well beyond simple automation and self-optimize performance across a broad network.  These systems self-adapt to and continually learn from new and changing conditions in real-time or nearly real-time conditions.  A Smart Factory is an industrial automation wonder, able to run entire production processes autonomously.  It can be connected to a global network of similar production systems and the digital supply chain as a whole.  We are truly living in the digital transformation age.

Technology has advanced rapidly since the turn of the century.  Recently, there has been increased interest in developing highly flexible solutions to solve challenges, in and outside facilities and the supply chain network.  Today, it seems that most, if not all, of the pieces of the puzzle can be assembled to create an incredibly adaptive production system and agile supply chain network ecosystem.

The Rise of the Digital Supply Chain, the Connected Enterprise

Smart Factories are only one step in the supply chain management process.  Traditionally linear, supply chains today are actually being transformed into highly interconnected, continually changing systems that integrate information seamlessly to advance production and distribution.  Today, this is all about connecting the physical to the digital world.

Information technology, data analytics and business intelligence are transforming the business landscape and changing the way we live, make decisions and interact with the world.  From Smart watches and other IoT devices to 3-D printers, autonomous vehicles and intelligent robots that wash our floors and produce our goods to drones, technology is everywhere.  We are interfacing with our world via sensors that are continually collecting data that is then analyzed and used for a wide variety of purposes. Look out traditional business models.

Digital business is altering traditional business processes by incorporating and analyzing huge volumes of data.  Yes, Big Data is definitely here to stay.

Did you know that
  • Since 2014, more data has been created than in the entire previous history of humankind?
  • By 2002, approximately 1.7 megabytes of new information will be created every second for every single person on Earth
  • Less than .5% of all data is actually ever analyzed and used (Wow! What a waste!)
Is the digital supply chain transformation the new reality?  How imminent is the evolution of the digital supply chain?  Are supply chain logistics professionals actually planning for this?  Apparently so.  80% of the respondents to the 2017 annual MHI survey on next generation supply chains acknowledged that they believe that the digital supply chain will be “the predominate model within the next five years”.  In order to bring the vision of the Industry 4.0 supply chain to life, traditional supply chains must evolve toward a “smart”, connected efficient supply chain structure.

In the past 10 years, almost every industry has been affected by the trend towards digital transformation resulting from the dramatic exponential gains in computing power. Of all the industries, however, perhaps none has been impacted more than the logistics industry.

By means of example, the Cyber Monday 2016 transactions equaled over 1 BILLION DIGITAL TRANSACTIONS for that one day of the year for only one online retailer!

Cyber Monday 2016
For years, the supply chain has existed as a series of separate siloed steps from product development and marketing through production and distribution to the product’s final destination:  the customer.  Using the Industry 4.0 digitalization concept, this changes entirely into a completely transparent, fully integrated supply chain ecosystem that can react in real time.

The digital supply chain depends upon technology including but not limited to:

  • Integration planning and execution systems
  • Supply chain logistics visibility
  • “Smart” procurement and warehousing
  • Efficient spare parts management
  • Advanced analytics
  • Digital supply chain enablers
  • Autonomous B2C logistics operations

The more that these technologies are used in concert, the stronger, more resilient and responsive the digital supply chain network will be.  The digital supply chain will enable companies to compete more effectively and will provide advantages including efficiency gains, decreased time and labor costs and much more.

As the supply chain becomes increasingly digital, the “rough edges” will wear off.  Increased visibility will provide transparency into the needs and challenges of supply chain network partners.  Because the entire supply chain ecosystem will be fully integrated and digital data will flow seamlessly, supply and demand signals will initiate at any point in the network and be able to travel in real time throughout the ecosystem.  Think of how this will change supply chain logistics networks!  If there is a shortage of a raw material, sudden influx of consumer demand due to a “hot” new trendy product or supply chain disruption due to a natural phenomenon, the entire ecosystem will know about it in real time and be able to react accordingly.  This will also enable logistics network partners to anticipate and act pro-actively to avoid supply chain disruptions.

Companies will need to invest in an array of digital technologies including the cloud, Big Data, IoT, augmented (virtual)) reality and more to enable new business models and facilitate the transformation to real time, shared data.  Through digital transformation and integration of every link across supply chains, enterprises will find new ways to operate, inter-relate and do business.  A complete, holistic view of the supply chain will be enabled, facilitating more natural collaboration and responsiveness from business to business and business to consumer.  As new technologies such as Big Data analytics, the cloud and IoT are increasingly adopted, consumers, employees and businesses are increasingly forcing companies to develop more responsive and reliable supply chains.  This is causing a “push and pull” effect on the supply chain.


Moving Towards the Digital Supply Chain (DSC)

Making the digital supply chain a reality will take far more than investing in technology.  Equally importantly, companies need to recruit, hire and retail people with the right combination of expertise and education.  Digital supply chain management will be an everyday reality and traditional business models will become outdated.  Making the digital supply chain work will necessitate a shift in the culture of organizations.

Get ready for transformation!  By harnessing the power of the digital supply chain and its elements, companies will be able to benefit from tremendous advantages in flexibility, efficiency, cost reduction and customer service.  Using digital technologies, business models will be altered, processes will be altered and new opportunities and means of producing revenue will be uncovered and developed.  This is digitalization.

According to a study by Price Waterhouse Cooper (PwC), already 33% of the 2000 industrial companies that participated report that their organizations have already achieved advanced levels of digitization.  72% of respondent companies indicated that they anticipate achieving advanced levels of digitization by 2020.  Internal improvements and collaboration are expected to generate a 3.5% p.a. in cost reductions over the next five years.

Since a 2013 study by PwC, noticeable investments have been made and results recognized.  Early adopters of the digital supply chain plan even more far reaching highly digitized horizontal and vertical value chain processes and change is occurring at the fastest rate in areas closest to the core business.  First movers (early adopters) rated themselves as being ahead of their primary competitors in terms of digital supply chain management and operational capabilities.  These companies are anticipating the most significant benefits from digital transformation of their value chains and have already gained a “nearly insurmountable advantage over competitors”.

According to some industry experts, the digital supply chain has been forming for years.  As 3PLs, warehouse operators and distribution centers utilize radio frequency barcode scanners, mobile computers and warehouse management systems to process goods and streamline inventory management operations, they are operating in the digital world.  The same is true for warehouses and third party logistics providers that use RFID, EDI and WMS.  The difference is the new connectivity across the supply chain network to other partners using cloud computing solutions to transmit data comprehensively and in real time throughout the digital supply chain ecosystem.

The digital transformation, reproducing existing processes or optimizing manual and paper-based processes is known as digitization.  The real value is moving beyond digitization to digitalization.  Although digitalization involves greater investment of time, labor and resources, the return on investment is higher.  Digitalization forces companies to go back to basics, to review the value proposition, not merely operational processes.  The point of digitalization is to deliver better products, services and an enhanced customer experience.  Through the process, considerable effort and resources may be expended.   Rethinking often leads to re-imagining and re-engineering.  This often results in using the lessons learned to  improve upon the experience, products, services and operations.

Yes, it may seem daunting, but the digital transformation will help businesses to be more agile, respond more quickly and operate more efficiently-all critical in today’s fast-paced, changing world.



Whether your business operates strictly in North America or across the globe, Industry 4.0, the Smart Factory and digital supply chain will undoubtedly have an impact on your company.  The world is undergoing another massive transformation, to the fourth industrial revolution so you better get ready.  The new paradigm unites the digital world with that of the physical universe.  Using new information technology devices, IoT, IoS, augmented reality, 3-D printing, cloud computing and other innovations, the industrial world is being transformed so that data can be shared, visualized and made transparent in real time.

Using digitization in combination with the wide array of new information systems and resources enables companies to collaborate, become pro-active and interact internally and with other organizations to become more efficient and produces tremendous cost, time and labor saving benefits.  It also enables companies to compete more successfully.

The digitization of supply chain management networks continues to increase.  More companies are investing in new information technology tools, resources and skilled workers to implement the vision of a connected world.

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