Download PDF Version
What does Industry 4.0 mean for you? There is a lot of buzz about what the “next industrial revolution” looks like and the potential it holds, but the journey looks different for every organization, and so may the end destination.
It’s very easy to look at General Electric’s transformation to “digital industrial” and say, just do what GE is doing. For the world’s largest manufacturers with billions in revenue, adopting GE’s digital transformation playbook may not be so farfetched. But for middle market firms—the heart and soul of the American manufacturing industry—revolutionary digitization can feel aspirational, not inspirational. Cutting-edge technologies like artificial intelligence, robotic process automation or in-line 3D printing might seem like distant dreams for manufacturers that are still focused on migrating to the cloud or just dipping their toes into shop floor automation.
However, stagnation is a death knell in today’s manufacturing environment. Technology, competition and shifting consumer expectations have changed the game, and middle market manufacturers can’t afford to sit back and watch how it’s going to play out. Manufacturers in China and India are investing in automation and innovation to better compete on a global scale and cater to growing customer demand for speed, convenience and customization. And Germany—where the term “Industrie 4.0” originated—has arguably leapfrogged the U.S. in manufacturing innovation. It shows: About a fourth of Germany’s GDP growth comes from its manufacturing sector, and they’ve lost only a small fraction of manufacturing jobs compared to peer industrialized nations.
It’s not time to bemoan the end of the U.S.’ manufacturing reign yet, though. The race to innovate is far from over—and reclaiming the crown may ultimately come down to the industry’s middle market.
Industry 4.0 and the Middle Market Maturity Continuum
Middle market manufacturers are arguably in the best position to take advantage of the changes that Industry 4.0 is introducing. More money than the average startup means more funding and resources for innovation (and more room for smart risk-taking); less bureaucracy and red tape than the big boys means more flexibility, collaboration and faster decision-making.
Just look to Germany’s midsized manufacturers for proof: According to this Harvard Business Review article, German middle market organizations issue five times as many patents per employee as large corporations. Clearly, the middle market can’t afford to think of Industry 4.0 as an idea just for the big guys.
But the U.S. manufacturing middle market is far from one big homogeneous group; it represents a wide spectrum of manufacturing capabilities deployed in different ways with different priorities and varying levels of technology and supply chain complexity. Nor do these manufacturers engage on an even playing field: New middle market entrants—untethered by traditional rules—are starting out with the tools and technologies fundamental to competing in an Industry 4.0 world. Their more established competitors may now need to scramble, retrofitting just to play catchup.
The keys to success are: 1) establishing a clear, shared vision of the future 4.0 value chain environment of your industry and your company in that industry; and 2) developing a tailored, prioritized action plan designed to create momentum and forward progress. A plan that establishes the right starting point based on a realistic assessment of where you are right now will be critical. For example, the Industry 4.0 readiness of a 10-year-old, $100 million electronic equipment manufacturer may look completely different from that of a 50-year-old, $500 million familyowned steel manufacturer. The steel manufacturer may still have legacy IT infrastructure that isn’t compatible with modern software applications and development processes. The electronic equipment manufacturer, on the other hand, may have built its workflows in the cloud from the very beginning.
While every organization has a different implementation trajectory, real and meaningful progress is possible for them all. For some manufacturers, the Industry 4.0 journey might be evolutionary instead of revolutionary—and that’s okay. Small, incremental innovations add up over time, and as long as these “incrovations” are aligned with the overarching Industry 4.0 vision, what is evolutionary today may be revolutionary when you look back five years from now.
Forget the Jargon: Industry 4.0 = Value Creation
You don’t need to be a tech whiz to turn the Industry 4.0 phenomenon to your advantage. The opportunity boils down to three areas of potential value creation: bottom-line impact, top-line growth and risk mitigation.
While value is created in different ways depending on where you are on the maturity continuum, incremental value is available to every manufacturer—but it must be rooted in incremental improvements to your current capabilities. It can start with a single improvement initiative in a single functional area. Even small, functional change has ripple effects throughout the entire enterprise. These single, incremental improvements should ultimately be performed against the backdrop of your overarching Industry 4.0 vision, strategy and roadmap to drive tangible ROI enterprise-wide.
The key is to flip your thinking. Instead of focusing on specific technology features or tools, let your goals for value creation lead the way. The real goal for your business isn’t, for example, to have predictive maintenance capabilities; it’s for that predictive maintenance investment to reduce your mean time between failures, optimize return on invested capital and ultimately preserve or enhance asset value. Start with your high-level objective—whether it’s higher levels of performance agility, better inventory turnover or a reduction in production errors— and work backwards from there, asking the question, “How will information transparency, availability and automation unlock business value to this capability?”
Keep in mind that value creation opportunities will also evolve as you progress in Industry 4.0 maturity. Digitization can fundamentally change the nature of your relationships with suppliers and customers, fostering collaboration and breaking down traditional barriers. The linear supply chain will morph into an integrated value chain of mutually beneficial relationships where suppliers and customers collaborate to achieve efficiencies and lower costs by exchanging information and securely integrating systems and processes.
The integrated value chain is predicated on a new level of transparency and information sharing, including constant, bidirectional communication and inter-company visibility into everything from inventory condition, supply status and shipping delays to future-focused factors predicting shifts in demand. This flow of information and aggregated business intelligence across the supply network is often referred to as the digital thread, the lifeblood of Industry 4.0.
The real value of the digital thread comes from enabling faster speed to market and speed to decision, empowered by access to more relevant and timely information, enabling better business intelligence and greater intimacy with supplier performance and customer behavior. This sets you up for synergistic co-creation of value, where savings and opportunities are generated and shared between business partner organizations, resulting in “win/win/win” relationships.
Getting Started: Assess Your Industry 4.0 Maturity
Before fretting about whether you need to invest in AI or predictive analytics, elevate the discussion: Assess where your business is on the continuum of Industry 4.0 implementation readiness.
Do you have the foundational elements in place to start monetizing your data or driving dynamic forecasting? If not, that doesn’t mean it’s time to throw in the towel. It’s imperative to understand that every company can make advancements, but you can’t run before you walk.
Change doesn’t occur in a vacuum, nor does it happen overnight. For the middle market, the road to Industry 4.0 is less one of digital transformation than it is of intentional digital maturity linked to business value, where disruptive technology is one small part of broader systemic change.
Acknowledging that every manufacturer, especially in the middle market, is at a different point in embracing data and technology, BDO has developed an Industry 4.0 Maturity Model across six dimensions: security, technology, data, process, organization, and governance. These six dimensions are interconnected—and will become even more intertwined as your organization becomes increasingly digital—and support our view of an integrated, crossfunctional approach to Industry 4.0 implementation. Clearly, each dimension unlocks several sub-dimensions, but the central point remains: This is much more than simply a technology opportunity.
Define Your Vision
Once you know where you are today, you can define where you want to be tomorrow, next year and five years down the line.
Change is unpredictable and rarely linear. While setting a strategic vision can point you in the right direction, any milestones you set that are contingent on the success of prior achievements may need to shift or change entirely based on empirical feedback. As the external digital environment evolves, so, too, may your desired outcomes. Continuous Industry 4.0 strategy refinement is prudent and even necessary.
Instead of focusing on specific features or tools, define your vision and set KPIs based on value to the business. The end-goal of Industry 4.0 isn’t flash. Regardless of your current maturity level, it’s all about creating value from your data. Prioritize Industry 4.0 investments based on where you see the biggest gaps and greatest opportunities.
A significant catalyst to Industry 4.0 adoption is the consumertechnology-driven evolution of customer behaviors and expectations. The best enterprise technology innovations are those that are developed to solve existing customer challenges or provide your business with a competitive advantage to better serve them. Technology that is “bleeding edge” but doesn’t deliver value to the customer—or its benefits come at the cost of something else the customer values—won’t truly move the needle. Rather than retrofitting technology to the customer, the customer can help your leaders set value priorities.
Set Up Your Pilot
Iterative, incremental innovation in small pilots enables faster decision-making and implementation.
Once upon a time, Facebook’s official motto was “move fast and break things.” That motto may have worked in the early years of Facebook’s growth trajectory and was even included in their IPO paperwork. By 2014, however, that philosophy of throwing spaghetti at the wall to see what sticks no longer worked for a company with $2.5 billion in revenue. In April of that year, Facebook officially adopted a new motto: “Move fast with stable infra[structure].”
Facebook’s shift in philosophy reflects the middle market’s innovation dilemma: Fail to act quickly, and you fall behind; act too fast, and you risk messing up. Failure is a necessary part of the innovation process. But to make failure profitable, you not only need to fail fast, you need to fail smart. For most middle market manufacturers, that means dreaming big, but starting small and scaling up what works fast.
That’s where the three I’s of innovation come in. Iterative, incremental innovation (“incrovation”) in small pilots enables faster decision-making and implementation, as well as the ability to adapt or change course at any point. Think of each pilot as an experimental sandbox, where the goal is to learn quickly and apply those learnings to the next experiment and/or scale the solution.
Your Industry 4.0 plan needs to have built-in flexibility to respond and adapt to real feedback and results. Once you have discovered something that works well, you must be prepared to absorb, integrate and expand on these successes without the traditional organizational friction—bureaucracy, politics and change aversion—that’s common in established businesses.
Map Internal and External Cross-Functional Processes
When dealing with complex, multi-stakeholder systems, change doesn’t occur in isolation.
Every action triggers a reaction, meaning functional change in one area will have effects elsewhere in the network—some of which may not be expected or good. By the same token, the interoperability (or lack thereof) of external systems or inputs may impact the efficacy of the proposed functional change. As a result, an end-toend process view of any solution will help you both mitigate the risk of unintended consequences and capitalize on the full process value of that solution.
For any Industry 4.0 initiative to succeed, organizations need to understand how systems information, processes and external entities interact and interface, where there are interdependencies, and how these elements cross borders and organizational boundaries. While each pilot iteration can be worked on modularly—broken down into independent tasks to allow for concurrent progress on interdependent areas—testing must always consider cross-functional interactions and feedback.
Going back to our Industry 4.0 Maturity Model, think about all six dimensions as interrelated, interdependent components of the planning process. Any change in technology will have corresponding implications for required data inputs, connected processes and security protocols, thus potentially introducing new vulnerabilities. The ability to enact the desired change is also contingent on how it is rolled out. Your Industry 4.0 roadmap should account for these relationships both within your organization and across the boundaries with external entities, and test each initiative against them, adapting as needed along the way.
Engage External Stakeholders
Your organization’s Industry 4.0 initiative will likely create ripple effects across the value chain and require external process and technology changes.
For example, if your focus is on traceability for supply chain resilience, do you include mandates on RFID tagging in your vendor contracts? If you want to improve demand forecasting through predictive analytics, do you have access to the data you need from your top 100 customers—and are their platforms compatible with your systems? Can your information systems communicate with your suppliers’? Equally important, can your customers’ information systems communicate effectively with you?
Even if total value chain integration is a faraway goal, you still will need to think about external interoperability and processes for collaboration. Sharing sensitive data to an external network is easier said than done. Doing so requires a fundamental shift in relationships between suppliers and customers, and raises new questions about data privacy and information security.
When planning your Industry 4.0 evolution, view your key suppliers as an extension of your own organization. You may even want to consider inviting these external parties into planning conversations. Collaborative planning with key customers and suppliers early on in your Industry 4.0 journey will help accelerate solution implementation and lay the groundwork for secure co-creation of value.
Prepare Your People
Too often, organizations embark on a digital initiative but forget about the human element.
Even as processes become automated and artificial intelligence takes over data-driven decision-making, change still needs to start with people. Technology for the sake of technology is a wasted investment; you need your employees to understand why they need to leave the status quo behind, believe in the strategic vision and feel engaged in the process. Most importantly, they need to understand what’s expected of them and have the resources, training and development to get to the new destination.
Another piece of the people puzzle is collaboration between functional areas that have historically operated in silos. Building cyber-physical systems that integrate software and information with physical processes requires the alignment of information technology with operations technology (OT). If the IT and OT departments aren’t in constant communication and committed to learning together, either can become a bottleneck in the roll-out of new capabilities.
In some ways, Industry 4.0 is less about revolutionary technology than it is about a philosophy of continuous improvement, and that mindset is integral to success, bearing in mind that the journey is more like a marathon than a 100-meter dash. The hardest piece of this transition may be fostering a corporate culture that embraces constant experimentation and learning—one in which short-term mistakes and failures are expected and accepted in the pursuit of long-term innovation and value creation.
Racing Forward Without Tripping
Industry 4.0 is the inescapable future of manufacturing—and the middle market is not exempt.
No manufacturer, regardless of size or ingenuity, is immune to technology disruption. The question companies need to ask themselves isn’t whether they can afford to invest in the future of manufacturing; it’s whether they can afford not to. And if middle market manufacturers play their cards right, they can come out on top of the industrial revolution by capitalizing on the benefits of their relative size and market position.
While inaction isn’t an option, risk must be weighed against opportunity. Technology can transform a business, but it can just as easily destroy it. There are essential building blocks for each maturity stage of Industry 4.0 that must be firmly embedded into the business before advancing to the next level. Experimentation is a necessary part of progress, but if you’re focused on speed over smarts and skip the basics, those shortcuts may come back to haunt you.
The middle market race to get ahead should be measured, tied to incremental milestones and checkpoints, with a careful eye toward risk management and scalability. Start with an honest assessment of your organization’s current Industry 4.0 readiness and set flash aside in favor of ROI and continuous improvement.
Read more BDO Insights