Industry 4.0: beyond smart factories to value creation across the entire supply chain

Source: Management Scope (April 2020); Interviewer: Arthur van Schendel | Author: Angelo van Leemput

Technologies are enhancing each other, processes are connected, the computing power is enormous and all this means that the previously unthinkable is now possible. ‘It’s leading to an explosion of interesting applications.’ But what should companies do with it? Professor of Operations & Supply Chain Management Ann Vereecke explains the possibilities offered by industry 4.0.

At the end of the 1980s, engineering student Ann Vereecke visited Flanders Technology, a major international trade fair in Ghent at which companies showed off their latest gadgets in the domains of computing, software, robotics and artificial intelligence. She couldn’t believe her eyes. The world was changing, automating and getting smaller as a result of communication. We were in the middle of the third industrial revolution. Over 30 years later, Vereecke has grown into a leading management thinker on what is now called the fourth industrial revolution, or – perhaps a little more fitting for the year 2020 – industry 4.0. In Ghent, the same city where the exhibition was held, she is now Professor of Operations & Supply Chain Management at Vlerick Business School. On Vlerick's impressive campus in Ghent's equally impressive city centre, she welcomes Arthur van Schendel, Managing Director of IT service provider Schuberg Philis, to talk about industry 4.0, smart factories and tomorrow's leaders.

Could you briefly outline global developments since you visited the Flanders Technology fair? In other words, what do you mean by industry 4.0 and how is this different from the third industrial revolution?
‘The striking thing is that many of the technologies presented at the time are still being used today. At Flanders Technology I saw computers, robots, and sensors, I learned about the internet and saw that people cautiously were experimenting with artificial intelligence (AI). As this was the end of the 1980s, my reaction was "Wow!" The main difference between the third and fourth revolutions is that in industry 4.0 all these technologies come together – they communicate with each other, they enhance each other, processes are connected, data is available, and robots have become cobots and are able to work with people. Interconnection is what it's all about. At the same time, computing power has increased enormously. Sensors have been around for a long time but it's only now, thanks to the Internet of Things, artificial intelligence and data analytics, that can we do things with them that were unthinkable in the 1980s. It’s this combination that is suddenly causing an explosion of interesting applications.’

The concept of industry 4.0 is going around like some kind of buzzword. Of course, the big question is, what should companies do with it?
‘That's what I often get asked by managers who have come across the concept. What should we do with it and how should we get started? Many companies that come to me think they can implement industry 4.0 by building a smart factory, often for reasons of efficiency. That’s possible, of course. Ultimately, though, industry 4.0 goes much further than that. It doesn’t just involve looking at smart factories, but also thinking about the entire supply chain and products too. What do we actually want to deliver to our customers? How can we add value?
In short, you need a strategy. Often, our task doesn’t go much beyond "find out which technology might be useful for us." But blindly automating your factory won't pay off – this isn’t just some kind of production improvement exercise. So don't just look at it from the factory viewpoint, but also consider from the outset how digital technology could add value to the services and products you provide to your customers. Or better yet, think whether it would be possible to come up with different and better things for customers through the use of digital technologies.’

You talk about cubic smart companies (‘smart to the power of three’) as the companies of the future. What do you mean by that?
‘A cubic smart company is one that works on the basis of the broad approach I just outlined. Such a company thinks about the extended supply chain, i.e. the entire chain from end to end. So not just smart factories, but also smart products and how these can be delivered to the customer in a smart way. A cubic smart company also looks beyond production and involves different aspects such as sales in the plans. This is quite a tricky exercise. In addition, I often see that companies are keen to automate their processes but that these processes are not even remotely lean. The worst thing you can do is automate a process that's full of waste.’

Why do businesses struggle so much with this theme?
‘I think there are a number of reasons for this. For one thing, there is something mystical about digitisation and industry 4.0. Directors and entrepreneurs don’t really know what to do with them; they hear the buzzwords floating around but have no idea how to tackle them in concrete terms and what they could do for their businesses. A second reason is the difficult decision-making process. Frequently, a board will need to be convinced, and they will always ask about the return on investments. It’s not always easy to give a clear answer on this, especially when processes need to be changed or business models might have to be adapted. Thirdly, there is the people aspect. Developments suddenly start taking place very quickly and we simply can’t train people with the right skills quickly enough.’

Also, don’t we sometimes make things a little more difficult than they need to be? My experience from everyday practice is that many problems or challenges are fairly linear in nature. They can often be solved quite easily using agile methods...
‘Some challenges can. I regularly hear companies say that they need to look for external knowledge, but of course that needn’t be the case. You can hire in this knowledge for sub-areas, but training people internally is also a solution that ties in with the big picture. People who focus on planning today will do something else tomorrow. Companies need to have a vision for this.’

What do all these changes mean for managers and leaders?
‘Processes will be increasingly automated and all routine decisions will be taken by the AI system. The manager of the future, or indeed today’s managers, will mainly need knowledge in order to tackle the exceptions.’

Does that mean we will get a different culture and that we are heading more towards expert-driven companies?
‘Yes, different forms of leadership will emerge. One of my colleagues, Stijn Viaene, has developed a model for the types of leadership required for the digital transformation, and another colleague of mine Karlien Vanderheyden (link: https://www.vlerick.com/nl/research-and-faculty/faculty/karlien-vanderheyden) and I have elaborated that model into digital transformation in the supply chain and pretty much reached the same conclusion. Experts are needed: people with vision, and people with the courage to look over the fence, as it were.’

You believe in think big, start small...
‘Yes, and you can interpret that in two ways. Firstly, start with a small section of the factory while also keeping the entire supply chain in mind. However, it could also mean that you use data to better predict what will happen next so you can translate this into better planning—while still bearing in mind the fact that advanced data analytics will soon allow the system to decide for itself what needs to be done. This transition from predictive to prescriptive systems is another step.’

What about the progress of cubic smart companies?
‘It's still in its infancy, but things are developing fast. Two or three years ago, there weren’t really any smart factories in Belgium. At most, there were a few pilot projects. A number of companies now have a very clear vision and are taking steps in this direction. The pilot projects have become mainstream. Everything is starting to move fast.’

Could you provide an example of a company that you think is doing well?
‘BMT Aerospace and Drive Solutions is a good example of a smart factory. It supplies high-quality industrial products to the automotive and aviation industries. BMT has embarked on very targeted projects to connect parts of the process. The group has a clear vision on value creation, the CEO believes in this very strongly and the board is open to it. You can do a lot with this kind of mindset. Of course, BMT also wants to see good financial figures at the end of the year, but the group is open to various other things. The payback period isn’t the only important aspect. Good examples of companies that are actively engaged in smart supply chains are the Dow Chemical Company, tank storage company Vopak and the Port of Rotterdam.’

Will an aspect such as sustainability also play an increasingly important role in industry 4.0?
‘Definitely. Sustainability is becoming an increasingly important theme. Previously it was mainly about financial returns and quality improvements, but now companies are increasingly focusing on their ecological footprint. The transition to industry 4.0 often goes hand in hand with greater sustainability. If you can use data to load ships more efficiently and let them travel more slowly so they don’t have to spend a whole day waiting in the port, there will also be considerable benefits in terms of fuel economy. This is relatively new: not so much the sustainability thinking itself, but above all the awareness that digital technologies such as artificial intelligence can sometimes help to give the supply chain a lower footprint.’

So far, we have mainly talked about the smart supply chain and smart companies in the manufacturing industry. Are these kinds of themes generally applicable, i.e. in other sectors too?
‘When we talk about operations management, we are talking about designing, steering, managing and optimising processes. And processes are found everywhere. The same applies to digital transformation or innovation. Every sector must think about its processes and the added value of technology. So in that sense, the answer is a firm yes. But of course, putting a robot in a metalworking factory isn’t the same as putting one next to a hospital bed.’

Which sectors are leading the way in industry 4.0?
‘Various studies have shown that this is mainly media, retail and banking. That makes sense. When we think about music these days, we think about Spotify. And we are making more and more purchases online and living our daily lives without cash. At the bottom of the lists, we find oil & gas and pharmaceuticals. The striking thing about these lists is that the closer you get to the consumer, the earlier digitisation begins and the faster it goes. Changes in supply chain thinking always start on the consumer side, with the companies that are quickest to feel customer demand. It often takes years for them to feel the consequences on the other side, for example in raw materials.’

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