Industry 4.0: Why it belongs on the CEO agenda

Industry 4.0, or the fourth industrial revolution, is no longer a vision of some far-off future. It’s already happening – and will pick up pace tremendously over the next few years. The main drivers of this trend are changes in customer expectations as well as the broad implementation of new technologies, such as the Internet of Things, sensors, connected devices, 3D printing, or cloud solutions. Value chains of industrial companies all over the globe are becoming increasingly digitized and connected, as are their products and services. At the same time, digital business models are challenging conventional approaches – often causing disruptive change.

Digital business models: an example from the manufacturing industry

In a traditional business model, the manufacturer’s machines are self-contained. Software is used to automate individual machines, but the machines themselves are not connected. In a digital business model, all processes – including sales, production planning, production control, material planning, and service – are automated and linked to each other as well as to the customer. It’s a win-win situation: the customer benefits from a high amount of transparency and real-time information, and the manufacturer can optimize and change processes with ease. What’s more, automated processes lead to higher efficiency.

This illustrates why Industry 4.0 is not just hype. Furthermore, I believe it belongs at the top of the CEO agenda, for the following three reasons:

1. Industry 4.0 will have a huge impact on corporate strategy

Virtually no manufacturing company anywhere in the world will be unaffected by Industry 4.0 – it will impact their corporate strategies and fundamentally change the way they operate. Preparing for Industry 4.0 is a long and expensive journey involving the entire company, and no one can afford to ignore it.

But how far has digitization advanced at industrial companies and what will change in the next five years? What specific benefits does digitization offer manufacturing companies? In other words, what is the business case? What are the main hurdles companies will have to overcome as they transform themselves into Industry 4.0 enterprises? These were the questions a team from PwC and Strategy& had in mind when drawing up a survey for 235 industrial companies headquartered in Germany. The results of our study are out now – read on for the main findings.

2. Industrial manufacturing companies are ready to invest – and invest big

According to our survey, industrial companies in Germany will invest an average of 3.3 percent of their turnover in Industry 4.0 solutions each year for the next five years. This amounts to an annual investment sum of around 40 billion euros. At the European level, we estimate annual investment to total 140 billion euros. Industrial companies in Germany clearly take Industry 4.0 very seriously. Of course, investment on that scale won’t be made without the commitment of top management.

Digitization spreading at a rapid rate

Looking at the survey results, we were completely astonished at the tremendous speed with which supply chains will likely be digitized over the next five years. Today, 24 percent of industrial companies claim to have a high level of digitization. By 2020, this percentage will have more than tripled: 80 percent of all businesses will have digitized their entire value chain. This trend implies both enormous change and enormous opportunity.

The promise of Industry 4.0: Increased efficiency and revenue

If a client asks me why they should invest in Industry 4.0, I can now give much more specific numbers based on our survey. Industry 4.0 will deliver major gains in efficiency and cost reduction. Companies expect that digitizing their production will increase efficiency by an average of 18 percent over the next five years. Digital solutions can also help manufacturing companies cut their costs some 14 percent by 2020.

3. Industry 4.0 puts the customer at the center

Another reason why Industry 4.0 belongs on the CEO agenda is that it changes the entire value chain, putting the focus on customers and their rapidly changing demands. Typically, companies can fulfill individual customer requirements much better when they work together in partnerships. Indeed, our study indicates that this is by far the most important reason companies collaborate within Industry 4.0.

Today, for example, coordinating and optimizing product flows across the various partners of a value chain can be very difficult. Often it’s the small details, such as incoherent labeling of parts or products or the lack of standards, that prevent partners from fully integrating and guiding efforts across their value chains.

Industry 4.0 applications will make it much easier for companies to work closely together. Cloud-based applications allow companies to flawlessly share data among partners, suppliers, and customers. This results in more harmonized end-to-end processes – provided, of course, that the information exchange is secure and based on communication standards. Who stands to benefit the most from this development? The customer. He benefits from a supply chain that can respond much more quickly to changes in his (and overall) demand, an improved and shared understanding of his needs, and better tailored services and products as a result. Take a machine manufacturer, for example. When the company better understands its customer’s end-customers – due to increased sharing of information and data – it can apply this information in R&D to improve its product. This opens up new opportunities for meeting end-customer needs.

Opportunities outweighing threats

To sum it up, Industry 4.0 poses a number of challenges for industrial companies. The required investments are huge and the company-specific business case often unclear; there are no agreed industry-wide standards as of yet, which puts long-term investments at risk; companies are rightfully concerned about data security, privacy, and IP security, as well as about not being able to find (enough) skilled employees for the task.

I am convinced, though, that these challenges can be overcome. Not only that, they are outweighed by exciting opportunities. By integrating production planning and control along their value chain, businesses can substantially increase efficiency and cut costs. Enhanced traceability and earlier detection will enable them to improve quality and reduce defects. Integrated horizontal planning across partners is especially promising, since it will increase flexibility and responsiveness to customer demands. I am positive that Industry 4.0 offers great potential for increasing sales by incorporating new digital products, services, and business models. Now it’s up to top management to seize those opportunities.

What is your experience with Industry 4.0? How close are you to creating a digital enterprise? I look forward to hearing your opinion!

Download Industry 4.0 survey
 

About the author

Volkmar Koch

Volkmar Koch

A Partner at Strategy&, Volkmar Koch is based in Frankfurt and leads the Big Data/CRM Center of Excellence for Europe. Volkmar has more than 20 years of professional experience, 15 of which in top management consulting. His focus includes supporting clients on creating new business models, specifically those related to digitization and data. He has broad experience in advising businesses on how to digitally transform their customer interfaces, value chains (Industry 4.0), operating models, and organizations. He is an expert in data analytics and helps corporations around the globe embrace the opportunities of big data, loyalty, and advanced analytics. Volkmar studied business administration and computer science at EBS, Oestrich-Winkel (Germany). Volkmar Koch is a guest author for the Bosch ConnectedWorld Blog.