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Procurement & the 4th Industrial Revolution
Published on 12/05/2016 | Operations
Here in Switzerland preparations are underway for the 47th gathering of the World Economic Forum in Davos in January. Now is a good time to reflect on the main topic of the last meeting – The Fourth Industrial Revolution – and how Procurement could enable the change that is already happening all around us.
By now most are familiar with the concept of the fourth industrial revolution, or “Industry 4.0”. The first industrial revolution began in the late 1700’s and was driven largely by the steam engine and the development of railroads. Industry 2.0 began nearly 100 years later with the division of labor in mass production, and of course electrification. The third revolution, often referred to as the digital revolution, started in the 1960’s with the development of mainframe computing, the personal computer and eventually the internet. The fourth industrial revolution builds on this significantly with the advent of cyber-physical systems enabled by an omnipresent internet with much smaller and inexpensive sensors, and by artificial intelligence and machine learning.
In his 2016 book, The Fourth Industrial Revolution, World Economic Forum founder and executive chairman Klaus Schwab effectively explores this topic, the megatrends that make it up, and the impact on the global economy, business, governments, individuals and society as a whole.
How can the procurement function adapt to the new reality of Industry 4.0? What can procurement leaders do to lead the change? To explore possible answers to these questions, let’s break it down in the context of Mr. Schwab’s four major effects of the fourth industrial revolution on business across industries:
- Customer expectations are shifting
- Products are being enhanced by data, which improves asset productivity
- New partnerships are being formed as companies learn the importance of new forms of collaboration, and
- Operating models are being transformed into new digital models
Digitalization is enabling more and more transparency in the supply chain all the time. More data is being made available at the fingertips of the customer, shifting the power to them. This is already highly prevalent in the B2C world with online shopping, where the internet has empowered the buyer to shop broadly for the best value from the comfort of his/her home. And, it’s not limited to the western world – For example last Friday was Singles Day in China where consumers spent nearly $18 billion in 24 hours – about four times Black Friday online sales last year in the U.S. For procurement in an industrial company, we need to harvest the data available to us in the value chain and constantly look for opportunities to exploit it, all the while digitalizing our strategic and transactional processes to maximize value and efficiency.
In Industry 4.0, everything moves much faster with continuously escalating customer expectations, resulting in shorter product life cycles. For procurement this means a need for not only closer collaboration with Research and Development (explored below under Collaborative Innovation), but also more agile supply chains. Take Zara for example – the world’s largest fashion retailer. In just 15 days, the company can design, produce, and deliver a new garment to stores for sale to consumers – a process that takes months for their competitors. This is an extreme example of agility which can totally change an industry.
The Internet of Things is here today – Home automation, smart metering, remote industrial control, smart logistics and fleet tracking – these are just a few common examples of data-enhanced products and services already available today and becoming more and more prevalent. Depending on who you listen to, there will be somewhere between 20 and 50 billion devices connected to the internet by 2020.
Internet-enabled sensors embedded in common products will change the way that we buy our company’s assets. For example, the ABB smart sensor for low voltage motors and the analysis of the data they provide is poised to change how industrial companies buy electric motors. The sensor picks up data on vibration, temperature and other parameters and uses it to reduce motor downtime by up to 70 percent, extend lifetime by as much as 30 percent and lower energy use by up to 10 percent. No longer will companies buy motors based on the purchase price, but instead the entire value proposition must be assessed – How much will the operation of the asset cost through its lifetime? – This is the question the buyer must answer when comparing alternatives. Suddenly data about the asset becomes just as important as the asset itself. The Internet of Things will change industries, and hence, the way that we buy.
In the appendix of his book, Mr. Schwab explores 23 technological innovations that are changing the world. One of them is 3D printing, which has already transformed some industries such as hearing aids, where the entire industry converted to 3D printing technology in about 18 months – those that did not change, did not survive. As this technology (and the many others identified by Mr. Schwab) evolve, their utilization and impact on business will only become more ubiquitous. As the main external face to the supply market, the procurement function must stay on top of the technological curve to enable the company to identify and adopt these technologies at the appropriate time.
Collaborative innovation between suppliers and customers, and even between competitors within industries will become the norm in Industry 4.0. To assure a strong competitive position in this newly complex ecosystem, procurement should take the lead in defining the commercial relationships, setting the rules of engagement, and bringing the right partners to the table with R&D and Product Management. An outstanding example is Apple, who last year spent only 4.5% of revenue on research and development – up from 3.5% the year before, but still quite a small figure for a company with such a robust product pipeline. How do they to do it? By leveraging the R&D capabilities and resources of their suppliers, of course! And they do it so well that in 2014 their named their then head of supply chain, Tim Cook, as CEO.
New Operating Models
Major manufacturing companies are seriously revamping their value chains, and most will need to do so in response to the fourth industrial revolution. One important trend is “asset-light” operating models. Take the concrete industry for example. Rather than sit on expensive assets in seasonal down periods, LafargeHolcim, the French-Swiss building materials conglomerate has announced a plan to significantly restrict capital expenditures and transition to a “capital-light asset model”.
Another opportunity is the recent evolution of tier one contract manufacturers. EMS (Electronic Manufacturing Services) were important enablers of the third industrial revolution. Now, companies like Jabil, Foxconn, Flex and Celestica are providing more than just manufacturing services, but design, engineering, fulfillment, reverse logistics – The entire value chain, with a global footprint. Now, all you need is an idea and a market, and with the right interfaces and operating model, you can bring a new product to any market with a high level of capacity flexibility. Of course, this fits well with the aforementioned “asset-light” strategy, and these companies are mostly quite digitized with outstanding visibility up and down the value chain. Further, with their exposure across many industries they offer a tremendous environment of innovation in product development. Recent examples of companies maximizing value through EMS include of course Apple, as well as Dyson, Cisco, and Lenovo, just to name a few.
So what does this mean for procurement leaders? Procurement should be in the lead to understand the capabilities of the supply market, challenge old thinking of our existing value chains, and build new, flexible and innovative operating models to support our business. Most companies have a process to facilitate the make-vs-buy decision, where procurement plays a key role. In many cases this can be the starting point for procurement to bring this new thinking to table.
Many industries have been up-ended and completely changed as a result of the third industrial revolution: Travel, movie rentals, music, newspapers, bookstores – If you were in one of these industries 20 years ago and did not change, you’re dead. Which industries will be transformed in Industry 4.0? Time will tell. If you’re a procurement manager, you are in an excellent position to lead your organization through the change
The fourth industrial revolution is incredibly deep, broad and complex – in this article I barely scratch the surface of what could be coming. Therefore I warmly welcome your comments – Let me know what you think – What will be the effects of the fourth industrial revolution on procurement? What can leaders in our function do to lead the change?
1 – The Fourth Industrial Revolution, by Klaus Schwab, Page 62
This article was originally posted on LinkedIn.