Industrie 4.0: Danke, Germany! Procurement Will Now Leapfrog to Strategic Maturity

Spend Matters welcomes this guest post from Raphael Demmer of GEP.

Industrie 4.0 is, in a nutshell, the promise of ever-more automation and it is all the hype these days. Kaitlyn McAvoy, in a recent post, cited McKinsey Partner Richard Kelly as pointing out this is “much more than hype,” i.e., it is the tangible future. Richard was absolutely correct; Industrie 4.0 has definitively arrived on the world business agenda. At the recent Hannover Messe, exhibitors from across the globe and from all industries (from Microsoft to Bosch) presented over 400 ongoing project examples in the Industrie 4.0 space. I would like to discuss in this post why, in particular, Industrie 4.0 should be great news for procurement and why it is worth being a proactive, targeted adopter.

Why thanks to Germany?

Before we proceed I would like to clarify that I consciously insist on the spelling Industrie, not Industry. The paradigm was coined by the German government as part of its industrial digitalization strategy in 2009. Unsurprisingly, any study I have come across ranks Germany ahead of the pack in Industrie 4.0 adoption and maturity. Japan and the U.S. are usually trailing behind somewhat. The Germans remain a role model to watch. Vorsprung durch Technik is not just Audi’s tagline ;-).

What is Industrie 4.0?

But let us take a step back to try to narrow and define what Industrie 4.0 even is. A Wiki query returns the definition that it is “the fourth industrial revolution” and “the current trend of automation and data exchange in manufacturing technologies.” You may ask how this is different from what we already have. Robotic production has technically been around since Heroux’s and Devol’s Unimate in the 1960s. ERP-related systems and software have been around for longer, although Gartner only popularized the term in the 1990s.

The key difference is the automation of data exchange. While previously the robotic arm and the ERP system were separate entities programmed and guided by people, now factories and indeed entire supply chains may become autonomous. In theory, the robotic arm and the assembly line will let the ERP system know if it needs servicing, or if parts for production are missing. The ERP system will communicate with suppliers with minimal human input, and suppliers’ systems will bid based on internal capacity. All systems could constantly figure out their optimal equilibrium for operations. This is essentially what supply chain and logistics visionaries are attempting through Blockchain technology at the moment. The Changying Precision Technology Company in China opened its first unmanned factory, or smart factory, if you will, just last year.

Other than the specific enabler of Blockchains, Paul Carreiro, VP at Infor, outlined that Industrie 4.0 is enabled by three key IT advancements:

    • The Internet of Thingswhich is essentially the proposition that all devices and systems will be interconnected and autonomously communicating (if you are a prepper, let me assure you that Skynet is probably still a wee bit off) and cyber-physical-systems — sensors that capture masses of useful and intricate production data.
    • The advancement in big data — to give a relatable fix point here; until 1995 8MB RAM was the norm for business-user computers and Excel was limited to 16,000 rows. Now, we are up to over 1 million, unless of course you are an avid Access user, where the sky's the limit. The point is, now we can actually mine and digest the data that is out there.
    • The advanced communications infrastructure — industry and business are becoming confident that their data is secure and always accessible. Although this is still a problematic proposition for some... am I right, Sony, U.S. military, AT&T, and Target, etc.?

Why is this great for procurement?

So, operations will be self-analytical and self-sufficient. That is great. We will finally have perfect specs and no more waste because stakeholders are skeptical of procurement. Industrie 4.0 sounds a bit like built-in zero-based-budgeting, which should make procurement rejoice, correct? Recently, GEP published a whitepaper on the future and implications of ever-more automated procurement — download and read it here. Given its tenets mentioned above, Industrie 4.0 would be instrumental in optimizing, simplifying, and to a degree automating, e.g., the following areas discussed:

  • Spend analysis and opportunity identification
  • Savings planning
  • Sourcing
  • Supplier management

Although they are still missing automatic data feed options, software like SMART by GEP has become highly adaptable and integrated in these areas already. No one could argue that Industrie 4.0 would not allow great and useful strides in spend analysis, for instance — e.g. if an ordered commodity is constantly in communication with the ERP system. This will primarily help buyers have an easier life and drive savings.

The problem is that in order to achieve automation and optimization in these areas, which are natural procurement responsibilities, they would have to be priorities for the existing business. Unfortunately, while digitalization is often well-advanced, many procurement organizations are still stuck in a non-strategic rut. They may be trusted to consolidate some categories and drive savings initiatives, beyond transactional work; however, they are not yet considered critical with respect to bringing in innovation through their unique intimate intersections with all other functions and with upstream and downstream suppliers.

Here again Industrie 4.0 is an opportunity for procurement to re-position itself. Already, specialist procurement (e.g., in legal services, marketing, and IT, all of which GEP covers by the way) is integral to many companies. Technology and capabilities for this industrial revolution will have to be procured, e.g.:

  • The most feasible cloud solution
  • Manufacturing analytics tools and services
  • Data security solutions

With the right buy-in, procurement can drive the adoption of Industrie 4.0 as a category which in itself will be a value-added innovation. As the Fraunhofer Institute and BME have argued, this will herald procurement as the subject matter expert for everything Industrie 4.0. It is rare such a sweeping operational paradigm shift becomes reality. It is procurement’s chance to highlight its innovation value-added potential across business horizontals.

For more forward thinking on procurement, visit the GEP Knowledge Bank.

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