Procurement and the 4th Industrial Revolution

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, Dan Bartel, Group SVP, Head of Procurement & Logistics/Chief Procurement Officer, ABB, unpacks Industry 4.0 in the context of Klaus Schwab’s 2016 book, The Fourth Industrial Revolution, in which Schwab (World Economic Forum Founder and Executive Chairman) identifies four significant effects of Industry 4.0 on businesses across industries.

“Customer expectations are shifting” – Schwab
Digitalisation is enabling more and more transparency in the supply chain. More data is being made available at the fingertips of customers, 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 their home. And, it is not limited to the western world: for example, recently Singles Day was celebrated in China and consumers spent nearly $18 billion in 24 hours – about four times Black Friday online sales last year in the United States! 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 such, all the while digitalising our strategic and transactional processes to maximise value and efficiency.

In Industry 4.0, everything moves much faster with continuously escalating customer expectations, resulting in shorter product lifecycles. For procurement, this means a need for not only closer collaboration with Research and Development (R&D), 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.

“Products are being enhanced by data, which improves asset productivity” – Schwab
The Internet of Things is here – 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 that are 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 company assets. For example, the ABB smart sensor for low voltage motors and the analysis of the data that 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%, extend lifetime by as much as 30% and lower energy use by up to 10%. 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 throughout 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 thus change industries and, hence, the way that we buy.

“New partnerships are being formed as companies learn the importance of new forms of collaboration” – Schwab
In the appendix of his book, 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 utilisation and impact on businesses 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 companies 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 R&D (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 do it? By leveraging the R&D capabilities and resources of their suppliers, of course! And they do it so well that in 2014 they named their then Head of Supply Chain, Tim Cook, as CEO.

“Operating models are being transformed into new digital models” – Schwab
Major manufacturing companies are seriously revamping their value chains and most will need to do so in response to the 4th Industrial Revolution. One important trend is ‘asset-light’ operating models. Take the concrete industry as an 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 expenditure and transition to a “capital-light asset model”.

Another opportunity is the recent evolution of Tier 1 contract manufacturers. Electronic manufacturing services (EMS) were important enablers of the 3rd Industrial Revolution. Now, companies like Jabil, Foxconn, Flex and Celestica are providing more than just manufacturing services, but design, engineer, fulfil, 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 digitised 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 maximising value through EMS include 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 around existing value chains and build new, flexible and innovative operating models to support businesses. 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 the table.

In closing
Many industries have been up-ended and completely changed as a result of Industry 3.0: 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 by Industry 4.0? Only time will tell. If you are a procurement manager, you are in an excellent position to lead your organisation through the change.

The 4th Industrial Revolution is incredibly deep, broad and complex – in this article, I barely scratched the surface of what could be coming.

Join us at the Smart Procurement World’s Gauteng Conference in September, where we will explore what Industry 4.0 means for the procurement function. International Procurement Digitalist, Bertrand Maltaverne, will explore:
– How artificial intelligence will (and won’t) change procurement and contracting
– How to lead procurement innovation through advances in emerging technology
– How digital labour is transforming operational procurement: removing transactional work
– How to drive superior value through digital procurement