Global Value Chain and the Industry 4.0

Global Value Chain & Industry 4.0 – In the value chain, every step of each process centre on a single goal: Increase value to the customer or improve the manufacturer’s advantage in the marketplace.

Global value chain for industry 4.0

“The digital supply chain has the potential to completely change supply chain. However, do your due diligence before rushing in.” – EverythingSupplyChain.com.

The vision of Industry 4.0 highlights technologies that enable greater competitive advantage. Smart factory design and function enable significantly higher productivity, efficiency, and self-managing production processes. In these production environments, people, machines, equipment, logistics systems, and work-in-process components communicate and cooperate with each other directly.

In Industry 4.0 manufacturing value chains, product development, production, and logistics processes combine intelligently across company boundaries. In Industry 4.0 manufacturing environments, forward-looking enterprises don’t fixate on speeds and feeds of the machinery. Instead, they focus on how smart assets and manufacturing methods can drive revenue.

Digtisation versus Digitalisation

Many manufacturers engaged in pioneering Industry 4.0 adoption efforts have arrived at an important discovery — the real value of Industry 4.0 manufacturing lies in moving beyond digitisation to digitalisation. The distinction between these terms is not always clear, even Industry 4.0 practitioners confuse them.

Digitisation — Digitisation involves creating a bits-and-bytes version of analogue or physical things, such as microfilm images, paper documents, photographs, and sounds. In smart factories, digitised information can create the virtual equivalents of assembly line components or even an entire factory floor.

Digitalisation — In business, digitalisation takes this transformation process one significant step further. Physical things can be digitised (be represented by a digital twin) but only business operations, functions, models or processes can be digitalised.

That is, only processes or activities can be improved by leveraging digital technologies. Only these process improvements can deliver maximum value for the least possible total cost and create a competitive advantage. Defining benefits as process improvements brings us directly to the idea of generating value. More and more analysts view digitalisation as the road on which businesses move from process-level improvements towards digital business and digital transformation.

The goal — In the world of digital manufacturing, transformation is the Promised Land, where good things start happening. Manufacturers discover new business opportunities and create new revenue streams and offerings.

However, these new symbols of a healthy digitalised manufacturing environment come with a hefty price tag; Manufacturing processes will have to be changed, risk adversity will have to be overcome, and existing partner relationships will have to be expanded or changed.

In short: the price of successful digital transformation is the willingness to change.

Value Proposition of Industry 4.0

Industry 4.0 has changed how we view business value and the potential to increase it. A growing number of economic analysts suggest that manufacturers have already reached the end of the line for value from traditional cost-cutting measures.

Looking for Value in All the Right Places

A recent online publication added a seldom-mentioned driver to the list of urgent reasons to modernise manufacturing. It appears that concentrating on low wages and cutting production costs have taken manufacturers as far as they can go. Now, they must find new ways to generate value.

Manufacturers throughout the world are eager to benefit from the business value that Industry 4.0 might generate. ASEAN manufacturers hope that Industry 4.0 technologies will help them stay out of the middle-income trap and provide healthy profits for the foreseeable future. It’s hard to ignore the McKinsey & Company’s eye-popping US$216 billion to US$627 billion ASEAN market forecast that’s all over the online press.

Successful adoption of Industry 4.0 technologies will involve looking for value in some new places, such as in customised products, services, and product design. Making it logical to consider value in the global manufacturing environment and the types of benefits that manufacturers might expect from participating in digital transformation efforts.

The Smile Curve & the Outcome Economy

Careful study of the global value chain and classic smile curve as it applies to ASEAN nations provides a vibrant story of international competition and economic development. Advanced countries such as the United States, Japan, and the major EU economies, operate at the high-value end of the product life cycle. These vary from initial concept, design, and branding on one end to marketing, sales, and post-sales services on the other.

Moving up the sides of the smile curve — During the past 30 to 50 years, countries with high-value economies outsource the lower-value work in the middle of the smile—manufacturing—to less developed countries such as ASEAN-6 nations and more recently China.

Faced with recent increases in labour costs, China is joining the move up the value chain. Now, they too are outsourcing lower-value manufacturing work to ASEAN nations with growing workforces of young people and lower operating costs.

The big “if” is digital manufacturing technologies and methods. The regional Industry 4.0 environment enables ASEAN manufacturers to accept higher-value work. However, the seemingly golden opportunity carries a very big “if.” To remain competitive, ASEAN-6 (Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam) manufacturers must train or retrain their workforce to competently operate modern manufacturing equipment and processes, and they must complete the training quickly.

The outcome economy — No matter how much value Industry 4.0 modernisation might enable, the global manufacturing environment is changing hard and fast. For ASEAN member countries and many other nations, the competitive environment is becoming harsher and less predictable than ever. Even primary considerations such as what to manufacture and how to satisfy customers are changing.

In a May 2015, CIO Journal article, Accenture CEO Paul Dougherty welcomed readers to the outcome economy. This idea described a new business environment. In it, companies create value not by making and selling products but by delivering solutions that “directly produce quantifiable results (outcomes).”

global value chain

The Smile Curve and Global Value Chain

This idea is not new. It’s part of the move toward customer-centred marketing and selling that’s been in progress for about five years. What makes the outcome economy notable are its enablers — modern digital technologies. Five years ago, easy access to the Internet helped sales prospects learn about a product before they ever met a sales rep while sales professionals were learning to pay attention to their customers and deliver solutions that customers want.

Now, digital technologies such as the IIoT, data analytics, and machine learning are making customer-centred manufacturing possible. The challenge for manufacturers is focusing their attention on which their customers are, deciding what they want and how to deliver the products they want.

Hitting a moving target — For many manufacturers, making a product still involves assembling components and selling the product. The product’s value lies in the selling price of the item and the efficiency of the manufacturer’s operations. Now, the focus is moving from making a product to results (outcomes) such as customer satisfaction, safety, or comfort. It also involves monetising new stages of a product’s life cycle (marketing, customer support, etc.).

For manufacturers in many industries, the outcome-based economy is about:

  • Bundling products and services.
  • Moving from one-time to ongoing transactions.
  • Enabling subscription-based transactions based on a recurring revenue relationship.

In short, the outcome economy emphasises monetising the entire product life cycle, that is, everything about the product.

Finding the Value in Manufacturing

It’s well enough to say a manufacturer must start selling more than their finished goods. Unfortunately, it’s more complicated.

Business leaders are learning where the value in manufacturing lies and it’s not where they might have expected. The lowest part of added value lies in the manufacturing process itself. Much of the value in a manufactured product lies with concept, R&D, branding and product design at one end and distribution, marketing, and sales and services at the other. The smiling curve (Figure 4-1), created by Acer Inc. founder, Stan Shih, in the early 1990s, illustrates this principle.

Three Levels of Value

When people talk about Industry 4.0, they often mention a two-tier value regime. The first category is what people typically think about value — cost savings, improved worker productivity, and faster times to market. These factors all depend on producing more products, more efficiently. Some analysts call this low-hanging fruit, which can be achieved by improving current manufacturing processes to make products with traditional business models.

Value in the second tier, however, depends on new business opportunities. This is where new and existing Industry 4.0 technologies combine to create new business models and revenue. Finding value in this new frontier of manufacturing requires modern equipment, high-risk tolerance, and a sharp eye for business opportunities

Industry 4.0 technologies help manufacturers with the right stuff to create value at the production process, business, and market levels.

Global value chain for industry 4.0

Global value chain for industry 4.0

Manufacturing-related, process-level value — This level describes value generated by process operations and maintenance within businesses:

  • Manufacture, maintenance, supply, and distribution costs reduced or avoided.
  • Improved supply chain transparency
  • Lower inventory costs
  • Avoiding equipment repair and maintenance costs.

Business-level value — Our next focus of interest lies several levels up the manufacturing hierarchy from processes to the enterprise (at the RAMI 4.0 business layer). This is where you find the total value of products and services generated by a business. The examples are familiar to every MBA student:

  • Revenue added via new products, services, or business opportunities
  • Revenue recovered from productivity lost to inefficient operations
  • Higher revenue, enabled by improved productivity
  • Improved production and worker productivity
  • Improvements in the quality of goods
  • Greater customer satisfaction and loyalty
  • Faster product time to market or time to service
  • Faster response to customer preferences and requirements

These types of value aren’t just measurements of financial performance. They also serve as indicators of potential value growth and business opportunity.

National-level value — Just as value, in general, can indicate opportunities at the business level, value in national level manufacturing activities identifies benefits beyond the enterprise. These difficult-to-quantify metrics reflect improvements in education, technological development, and quality of life:

  • Provide modern consumers with satisfaction enabled by advanced products and services that they crave.
  • Improve wages and living standards for the nation’s people.
  • Develop a workforce with skills in new fields such as data science and analytics, data engineering, and agile manufacturing applications.
  • Improve innovation in fields such as analytics and advanced production automation
  • Create a strong local demand for Industry 4.0 components (IoT, analytics, etc.), which helps companies build capabilities in these areas.

Moving on from business theory, in the next chapter we review the real-life efforts of ASEAN manufacturers and governments to adopt and use Industry 4.0 technologies.

Written by Colin Koh, Senior Business Development Manager, Industry 4.0 Consultant. This Industry 4.0 Article Series is aimed to enlightened readers about everything they need to know about Industry 4.0 and its application about technologies and benefits to companies and consumers.

Need help on your i.4.0 journey? Drop us an enquiry below.