There has been much hype about “Industry 4.0” and how it has been (and will) change the manufacturing industry beyond all recognition in the near future. In this article, we explore whether there is going to be such a dramatic industrial revolution as many pundits are predicting, or whether this is more of a technological evolution that has been taking place (often in stealth) over recent years. We will also focus on some of the key commercial and legal issues to take into account when considering adopting or implementing new smart manufacturing solutions.
WHAT IS INDUSTRY 4.0?
Industry 4.0 refers to the most recent industrial revolution by reference to the three previous industrial revolutions, i.e. the introduction of power generation in the late 18th century, then the industrialisation at the beginning of the 20th century and thirdly electronic automation from the 1970’s-2000’s. Now we are witnessing the move to smart automation, dynamically connected factories and systems, and more generally, “Industry 4.0”. Industry 4.0 is somewhat of a “term of art” within the industry (and means different things to different people), but essentially involves the use of new technology such as the internet of things, increased and sophisticated automation and connectivity, cyber-physical systems (“CPS”) and robotics to create “smart” factories and “smart” manufacturing. “Industrie 4.0” was also initiated as a “Future Project” by the German federal government to promote the computerisation of manufacturing. There have been a number of technological catalysts that have also helped stimulate growth, such as the introduction of IPv6 (meaning virtually unlimited addressing space has become available), standardisation of protocols, cheaper sensor technology and improved use of Wifi and connectivity on factory and shop floors.
There has been a real growth in the market of smart manufacturing and for good reason. By using the power of sensors, data and connected systems, companies are able to create smart factories. By investing in smart manufacturing, companies can increase productivity by up to 30% according to a report on the ‘New Industrial Revolution’ by Deutsche Bank Research. An example of the power of smart manufacturing was seen when Harley Davidson worked with SAP to create a factory of the future, which reportedly reduced their production time from 21 days to six hours. Stanley Black & Decker have also reportedly seen a 10% improvement in productivity and labour for one of their key production sites in Mexico. There are some eye-watering statistics out there that have been reported on the potential opportunity for Industry 4.0, and of course these are only predictions, but they still give a sense of the energy and excitement that many in the manufacturing industry feel with the advent of Industry 4.0. For example, Cisco predict that by 2020 50 billion devices will be connected to the internet of things, of these approximately 1.5 billion are large manufactured products. However, currently only 2% of large manufactured products are already connected, suggesting a huge opportunity for growth. Goldman Sachs has previously predicted that the opportunity for the industrial internet of things could amount to USD 2 trillion by 2020.
Technology advances are driving the growth and creating new ways of working, as well as resultant challenges. Digital intelligence and robotics can be combined to help complement the worker, acting as a ‘digital twin’. Greater use of cloud, big data and enhanced analytics will also be very important for manufacturers to drive and unlock the required productivity gains. However, technology advances are also creating a potential skills gap in the market and a new type of skilled workforce is needed. Another technology furthering productivity is additive manufacturing and 3D printing. It is dramatically changing the supply chain and logistics in many markets allowing local production of products and components, thereby reducing transport costs. According to reports, the global 3D printing market is expected to be worth $16.2 billion by 2018 and the global market for additive manufactured products will grow from $3 billion to $100 billion per annum by 2020.
“Servitization” (i.e. the move from products to services) is another key trend we are seeing evolving as part of the advent of Industry 4.0. Many are embracing the change and opportunity that this presents. For example, a number of high profile car manufacturers have recently expressed their intention to move from mainstream car manufacturing to “mobility services”, as they see this as the driver for growth in the future, particularly with developments in driverless cars.
CHALLENGES AND RISKS
Adopting and implementing smart manufacturing solutions/ technology and embracing Industry 4.0 does also come with some challenges and risks. A number of these risks and challenges were developed and discussed by us with a range of manufacturers at the recent EEF (the manufacturers organisation) regional advisory board, which took place at the International Festival for Business in Liverpool, UK.
■ Acceptance issues – Implementing automated solutions within an organisation can be an expensive and time consuming process, with delays impacting productivity and potentially causing material losses. Technical accuracy is paramount to ensure high quality production of products and reduce wastage and mistakes. Making sure that your contracts are structured to include a robust testing and acceptance process is vital, with clear commitments as to who is responsible should the test results deviate from the required technical specification for the solution and who is required to fix matters in the circumstances. A manufacturer will also need to ensure that responsibility for integration with other existing IT and physical systems, together with any optimisation of the new solution, is appropriately addressed. A manufacturer may also wish to include relevant commercial protections such as late delivery credits/liquidated damages and/or applicable termination rights linked with late delivery to help incentivise against any delay.
■ Warranty commitments and fixing matters – Once an automated solution is “live” any problems with the technological or physical systems or equipment can create potentially huge productivity problems for a manufacturer, so ensuring that your contractual arrangements are organised to manage against this risk is key. A manufacturer may expect to have certain warranty commitments that the solution provided is “fit for purpose” or will operate in accordance with the agreed technical specification, and we would recommend that contractual provisions are included to deal with warranty claims and fixing issues. A comprehensive service level agreement (“SLA”) is recommended to be included to deal with the timeliness and responsiveness requirements of the solution provider in respect of fixing any issues that arise, and how they will work with the manufacturer, and any hand-offs with other third party providers, that support the overall end-to-end solution.
■ Just in time (“JIT”) production/delivery – Just in time delivery/production or “lean manufacturing” provides key strategic benefits for many manufacturers to help them save costs and more effectively optimise their assets. Ensuring that any automated solution helps drive and support JIT delivery is critical. To the extent that any automated solution is connected with the manufacturer’s ERP system, the manufacturer will need to specify contractually who takes on responsibility for the “integration risk”, so that the various systems speak to each other effectively. A manufacturer will also need to structure its contracts with its supply-chain to support JIT delivery and provide for appropriate remedies should a key supplier be late, which may cause knock-on impacts for the business. This can be achieved contractually through a combination of provisions including reporting, governance, price reductions or credits for late delivery and appropriate intervention and termination rights.
■ Cyber-security and data protection issues – As with any solution using connected technology, the risks for manufacturers from a cyber-security and data protection perspective are more acute. Manufacturers will need to ensure that the appropriate cyber-security safeguards are in place so that the solution is physically secure and that they address contractually who has responsibility for keeping the system secure, as well as who has liability if a breach occurs. Practically, a manufacturer should develop contingency and response plans to deal with any cyber-security incident or attack. For certain manufacturers, they have struggled with adoption of automated solutions due to perceived cyber risk, particularly those manufacturing in the Defence industry. To the extent that the automated solution collects any “personal data”, the manufacturer will need to ensure that the system and the contractual arrangements with the solution provider are compliant now, and with the forthcoming European General Data Protection Regulation in mind (which is anticipated to come into force in May 2018).
Despite the above challenges, we are already seeing many clients trialling and implementing new technology and systems to help automate their processes, unlock benefits and steal a march on their competitors. One of the major challenges the UK manufacturing industry faces, is competing with other countries on cost, but with new technology and innovation there is a clear opportunity to create and drive value. SUMMARY Whilst Industry 4.0 may not necessarily be the “revolution” that people have been talking about, as many organisations have already been adopting elements of Industry 4.0 for years, the evolution of Industry 4.0 is certainly disrupting the market and is very much here and now.
Whilst Industry 4.0 may not necessarily be the “revolution” that people have been talking about, as many organisations have already been adopting elements of Industry 4.0 for years, the evolution of Industry 4.0 is certainly disrupting the market and is very much here and now.