M A N U F A C T U R I N G W
H
I
T
E
P
A
P
E
R
w w w . m e n t o r . c o m
INDUSTRY 4.0 SERIES: IS THIS A
MANUFACTURING REVOLUTION?
Part 1, Stop the Leaking Factory
MICHAEL FORD, VALOR DIVISION
Industry 4.0 Series: Part 1, Stop the Leaking Factory
w w w. m ento r.co m
2
How exciting it is that in an industry that has seen introverted
evolution during the past 30 years, we now have the emergence of
Industry 4.0, touted as being the next industrial revolution. Such
broad, confident statements have prompted a deluge of questions
and interest, but also has raised skepticism, and, of course, a lot of
attention from marketing people.
For me, having been an engineer in PCB electronics manufacturing
since the early 1980s, with most of my time spent creating
improvement solutions through software, to qualify Industry 4.0 as
the revolution it claims to be and to be taken seriously, depends on a
number of key criteria. I have seen many “innovations” come and go
over the years, leaving behind them a wake of ever increasing
frustration as the industry remains fragmented in terms of information
technology standards, and is still ultimately ruled by 1970s ERP
operational technology.
What I am looking for is
• Does Industry 4.0 represent a fundamental change in what is
being done, or is it simply an improvement of what has been
there before?
• Is there a real driving force behind Industry 4.0? If not, then this
may qualify only as a “story of the month”, or even year, but then
ultimately fade into memory.
• Is the timing right? Industrial revolutions do not happen
overnight, but there still should be a recognizable trigger. Is
there a key issue, or combination of issues that make this
revolution inevitable, now? What is present today that has not
been there before?
• Does it affect everyone? In past industrial revolutions, it was not
only the guys who invented and operated some new machinery
that were affected. The effects went a great deal wider than the
industry itself. The whole supply chain of goods was re-written.
Industries physically moved locations. Fortunes were won and
lost. Ordinary people’s lives were changed, whether as owners,
workers, and above all, customers. To qualify as a revolution, the
world will need to be changed.
In this series, we will investigate what Industry 4.0 actually is, but
really, and more importantly, what the issues are behind it that makes
significant change to the PCB electronics industry inevitable.
We will look at through the whole supply and demand chain, at what
changes need to be made, starting with the consumer, the customer,
to understand what their demands are, how they want to behave, and
what benefits or changes Industry 4.0 will bring to them.
We look also across the breadth of the manufacturing organization, to
see exactly what is required to make a step-change practically
Michael Ford started his career as
a computer software and
hardware engineer in 1982.
Working for Sony in the U.K.,
Michael became one of the first
successful adopters of computer
technology into the
manufacturing shop-floor, going
on to manage in Japan Sony’s
global Lean Manufacturing
solutions.
Joining Valor Computerized
Systems in 2008 gave Michael the
opportunity to apply his
experience into the main-stream
of the industry. With almost 30
years of experience, Michael’s key
strength is the instinct of finding
solutions and opportunities
where there had been challenges
and problems.
Michael is currently working as
part of the Marketing
Development team within the
Valor Division of Mentor Graphics,
focusing on the realization of real
and practical solutions for
manufacturing based on the
application of Lean Thinking, end-
to-end, from design through the
entire manufacturing process.
Industry 4.0 Series: Part 1, Stop the Leaking Factory
w w w. m ento r.co m
3
possible when adopting the principles of Industry 4.0. We look into how this may be connected with
on-shoring activities, bringing manufacturing back to what many people believe to be “where it belongs”,
close to the customer.
To build the complete picture, we will also look into the depths of the financials behind Industry 4.0 to
discover what products “should cost” and where the contributions of costs and savings will come from versus
the value of quality and availability.
What cannot be denied is where the market has been moving inexorably toward. Product depreciation in the
post manufacturing distribution chain has slowly but surely become more significant. The whole distribution
chain has been gradually shrinking; until today, where in some cases, it has disappeared altogether driven by,
in effect, direct shipping from the factory to the customer.
We will explore this area in detail, as it seems to be the primary motivation behind Industry 4.0, which already
has lead factories to gradually shorten production lot sizes and increase the effective mix of products. While
doing so, however, productivity, especially in the SMT area which is heavily influenced by material setup
changes between products, has suffered.
WHERE ARE WE STARTING, AND WHERE ARE WE GOING?
A good starting point then for our investigation into Industry 4.0 for electronics is to start here, to understand
the market forces that have now come to a critical point where manufacturing needs to make what ultimately
is a business decision as much as it is technical. Let’s not talk about Industry 4.0, which is after all a topic fairly
limited to Germany and to a lesser extent in Europe, but really start to understand the global industry trends
that have led to its creation. Most electronics manufacturing today is based around a global supply model.
Let’s talk about the future, about changes that need to be made
in manufacturing to meet market demands versus continued
incremental change. Then, we will see whether this Industry 4.0
for electronics is as real and practical as it may be for other
industries.
The challenge that Industry 4.0 needs to resolve is how to
provide people with the flexibility in their choice of products,
but, without the crippling effect of the” build to order” lead-
times, as persist for automotive. The symptoms of this issue have
been there and growing for electronics manufacturing for many
years. As product life-cycles shorten and product variation
increases, meeting the increasingly fashionable customer
demand patterns, delays in the distribution of products after
leaving factories become much more significant. The pain from
this is felt significantly as the inevitable depreciation in the value
of the goods sit in the various warehouses or on container ships.
The more competitive electronics manufacturers often adopt the “hit product” strategy. A hit product is
usually one with the latest significant technology or feature advancement, supported by an intense marketing
campaign, making the product an instant “must have”. Getting this out into the market very quickly, ahead of
potential competitors, affords a window of opportunity where people will be willing to pay a premium price.
This short period is when the vast majority of profit can be made. Very quickly, competitors come along with
what is perceived as a better product, and demand dies almost immediately. Significant losses can then be
“Any fool can make
things bigger, more
complex, and more
violent. It takes a
touch of genius–and
a lot of courage–to
move in the opposite
direction.” ALBERT EINSTEIN
Industry 4.0 Series: Part 1, Stop the Leaking Factory
w w w. m ento r.co m
4
incurred as the value of the stock of the many
variants of the hit product, throughout the global
distribution chain, are slashed.
The critical factor for success is to shrink the
distribution chain to its absolute minimum. It is
for this reason that popular products such as
mobile telephone handsets are shipped from
China by air to any customer worldwide. The
cost of extreme transportation is less than
potential depreciation, considering product life-cycles of
sometimes just three months, itself shorter than the time it would take just to ship the product by sea.
The result of diminished or non-existent distribution chains can be crippling for factories. Short and medium
term forecasting by ERP is essentially compromised. Factories face not only a higher mix of products, but also
almost daily quantity changes. How can the factory, especially in an SMT situation, meet the rapidly changing
demand without significant productivity loss, or, having to resort to building to stock?
FACTORIES IN TROUBLE, DEALING WITH SHORTER END-OF-
LIFE SCENARIOS
Short-term demand changes are not a new thing to many factories. In the past, this kind of demand-pattern
management occurred often when a product approached its end of life, especially for OEM manufacturing
operations.
When going through the traditional ERP sales-order planning process, there is visibility of current raw
materials, the current high-level site production plan, the quantity of stock in the factory and, significantly, in
the distribution chain. The sales organization is then asked to make their forecast of sales going forward. This
is the complete set of information that the ERP organization needs to create the next factory plan and have
MRP order the materials.
Among the many variables in this process, however, one of the most significant is communication during the
sales forecasting process. Disagreement between marketing and sales people becomes more pronounced as
the end-of-life stage of a product approaches. Marketing can influence product demand through advertising
and pricing over the medium and long term. Although the effects of these activities for larger companies can
be quite precise in terms of market demand control, other strong influences are competitive products
entering the market suddenly and customers’
expectations about future products and technologies.
Toward the end of life of a product, these influences make
sales people very nervous. Motivated by commissions and
sales target achievement bonuses, they will not commit
to numbers if they feel those predictions carry risk.
An example is when LCD monitors became affordable in
the market several years ago. The sales team of a certain
maker of CRT-based monitors got nervous, seeing the
new cheap LCD monitors being offered for sale. As a
result, sales reduced their forecast significantly.
Because of the large volume of CRT monitors in the
distribution chain, the ERP logic decided that no new
Industry 4.0 Series: Part 1, Stop the Leaking Factory
©2015 Mentor Graphics Corporation, all rights reserved. This document contains information that is proprietary to Mentor Graphics Corporation and may
be duplicated in whole or in part by the original recipient for internal business purposes only, provided that this entire notice appears in all copies.
In accepting this document, the recipient agrees to make every reasonable effort to prevent unauthorized use of this information. All trademarks
mentioned in this document are the trademarks of their respective owners.
F o r t h e l a t e s t p r o d u c t i n f o r m a t i o n , c a l l u s o r v i s i t : w w w . m e n t o r . c o m
08/15 TECH13260
CRT-based monitors needed to be manufactured, and so they were not included in the next factory plan. The
factory staff had no warning of this decision and had many dedicated lines to CRT monitor production; as a
result, they were at a loss to know what to do. Jobs were lost, people were laid off.
Three months later, the sales people found that the quality of the new cheap LCD monitors was less than
people expected, which resulted in a continuing reasonable demand for CRT monitors. At the next run, the
ERP logic noticed the up-turn in the forecast and that stocks in the distribution chain were depleted, so it
made a maximum order for CRT monitors to the factory. Management at the factory was again caught
unawares. The CRT lines were still in place and the key materials were still in the warehouse, but there were no
people, and, it was summer vacation time. The result was that the site had to remain open over the vacation
and bring in huge numbers of temporary staff, so much so that there were even some wearing security tags
on day-release from prison. Anyone could get work at that time. The cost in employees and quality for the
factory was extreme, however.
This is how ERP and sales forecasting together traditionally has been working, seemingly amplifying the
natural fluctuation of demand into an almost square wave “boom and bust” demand pattern for products
near to end of life at the factory. Had the factory management seen the actual fluctuation in demand, they
would have had time to adjust the lines and the delivery rates; and, it was later calculated, the business would
have remained profitable. This is an example of the reality and pain for the factory when faced with demand
fluctuation.
Interestingly, at the same company sometime later, another computer peripheral reached the end-of-life
stage. In this case, the product manager took matters into his own hands, and through extensive effort,
planned production based on actual customer demand. The result was that, although the business volume
slowly decreased, it ended up being a “cash cow” for the company, as competitors in the market pulled out
leaving all the remaining opportunity to this one company.
This “end-of-life” scenario is now becoming the every-day scenario. The reduction of the distribution chain,
the speed of technology change, the shorter product life-cycles, and the multitude of product variations now
bring this issue to the factory every day. However, the current ways of dealing with variation, while perhaps
acceptable for a short period at the end of life of a product, cannot work well on a continuous basis.
If the factory can manage the short-term demand changes, and the marketing people are looking after the
longer term demand profiles, then far greater operational performance can be achieved. The ERP organization
still needs to be at the center, materials still need to be ordered, and the overall site operation still needs to be
planned. The short-term deviations are what to be addressed. These are acknowledged and essential
principles that form Industry 4.0, and now we know why.
What does it take then for our factory to be flexible and agile, to be able to respond to sudden demand
changes? In the next installment, we’ll take a look at the key resistances to flexibility that seem entrenched in
our factory operations today, restricting the ability to change.