The history of the second half of the 20th century is intricately interwoven with the boom in manufacturing & consumption, especially in the Western world. Falling prices have made things like cars requiring thousands of parts from hundreds of suppliers affordable for a large part of the population.
Surprisingly, a lot of the efficiency gains that have made this possible are not technological but are instead management innovations – new ideas around how to think about procuring parts & other raw materials, how to manage supply chains and how to address defects. These approaches are generally classified as Lean Manufacturing. These new ideas were at the center of Toyota’s revolutionary Kanban approach to manufacturing and helped Japanese cars become extremely competitive in the US car market in the 1970s.
Back then, there were sizable latent efficiency gains to be had, not by incorporating new technologies, but by simply changing the approach to procuring parts and raw materials. The idea of lean manufacturing or just-in-time procurement is to minimize the number of suppliers kept in stock and to instead procure smaller batches of inventory to reduce working capital needs and minimize the risk of having dead inventory in case production requirements change. Managers saw that they could reduce capital requirements by procuring the least amount of inventory needed at the last possible moment and kept trading in robustness for lower capital requirements. This delivered significant results across numerous industries – but this came at a cost.
When the Covid-19 pandemic hit, an ensuing ‘bullwhip’ effect took place. The sudden drop in consumer demand meant that manufacturers canceled orders with their suppliers, those suppliers canceled orders with their upstream suppliers and so on. Companies shut down and parts of the economy ground to a halt, and the ensuing economic impact looked likely to dwarf the Great Recession of 2008. However, central banks acted fast, injecting the economy with unprecedented stimulus, buying bonds and transferring cash directly to their citizens.
Absent of opportunities for spending on services (such as restaurants or travel or concerts) due to lockdowns, work-from-home or fear of the virus, consumers took these stimulus cheques spent disproportionately more on goods than on services (besides of course buying stocks or trading crypto). The result was another bullwhip effect, but in the opposite direction, as consumer demand rose nearly as suddenly as it had fallen.
The aforementioned reduction in inventory levels driven by the hunt for greater efficiency & lean manufacturing principles however meant that supply chains everywhere were entirely unprepared to deal with this precipitous rise in demand. Today, this has led to everything from ships piling up at ports unable to dock to the global chip shortage and the end of a decades-long expectation of fully stocked shelves at grocery stores & big-box retailers.
Where then does this leave industries in need of greater efficiency? Gains in efficiency are relevant not just to keep prices low, especially in the wake of rising commodity prices, but also to combat unnecessary wastage. The answer could be strikingly similar to what had powered previous leaps in productivity. Just like the first, second and third industrial revolutions, the ‘fourth industrial revolution’ may need new technologies on the production floor – such as ubiquitous internet connectivity, sensors, smart devices, IOT, big data and AI/ML – to usher in a new wave of industrial progress.
What could this much vaunted fourth industrial revolution, also called Industry 4.0, look like? Some of it is already here. Factories are increasingly digitizing the production floor and leveraging technologies part of the big data ecosystem to gain insights into production progress, track targets, diagnose defects, distribute work evenly between production lines and reduce waste.
Factories can be gargantuan, complex setups with different departments handling different parts of the production process, numerous production lines working in parallel often on different variations or different products, numerous input streams for raw materials and hundreds if not thousands of workers juggling this complexity while chasing challenging production timelines. Certain sectors can be more prone to this complexity. For instance, the garment industry is very labour-intensive and in addition, has to deal with multiple parallel designs produced within the same factory but on different production lines and using different rolls of fabric. In addition, consumers today expect brands to create new designs on shorter timeframes, which means that each design might only spend a few weeks on the production line before another one comes in, leaving lesser time for workers to get accustomed to their tasks and making balancing of work amongst production lines more difficult.
Industries like these might have the most to gain from this new industrial revolution. With each production line equipped with tablets to input information about defects, each piece flowing through the line having a QR code or RFID that gets scanned as it makes its way through the production process and TV screens displaying real-time metrics and highlighting defects, the factory floor becomes illuminated with real-time data & intelligence that augments the expertise of the staff working within it. These insights are enhanced with big data and AI/ML algorithms that can make sense of the data collected to weed out knottier production issues and suggest a better production setup. All of this is borne out in practice – factories in the garment industry that have adopted this technology can see their efficiency improve and defects reduce by a substantial amount, often north of 10%.
More mechanized industries can benefit from the fourth industrial revolution, too. Mahindra, the conglomerate that, among other things, manufacturers heavy transport and agricultural vehicles, has been an early adopter of Industry 4.0 technology in its manufacturing plants. It has committed to making systems transparent, interoperable and backed by analytics in order to gain a sustainable competitive advantage.
Like many things, the Covid-19 pandemic has highlighted the fragility of our systems and the need for new innovation. With lean manufacturing practices having run their course in terms of improvements they could bring to efficiency and costs, and the pandemic bringing the need for more robust supply chains into focus, the manufacturing sector could have a lot to gain by accelerating the evolution of new technologies. Along with specialist software and hardware providers, manufacturers could help to bring on a new industrial revolution and see a step-change in efficiency levels and reduced wastage.