China and Industry 4.0

September 3, 2018
China and Industry 4.0

China is leading the world in implementation of Industry 4.0.

Industry 4.0 is a digital factory concept that promises to dramatically increase productivity, decrease inventory holding costs, improve quality, and increase forecasting accuracy.  The IT architecture has to be built around the company’s unique business needs and processes instead of building a strategy around a particular technology to make Industry 4.0 work.

Investments in Industry 4.0 should have a payback period of less than two years.

This post is based on the McKinsey article, Imperatives for China’s factories of the future, by Anil Sikka, August 3, 2018. Image source: Shutterstock / Phonlamai Photo.

Discussion Questions:

1.  Industry 4.0 requires a major investment in IT architecture, e.g. data, analytics, robots. Are there limitations to implementation of Industry 4.0 that were not mentioned in the article for companies in the United States?

Guidance: Review the concept of scalability.  Students should recognize that the costs of implementation may limit Industry 4.0 to larger companies.  Additional issues that should be noted are workforce availability to implement and operate the IT architecture, and the requirement for tighter supply chain integration.

2. What happens to break-even quantity when Industry 4.0 is implemented? Recall that the estimated payback period for implementation of Industry 4.0 is less than two years.

Guidance: Review the basic break-even quantity model.  Students should be asked to describe how the variables (total fixed cost and variable cost/unit) would increase or decrease to achieve such a payback period.  Students should readily see that fixed costs will be significantly increased due to the IT architecture costs and that variable costs/unit should be expected to be reduced significantly.

Have students plug a base set of numbers into the break-even quantity model.  Then, students should increase fixed costs by 200% and decrease variable costs/unit by 80%.  What happens to break-even quantity?  Break-even quantity will rise unless the sales price/unit increases.  So, students will need to explore other concepts to explain the shorter payback period.  This can be a catalyst for further discussion about economies of scale, inventory costs, etc.

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