The Digital Mirror: How Industry 4.0 is Changing Supply Chain Management

Is the supply chain ready for industry 4.0?

“It’s a digital mirror. It’s a digital twin of the product, a twin of the asset, a mirror of the world. This allows us to begin to dynamically adjust processes. The philosophy we have is that we want to create a digital mirror of the real world with this environment.”

-Hans Thalbauer, Senior VP, supply chain and IoT, SAP

The fourth industrial revolution is living up to its name. Digital transformation impacts nearly every industry, but it’s especially useful in applications where it can bring to light valuable data which would otherwise be inaccessible. One example is adding internet-connected sensors to machine tools, allowing production data to be analyzed in the cloud. In healthcare, IoT is used for remote health monitoring, which uses connected devices such as wearables to eliminate the need for some visits and checkups, saving time and costs.

Just like in these examples, supply chain management involves a lot of obscured and inaccessible data, meaning a lot of opportunities for IoT, enabling leaner and more sophisticated supply chains.

Hans Thalbauer, Senior VP supply chain and IoT, SAP

Hans Thalbauer, Senior VP supply chain and IoT, SAP

Supply chains are the specialty of the global industrial software giant SAP. We interviewed Hans Thalbauer, senior VP of supply chain and IoT at SAP, to find out more about how IoT will change industrial supply chains.

“Digital supply chain is all of the solutions and business processes that are relevant for the Chief Operating Officer,” said Hans Thalbauer, senior VP of supply chain and IoT at SAP.  “We define it in a way where we say we need to combine years of ledger planning, we need to include logistics and transportation management topics, but also the engineering, R&D, manufacturing and asset management areas. In this context, industry 4.0 and the industrial internet of things are super important.”

Next-Level Asset Tracking and Traceability

Historically, asset tracking has been done using barcodes and tracking numbers. This approach provides a series of discrete data points as the asset moves through the supply chain. However, this approach can cause problems when something goes wrong. We’ve all experienced the simplest example when ordering a package online. The tracking number shows the package is ‘out for delivery’, but there is no information about where it is or when it will arrive. At home, it’s a small inconvenience. For a factory receiving a shipment of parts, it could lead to confusion, penalties and downtime.

Connected sensors on assets and the vehicles which move them can solve this problem by providing on-demand location and time data. Rather than knowing an asset’s last known check-in, assets could be traceable to their exact current location, allowing personnel to make better decisions. While GPS tracking is by no means a new technology, the development of less expensive and complex devices and systems to achieve it makes it accessible to ever-smaller companies.

In addition, new management software is enabling this better visibility as well.

Traceability is a key focus for Identify 3D, which offers a digital distribution system for managing 3D CAD files, such as part designs.

Joe Inkenbrandt, cofounder and CEO, Identify 3D

Joe Inkenbrandt, cofounder and CEO, Identify 3D

“Every time your file moves in the supply chain, such as from a supplier to a printer, we keep a trace of what happened to that file so that for each part that is being manufactured, you know the authenticity of that product. You can connect it back to the original design or set of data that was used for the production process,” said Joe Inkenbrandt, CEO and Cofounder of Identify3D.

According to Thalbauer, better asset tracking technology feeds into a larger vision for IoT-connected supply chain.

“We need to create the connectivity not only to the things but also to the business partners. And we need to be able to connect to not only the supplier, but also the supplier’s supplier. So, we’re achieving a dream which everyone in supply chain has had for the last few decades. And why is this important? It minimizes risk,” explained Thalbauer.

“For example, consider the recent hurricane in North Carolina. In the area are some automotive plants. Maybe some of them already shut down—this has an impact to their suppliers. In Japan, actually in Hong Kong right now, there’s a typhoon coming. This might have another impact on some of the plants which are there for their suppliers. And if I know this, and if I consider that, and if I have this information that ‘my supplier’s supplier has a plant in Japan and there’s an earthquake and because of that the plant will be down for the next two weeks,’ I can make the decision to order parts earlier or later from others around the world.”

“So, we need to have this type of intelligence. You have a completely free environment, but always in the business context, you say, this supplier is producing this component, where is it coming from? I see where it’s coming from. Which finished projects include a certain part on the BOM? Which customer orders are impacted by that? Oh yeah, these customers orders.”

Fleet Monitoring and Just-In-Time

Toyota pioneered the concept of just-in-time production several decades ago due to the company’s Japan-based operation’s lack of the cash, physical space and local suppliers needed to maintain a large inventory of parts and deliver products in big batches. Instead, the Toyota Production System takes a lean approach to inventory, resulting in faster response time from suppliers and lower investment in in-process inventories.

However, the keystone of JIT is that parts must arrive when you need them. On an automotive assembly line, the windshield wiper station does not have the next bin of wiper blades to install until the current bin is almost empty. If that shipment is delayed, it could cause quality issues or even a line stoppage. If the shipment is early, it causes other problems, as the factory isn’t ready to receive it.

To make this tight schedule work, OEMs have responded by creating strict appointments for shipments. For the OEM, this ensures that parts arrive on time. However, it puts high pressure on suppliers, who must deliver on time or face high penalties. In some cases, suppliers are required to pay for the downtime caused by a late shipment. This massive penalty leads to things like expedited shipping, where suppliers pay a premium to get parts to the OEM on time. It also leads to suppliers keeping an inventory of parts to ensure a stoppage won’t delay a shipment and incur the penalties.

In short, Just-in-time creates efficiency at the OEM but creates inefficiency in suppliers. In turn, those extra costs wind up in the supplied parts.

Theoretically, the most cost-efficient supply chain would utilize JIT all the way from the raw material to the end customer. With IoT, this becomes possible.

“The future will be even more exciting because there will be more and more machine learning capabilities so that we can predict,” explained Thalbauer. “So instead of only knowing and having visibility of what is current and right now and dynamically adjusting to it, we also can start to predict more and more of what might happen. This of course is a very different philosophy which leads us to introduce the so-called touchless supply chain, which is a very much highly automated environment.”

Thalbauer described a three-pronged approach to SAP’s digitization of supply chain management.

“First of all, we are providing the visibility aspect: the KPIs, including manufacturing OEE for example, performance management and strategy. The second aspect that we include is connectivity: connecting digitally to the business partners as well as to the things. We say, ‘to perfect reality, connect digitally.’ For this, we have intelligence around predictive quality management, predictive manufacturing, predictive maintenance. The final aspect includes mobile solutions to address the users, the service technicians, and so on. The tagline that you see us using more and more is ‘digital supply chain connects digitally to perfect reality.’”

The democratization of these tools, such as GPS shipment monitoring and predictive analytics, can save lower-tier suppliers time and money, but visibility is a double-edged sword. A supplier may be required to give production data access to a client, but that data could reveal a certain amount of slack built into the system to ensure deadlines are met. If a client identifies that slack and wants it eliminated, it could cause issues in the relationship.

So, industry 4.0 technology will benefit OEMs. But, will it also benefit those lower in the supply chain?

“If I am the OEM, and if I believe the data that I’m sharing with my contractors and manufacturers is critical, then I will put that as part of my requirements if you want to do business with me you need to have some kind of system that enables you to control the data all the way to the production point,” explained Inkenbrandt, speaking about Identify3D’s digital security and authentication software. “The benefit for the contractor that owns the manufacturing is the ability to meet the requirement of those larger clients when it comes to securing their data featuring their IP.”


Blockchain technology is very early in its adoption cycle. While high-profile projects like cryptocurrency are increasing awareness of the technology, useful applications are few and far between.

One of the most promising applications for blockchain is in supply chain management. Since the technology creates an open, secure record of transactions, blockchain can make different processes across networks more visible and interoperable. SAP is using blockchain in SAP Leonardo, the company’s cloud platform. “IT technology can connect to things—to the augmented machines, to the products, to everything. We then have big data management in this cloud platform and we add machine learning in order to determine the patterns of the data and start to predict, making it intelligent. We add the blockchain in order to automate processes across networks,” explained Thalbauer.

Being a digital security service provider of sorts, Identify 3D is also involved in using blockchain technology. “We are not a blockchain company, we are blockchain enabled. Most of our deployment are using a centralized database. This is because there are not many actors involved today. So, we don’t need to have a distributed ledger. However, we thought of two different, let’s call that proof of concept at this point, because that’s really what they are, where we put the trace part of our software on the blockchain,” explained Inkenbrant.

While blockchain isn’t yet fully integrated into real-world manufacturing yet, it’s definitely poised to play an important role in the factory of the future.

Version Control

One complicated and error-prone process in manufacturing is versioning and iteration. Even within one company, it can be difficult to ensure that the design engineers and the machinists are looking at the same drawing. However, expand that problem across the entire supply chain, and version control becomes an important application area for industry 4.0 technology.

This area is something Identify3D is focused on. “With our software, you can decide who has the right to access your parts, what machine they need to be made on, what materials, what specs, any type of requirement, you define that,” explained Inkenbrandt. “Then we have a component that we call enforce, which is the piece of the software that will fit in the machine, depending on the machine manufacturer, sometimes it’s in the controller, sometimes it’s in the software that drive the machine. That piece needs to be connected to the machine, to read the settings of the machine to authorize for production or deny if the settings are incorrect.”

The Digital Mirror For All

Much of what is reported as new or emerging industry 4.0 technology is not especially new—it has existed at the largest, most powerful manufacturing companies for years, but is not viable for small and medium-sized manufacturers to execute due to high costs. However, the breakthroughs come as new technology lowers the cost barrier for advanced functionality, allowing small companies to get involved. For example, a connected feedback control and monitoring system existed last century, but required a massive investment and a factory essentially built around the system, with a central control room. Today, that level of control is essentially possible with smart network-connected plug-and-play sensors, a cloud IoT platform, and a laptop.

I asked Hans Thalbauer about this technology’s applicability in smaller companies. “Absolutely,” he answered. “First of all, the productivity of automation can be increased. The second piece is the energy management of the facilities, for example. You can do a lot in one single plant with connecting to the IoT. Even if it’s one warehouse or one distribution center, it’s all about lights, doors opening for forklifts driving through, for example. You can decrease the level of energy use a lot, and at the same time increase the productivity and efficiency of how you run a plant. This is true for one single plant, or huge plants or huge manufacturing companies.”

To explore more about Industrial IoT and industry 4.0, read What is Industry 4.0, Anyway?