What Is a Smart Factory?

SAP’s Insights post combines data-driven research with expert knowledge to explain Smart Factories. Read the full article to learn more.

As the name implies, a smart factory is… smart. An interconnected network of machines, communication mechanisms, and computing power, the smart factory is a cyber-physical system that uses advanced technologies such as artificial intelligence (AI) and machine learning to analyze data, drive automated processes, and learn as it goes.

Smart factories and smart manufacturing are part of the technological transformation known as Industry 4.0 or the Fourth Industrial Revolution. Each of the first three industrial revolutions was born out of an innovative new technology that completely changed the way we worked and manufactured goods: namely, the steam engine, the assembly line, and the power of the computer. Today, the fourth revolution is driven by digital transformation and intelligent automation.

Benefits of a Smart Factory

Many businesses have made do with supply chain operations and systems that have basically not changed in decades. But with consumer expectations and economic uncertainty at an all-time high, supply chain managers need solutions that can provide measurable and significant benefit – and can bring it quickly. According to Forbes magazine, in 2017 just 43% of manufacturers had smart factory initiatives underway. By 2019, 68% of them did. For companies that invest in digital transformation and smart factory solutions, there is potential for significant business benefits, including:

  • Productivity and efficiency: Throughout its history, manufacturing has primarily been about reacting – looking at an event or a trend that has already happened and then trying to steer the business in a different direction after the fact. Smart factory technologies are designed to reduce the need for reactive practices and move supply chain management into a more resilient and responsive mode. The use of predictive analytics and Big Data analysis allows for optimized processes to be identified and put in place. Just-in-time inventory management, accurate demand forecasting, and improved speed to market are a few of the efficiency benefits that smart factories deliver. Augmented by digital insights, the people working in smart factories are also able to streamline their efforts, adding to the overall productivity of the operation. In their 2019 smart factory study, Deloitte tells us that “Companies report up to 12% gains in areas like manufacturing output, factory utilization, and labor productivity after they invested in smart factory initiatives. Moreover, manufacturers with smart factories will likely surpass traditional factories with 30% higher net labor productivity by 2030.”
  • Sustainability and safety: In a 2019 Nielsen survey, 66% of consumers indicated that they would be willing to spend up to 10% more for products they knew to be sourced and manufactured using socially and environmentally responsible methods. Modern smart factory technologies make it easier than ever for businesses to identify and implement opportunities for more green, safe, and socially responsible manufacturing practices. Digital innovations such as blockchain and RFID sensors can be used by smart factory managers to ensure irrefutable provenance and quality control of all materials and supplies – coming from even the most distant links in the supply chain. And closer to home, the International Society of Automation reports that robots and automated devices can help reduce or eliminate three out of the five leading causes for workplace injuries.
  • Product quality and customer experience: Much like the kids’ telephone game, traditional manufacturers often had a difficult time ensuring their directives were being accurately received and followed by the lower tier suppliers and manufacturers in their supply chains. In the smart factory, cloud connectivity and end-to-end visibility in smart factories brings real-time insights and recommendations to all tiers of the manufacturing process. The ability for rapid customization and response to shifting trends means that products are tightly up to date with customer desires. Advanced analysis of system data quickly spots weaknesses or areas for improvement. This leads to improved competitiveness in the market, better product reviews, and fewer costly returns or recalls.

Smart Factory Technologies

Smart factory technologies are highly agile. As digital transformation initiatives ramp up within a business, there are almost infinite possibilities to scale, modify, and adapt as needed.

  • Cloud connectivity: Whether public, private, or hybrid, the cloud is the conduit through which all data and information flows across a smart factory. Business-wide and global cloud connectivity ensures that each area of the business is operating with real-time data and that there is immediate visibility into all the connected assets and systems within the supply chain.
    Artificial intelligence: Operational systems that use integrated AI technologies have the speed, power, and flexibility to not only gather and analyze disparate data sets, but to provide real-time insights and responsive recommendations. The automated processes and intelligent systems within a smart factory are continually optimized and informed by artificial intelligence.
    Machine learning: One of the most valuable benefits that machine learning brings to the smart factory is its capacity for advanced predictive maintenance. By monitoring and analyzing manufacturing processes, alerts can be sent out before system failure occurs. Depending upon the situation, automated maintenance can take place or, if necessary, human intervention can be recommended.
  • Big Data: Robust and large data sets allow predictive and advanced analytics to take place in a smart factory. Businesses have long understood the strategic value of Big Data but, until recently, have often lacked the systems necessary to make meaningful use of it. Digital transformation in supply chains and smart factories has opened up a world of potential for businesses to optimize and innovate using Big Data insights.
  • Industrial Internet of Things (IIoT): In a smart factory, when devices and machines are fitted with unique identifiers and the ability to send and receive digital data, they comprise an IIoT network. Modern machinery may already have digital portals but even decades-old analog machines can be fitted with IIoT gateway devices to bring them up to speed. Essentially, data sent from the device reports on its status and activity, and data sent to the device controls and automates its actions and workflows.
  • Digital twins: An exact, virtual replica of a machine or system becomes its digital twin. It allows for maximum innovation and creativity with minimal operational risk. A digital twin can be pushed to its limit, reconfigured in multiple virtual ways, or tested for its compatibility within an existing system – all without ever incurring risk or resource wastage in the physical world.
  • Additive printing: Also known as 3D printing, it allows smart factories to use intelligent automation for on-demand manufacturing. This is particularly crucial in times of unexpected supply chain disruption or sudden product demand. But even when it’s business as usual, virtual inventories can greatly minimize risk and waste by allowing just-in-time manufacturing.
  • Virtual reality (VR) and augmented reality (AR): In 2019, Assembly Magazine described some of the applications of VR wearables in the smart factory as “being able to tie together environmental conditions, inventory levels, process state, assembly error data, utilization, and throughput metrics in a context-dependent manner (where you look or walk).” This immersive sensory experience lets users augment their natural senses with real-time data from across any location or point in time – to give unobstructed awareness of factory status.
  • Blockchain: Fortunately, as smart factory technologies advance, security solutions are keeping pace alongside them. Blockchain has many applications in the supply chain, from creating “smart contracts” with suppliers to tracking the provenance of goods and handling across the supply chain journey. In smart factories, blockchain is especially useful to manage access to connected assets and machines across the business – protecting the security of the system and the accuracy of records held by those devices.
  • Modern database: In-memory databases and modern ERP systems are the “brains” behind Industry 4.0 and all smart factory and intelligent supply chain solutions. Legacy, disk-based databases are pushed – often well beyond their limits – to keep up with the complex data management and analytics functionality needed to run smart factories and modern supply chains.


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