With evolution of Industry 4.0, how should we operate our production lines and factories, how should we manage and optimize inventory, how should we deploy our workers, how should we run our businesses, how should we manage our supply chains? This chapter aims to highlight the impact of Industry 4.0 on manufacturing systems and services, as well as supply chains, in particular, on inventory systems and optimization. An integrative R&D framework for inventory systems modeling and optimization is proposed, which directs our R&D effort in modeling and optimizing inventory systems with Industry 4.0.
- Industry 4.0
- cyber-physical systems
- Internet of Things
- Internet of Services
- inventory systems
- inventory optimization
The world is experiencing Industry 4.0, the fourth industrial revolution. The first industrial revolution took place in the eighteenth century with the introduction of mechanical production machines powered by water and steam. The second industrial revolution started at the beginning of the twentieth century with mass production powered by electric energy. The third industrial revolution came in 1970s with production automation using electronics, computers and information technology. The current industrial revolution began in the early of this millennium with autonomous production using Cyber-Physical Systems (CPS), Internet of Things (IoT) and Internet of Services (IoS). This digitization not only enables the integration of processes and systems across companies and industrial sectors, but also creates new business models and value generation opportunities.
Industry 4.0 has been greatly influencing people’s daily life in every aspect, from shopping to dining, from working to entertaining, etc. It is changing people’s life styles and living behaviors, even thinking and mindset. Industry 4.0 has brought a revolutionary impact to manufacturing systems and services, as well as supply chains. In the environment of Industry 4.0, factories are smart, products are smart, and customers are demanding for being all round served with great satisfaction. Enterprises and businesses are digitalized, profitable and sustainable. Manufacturing systems and services are real time capable, interoperable, modular, decentralized, virtualized, and service oriented. Supply Chains are fully visible, connected and integrated.
Digitalization, visibility, connectivity and interoperability are the essence of Industry 4.0. With rapid growth of Industry 4.0 technologies, inventory systems and optimization are being transformed to a new state. This chapter explores what is the impact of Industry 4.0 on inventory systems and optimization, how Industry 4.0 enables the transformation of inventory systems and optimization to a new state and what are the benefits of such transformation to the industry.
We briefly review Industry 4.0 and enabling technologies in Section 2. In Section 3, we discuss the possible changes with factories, products, customers and businesses in the environment of Industry 4.0. Section 4 highlights the attributes of manufacturing systems and services with Industry 4.0. Section 5 discusses the benefits brought by Industry 4.0 to businesses. In Sections 6–8, we focus on inventory systems and optimization. Section 6 explores the impact of Industry 4.0 on inventory systems, and Section 7 discusses the impact of Industry 4.0 on inventory optimization. In Section 8, we propose a new integrative R&D framework for inventory systems modeling and optimization. Section 9 concludes the chapter.
2. Industry 4.0 and enabling technologies
Industry 4.0 is a transition to the digital transformation of industries, a merger of the physical and digital worlds. Industry 4.0 is also a fusion of technologies that clear the boundaries among the physical, digital, and biological spheres [1, 2, 3]. Those technologies include Artificial Intelligence, Robotics, Internet of Things, Autonomous Vehicles, 3-D Printing, Nanotechnology, Biotechnology, Materials Science, Energy Storage, and Quantum Computing [4, 5, 6, 7, 8, 9, 10]. In this chapter, we shall not detail the mentioned technologies, but briefly highlight how Industry 4.0 is enabled by the technologies.
Industry 4.0 is enabled by the technologies that integrate the digital and real worlds. As an illustration, the core technologies related to manufacturing systems and services, and supply chains, are elaborated as follows:
3. Factories, products, customers and businesses in the environment of Industry 4.0
Industry 4.0 uses digital technologies to make manufacturing more agile, flexible and responsive to customers. It is able to create a smart factory where the Internet, wireless sensors, software and other advanced technologies work together to optimize the manufacturing system and improve customer satisfaction. Industry 4.0 enables a business to react more rapidly to market changes, offer more personalized products and increase operational efficiency in a cycle of continuous improvement.
Industry 4.0 is creating intelligent products, processes and procedures. In a smart factory, workers, machines and resources easily communicate via the ubiquitous connectivity of people, things and machines. Products, transportation equipment and tools cooperate in order to create better each following production step. It leads to the connectivity of virtual world and physical objects in the real world.
4. Manufacturing systems and services with Industry 4.0
Industry 4.0 is connecting systems, machines, and work units in order to create intelligent networks along the value chain that can work separately and control each other autonomously but in a cohesive manner. In the Industry 4.0 environment, the key attributes of manufacturing systems and services are real time capability, interoperability, modularity, decentralization, virtualization and service orientation.
5. Benefits to businesses
Industry 4.0 is making it easier for companies to collaborate and share data among customers, manufacturers, suppliers and other parties in supply chain. It improves productivity and competitiveness, enables the transition to a digital economy, and provides opportunities to achieve economic growth and sustainability.
In the environment of Industry 4.0, all the parties in the supply chain share the data from their production sites, vehicles, warehouses and databases in real time. Real-time POS (point of sales) and inventory data are available to understand the business situation. Customer urgent orders can be attended timely with customer satisfaction. Condition and location of products are trackable and controllable. Product quality is better controlled. Inventory is better managed. Equipment settings are self-adjusted based on materials used, products being made and other ambient conditions. Mass-produced products are customized according to the needs of an individual customer. Equipment can be monitored remotely and malfunctions can be predicted accurately. Whatever business is, a fluid digital continuum is able to connect customers, suppliers, partners, production equipment and products throughout the lifecycle of the product and services. The benefits brought by Industry 4.0 to businesses are specifically summarized as follows:
In a summary, Industry 4.0 enables a digitally integrated and intelligent value chain offering almost limitless possibilities. Industry 4.0 solutions improve operations efficiency, productivity, product quality, inventory management, asset utilization, time to market, agility, workplace safety and environmental sustainability. In the following sections, to be more specific, we highlight the impact of Industry 4.0 on inventory systems and optimization, and propose a new integrative R&D framework for inventory systems modeling and optimization in the Industry 4.0 environment.
6. Impact of Industry 4.0 on inventory systems
In the business world, inventory is very important, which is directly linked to cash and cash flow. Inventory appears everywhere, in a visible form or non-visible form. In manufacturing, there are raw material inventory, work in process (WIP) inventory, and finished goods inventory, which are all in a visible form. In communication, for example, bandwidth, server and memory card capacity can be considered as inventory, in a non-visible form. Thus, to efficiently and effectively managing inventory, either in a visible or non-visible form, is the winning formula to businesses.
In the context of supply chain, suppliers have raw material inventory, manufacturers have raw material inventory, work in process (WIP) inventory and finished goods inventory, distributors have semi-product inventory and finished goods inventory, retailers have finished goods inventory. In each stage, inventory need be kept so as to improve the satisfaction level of its downstream stage, reduce certain costs and ensure efficient and effective operations of the supply chain. It is not favorable to hold inventory in each stage because of carrying cost, cash retention, product depreciation, etc. Inventory optimization is to keep the minimal inventory to maximally fulfill the downstream demand, that is, to keep the right balance between the supply from the upstream and the demand from downstream [14, 15, 16, 17].
The impact of Industry 4.0 on inventory systems can be summarized as four aspects: inventory process, inventory classification, inventory system parameters, and inventory system review.
7. Impact of Industry 4.0 on inventory optimization
The purpose to keep inventory is to buffer the uncertainties which may come from the upstream (e.g., suppliers) and the downstream (e.g., customers) so as to timely fulfill customer demand if any. However, to keep the inventory too high will incur a higher inventory cost, while keeping the inventory too little will compromise the customer satisfaction level. It is utmost important to keep the right inventory at the right time in the right place with the right price and the right time duration. Thus, inventory must be optimized to minimize the inventory cost and maximize the customer service level.
Inventory optimization is to decide when to order and how much to order, which constitute an inventory policy. The optimal inventory policy is determined by solving an optimization problem that is composed of an objective function and a set of constraints. The objective function and constraints define the relationships of the system parameters. The objective is either to minimize the total operational cost, or to maximize the customer service level. The decision variables are the time to place an order and the quantity of an order. The optimization problem is formulated based on the assumption of the system parameters. Some of the system parameters are constant, some are variables which change over the time, and some are random variables which change according to a certain probabilistic distribution. The main challenges to optimize an inventory system are how to accurately characterize the system parameters, how to formulate the relationships of the system parameters and construct the objective function and constraints, and how to derive the optimal solution to the optimization problem.
For an inventory system in the environment of Industry 4.0, the values of some system parameters are directly captured in the information systems [18, 19, 20]. Through data analytics, these system parameters can be well modeled and characterized. For some system parameters which are not directly recorded in the information systems, they can be analyzed and described based on their relations to other system parameters. It is very difficult to analytically formulate the relationships of the system parameters, in particular, when the inventory system is complex. With all available data and analysis, it might not be necessary to come out with mathematical formulas for the system parameter relationships. Through extensive deep data analytics, the optimal inventory policy is expected to be achieved as well.
8. New R&D framework for inventory systems modeling and optimization
Industry 4.0 enables digitalization, visibility, connectivity and interoperability across supply chain. The impact of Industry 4.0 on inventory systems and optimization is huge. Industry 4.0 is shaping a new R&D paradigm for inventory systems and optimization. As an initial attempt, we are proposing a new integrative R&D framework for inventory systems modeling and optimization in this section.
There are various types of inventories, in a visible or non-visible form. As an illustrative example, we consider the finished goods inventory in supply chain, where the upstream is suppliers and the downstream is customers, end-users of products, as shown in Figure 1.
The primary function of the inventory is to purchase the products from the suppliers and sell the products to the customers. Through such trading, buy and sell, the revenue will be generated. The main purpose to manage the inventory is to maximize the sales to the customers by holding the minimal stock on hand. Thus, inventory management need to clearly know its customers and well understand its suppliers. Industry 4.0 provides all opportunities for the inventory management to achieve its ultimate goal, maximizing its revenue.
To clearly know the customers is the first important to managing the inventory. Customer is a king, no customer no sales, no sales no revenue, no revenue no business. Through data analytics and market intelligence, customers’ behavior is modeled, and future customer demand is forecasted. The product selling price might have great influence on customer demand. Similarly, the customer satisfaction affects customer demand as well. The analysis on the customer sensitivity to pricing and the effect analysis of the customer satisfaction are able to improve the accuracy of future customer demand forecasts.
To well understand the suppliers is able to reduce the operational cost in managing the inventory. Leveraging all available data and business intelligence, the supplier performance is evaluated and analyzed. From the performance analytics, it is ready to know that which supplier can provide the best quality of products or the best service at which price, which supplier is most reliable, which supplier can deliver the products timely, and which supplier is most responsive and flexible to attend the last minute urgent order.
Conventionally, after estimating the system parameters and forecasting the customer demand, an inventory optimization model is built up to derive the optimal inventory decision in terms of the objective function. With Industry 4.0, all the data about the suppliers, customers and the inventory itself are available to be utilized for establishing an integrative data driven inventory optimization model. Instead of the conventional sequential approach with the assumptions on the system parameters, an integrative data driven approach is applied without the assumption on the system parameters. By knowing the customers and understanding the suppliers, the inventory can be managed efficiently and effectively so that the maximal revenue can be achieved with the maximal customer satisfaction.
Industry 4.0 enables factories smart, products smart, and supply chains smart as well, and makes manufacturing systems and services more agile, flexible and responsive to customers. Through a brief overview on Industry 4.0 and enabling technologies, this chapter discussed the possible changes with factories, products, customers and businesses in the environment of Industry 4.0. The attributes of manufacturing systems and services with Industry 4.0 were highlighted, and the benefits brought by Industry 4.0 to businesses were discussed. To be more specific, the chapter focused on inventory systems and optimization. The impact of Industry 4.0 on inventory systems and optimization was explored, respectively. The new integrative R&D framework for inventory systems and optimization was proposed in this chapter.
How to efficiently and effectively manage inventory is a common challenge for all businesses and companies. It has been a long standing issue in industrial practice, and there is no universal solution to all businesses and companies. It is probably because the conventional approaches and methods for inventory systems modeling and optimization have their limits, or there is lack of the information on knowing customers and understanding suppliers. With Industry 4.0 implementation and progress, it is anticipated that there will be more and more breakthroughs in approaches and methods for inventory systems modeling and optimization.