Industry 4.0 and Finance (Part 1)

January 17, 2019 Sanjay Galal

Industry 4.0 and FinanceWith all the current discussions about Industry 4.0 and the digitalization of industrial value chains, it seems to me that people sometimes forget to mention my own field of endeavour: finance. I suppose that’s not surprising. Finance, alas, may not be the sexiest component of the evolving Industry 4.0 value chain. When the awards are handed out, it’s the men and women implementing automation to the shop floor, introducing AI-backed chat bots into enterprise-wide collaborative networks, or applying predictive analytics for enormous savings in inventory and logistics, who go home with the ribbons, the accolades, the admiration and the Internet articles.

I am not, however, complaining. As digitalization progresses, efficiencies and innovations in these areas create overall gains in competitive advantage and profitability, and they deserve to be recognized and rewarded. I would like, however, to point out three things I think are important to consider in relation to finance and Industry 4.0:

Point 1: Finance is the Mother of all Data Providers

The data revolution is dependent on structured data, that is, data organized in a manner that makes it accessible and useful to computer software. Unlike most other departments in the manufacturing environment, finance has been creating meticulously-structured data for automated computing systems for decades. In fact, as evidenced by protocols such as double-entry bookkeeping, structured data has always been an essential component of finance. Finance, like Industry 4.0 itself, is data-driven, and it would be very odd if the advantages of Industry 4.0 did not carry over into the world of finance.

Point 2: Accounting is the Central Nervous System of Enterprise Resource Planning (ERP) Systems

ERP is, at its most basic level, accounting software. When a bolt leaves a kanban  basket, the ERP system is there to record the cost and order a new one. Finance welcomes the advent of the Internet of Things and cyber-physical systems, because it gives us granular insight into, and control over, the costs of producing goods and services. As financial workers, we thrive on a universe of details, and on the ability to drive insights and execute decisions from those details. In that sense, Industry 4.0 is an extension of what we already do, but with exponential benefits.

Point 3: Finance is Changing Rapidly in Response to Industry 4.0 Opportunities

Financial workers are no slouches. We know that the world is changing, and we know when it’s time to adapt. The world’s economies have evolved from the old push-paradigm, in which manufacturers created goods that set the consumer agenda, towards a pull-paradigm, wherein the consumer is king, and factories are flexible enough to profit from shorter, rapidly-changing production runs. This new economy will be less about economies-of-scale than previous economies, and more about economies-of-technology. Technologies that create agility and flexibility will be key to the profits of future manufacturers. This will, of course, require changes in finance, changes predicated on many of the same Industry 4.0 technologies responsible for efficiencies in the warehouse, the loading dock, and on the shop floor.

Naturally, the question arises – will financial workers even be necessary in the automated future? Only time will tell, but for the moment, our jobs are secure – and essential. CPAs and financial analysts are busy helping companies prepare for Industry 4.0, asking, and attempting to answer, a battery of important questions.

Is the cost of transformation justified by potential future profits?

Will the purchase of new technologies, or engagement in Industry 4.0 opportunities, result in quantifiable advantages?

To what degree can we quantify the ‘economies of technology’ in comparison to traditional investments?

What new risks arise from the connectivity and transparency of Industry 4.0 initiatives?

And, in the face of constant innovation, what new business models and value streams can be monetised to extract value?

Despite the Chinese admonition about living in interesting times, I am of the opinion that it’s very exciting to live and work in the ongoing rollout of an industrial revolution. In Part 2 of this blog, I will discuss some of the concrete applications of Industry 4.0 that are changing the face of finance.

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