Supplier integration in industry 4.0 - requirements and strategies

Müller, Julian; Veile, Johannes W.; Voigt, Kai-Ingo Conference Paper Supplier integration in industry 4.0 - requirements and strategies Provided in Cooperation with: Hamburg University of Technology (TUHH), Institute of Business Logistics and General Management Suggested Citation: Müller, Julian; Veile, Johannes W.; Voigt, Kai-Ingo (2018) : Supplier integration in industry 4.0 - requirements and strategies, In: Kersten, Wolfgang Blecker, Thorsten Ringle, Christian M. (Ed.): The Road to a Digitalized Supply Chain Management: Smart and Digital Solutions for Supply Chain Management. Proceedings of the Hamburg International Conference of Logistics (HICL), Vol. 25, ISBN 978-3-7467-6535-8, epubli GmbH, Berlin, pp. 23-36, https://doi.org/10.15480/882.1801 This Version is available at: https://hdl.handle.net/10419/209341 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by-sa/4.0/ Supplier Integration in Industry 4.0 – Requirements and Strategies Julian Marius Müller1, Johannes W. Veile2, Kai-Ingo Volgt2 1 – Salzburg University of Applied Sciences 2 – University of Erlangen-Nürnberg Cross-company networking is essential to successfully implement Industry 4.0. In this context, numerous new demands on suppliers arise leading to integration challenges that require specific integration strategies. While these topics are important in business practice, an aggregated holistic overview is still missing. Therefore, this article examines new demands on suppliers, challenges in the implementation process, and integration strategies for supplier integration in the context of Industry 4.0. Expert interviews with 15 different industrial companies fromthesectorsmechanicaland plantengineering, electronicsand electricalengineering, automotive, and information and communication technology serve as an empirical basis. This study provides insights into the challenges and strategies of supplier integration, helps academia to understand this topic, and indicates need for future research. Furthermore, this paper develops implications for corporate practice in the area of supplier management. Keywords: Industry 4.0; Industrial Internet of Things; Supplier Integration; Integration Strategies First recieved: 17.May.2018 Revised: 07.Jun.2018 Accepted: 26.Jun.2018 23 Supplier Integration in Industry 4.0 – Requirements and Strategies 1 Introduction Industry 4.0 aims to establish intelligent, self-managing, and interconnected industrial value creation to ensure future competitiveness of the manufacturing industry (Kagermann et al., 2013; Kang et al., 2016; Lasi et al., 2014). Both research and practice have mainly focused on technological developments and the technical implications for value creation so far (Brettel et al., 2014; Emmrich et al., 2015; Kagermann et al., 2013; Kans & Ingwald, 2016; Kowalkowski et al., 2013; Liao et al., 2017; Rennung et al., 2016). Furthermore, almost exclusively large companies have been the focus of academia and corporate practice (Kowalkowsi et al., 2013; Radziwon et al., 2014). Up to the present day, Industry 4.0 is primarily thought within the boundaries of a company and consequently present efforts aim at implementing the concept in a company. Yet, the predicted potential of intelligent interconnected value-added processes can only be exploited in its entirety by interconnecting companies and value chains resulting in networks (Kagermann et al., 2013; Lasi et al., 2014). Therefore, the implementation of the holistic concept Industry 4.0 also requires a holistic approach. However, integration processes across company boundaries pose numerous challenges. First, such integration requires openness, willingness to cooperate, and compatibletechnologieson allsides(Kiel etal., 2017; Müller etal., 2018a). Second, the integration of suppliers requires, e.g., them to have the necessary infrastructure and drive forward the implementation of Industry 4.0. As suppliers are often small and medium-sized enterprises (SMEs), some might have neither the necessary resources nor access to the required knowledge (Icks et al., 2017, Müller et al., 2018b). Therefore, especially SMEs need to find adequate partners for cooperation (Müller et al., 2017). The aim of this study is to analyze how to integrate suppliers in the context of Industry 4.0. The following research questions are proposed: (1) Which requirements need to be met when integrating suppliers? (2) Which challenges arise when integrating suppliers? (3) Which strategies can be used to integrate suppliers? 24 2 Theoretical background Shedding light into the research object is important for several reasons. The way suppliers are integrated into the value creation process of a company has an impact on the extent to which possibilities Industry 4.0 can be used at all (Siepmann, 2016). Supplier integration represents a source of differentiation and can therefore help to create sustainable competitive advantages. Last but not least, versatile, realtime-optimized, and autonomous cross-company value creation networks can only be establishedthrough adequate supplier integration, which is the overriding goal of Industry 4.0 (Bauernhansl, 2014). 2 Theoretical background 2.1 Industry 4.0 The term ”Industry 4.0” refers to a paradigm shift in industrial value creation. It is particularly widespread in the German-speaking world (Burmeister et al., 2015; Lasi et al., 2014), while the term ”Industrial Internet of Things” is particularly used in the Anglophonic world (Hartmann & Halecker, 2015; IIC, 2017). The origin of Industry 4.0 dates back to the year 2011 and was significantly influenced by the work of Kagermann et al. (2011) in the context of the Hanover Fair. Furthermore, they published implementation recommendations in 2013 in a final report of the Working Group Industry 4.0 (Kagermann et al., 2013). In the age of industrialization, technical innovations repeatedly led to paradigm shifts that are called ”industrial revolutions” ex-post (Lasi et al., 2014). The first industrial revolution began at the end of the 18th century and was characterized by the mechanization of the value creation process and the use of water and steam power. Dated back to the beginning of the 20th century, the second industrial revolution was characterized by mass production through assembly line production, the application of the Taylor principle of division of labor, and the use of electrical energy. The use of electronics and information technology to automate and digitize production heralded the third industrial revolution in the 1970s. All industrial revolutions have led to an increasing degree of complexity of the production systems (Bauernhansl, 2014; Kagermann et al., 2013; Kelkar et al., 2014; Lasi et al., 2014). 25 Supplier Integration in Industry 4.0 – Requirements and Strategies It is predicted that the present economy is at the beginning of a fourth industrial revolution, summarized by the term Industry 4.0. This new paradigm shift is characterized by a digital interconnection and virtualization of the industrial value creation process (Bauernhansl, 2014; Kagermann et al., 2013; Kelkar et al., 2014; Lasi et al., 2014). For the first time in history, a change of paradigm is announced a priori (Drath & Horch, 2014). For this reason, Industry 4.0 is to be understood as a vision whose potential can be realized in the future (Drath & Horch, 2014, Lasi et al., 2014). However, as the technical foundations have existed for some time, while the practical implementation is only gradually developing, some scientists perceive Industry 4.0 more as an evolution than a revolution (Kagermann, 2014; Sendler, 2013). Industry 4.0 is controversially discussed in science, hence no common understanding has emerged so far (Bauer et al., 2014). According to Bauer et al. (2014, p. 18), Industry 4.0 is a ”real-time capable, intelligent, horizontal, and vertical networking of people, machines, objects” and information and communication technology systems. Based on intelligent, digitally interconnected systems, people, machines, plants, logistic processes, and products can communicate and cooperate in real-time with each other (Platform Industrie 4.0, 2017). Industry 4.0 is ”a new level of organization and control of the entire value chain across the life cycle of products” (Platform Industry 4.0, 2017). The interconnection of the operational value creation process takes place across corporate functions, companies, and entire value creation chains (Kagermann et al., 2013). Therefore, a high level of standardization of interfaces between companies is required (Müller & Voigt, 2017). Using new technologies enables the development of an intelligent value-added system within the framework of Industry 4.0. First, cyber-physical systems (CPS) result from the interconnection of embedded systems and link information technologies with mechanical and electrical components (Becker, 2015; Kagermann et al., 2013; Zhou et al., 2015). In addition, the collection, analysis, and use of large amounts of data play a decisive role and is subsumed among the term ”big data”. Finally, cloud solutions for storing and transmitting data via stable networks are used (Rüßmann et al., 2015; Bauer et al., 2014). Research on the subject of Industry 4.0 is generally still in its infancy, which is particulartrue forthe implementationacrosscompanybordersand valuecreation chains. 26 3 Methodology 2.2 Supplier Management and supplier integration Supplier management is ”the design, management, and development of a company’s supplier portfolio and supplier relationships” (Wagner, 2002, p. 11). The aim of supplier management is to secure a company’s demand through an efficient supplier network and thereby contribute to the value creation (Helmold & Terry, 2016). Supplier integration is a sub-process of supplier management (Helmold & Terry, 2016) representing a form of verticalcooperation (Möller, 2002). This implies close strategic cooperation with both key suppliers and customers in order to generate advantages (Schoenherr & Swink, 2012; Thun, 2010; Wiengarten et al., 2016). The goal ofsupplier integration is to designintegrationstrategies, practices, processes, and behaviors in a collaborative, synchronized, and well-controllable manner (Zhao et al., 2015). Combining a company’s resources with the capabilities of its supplier and realizing joint activities can help to generate sustainable competitive advantages (Rink & Wagner, 2007). Shortening product development and product life cycles and the associated fast, flexible, and efficient production processes in the context of Industry 4.0 increases the importance of supplier integration (Hofbauer et al., 2016). 3 Methodology 3.1 Research design The study follows a qualitative research design to answer the research questions (Gläser & Laudel, 2010). A qualitative design is characterized by considering and analyzingdifferentperspectivesandintegratingtheinterviewees’andresearchers’ views (Flick, 1995). This design is particularly suitable for the research at hand because supplier integration in the context of Industry 4.0 is a very topical issue and little comprehensive knowledge is available (Kaiser, 2014). Semi-standardized in-depth expert interviews serve as a data basis (Gläser & Laudel, 2010). All interviews followed an interview guideline and were conducted via telephone in German. On the one hand, the interview guideline was designed so that the interviewee was able to openly respond to questions and present his or her subjective perspective. The result was a natural course of conversation 27 Supplier Integration in Industry 4.0 – Requirements and Strategies in which the interviewee could answer freely. In addition, the interviewer could follow up on certain questions or adapt his questions. On the other hand, a partial standardization of the interviews allowed to compare and evaluate the interviews (Mayring, 2015; Gläser & Laudel, 2010). After general questions, the experts were asked about their opinion on the topic of supplier integration in the context of Industry 4.0. The main part contained specific questions on the sub-topics (1) challenges with suppliers in the context of Industry 4.0, (2) expectations of suppliers as for Industry 4.0, (3) and adequate integration strategies. All interviews were audio-recorded and subsequently transcribed with the permission of the interview partners leading to more than 200 pages of text material. For confidentiality reasons, all interviews were anonymized. 3.2 Data sample The data sample comprises 15 semi-standardized in-depth expert interviews. Originally, 46 companies were surveyed, and thereof experts from 15 companies wererecruited foran interview, corresponding toa response rateof approximately 33 percent. The surveyed experts come from a heterogeneous sample of companies, headquartered in the Federal Republic of Germany. The sample includes companies from the sectors electrical engineering and electronics, mechanical and plant engineering, automotive, and information and communication technology. These sectors were chosen because they are representative for the most important sectors in Germany, and as they are in particular, driving forward Industry 4.0 (Kagermann et al., 2013). The following figure shows the distribution of enterprises within the sample. The size of the sample companies is heterogeneous. It varies in terms of turnover from approximately 150 million to approximately 80 billion euros and in terms of employees from approximately 3,000 to approximately 400,000 employees. All experts hold a position in either medium or upper management and have several years of business experience. The interviewed positions include nine representativesfrompurchasingdepartments,ofwhichsixareheadofpurchasing, two ChiefDigital Officers, oneChief ExecutiveOfficer, one Chief Technology Officer, one head of external cooperation, and one head of supplier management. 28 3 Methodology Figure 1: Sector distribution of sample companies All interviews were conducted from April to June 2017 via telephone. In accordance with the interviewees, the interviews were audio-recorded and transcribed. 3.3 Data analysis The interviews were examined using a qualitative content analysis according to Mayring (2015). Therein, the experts’ statements are reduced to their core statements and, later on, paraphrased and subsequently generalized (Mayring, 2015). The paraphrases, which contain similar content, can be divided into few statements, which Mayring calls categories. The categories are formed inductively 29 Supplier Integration in Industry 4.0 – Requirements and Strategies Liao, Y. and L. 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