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Man in monitoring performance in a smart factory

What is a smart factory?

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.

What is a smart factory

Smart factories for a changing world

In the past few years, it’s become increasingly apparent to business leaders that digital transformation is an urgent priority for supply chains and manufacturing operations that hope to be competitive and resilient in the 2020s. The pandemic further exposed global supply chain weaknesses and industry vulnerabilities. An article in Forbes magazine reiterated this, stating “COVID-19 has shown the world something that the manufacturing industry should already know. Traditional supply chains and manufacturing ecosystems are failing and we need to shift to a more adaptable, agile solution that is fully digitally enabled.”


Consumer expectations are also contributing to the development of smart factory technologies and the factory of the future. Known as the Amazon Effect, consumer demand for next-day delivery has been rising at a steady and rapid pace. According to Entrepreneur magazine in 2019, “For better or worse, the U.S. economy and the global economy are in the throes of the Amazon Effect. […] E-commerce providers have been under ever-increasing pressure to match Amazon’s speed and efficiency, and there is no evidence consumer expectations are easing.” This trend has been a major factor in the rising demand for smart factory technology, as outdated systems prove unequal to meeting the scale of logistics and warehousing capacity that is needed to keep pace with this phenomenon.


Manufacturers and supply chain managers face further risk and operational disruption as they strive to minimize their reliance upon international partners. Smart factory solutions like on-demand manufacturing and virtual inventories can certainly minimize dependency upon overseas suppliers and manufacturers. However, as Harvard Business Review points out in a 2020 article, it is easier said than done to bring manufacturing back to the U.S. “Manufacturers have turned to specialists and subcontractors who narrowly focus on just one area – and even those specialists have to rely on many others. And just as the world has come to rely on different regions for natural resources like iron ore or lithium metal, so too has it become dependent on regions where these specialists reside.” Increasing domestic manufacturing can certainly reduce cost and supply chain risk, but it doesn’t necessarily eliminate the need for overseas partners nor reduce the total number of links in the chain. It is therefore more crucial than ever that digital factory technologies are in place to optimize efficiency and visibility.

How does a smart factory work?

We often talk about automated processes as if they were unique to a smart factory – yet automation and robotics have been in use for decades in manufacturing operations. Many traditional factories use automated machines such as barcode scanners, cameras, and digitized production equipment in various parts of their operation. But those devices are not interconnected. The people, assets, and data management systems in a traditional factory all operate in isolation from one another and must be manually coordinated and integrated on an ongoing basis.


A smart digital factory works by integrating machines, people, and Big Data into a single, digitally connected ecosystem. A smart factory not only curates and analyzes data, it actually learns from experience. It interprets and gains insights from data sets to forecast trends and events and to recommend and implement smart manufacturing workflows and automated processes. A smart factory undergoes continuous procedural improvement to self-correct and self-optimize – it can teach itself (and humans) to be more resilient, productive, and safe.


The structure of a smart factory


The basic structure of a smart factory can be broadly summarized into three steps:

Structure of a smart factory

The three main procedures that make up a smart factory

  1. Data acquisition: Artificial intelligence and modern database technologies allow for the curation and acquisition of disparate sets of useful data across the business, supply chain, and the world. By way of sensors and gateways, the Industrial Internet of Things (IIoT) allows connected machines to gather data into the system. Through myriad other data portals, AI-powered systems can compile data sets related to performance, market trends, logistics, or any other potentially relevant source.
  2. Data analysis: Machine learning and intelligent business systems use advanced analytics and modern data management solutions to make sense of all the disparate data gathered. IIoT sensors can warn when machines need repair or servicing. Market and operational data can be compiled to spot opportunities and risks. Workflow efficiencies can be studied over time to optimize performance and auto-correct as warranted. In fact, the data sets that can be compared and analyzed present an almost infinite possibility of combinations to inform digital factory optimization and supply chain forecasting.
  3. Intelligent factory automation: Once the data acquisition and analysis have taken place, workflows are established and instructions are sent to the machines and devices within the system. These devices may be within the four walls of the factory or far afield in the logistics or manufacturing links in the supply chain. Smart workflows and processes are continually being monitored and optimized. If a news report warns of a spike in demand for a certain product, 3D printer workflows can be instructed to ramp up production priority for that item. If a shipment of raw materials is delayed, inventory buffers can be put into rotation to eliminate any disruption.

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: Consumers are increasingly willing to spend a bit more for products they know 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. 

Achieving smart factory transformation

2020 ushered in enormous disruption and operational risk for businesses around the world. Prior to COVID-19, a 2019 Deloitte survey of over 600 senior manufacturing sector executives reported that 86% believed that in the next five years, “Smart factory initiatives will be the main driver of manufacturing competitiveness.” Today, more than ever, digital transformation and supply chain modernization have changed from long-term goals to urgent and immediate priorities for companies determined to innovate and compete.  


How you begin your smart factory transformation will depend on where you are now and which processes are the most critical to your business. An initial systems audit will help you analyze and take stock of existing processes, assets, and business systems.  Before you can begin to automate workflows and manufacturing processes, you will need to assess what they look like today.   


At the outset of your digital transformation journey, it’s also important to remember that the “smart” in a smart factory comes from its advanced data analysis and data management capacity. A modern database and a robust ERP system are the brains behind a smart factory. They support the advanced functionality that drives the system. A major factor in the success of any smart factory transformation will be the capability of existing business systems to manage Big Data and to integrate technologies like AI, machine learning, and advanced analytics. 


Finally, one of the best things about smart factory transformation is that, to be effective, it doesn’t have to happen all at once. Nor does it require existing business activities to be interrupted or paused. Every initiative a business takes to modernize and optimize their digital systems will bring them a step closer to a fully integrated smart factory. Furthermore, by their very nature, smart factory technologies gather and analyze data. This means that the impact and ROI of any new digital technologies can – from the moment of installation – be measured and assessed.

Smart factories in action

  • See how developing more transparent smart factory processes helped Absen improve productivity.
  • Learn how Arpa Industriale, a producer of interior design materials, built a smart factory that drove performance improvements and helped reduce energy, water, and gas usage.
  • Find out how automation and connectivity helped WAGO develop an interconnected framework for machinery of any age.

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