The Fourth Industrial Revolution and why cash flow is at its center

We’re living in the fourth industrial revolution – a term coined in Germany in 2006. But what does this mean and why is it driving a renewed focus on cash? Here’s everything you need to know.

Whether we recognize it or not we are now living in the Fourth Industrial Revolution. What was first coined in Germany in 2006 as a manufacturing initiative, is now a global technology-led revolution. But what exactly is Industry 4.0, how is it impacting business and why is it driving a renewed focus on cash?

What is the Fourth Industrial Revolution?

Like each of its predecessors, the Fourth Industrial Revolution is an advancement in the technologies that drive business, resulting in a new landscape for commerce. It’s primarily characterized by a blurring of the boundaries between the physical and digital worlds, with rapid developments in technologies like AI, wireless networks, blockchain, big data, and computer processors driving efficiency and change.

Deloitte describes the impact that the Fourth Industrial Revolution could have on business as:

“…the marriage of physical and digital technologies such as analytics, artificial intelligence, cognitive technologies and the internet of things (IoT). This marriage of the physical with the digital allows for the creation of a digital enterprise that is not only interconnected, but also capable of more holistic, informed decision making.”

The key takeaway here is that businesses are transforming from physical entities into smart digital enterprises. The impact of this paradigm shift is difficult to overstate. Established businesses are now being exposed to an ever-increasing rate of change in a global marketplace; subject to external forces that are difficult to comprehend and almost impossible to predict.

And as a result of the pace of change that this industrial revolution is bringing about, new digital market entrants are able to surface with radically different business models, not just disrupting established market leaders, but often annihilating them almost overnight. In 2016 at the WEF, Pierre Nanterme, CEO of Accenture, said that:

“Digital is the main reason just over half the companies on the Fortune 500 have disappeared since the year 2000”

According to McKinsey, the average lifespan of a S&P 500 company is now less than 20 years, versus 61 years back in 1958. And the transformation isn’t just limited to bleeding-edge software companies. Take Tesla, theoretically a car company, in reality a hardware platform (the car) built around a living, beating heart of software. Critically, these companies have completely new levels of insight and agility in the marketplace.

Tesla gathers millions of data points every day on how people drive, and it uses this insight to inform product design. Further, when the Ferrari 458 outpaced the Tesla S, overnight Tesla released a software update to all its cars giving drivers the option to select ‘insane mode’ to regain the top spot. This example of the new world order showcases how companies have intelligent long term product strategies together with the ability to respond with lightning speed to a perceived market threat.

What technologies are behind the Fourth Industrial Revolution?

One of the best ways to understand the potential impact of the Fourth Industrial Revolution is to begin to comprehend the power of the specific technologies that are driving it forward. These are some of the main forces behind the revolution:

AI

Artificial intelligence is now far from a sci-fi concept – it’s already embedded in industries of all sorts. AI programs can recognize patterns, process data, and make bespoke recommendations faster than any human and on a scale previously impossible. And with the power of machine learning, they get better at it every single time.

Internet of Things (IOT)

The Internet of Things is a natural extension of the development of wireless networks – but this time it’s not just computers that are internet-enabled, it’s everything. From wearable tech like smart watches to tracking devices for commercial shipments, if there’s data to be collected, IoT allows for it. This data can then be leveraged by the owner company for insights into consumer behavior, for example, or to uncover inefficient steps in a supply chain.

Cloud technology

Cloud technology isn’t exactly new, but its growing pervasiveness is a direct result of the digital industrial revolution. Cloud software enables efficient decentralization of workforces and cloud storage has revolutionized the way we store information. Both of these open the possibility for massive operational efficiencies – enabling increasingly effective digitalization and decentralization of information, processes, and even teams.

Big data

In a world that seems more complex than ever, good data is key to understanding opportunity. Thankfully, data collection is now more viable for all businesses than ever before, with digitalization meaning that data pertaining to an increasing number of events can be recorded with ease. And with the power of AI, the data that is being collected is also more easily understood.

Keeping up with the revolution

To compete in this new world order, astute companies are marshalling their resources, focusing investment on R&D, productivity improvements, M&A, debt reduction, and technology to enable them to shift their business models towards smarter, digitally enabled enterprises. While cash has always been king in the business world, ample working capital is now arguably more important than ever as businesses seek the monetary fuel to power essential transformation strategies.

Following the 2008 Financial Crisis, banks are no longer the default option for liquidity. Instead, companies are looking to their own operations to free up cash. Company supply chains are a critical target, with The Hackett Group estimating that some $6 trillion is locked up in supply chains in companies across North America and Europe alone. And advisory firm EY estimates that companies can release 5-7% of their revenues in cash back to the business; for a $10bn revenue company this equates to $500-$700m back on the balance sheet.

Further, it’s not just about balance sheet improvements. By managing supplier payments more effectively, companies can reduce their Cost of Goods Sold by tens of millions of dollars, while at the same time ensuring supply chain health through early payment options.

Supply chain challenges holding back the revolution

However, fully realizing the cash prize until now has been challenging. Companies have struggled to truly understand how cash is deployed across their supply chains and the ability to take action to free up and invest cash has been limited for buyers and suppliers alike. Companies have suffered from:

Poor visibility: up to 70% of company revenues can be deployed in working capital to fund operations. Yet companies struggle to gain an accurate picture of how this cash is deployed, where cash is stagnating and how this changes over time.

Broken processes: few companies today are truly connected with their supply chain. Accounts payable process are labor intensive, with over 60% of suppliers still submitting paper invoices. Existing supplier financing solutions do not alleviate the burden, as they too require high levels of manual intervention for reconciliation, deployment, and support.

Siloed solutions: supplier financing solutions only address small parts of the supply chain and can normally only meet a single goal of improving working capital or reducing costs. They are challenging to deploy and once implemented, virtually impossible to adjust to meet changing business conditions.

Misaligned: internal functions including treasury, procurement and finance have operated with conflicting working capital, supply chain cost and supplier health objectives resulting in opposing goals and reduced program performance.

Company-centric: programs to date have primarily been company-centric, prioritizing the buying organization over the welfare of suppliers. Working capital and invoicing programs have therefore struggled to gain buy-in and adoption, limiting their success and often stressing the supply chain.

While working capital programs to date have therefore achieved some degree of success, the friction in the financial supply chain caused by these issues has resulted in added cost, limited cash efficiency and additional strain in the supply chain.

The Fourth Industrial (Cashflow) Revolution

Now however, a separate revolution is taking place alongside the Fourth Industrial Revolution. Driven by the need to release new levels of cash, companies are transitioning from limited working capital programs towards enterprise-wide cash optimization. This transition is both fueled and enabled by the Industry 4.0 technologies. The key attributes of this approach are:

Intelligent: companies today are leveraging big data and analytics to accurately understand how cash is currently deployed across their supply chain by comparing their performance against ‘data lakes’ of real supplier payment behavior. This understanding aids the creation of accurate scenarios and enables them to deploy AI augmented working capital and early payment programs that optimize cash flows for all parties and reduces financing and supply chain costs.

Connected: the advent of true working capital focused networks is enabling businesses to become connected with each other, exchange financial information and access early payment on demand. These networks create new levels of transparency, automate the purchase-to-pay cycle and elevates insight and business agility.

Scalable: by accessing working capital networks, adopting an intelligent approach to payment terms and early payment programs, cash optimization programs are scaled rapidly across supply chains as suppliers access programs digitally and are automatically provided with terms that fit their requirements.

Collaborative: by utilizing an intelligent, data-driven approach treasury, procurement and finance functions can assess and align around common company-wide goals, creating working capital, early payment and cost reduction programs that benefit all parties across the supply chain.

Equitable: supply chain liquidity and resilience is enhanced as suppliers benefit from early payment certainty and financing, which is based on the buyer’s cost of capital and free-to-use invoicing tools.

The effect of this revolution is that businesses across the supply chain are able to cash flow forecast with more confidence, improve the way they manage their cash, and optimize their use of working capital. Working capital processes are more efficient, freeing up cash to invest back in their business and supply chain costs are lowered, realizing margin improvements. They are ensuring that their supply chains have access to affordably priced finance through early payment certainty and are improving collaboration and supply chain strength through aligned and connected processes.

It is these businesses that are identifying the cash opportunity and leveraging a technology-led approach to realize it, that are positioned to compete and thrive as the Fourth Industrial Revolution marches on.