How it started, how it’s going: four industrial revolutions and Procurement 1.0 to 4.0

The evolution of industry has been characterized by clear breakthroughs distinguished by the implementation and diffusion of new technologies. Procurement underwent a parallel transformation, being an integral part of industry.

The first industrial revolution was characterized by the use of steam-powered machinery (mechanization), following the invention of the steam engine by James Watt in 1782. This innovation led not only to an increase in industrial capacity in terms of their throughput and speed of production, but also to the development of rail, sea and, in subsequent decades, air transport. Consequently, changes in procurement were also taking place.

Procurement 1.0 was characterized above all by a reduction in the time needed to transport components, thanks primarily to the mechanization of transport. At the end of the 18th century, business contacts were limited by distances, so cooperation was mostly local, with the owners of small businesses usually being both their founders, buyers and sellers at the same time. The flow of inputs and outputs was based on a "pull approach"; products were pulled to market, from producers to local distributors.

Production plans operated on the basis of na?ve forecasts from previous periods and were very slow to respond to market signals, consequently often leading to excessively high stock levels, bottlenecks, delays and a level of customer service that would be unacceptable from the current point of view, combined with frequent shortages of finished products.

Warehouse management was limited to the collection and storage of intermediate materials, or final products. The distribution network from the producer to the final seller was carried out by human hands or with the help of animals, although the first industrial revolution and the consequent gradual spread of railways and steamships allowed goods to be transported further distances over time.

From a record-keeping and compliance point of view, Procurement 1.0 was very simple and operational; at best, it was limited to recording from whom a product was bought and at what price, with acquaintances and mutual sympathies being the most common basis for business agreements. For accounting purposes, there were also ledgers and paper sales receipts.

The second industrial revolution is referred to as the age of electricity, but it is also the time of the invention of the telegraph. These two breakthrough technologies enabled further advances in transport and a great leap forward in communication. At the same time, ores such as steel, copper and aluminum became valuable construction materials for newly developed machines and products, along with the accelerated development of the chemical industry. Industry 2.0 was also the division of labor into minor activities performed repetitively on production lines developed by Frederic W. Taylor in the early 20th century and the development of mass production with shift work due to electrification and automation. At the same time, Henry Ford developed the concept of line work, which, with some improvements, is still used today.

Procurement 2.0 was an opportunity to optimize costs by starting mass production, but also continued to reduce transport costs. Faster transport enabled collaboration with business partners over much greater distances, extending beyond their own national borders. A wider range of suppliers made it possible to choose business partners, not necessarily because of short distances, as this was gradually becoming less of an issue. New industries began to require purchasing specialists with mechanical, electrical, chemical, or engineering skills. Companies also gradually differentiated the professionals they hired according to their experience, knowledge, and specialized skills. The production model evolved into a "push strategy", as mass production involved large batches of semi-finished products and consumer goods. Also, at this time the first forklift trucks powered by electric motors and controlled by their operators started to be used.

The third industrial revolution (computerization) has been described as the automation of processes through the use of ICT (Information and Communications Technology), which the Polish Development Fund defines as a "family of technologies that process, collect and transmit information in electronic form". At the same time, these were completely different production solutions; numerical control of machines gave the flexibility to optimize mass production. The production machines had integrated computers with built-in memory for their control and programming.

Following the introduction of the first industrial robot in 1961 by Joseph F. Engelberger, a rapid progression of automation and robotization of production lines was observed, leading to a drastic decrease in production costs by replacing human hands and traditional machinery with robots in the following decade. The 1980s and 1990s popularized the use of office computers, allowing electronic support for office work and further accelerating it.

Procurement 3.0 meant at this point that costs were optimized as a result of robotization and the reduction of low-skilled manual labor, while at the same time the development of low-cost long-distance transport in a multitude of alternatives and widespread telephony together with computerization introduced global commerce as a standard approach in most companies. Computerization also had an obvious impact on third-generation procurement, as day-to-day management was supported on an ongoing basis by computer applications and the gradual introduction of ERP (Enterprise Resource Planning), WMS (Warehouse Management System), TMS (Transportation Management Systems) and other systems. In the last decade, I have also observed on an ongoing basis the development of e-procurement made possible by the integration of ICT with specialized procurement support applications.

Procurement became unquestionably global, with a selection of the most competitive suppliers in the market, while operational purchasing with the support of software could be partly automated. The applications also supported day-to-day business processes, controlling the compliance of documentation, or assisting in purchasing decisions. Specialized software further enabled greater transparency of offers, analysis of technical data, prices, machinery, and production components.

From a compliance perspective, companies began to describe their processes and purchasing decisions using contextual data. In addition to noting prices and supplier names, buyers began to create cause-and-effect sequences, describing who won and who lost a tender and why.

From the compliance point of view regarding decision-making processes, these elements were increasingly scrutinized by management. The first predictive models also began to emerge, specifying business behaviors and decisions for specific situations the company might face. This information was critical, as it laid the foundations for the now increasingly used, though still new, AI-enabled predictive models.

Currently, we are already talking about the fourth industrial revolution (digitalization), as a result of the extremely dynamic development of Industry 3.0 solutions combined with widespread access to broadband internet. Today, it is possible to digitally map physical, production and many other processes in almost real time, thanks to the close interconnection between real mechanisms and the layer of calculations taking place in information systems. This opens unprecedented possibilities for automating tasks in so-called cyber-physical systems. These are described as systems that have computational and physical capabilities that can co-operate with humans via modern tools. According to Martin Christopher, the fourth industrial revolution will transform the supply chain through technology. The breakthrough will consist of instant manufacturing, advanced robotics and the digitization of supply chains.

Industry 4.0 as a current concept means looking technologically at business processes. Working on big data sets is an indispensable part of it, while allowing intelligence to be built into services, devices, products, processes, all the way up to entire warehouses and factories. This is known as horizontal process integration. We commonly use the adjective smart, meaning "clever," "savvy," "smart," in reference to such items and processes. Vertical process integration adopts a combination of information systems in varying degrees of detail - from individual sensors installed on machines to complete production management systems. In the case of information systems, smart will mean "intelligent."

In Figure 1 on top of this Article I have presented a vision of a smart factory that is part of the Internet of things and services. Vehicles, buildings, control of logistics processes, management of production processes by robots and AI ultimately yield products that are also increasingly smart.

Deloitte's research shows that companies' expectations for such intelligence, i.e. automation of operations, are extremely high, and are primarily concerned with reducing costs and increasing productivity. Long-term expectations, on the other hand, are about increasing the accuracy of tasks and improving the customer experience.

In the context of Transformation 4.0, purchasing processes as part of the supply chain can be defined as the practice of redefining models, functions, operations, processes, and activities by leveraging technological advances to build an efficient business environment where operational and financial profit is maximized, while cost and risk are minimized.

Eleven digital activators have been identified in Industry 4.0 to facilitate the transition of this transformation for procurement and supply chains in manufacturing systems, shown in Figure 2 below.

In the next article, I will describe some of these, in my opinion the most important digital technologies in Procurement 4.0.

This article is a translated fragment of my post-graduate Paper: " Procurement digitalization in business. Concept, Problems and Opportunities for Improvement" submitted in 2021 at Warsaw School of Economics (SGH).

References:

B. Nicoletti Procurement 4.0 and the Fourth Industrial Revolution. The Opportunities and Challenges of a Digital World Palgrave Macmillan, Rome 2020

Polish Development Fund https://pfr.pl/slownik/slownik-itict.html

Next Generation Digital Procurement Accenture partnership materials, 2017

Technologie Cyfrowe w Biznesie. Przedsi?biorstwa 4.0 a Sztuczna Inteligencja red. B. Gregor, D.?Kaczorowska-Spychalska, wyd. PWN SA, Warszawa 2020

M. Christopher, Logistics and Supply Chain Management, 5th Edition, Pearson Education, Harlow 2016

M. Antonowicz, T. Gonsior, Rola innowacji w procesie zakupowym przedsi?biorstw, ?Handel Wewn?trzny” 2018

Z. Seyedghorban, D. Samson, Digitalization of Procurement, CIPS, University of Melbourne, 2019