Industry 4.0 is a term often used to refer to the developmental process in the management of manufacturing and chain production. The term also refers to the fourth industrial revolution.

The term Industry 4.0 was first publicly introduced in 2011 as “Industrie 4.0” by a group of representatives from different fields (such as business, politics, and academia) under an initiative to enhance the German competitiveness in the manufacturing industry. The German federal government adopted the idea in its High-Tech Strategy for 2020. Subsequently, a Working Group was formed to further advise on the implementation of Industry 4.0.

In 2003, they developed and published their first set of recommendations. Their vision entailed that

“these Cyber-Physical Systems comprise smart machines, storage systems and production facilities capable of autonomously exchanging information, triggering actions and controlling each other independently. This facilitates fundamental improvements to the industrial processes involved in manufacturing, engineering, material usage and supply chain and life cycle management.”

Industry 4.0: Definition, Design Principles, Challenges, and the Future of Employment

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Industry 4.0 remains a term well-known in German-speaking areas. Consequently, this guide will aim at attempting to define the term, exploring the design principles, the advantages and the challenges facing such an approach, and try to quantify the potential lying underneath.


To be able to understand how Industry 4.0 became today’s buzzword, a look at its predecessors might give us a perspective on how this revolution in particular is different. The following diagram shows a timeline of the evolution of manufacturing and the industrial sector in general (Source: Deloitte).


The First Industrial Revolution

The industrial revolution in Britain came in to introduce machines into production by the end of the 18th century (1760-1840). This included going from manual production to the use of steam-powered engines and water as a source of power.

This helped agriculture greatly and the term “factory” became a little popular. One of the industries that benefited a lot from such changes is the textile industry, and was the first to adopt such methods. It also constituted a huge part of the British economy at the time.

The Second Industrial Revolution

The second one dates between 1870 and 1914 (although some of its characteristics date back to the 1850) and introduced pre-existing systems such as telegraphs and railroads into industries. Perhaps the defining characteristic of that period was the introduction of mass production as a primary means to production in general.

The electrification of factories contributed hugely to production rates. The mass production of steel helped introduce railways into the system, which consequently contributed to mass production. Innovations in chemistry, such as the invention of the synthetic dye, also mark such period as chemistry was in a rather primitive state then.

However, such revolutionary approaches to industry were put to an end with the start of World War I. Mass production, of course, was not put to an end, but only developments within the same context were made and none of which can be called industrial revolutions.

The Third Industrial Revolution

Perhaps the third one is much more familiar to us than the rest as most people living today are familiar with industries leaning on digital technologies in production. However, the third industrial revolution is dated between 1950 and 1970.

It is often referred to as the Digital Revolution, and came about the change from analog and mechanical systems to digital ones.

Others call it the Information Age too. The third revolution was, and still is, a direct result of the huge development in computers and information and communication technology.



The fourth industrial revolution takes the automation of manufacturing processes to a new level by introducing customized and flexible mass production technologies.

This means that machines will operate independently, or cooperate with humans in creating a customer-oriented production field that constantly works on maintaining itself. The machine rather becomes an independent entity that is able to collect data, analyze it, and advise upon it.

This becomes possible by introducing self-optimization, self-cognition, and self-customization into the industry. The manufacturers will be able to communicate with computers rather than operate them.

How will machines communicate?

The rapid changes in the information and communication technologies (ICT) have broken the boundaries between virtual reality and the real world. The idea behind Industry 4.0 is to create a social network where machines can communicate with each other, called the Internet of Things (IoT) and with people, called the Internet of People (IoP).

This way, machines can communicate with each other and with the manufacturers to create what we now call a cyber-physical production system (CPPS). All of this helps industries integrate the real world into a virtual one and enable machines to collect live data, analyze them, and even make decisions based upon them.


Although “Industry 4.0” is the common term referring to the fourth industrial revolution, academics still struggle to properly define the approach. This makes it even harder to distinguish the main components of such an approach. In their Literature Review, Hermann, Pentek, and Otto take it upon themselves to find out the main components of the industry.

Given the fact that the term originated in a German-speaking area, they set out to find out the most frequently cited terms and definitions relating to the industry.

In their research, of course, the German equivalent of each term (or perhaps the English equivalent) was used. The results were as follows (Source: “Design Principles for Industrie 4.0 Principle” by Hermann, Pentek, and Otto):

Search Term (Group)

Number of Publications in Which Search Term (Group) Occured

Cyber-Physical Systems, Cyber-Physikalische Systeme, CPS


Internet of Things, Internet der Dinge


Smart Factory, intelligente Fabrik


Internet of Services, Internet der Dienste


Smart Product, intelligentes Produkt


M2M, Machine-to-Machine


Big Data




Cyber-Physical Systems, Internet of Things, Smart Factory, and Internet of Services are the most common four terms cited in academic research publications related to the industry. Consequently, and given its initial stage, these are the four main components of the industry.

Cyber-Physical Systems

As mentioned above, a cyber-physical system aims at the integration of computation and physical processes. This means that computers and networks are able to monitor the physical process of manufacturing at a certain process. The development of such a system consists of three phases:

  • Identification: Unique identification is essential in manufacturing. This is the very basic language by which a machine can communicate. RFID (Radio-frequency identification) is a great example of that. RFID uses an electromagnetic field to identify a certain tag that is often attached to an object. Although such technology has been around since 1999, it still serves as a great example of how Industry 4.0 operated initially.
  • The Integration of Sensors and Actuator: This is essential for a machine to operate. The integration of sensors and actuators simply means that a certain machine’s movement can be controlled and that it can sense changes in the environment. However, even with the integration of sensors and actuators, their use was limited and does not allow them to communicate with each other.
  • The Development of Sensors and Actuators: Such development allowed machines to store and analyze data. A CPS now is equipped with multiple sensors and actuators that can be networked for the exchange of information.

The Internet of Things (IoT)

A cyber-physical system still sounds familiar to us today. Machines can exchange data and, in a lot of applications, can sense the changes in the environment around them. Fire alarms are a good example of that. The Internet of Things, however, is thought to be what truly has initiated Industry 4.0.

The Internet of Things is what enables objects and machines such as mobile phones and sensors to “communicate” with each other as well as human beings to work out solutions. The integration of such technology allows objects to work and solve problems independently. Of course, this is not entirely true as human beings are also allowed to intervene.

However, in case of conflicting goals, the case is usually raised to higher positions. According to Hermann, Pentek, and Otto, ““things” and “objects” can be understood as CPS. Therefore, the IoT can be defined as a network in which CPS cooperate with each other through unique addressing schemas.


The Internet of Services (IoS)

It is easy to see that in today’s world each and every electronic device is more likely to be connected to either another device, or to the internet. With the huge development and diversity in electronic and smart devices, obtaining more and more of them creates complexities and undermines the utility of each added device.

Smart phones, tablets, laptops, TVs or even watches are becoming more and more interconnected, but the more you buy, the added value of the last device becomes unrecognizable. The Internet of Services aims at creating a wrapper that simplifies all connected devices to make the most out of them by simplifying the process. It is the customer’s gateway to the manufacturer.

Smart Factory

Smart factories are a key feature of Industry 4.0. A smart factory adopts a so called Calm-system. A calm system is a system that is able to deal with both the physical world as well as the virtual. Such systems are called “background systems” and in a way operate behind the scene. A calm system is aware of the surrounding environment and the objects around it.

It also can be fed with soft information regarding the object being manufactured such as drawings and models. According to Hermann, Pentek, and Otto

“the Smart Factory can be defined as a factory where CPS communicate over the IoT and assist people and machines in the execution of their tasks.”


The design principles allow manufacturers to investigate a potential transformation to Industry 4.0 technologies. Based on the components above, the following are the design principles:

  • Interoperability: Objects, machines and people need to be able to communicate through the Internet of Things and the Internet of People. This is the most essential principle that truly makes a factory a smart one.
  • Virtualization: CPSs must be able to simulate and create a virtual copy of the real world. CPSs must also be able to monitor objects existing in the surrounding environment. Simply put, there must be a virtual copy of everything.
  • Decentralization: The ability of CPSs to work independently. This gives room for customized products and problem solving. This also creates a more flexible environment for production. In cases of failure or having conflicting goals, the issue is delegated to a higher level. However, even with such technologies implemented, the need for quality assurance remains a necessity on the entire process
  • Real-Time Capability: A smart factory needs to be able to collect real time data, store or analyze it, and make decisions according to new findings. This is not only limited to market research but also to internal processes such as the failure of a machine in production line. Smart objects must be able to identify the defect and re-delegate tasks to other operating machines. This also contributes greatly to the flexibility and the optimization of production.
  • Service-Orientation: Production must be customer-oriented. People and smart objects/devices must be able to connect efficiently through the Internet of Services to create products based on the customer’s specifications. This is where the Internet of Services becomes essential.
  • Modularity: In a dynamic market, a Smart Factory’s ability to adapt to a new market is essential. In a typical case, it would probably take a week for an average company to study the market and change its production accordingly. On the other hand, smart factories must be able to adapt fast and smoothly to seasonal changes and market trends.


Industry 4.0 will truly revolutionize the way manufacturing processes work. However, it’s important to weigh the advantages and the challenges that companies may face.

Advantages of Industry 4.0

  • Optimization: Optimizing production is a key advantage to Industry 4.0. A Smart Factory containing hundreds or even thousands of Smart Devices that are able to self-optimize production will lead to an almost zero down time in production. This is extremely important for industries that use high end expensive manufacturing equipment such as the semi-conductors industry. Being able to utilize production constantly and consistently will profit the company. According to a study published by PwC,

“Digitized products and services generate approximately €110 billion of additional revenues per year for the European industry.”

  • Customization: Creating a flexible market that is customer-oriented will help meet the population’s needs fast and smoothly. It will also destroy the gap between the manufacturer and the customer. Communication will take place between both directly. Manufacturers won’t have to communicate internally (in companies and factories) and externally (to customers). This fastens the production and delivery processes.
  • Pushing Research: The adoption of Industry 4.0 technologies will push research in various fields such as IT security and will have its effect on the education in particular. A new industry will require a new set of skills. Consequently, education and training will take a new shape that provides such an industry will the required skilled labor.

Challenges facing Industry 4.0

  • Security: Perhaps the most challenging aspect of implementing Industry 4.0 techniques is the IT security risk. This online integration will give room to security breaches and data leaks. Cyber theft must also be put into consideration. In this case, the problem is not individual, but can, and probably will, cost producers money and might even hurt their reputation. Therefore, research in security is crucial.
  • Capital: Such transformation will require a huge investment in a new technology that doesn’t sound cheap. The decision to make such transformation will have to be on CEO level. Even then, the risks must be calculated and taken seriously. In addition, such transformation will require a huge capital, which alienates smaller businesses and might cost them their market share in the future.
  • Employment: While it still remains early to speculate on employment conditions with the adoption of Industry 4.0 globally, it is safe to say that workers will need to acquire different or an all-new set of skills. This may help employment rates go up but it will also alienate a big sector workers. The sector of workers whose work is perhaps repetitive will face a challenge in keeping up with the industry. Different forms of education must be introduced, but it still doesn’t solve the problem for the elder portion of workers. This is an issue that might take longer to solve and will be further analyzed later in this report.
  • Privacy: This not only the customer’s concern, but also the producers. In such an interconnected industry, producers need to collect and analyze data. To the customer, this might look like a threat to his privacy. This is not only exclusive to consumers. Small or large companies who haven’t shared their data in the past will have to work their way to a more transparent environment. Bridging the gap between the consumer and the producer will be a huge challenge for both parties.



Industry 4.0 has a lot to promise when it comes to revenues, investment, and technological advancements, but employment still remains one of the most mysterious aspects of the new industrial revolution. It’s even harder to quantify or estimate the potential employment rates.

What kind of new jobs will it introduce? What does a Smart Factory worker needs to have to be able to compete in an ever changing environment such as this? Will such changes lay off many workers? All of these are valid questions to the average worker.

Industry 4.0 might be the peak of technological advancement in manufacturing, but it still sounds as if machines are taking over the industry. Consequently, it is important to further analyze this approach in order to be able to draw conclusions on the demographics of labor in the future. This will help workers of today prepare for a not so far future.

Given the nature of the industry, it will introduce new jobs in big data analysis, robot experts, and a huge portion of mechanical engineers. In an attempt to determine the type of jobs that Industry 4.0 will introduce or need more labor in, BCG has published a report based on interviews with 20 of the industry’s experts to showcase how 10 of the most essential use cases for the foundation of the industry will be affected.

The following are some of the important changes that will affect the demographics of employment:

  • Big-Data-Driven Quality Control: In engineering terms, quality control aims at reducing the inevitable variation between products. Quality Control depends to a large extent on statistical methods to show whether a specific feature of a product (such as size or weight) is changing in a way that can be considered a pattern. Of course such a process depends largely on collecting real-time or historical data regarding the product. However, since Industry 4.0 will rely on big data for that, the need for quality control workers will decrease. On the other side, the demand for big data scientists will increase.
  • Robot-Assisted Production: The entire basis of the new industry relies of the smart devices being able to interact with the surrounding environment. This means that workers who assist in production (such as packaging) will be laid off and be replaced with smart devices equipped with cameras, sensors, and actuators that are able to identify the product and then deliver the necessary changes for it. Consequently, the demand for such workers will drop and will be replaced with “robot coordinators”.
  • Self-Driving Logistics Vehicles: One of the most important focuses of optimization is transportation. Engineers use linear programming methods (such as the Transportation Model) to utilize the use of transportation. However, with self-driven vehicles, and with the assistance of big data, so many drivers will be laid off. In addition, having self-driven vehicles allows for restriction-free working hours and higher utility.
  • Production Line Simulation: While the need for optimization for transportation declines, the need for industrial engineers (who typically work on optimization and simulation) to simulate productions lines will increase. Having the technology to simulate production lines before establishment will open up jobs for mechanical engineers specializing in the industrial field.
  • Predictive Maintenance: Having smart devices will allow manufacturers to predict failures. Smart machines will be able to also independently maintain themselves. Consequently, the number of traditional maintenance technicians will drop, and they’ll be replaced with more technically informed ones.
  • Machines as a Service: The new industry will also allow manufactures to sell a machine as a service. This means that instead of selling the entire machine to the client, the machine will be set-up and maintained by the manufacturer while the client takes advantage of the services it provides. This will open up jobs in maintenance and will require an expansion in sales.


Industry 4.0 is definitely a revolutionary approach to manufacturing techniques. The concept will push global manufacturers to a new level of optimization and productivity. Not only that, but customers will also enjoy a new level of personally customized products that may have never been available before. As mentioned above, the economic rewards are immense.

However, there are still many challenges that need to be tackled systematically to ensure a smooth transition. This needs to be the focus of large corporations and governments alike. Pushing research and experimentation in such fields are essential.

While speculations regarding privacy, security, and employment need more study, the overall picture is promising. Such approach to manufacturing industries is truly revolutionary.

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