The purpose of this paper is to find from literature, (a) why ‘smart factory’ is an appropriate development to the factory system now, and (b) what is a smart factory, and what are its constituents and governing principles of design. The findings are used to propose a methodology for retrofitting or designing a smart factory. In the first step, the prevailing factory system and its weaknesses are identified. In the next step the technological developments, that are conducive to form the smart factory, which outperforms the existing factory system, are reviewed. In the third step the smart factory definitions are analyzed and in the fourth step the constituents, governing design principles, as identified from the literature are collected, analyzed and categorized. In the final step, we used the findings to propose a methodology to retrofit an existing factory or design a new smart factory. The literature concerning ‘smart factory’ is abundant, and a strict selection scheme was used, to choose the literature for the study. This might have eliminated some relevant literature. Smart Factory is a disruptive development to the existing factory system, and as such the findings first assist to identify the ‘advanced knowledge in science and technology’ that is needed for success (sensors, IoT, storing and processing a huge amount of data and data analytics). It then identifies various possible technologies that can constitute to specific smart factory implementations and guide with the design principles. The value of this research is the proposed methodology, which can guide anyone planning to move forward in the smart factory path.