McKinsey - Internet of things and future of manufacturing - June 2013
In what’s called the Internet of Things,1the physical world is becoming a type ofinformation system—through sensors andactuators embedded in physical objects andlinked through wired and wireless networksvia the Internet Protocol.In manufacturing, the potential for cyberphysical systems to improve productivityin the production process and the supplychain is vast. Consider processes that governthemselves, where smart products can takecorrective action to avoid damages andwhere individual parts are automaticallyreplenished. Such technologies already existand could drive what some German industryleaders call the fourth industrial revolution—following the steam engine, the conveyorbelt, and the first phase of IT and automa-tion technology.What opportunities and challenges lie aheadfor manufacturers—and what will it take towin? To discuss the future of manufacturing,McKinsey’s Markus Löffler and AndreasTschiesner recently sat down for a conversation with Siegfried Dais, deputy chairmanof the board of management at Germanengineering company Robert Bosch GmbH,and Heinz Derenbach, CEO of BoschSoftware Innovations GmbH.A new era for manufacturingand logisticsMarkus Löffler: The Internet of Thingshas already set in motion the idea of a fourthindustrial revolution—a new wave oftechnological changes that will decentralizeproduction control and trigger a paradigmThe Internet of Things and thefuture of manufacturingExecutives at Robert Bosch and McKinsey experts discuss the technology-drivenchanges that promise to trigger a new industrial revolution.Markus Löffler andAndreas TschiesnerJoshCochran1For more information, seeMichael Chui, MarkusLöffler, and Roger Roberts,“The Internet of Things,”McKinsey Quarterly, 2010Number 2, mckinsey.com.J U N E 2 0 1 3b u s i n e s s t e c h n o l o g y o f f i c e
2shift in manufacturing. My question for thegroup is how do we think this paradigm shiftwill affect the classic production process andthe manufacturing value chain?Siegfried Dais: Given the Internet ofThings—or Industry 4.0 as we call it whenreferring to manufacturing production—itis highly likely that the world of productionwill become more and more networked untileverything is interlinked with everythingelse. And logistics could be at the forefrontof this shift.Andreas Tschiesner: I agree. And it willmake logistics and the supplier networkgrow enormously more complicated.Although lean manufacturing can certainlyreduce inventories, manufacturers will needto coordinate with more and more suppliers—often globally, and with longer transport times, more manufacturing steps, andsignificantly more parties.Siegfried Dais: Right. If a plant implements lean manufacturing, it keeps stocksto a minimum—not one part too many ortoo few. Components are constantly traveling the planet, often arriving within a day.With the Internet of Things, this systemmust extend beyond the limits of individualfactories to interconnect multiple factoriesand even regions. Now the questions becomewho will do this? How do we find an architecture that is stable enough to keep everything networked together? I think it willprimarily require algorithm specialists andsoftware architects. We will need “steeringinstruments”—new algorithms and applications that interlink millions of things, thatensure that everything runs stably,and that are synchronized across the entirevalue chain.Andreas Tschiesner: So how do we assessour existing logistics systems and identifythe gaps? Let’s take container logistics inmaritime shipping, which might be considered almost Stone Age in view of what is tocome. It will be a tremendous effort to bringcontainer logistics into the next generationof manufacturing.Siegfried Dais: To really drive developments, two competencies must cometogether. First, we need to recognize thechange potential, value creation, and costreductions we can achieve if we apply what’sactually “new” about new technologies. Forexample, take cyberphysical systems, whichcan tell us where every single unit is at anygiven time. Logistics players often use thistool, but with an old mind-set that fails toexploit the advancements the tool wasdesigned to offer. So the first requirementis that logistics players truly use what’s new.TakeawaysIn manufacturing, there isgreat potential for cyberphysical systems to improvethe production processand the supply chain. TheInternet of Things has setin motion a new wave oftechnological change thatwill disperse control.To drive development, twocompetencies must cometogether: using what’s trulynew about new techno-logies and finding peoplewho can design robustalgorithms to make thesystem user-friendly.The trend of separatingdesign and production,which started in designcompanies, will continueto spread across otherindustries and sectors.Likewise, supply-chainintegration will play adecisive role in newoperating models.To drive development, two competencies must come together.First, we need to recognize what we can achieve if we applywhat’s actually ‘new’ about new technologies. The secondcompetency is finding people who can design robust algorithms.
3slogan “process2device.” That means aphysical device becomes an active part of abusiness process: delivering data, sendingevents, and processing rules. This notion isdriving us.Fusing processesand devicesMarkus Löffler: Most companies think ofphysical flows—meaning the flow of materialcomponents through the supply chain—asseparate from information flows and thenconsider how and where to coordinate andsynchronize them. After the fourth industrialThe second competency is finding peoplewho are able to design robust algorithms:those who make the system user-friendly sothat the people who use it day-to-day canimmediately recognize problems and knowhow to react without getting tangled up in aweb of interdependencies.Heinz Derenbach: One core element isthe ability to create models. It is essentialto translate the physical world into a formatthat can be handled by IT. This requiresmathematical, domain, market, and contextknow-how. In the connected world, wecannot separate the physical world frombusiness processes. We capture this in theSiegfried DaisSiegfried Dais has been deputy chairman of the board of managementat Robert Bosch GmbH since 2004 and a limited partner at RobertBosch Industrietreuhand KG since 2007. He oversees the businessdivisions that cover drive and control technology, solar energy,Bosch Software Innovations, and health-care telemedicine.
4with the technical data of the components.This requires a high degree of standardizationso that the machine knows what it needs to doto any given component, and the componentscan confirm that the machine has done it.Such IT linkage goes far beyond currentmanufacturing systems.Markus Löffler: That’s an interestingpoint—what happens is a complete consolidation of devices and process management.“Process and device” will be inseparable;physical things become part of the process.What this means for the plant is that machinesand work flows merge to become a singleentity. The work flow ceases to exist as anindependent logistical layer; it is integratedinto the hardware.Andreas Tschiesner: This idea can betaken even further—if existing machinecapacities only work through componentson order, does it even matter who owns theassets? In other words, will we experience atrend in plants similar to what we have seenin cloud computing, where the customerpurchases only virtual capacity?Siegfried Dais: Quite possibly, and itwould change the business of manufacturingcompletely. For certain products, this trendis already becoming apparent. But it won’thappen overnight.revolution, there will no longer be a difference between information and materials,because products will be inextricably linkedto “their” information.Siegfried Dais: Right. For example, a pieceof metal or raw material will say, “I am theblock that will be made into product X forcustomer Y.” In an extreme vision, thisunfinished material already knows for whichcustomer it is intended and carries with itall the information about where and whenit will be processed. Once the material isin the machine, the material itself recordsany deviations from the standard process,determines when it’s “done,” and knows howto get to its customer. It might not happenright away, but things will definitely movein this direction.Markus Löffler: That would mean thatmechanical engineering would also beinseparable from IT.Heinz Derenbach: Exactly. I don’t thinkthat competencies can be mixed at will,but we do need new forms of interdisciplinarycollaboration. The next big step will be tothink through the interdependencies amongthe machine, the production components,the manufacturing environment, and the ITthat connects it all, so that the productiontechnology controlling the machines mergesWe need new forms of interdisciplinary collaboration.The next big step will be to think through interdependencies,so that the production technology controlling the machinesmerges with the technical data of the components.
5Markus Löffler: With these radicalchanges looming, who has the best chanceof controlling the profit pool—those withthe production technology or those whoown the assets?Siegfried Dais: I would take a step backand ask, in the mind of the consumer, whorepresents the final product? The designer?The manufacturer? Or the person whocreated the contract with the customer forthe final product?Andreas Tschiesner: Right. Thistakes us into the field of contract manu-facturing.Siegfried Dais: Design companies havealready separated design and production.They create products or solutions forcustomers but do not produce them; theysimply provide the specifications to contractmanufacturers, who then handle production.This trend of separating design and production will continue to spread across otherindustries and sectors.Supply-chain integration:What’s in storeAndreas Tschiesner: I think supply-chainintegration will play a decisive role in newHeinz DerenbachHeinz Derenbach has been chairman of the executive boardof Bosch Software Innovations GmbH since 2011. He has directmanagement responsibility for business planning, strategicportfolio management and technology, and product development.