Essay:In what’s called the Internet of Things,1 the physical world is becoming a type of information system—through sensors and actuators embedded in physical objects and linked through wired and wireless networks via the Internet Protocol.

Essay:In what’s called the Internet of Things,1 the physical world is becoming a type of information system—through sensors and actuators embedded in physical objects and linked through wired and wireless networks via the Internet Protocol.

In what’s called the Internet of Things,1

the physical world is becoming a type of

information system—through sensors and

actuators embedded in physical objects and

linked through wired and wireless networks

via the Internet Protocol.

In manufacturing, the potential for cyber­

physical systems to improve productivity

in the production process and the supply

chain is vast. Consider processes that govern

themselves, where smart products can take

corrective action to avoid damages and

where individual parts are automatically

replenished. Such technologies already exist

and could drive what some German industry

leaders call the fourth industrial revolution—

following the steam engine, the conveyor

belt, and the first phase of IT and automa-

tion technology.

What opportunities and challenges lie ahead

for manufacturers—and what will it take to

win? To discuss the future of manufacturing,

McKinsey’s Markus Löffler and Andreas

Tschiesner recently sat down for a conver­

sation with Siegfried Dais, deputy chairman

of the board of management at German

engineering company Robert Bosch GmbH,

and Heinz Derenbach, CEO of Bosch

Software Innovations GmbH.

A new era for manufacturing and logistics

Markus Löffler: The Internet of Things

has already set in motion the idea of a fourth

industrial revolution—a new wave of

technological changes that will decentralize

production control and trigger a paradigm

The Internet of Things and the future of manufacturing

Executives at Robert Bosch and McKinsey experts discuss the technology-driven

changes that promise to trigger a new industrial revolution.

Markus Löffler and

Andreas Tschiesner

J o sh

C o c h ra

n

1 For more information, see Michael Chui, Markus Löffler, and Roger Roberts,

“The Internet of Things,” McKinsey Quarterly, 2010 Number 2, mckinsey.com.

J U N E 2 0 1 3

b u s i n e s s t e c h n o l o g y o f f i c e

2

shift in manufacturing. My question for the

group is how do we think this paradigm shift

will affect the classic production process and

the manufacturing value chain?

Siegfried Dais: Given the Internet of

Things—or Industry 4.0 as we call it when

referring to manufacturing production—it

is highly likely that the world of production

will become more and more networked until

everything is interlinked with everything

else. And logistics could be at the forefront

of this shift.

Andreas Tschiesner: I agree. And it will

make logistics and the supplier network

grow enormously more complicated.

Although lean manufacturing can certainly

reduce inventories, manufacturers will need

to coordinate with more and more suppli­

ers—often globally, and with longer trans­

port times, more manufacturing steps, and

significantly more parties.

Siegfried Dais: Right. If a plant imple­

ments lean manufacturing, it keeps stocks

to a minimum—not one part too many or

too few. Components are constantly travel­

ing the planet, often arriving within a day.

With the Internet of Things, this system

must extend beyond the limits of individual

factories to interconnect multiple factories

and even regions. Now the questions become

who will do this? How do we find an archi­

tecture that is stable enough to keep every­

thing networked together? I think it will

primarily require algorithm specialists and

software architects. We will need “steer ing

instruments”—new algorithms and applica­

tions that interlink millions of things, that

ensure that everything runs stably,

and that are synchronized across the entire

value chain.

Andreas Tschiesner: So how do we assess

our existing logistics systems and identify

the gaps? Let’s take container logistics in

maritime shipping, which might be consid­

ered almost Stone Age in view of what is to

come. It will be a tremendous effort to bring

container logistics into the next generation

of manufacturing.

Siegfried Dais: To really drive develop­

ments, two competencies must come

together. First, we need to recognize the

change potential, value creation, and cost

reductions we can achieve if we apply what’s

actually “new” about new technologies. For

example, take cyberphysical systems, which

can tell us where every single unit is at any

given time. Logistics players often use this

tool, but with an old mind­set that fails to

exploit the advancements the tool was

designed to offer. So the first requirement

is that logistics players truly use what’s new.

Takeaways

In manufacturing, there is

great potential for cyber­

physical systems to improve

the production process

and the supply chain. The

Internet of Things has set

in motion a new wave of

technological change that

will disperse control.

To drive development, two

competencies must come

together: using what’s truly

new about new techno­

logies and finding people

who can design robust

algorithms to make the

system user­friendly.

The trend of separating

design and production,

which started in design

companies, will continue

to spread across other

industries and sectors.

Likewise, supply­chain

integration will play a

decisive role in new

operating models.

To drive development, two competencies must come together. First, we need to recognize what we can achieve if we apply what’s actually ‘new’ about new technologies. The second competency is finding people who can design robust algorithms.

3

slogan “process2device.” That means a

physical device becomes an active part of a

business process: delivering data, sending

events, and processing rules. This notion is

driving us.

Fusing processes and devices

Markus Löffler: Most companies think of

physical flows—meaning the flow of material

components through the supply chain—as

separate from information flows and then

consider how and where to coordinate and

synchronize them. After the fourth industrial

The second competency is finding people

who are able to design robust algorithms:

those who make the system user­friendly so

that the people who use it day­to­day can

immediately recognize problems and know

how to react without getting tangled up in a

web of interdependencies.

Heinz Derenbach: One core element is

the ability to create models. It is essential

to translate the physical world into a format

that can be handled by IT. This requires

mathematical, domain, market, and context

know­how. In the connected world, we

cannot separate the physical world from

business processes. We capture this in the

Siegfried Dais

Siegfried Dais has been deputy chairman of the board of management

at Robert Bosch GmbH since 2004 and a limited partner at Robert

Bosch Industrietreuhand KG since 2007. He oversees the business

divisions that cover drive and control technology, solar energy,

Bosch Software Innovations, and health­care telemedicine.

4

with the technical data of the components.

This requires a high degree of standardization

so that the machine knows what it needs to do

to any given component, and the components

can confirm that the machine has done it.

Such IT linkage goes far beyond current

manufacturing systems.

Markus Löffler: That’s an interesting

point—what happens is a complete consoli­

dation 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 machines

and work flows merge to become a single

entity. The work flow ceases to exist as an

independent logistical layer; it is integrated

into the hardware.

Andreas Tschiesner: This idea can be

taken even further—if existing machine

capacities only work through components

on order, does it even matter who owns the

assets? In other words, will we experience a

trend in plants similar to what we have seen

in cloud computing, where the customer

purchases only virtual capacity?

Siegfried Dais: Quite possibly, and it

would change the business of manufacturing

completely. For certain products, this trend

is already becoming apparent. But it won’t

happen overnight.

revolution, there will no longer be a differ­

ence between information and materials,

because products will be inextricably linked

to “their” information.

Siegfried Dais: Right. For example, a piece

of metal or raw material will say, “I am the

block that will be made into product X for

customer Y.” In an extreme vision, this

unfinished material already knows for which

customer it is intended and carries with it

all the information about where and when

it will be processed. Once the material is

in the machine, the material itself records

any deviations from the standard process,

determines when it’s “done,” and knows how

to get to its customer. It might not happen

right away, but things will definitely move

in this direction.

Markus Löffler: That would mean that

mechanical engineering would also be

inseparable from IT.

Heinz Derenbach: Exactly. I don’t think

that competencies can be mixed at will,

but we do need new forms of interdisciplinary

collaboration. The next big step will be to

think through the interdependencies among

the machine, the production components,

the manufacturing environment, and the IT

that connects it all, so that the production

technology controlling the machines merges

We need new forms of interdisciplinary collaboration. The next big step will be to think through interdependencies, so that the production technology controlling the machines merges with the technical data of the components.

5

Markus Löffler: With these radical

changes looming, who has the best chance

of controlling the profit pool—those with

the production technology or those who

own the assets?

Siegfried Dais: I would take a step back

and ask, in the mind of the consumer, who

represents the final product? The designer?

The manufacturer? Or the person who

created the contract with the customer for

the final product?

Andreas Tschiesner: Right. This

takes us into the field of contract manu-

facturing.

Siegfried Dais: Design companies have

already separated design and production.

They create products or solutions for

cus tomers but do not produce them; they

simply provide the specifications to contract

manufacturers, who then handle production.

This trend of separating design and produc­

tion will continue to spread across other

industries and sectors.

Supply-chain integration: What’s in store

Andreas Tschiesner: I think supply­chain

integration will play a decisive role in new

Heinz Derenbach

Heinz Derenbach has been chairman of the executive board

of Bosch Software Innovations GmbH since 2011. He has direct

management responsibility for business planning, strategic

portfolio management and technology, and product development.

6

The authors wish to thank Oliver Bossert for his contributions to this article.

Markus Löffler is a principal in McKinsey’s Stuttgart office, and Andreas Tschiesner is a director in the

Munich office. Copyright © 2013 McKinsey & Company. All rights reserved.

operating models. The point is to completely

integrate all relevant information into this

chain. We are still a long way off, but it will

be fascinating to see whether even large

supply­chain operators will be able to keep

pace with the speed of technology.

Siegfried Dais: With all this new infor­

mation available—about interdependencies,

the flow of materials, the cycle time, and so

on—manufacturers can lower their inventory

costs and reduce the amount of capital

required. But don’t forget: this involves huge

amounts of data, and the fundamental

prerequisite for such a system is that it is

stable and reproducible. Common sense

won’t help here; this involves rigorous

mathematics. And what’s interesting is

that the algorithms for this already exist.

Mathematics has already solved numerous

problems that we won’t encounter in the real

world for another 50 years. But analytical

talent is becoming increasingly rare in the

labor market, so there will be fierce compe-

tition for mathematicians and analysts. The

opportunities presented by the Internet of

Things are clear—but so are the challenges. •


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