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-
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
J o sh
C o c h ra
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
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
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
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.
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
The trend of separating
design and production,
which started in design
companies, will continue
to spread across other
industries and sectors.
integration will play a
decisive role in new
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.
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
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 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.
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
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
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.
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-
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 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.
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. •