IoT and ERP: A potentially profitable partnership for manufacturers
The Internet of Things (IoT) can help cut costs for manufacturers; the next step is leveraging it for business growth through enterprise resource planning (ERP) and other enterprise systems.
It's easy to see why manufacturers like the concept of the Internet of Things (IoT). It represents something most of them have been seeking for decades-an end-to-end information network that provides real-time visibility into all their operations.
That possibility is the likely reason manufacturers are expected to spend the biggest share of the $800 billion that International Data Corporation (IDC), an industry analyst firm, expects companies to invest in IoT technology throughout 2017. That figure, which includes all industries and all forms of IoT technology spending—hardware, software, services, and connectivity—represents a 16.7% increase over 2016. IDC expects that trend to continue with overall IoT spending exceeding $1.4 trillion by 2021.
Manufacturers will lead the way, spending $183 billion in 2017 alone, according to IDC. Most of the money manufacturers spend on the IoT in 2017 will be earmarked for projects designed to improve production operations. That fact points to one piece of good news and one piece of bad news about the state of IoT in the manufacturing sector.
The good news is IoT technology can have a major positive impact on production operations. There are, in fact, many instances of manufacturers revamping business processes in ways that reduce costs, or boost revenues, using IoT technology. Some have leveraged the technology to create entire new business models and generate new revenue streams.
The bad news is IoT technology is not mature enough to help most manufacturers take the final step of creating networks that can convert production-related data into information that can be viewed and analyzed by enterprise resources planning (ERP) users and other enterprise systems. Such networks, which would allow manufacturers to anticipate and respond to potential problems before they cause business disruptions, are the true promise of the IoT. Manufacturers are getting a glimpse as they incorporate this technology into their operations.
Service as a business model
One example is STILL, which makes and sells warehouse material handling products primarily in Europe and Latin America. STILL recently equipped forklifts with sensors that receive and respond to instructions on when and where to move material around a warehouse. Because those instructions are delivered by a web-based warehouse management system, STILL believes it will be able to change the way it bills customers for using its forklifts.
Instead of selling a customer a set of forklifts and walking away, STILL envisions offering a forklift service such that invoices are based on the amount of material moved over a billing cycle. The combination of IoT-enabled sensors and the web-based warehouse management system lets STILL track volume remotely and issue correct invoices.
Kaeser Compressors has harnessed IoT technology in a similar fashion to launch a new business called Sigma Air Utility. Under this model, Kaeser installs compressors in a customer's facility and uses its web-based network to track how much air the facility uses. It then bills the customer only for the air used; just as electric or gas utilities bill customers for consuming energy.
These business models have inspired an industry buzzword: servitization, which refers to using a company's product as the basis for a business built around a recurring, service-based revenue stream. These models are popular among manufacturers because profit margins on services have proven to be higher—sometimes as much as 20%—than on products.
These models also bring manufacturers closer to the true end-to-end networks that IoT promises because they require connecting IoT-enabled devices with at least one or more enterprise-level application. For instance, STILL and Kaeser monitor the equipment deployed in their service-based businesses through modules of an ERP suite.
"Companies like STILL and Kaeser are well along the maturity curve in showing how IoT can transform business models," said David Parrish, SAP's senior global marketing director for the automotive and industrial sectors. "They also are exceptions. Most of the companies we work with are just starting that journey."
Parrish and other industry experts noted forces are aligning to make it easier for manufacturers to leverage IoT technology in their individual businesses.
The IoT maturity curve
"A lot of companies have been thinking about IoT for a while," Parrish said. "But a few things have happened over the last few years to stir more action. Sensor prices have come down. The ability to use technology to analyze large volumes of sensor data—the whole Big Data thing—is becoming more real. The result is everyone is doing something. How much they're doing now is largely dependent on the sophistication of the IT group, or how driven the operations people are about staying innovative."
A recent survey commissioned by IFS, another ERP software provider, supports the notion only a select few manufacturers are very far along the IoT maturity curve. The survey collected responses from 200 manufacturing professionals with authority to make IoT technology purchasing decisions in their respective companies. The responses to one question spoke to manufacturers' IoT maturity level.
The multiple-choice question asked how IoT data was consumed across the enterprise and offered the following list of possible responses:
- Equipment-mounted diagnostic tool used by plant floor technicians
- Computerized maintenance management system (CMMS) used by maintenance staff
- Supervisory control and data acquisition (SCADA) system used by plant floor management
- Process automation system used by plant floor management
- Manufacturing execution software used by plant floor management
- Enterprise asset management software used by plant managers
- Asset performance management software used by plant managers and senior executives
- ERP software used by senior executives.
Figure 1 showed only 16% percent of respondents said IoT data is available to senior management through an ERP system. This confirms that even companies that have deployed IoT technology still struggle to take that final step toward building an end-to-end information network. That doesn't mean manufacturers aren't getting a return on their IoT investments. Just over half of respondents said their IoT data is pushed to a process automation system, which means data is probably instrumental in streamlining a process that often adds extra time or costs to a company's production operations.
A logical progression
Rick Veague, IFS' chief technology officer (CTO) for North America, said automating production processes and creating condition-based equipment maintenance programs were the most common ways in which survey participants said they use IoT technology. Lower operating costs typically are the biggest benefit from using IoT technology in this fashion.
Veague said it's logical for manufacturers to choose these types of projects for their initial forays into the IoT realm. Veague noted manufacturers have been attaching sensors to plant floor machines and equipment for decades. It's not difficult to connect those sensors with software applications—like industrial automation and maintenance management systems—that also operate on the factory floor. While the cost savings from this approach are real, and sometimes substantial, Veague believes manufacturers can reap even greater value by extending their IoT footprint beyond the factory floor.
"Right now, the primary value industrial companies are seeking from IoT seems to be cost avoidance," Veague said. "The greater potential for IoT in these settings, however, is business growth. To realize that benefit, companies must not only think creatively about IoT. They must be able to use IoT data in the context of their business, which means tighter integration with applications like ERP."
Veague also said manufacturers are not necessarily at fault for not pushing more IoT data to their ERP systems. Until recently, ERP systems simply were not able to consume such data, and the responses to another question in the IFS survey indicates that remains a problem for many manufacturers. Roughly 49% of the respondents said their ERP system performed "somewhat well" at consuming IoT data, with another 6% saying their systems performed that task extremely well. The remaining 45% said their ERP system either did a poor job of consuming IoT data, or actually impeded their ability to use such data at the enterprise level.
"It's interesting that not even the most advanced companies were likely to say their enterprise software did a very good job of helping consume IoT data," Veague said. "This indicates the level of maturity of enterprise software. There obviously is room for growth here . . . the ability of ERP and other software applications to support IoT still is not robust enough."
The vendor perspective
The ERP vendor community is aware of this fact, and almost every vendor in the industry has an IoT strategy. Some ERP vendors are further along than others when it comes to IoT-enabling their platforms, but there is one thing all seem to agree on: Any truly IoT-enabled ERP system must be cloud-based.
That's why even the industry giants such as SAP and Oracle, with their huge customer bases, are still running on-premise versions of their software are now touting the virtues of software in the cloud. In fact, both Oracle and SAP have been working somewhat quietly over the past several years to build a portfolio of products that can support end-to-end, IoT-enabled business networks.
For instance, SAP has purchased companies like Ariba, Concur and Success Factors, which gives the company instant access to cloud-based systems for procurement, time, and expense reporting and human resources management. SAP is also developing a cloud-based version of its Manufacturing Integration and Intelligence product. That's where IoT data taken from the shop floor would stop first before being presented to higher-level ERP applications.
"Manufacturing Integration and Intelligence is now the lifeblood of our manufacturing solutions," Parrish said. "It's being designed for the cloud and for data integration and transfer from a communications standpoint."
Terri Hiskey, vice president of product marketing for Epicor, said manufacturers seeking to build an IoT infrastructure need a cloud-based ERP system because that's the only type of platform that can facilitate the connections that are needed to turn all of the information coming from various shop floor devices into useful information.
"You need to look at the system's architecture," she said. "It needs to be built on open standards with open application programming interfaces. The newer, cloud-based systems are being written in that fashion; the older, on-premise systems may not have been."
David Gustovich, vice president with Oracle's NetSuite Global Business Unit, said the ultimate purpose of feeding IoT data to an ERP system is giving users information that can be viewed and analyzed and make better business decisions. He agreed building an infrastructure on open standards is essential to making that happen, but he also believes that focus should begin at the device level.
"When thinking about the Industrial IoT (IIoT), you have to consider how you're going to make your machines and devices talk a common language that can be brought into the structured data environment of an ERP system," Gustovich said. "Many companies will have to invest in new programmable logic controllers (PLCs), control panels and drivers that are OPC-compliant. OPC becomes the standardized communication protocol to amalgamate all these different data tags from the different types of devices and equipment. When you aggregate that data, it can be passed into the cloud in a more efficient and secure manner."
Hiskey said mastering the art of aggregating and presenting IoT data through an ERP interface will provide manufacturers multiple competitive advantages going forward. "It important to think about how IoT can impact the user experience," she said. "We've all being spoiled by the Amazon experience—the 1-click, easy to use interface. That's bleeding into the B2B arena. As more millennials come into the workforce, especially in the old-line industries, you'll need those types of interfaces to fill your jobs.
"It's on us as software developers to think about the experience we're offering to both the employees of manufacturing companies and their customers," she said. "The manner in which we connect IoT technologies with ERP software will determine the quality of that experience."
Sidney Hill Jr. is a graduate from the Medill School of Journalism at Northwestern University. He has been writing about the convergence of business and technology for more than 20 years.
Quick article synopsis
Problem: Manufacturing companies are constantly looking for better ways of integrating data from all of their operations. They are particularly interested in moving shop-floor data to the enterprise systems, in hopes of helping managers and executives make better, more strategic business decisions.
Solution: A properly-built IoT infrastructure can facilitate the flow and aggregation of data across the enterprise to give users a constant, real-time view of all processes. Such a network can help a manufacturing company in many ways, from reducing costs, helping to spawn new lines of business, and even in recruiting top-level talent.
Action to take: Talk with suppliers of both process automation and ERP solutions to determine their strategies for facilitating the use of IoT across an enterprise. Examine which parts of your business can benefit from use of IoT first, develop pilot programs in conjunction with an enterprise-wide vision.
See additional resources and related articles about the IoT and ERP linked below.
Places to start:
- SAP Cloud Platform for the Internet of Things
- Industrial Internet of Things (IIoT) and Digital Transformation
- Internet of Things... Let's Make Connections
- NetSuite announces new functionality for manufacturing industry