CSCMP's Supply Chain Quarterly

Quarter 1 2015

How the Internet of Things will change your world

Networked, connected devices and equipment will provide supply chain and logistics managers with something they often lack: the visibility and data necessary for supply chain optimization.

The Internet of Things (IOT) is most often mentioned in a consumer context—perhaps a scenario where a smartphone "talks" to a coffee maker and tells it when to have the coffee ready, or a refrigerator sends a text message alerting the consumer that it's time to buy more milk. But the IoT is not simply a facilitator of consumer convenience.

That's because the Internet of Things allows for visibility where there previously was none. It captures data where it previously was not possible. It therefore provides supply chain and logistics managers with something they often lack: the visibility and data necessary for supply chain optimization.

The Internet of Things, in other words, has the potential to change everything.

What is the IoT?

The IoT represents the convergence of the physical and digital worlds. Physical objects are equipped with technology that enables the object to send and receive information via fixed-wire or wireless communications links to the Internet, and to then transmit information in one form or another. The McKinsey Global Institute defines IoT devices as those that "can monitor their environment, report their status, receive instructions, and even take action based on the information they receive."1

This definition from One Network Enterprises, a supply chain technology provider, offers a supply chain example: "[The IoT] refers to data communication among a large range of assets or devices—from your fridge to your oven or, more pertinently, from your inventory to its container, from the container to the carrier, from the pallet to the warehouse. The more your assets can 'speak' to one another and share data, the more they can work together to help you improve your processes."*2

There are three basic components that make a "thing" or a device part of the IoT: sensors, connectivity, and processors.

A device must have these three components in order for it to be considered part of the IoT. These components are what differentiate a smart or IoT-connected container, for example, from a traditional container.

You might think that this capability would still be rare. But the number of Internet-connected devices that could potentially function as part of the IoT is growing exponentially. In 2003 the world's population stood at 6.3 billion, and there were approximately 500 million connected devices, or fewer than 0.08 devices per person.3 By 2010 the global population had increased to 6.8 billion, and the number of connected devices had increased to 12.5 billion—or 1.84 devices per person.4 For the first time, the number of connected devices exceeded the number of people in the world. The explosive growth of these devices was largely fueled by the release of the first (and subsequent) iPhones, other smartphones, and tablets.

That growth was just the beginning. The networking systems company Cisco Systems estimates that the number of IoT-capable devices will increase to 50 billion by 2020.5 Morgan Stanley believes the number will be higher: The investment banker estimates that there will be 75 billion IoT devices by 2020.6

The arrival and exponential growth of the Internet of Things has spurred what is being called "the fourth industrial revolution." The research firm Gartner Inc. predicts that the IoT will add US $1.9 trillion in value to the global economy by 2020,7 while Cisco estimates that this revolution will create over US $14 trillion in value over the next 10 years.8}

The IoT and the supply chain

As the number of IoT devices grows, so will the impact of the IoT on supply chain operations and management. IoT devices have proliferated and are already moving into industrial environments, such as warehouses, manufacturing plants, health care, banking and finance, and transportation.

Gartner has predicted that the growth of IoT devices will "significantly alter supply chain leaders' information access and cyber-risk exposure." Michael Burkett, managing vice president at Gartner, takes this further: "It's important to put IoT maturity into perspective because of the fast pace at which it is emerging, so supply chain strategists need to be looking at its potential now."9

The number of ways the IoT could impact supply chains—and vice versa—is incredible, and that number will continue to grow. The following are examples of the many areas where that is already happening:

Transparency and visibility. Tracking and monitoring shipments in real time using a combination of sensors, connected devices, and communication channels significantly enhances a company's ability to optimize efficiency.

Purfresh is using the IoT to change the shipment of perishable products by ocean. Purfresh is a provider of enhanced atmosphere technology and documented, real-time monitoring and control. This technology enables Purfresh to make ocean transport a viable option for even the most sensitive cargo.

The Purfresh technology provides the capacity to collect real-time data, including the atmospheric conditions inside a refrigerated container and the container's location. The technology also sends automatic alerts (for an unexpected condition, such as an incorrect temperature or an unplanned power-off event) and provides detailed trip reports. When an issue is identified, it can be corrected remotely while the shipment is in transit, enabling perishable products to arrive intact and in good condition.

For an example of how the IoT can improve transparency and visibility in the warehouse, see the sidebar.

Proactive replenishment. Having the capability to automatically recognize the need to order and restock a product on a "machine-to-machine" basis reduces the need for human interaction. Some vending machines, for example, know when they are out of or low on specific items and will immediately trigger an alert to reorder them, instead of waiting for a service person to manually reorder products. The result is less human intervention, quicker replenishment, better sales forecasting, and, ultimately, increased revenues.

Coca-Cola has achieved a real-world application for proactive replenishment in its Freestyle "soda fountain" machine. It's about the same size as traditional vending machines, but it can dispense 126 different flavors, offering consumers a huge number of combinations. The machine uses cartridges that store concentrated syrups and are equipped with radio frequency identification (RFID) chips. The RFID chips detect how much of each syrup the machine has and what combinations are being used; when it detects that it needs supplies, it transmits information to both Coca-Cola and the store owner, including what has been sold, a record of when sales occurred, troubleshooting information, and service data. As a result, both product sales and customer satisfaction increase.

Predictive maintenance. Predictive maintenance programs for machines and other equipment can utilize sensors and connected devices to monitor and react to problems in applications as diverse as large-scale manufacturing and diagnostics on the family minivan. This self-diagnosis capability can detect a potential problem before failure, order a replacement part, and even schedule maintenance to avoid costly downtime. Further, the use of the IoT to stay ahead of maintenance issues has implications on an industrywide scale. With continuous retrieval of data from factory equipment, for instance, manufacturers can better see problematic trends that could affect future production, and parts depots can better forecast inventories and ensure consistent safety-stock levels.

In relation to home automation, predictive maintenance will become integrated into our everyday lives. Appliances will become smarter, more efficient, and easier to monitor. Internet-connected sensors will be embedded into everything from appliances like washing machines and dryers to heating, ventilation, and air conditioning (HVAC) systems. These connected appliances will perform self-diagnosis, determine the most cost-efficient time to operate, and even automatically order maintenance parts when needed. This capability holds so much promise that companies like GE are investing heavily in these technologies for both commercial and industrial applications.

Reduction in asset loss. Distributors and manufacturers are challenged with keeping track of assets that are in almost constant motion. Without appropriate strategies in place to manage the tracking of equipment, supplies, and products, the likelihood of misplacing or losing valuable assets increases. Utilizing real-time IoT devices eliminates manual data entry and automates tracking processes, reducing human error and insulating businesses from costly asset loss.

When equipped with an RFID tag and a sensor, objects are uniquely identifiable, and they are also able to communicate data in real time. These two factors have important implications for asset tracking in distribution centers. Using RFID tags and readers, a distribution center manager has the ability, for example, to identify the exact location of a crate of tomatoes within the facility, the crate's point of origin, the temperature of the crate, and the number of days until product expiration. This information allows the manager to make informed decisions regarding shipment so as to reduce asset loss.

Another warehouse example of asset protection is that of TotalTrax's ImpactManager RF impact-monitoring system. The ImpactManager, which is mounted on a forklift, controls access to the equipment, monitors usage, and detects impacts. When there is an impact that meets or exceeds a predetermined threshold, the unit records event details, such as date, time, gravitational-force rating, truck number, and identification number of the driver involved, and then wirelessly transmits this data to an administrator. An alarm also sounds to alert the driver that an impact has been registered. The alarm promotes better driving habits: As operators learn what sets the alarm off, they begin to drive more cautiously. Using this technology on eight of its forklifts, customer Spokane Industries achieved a 90 percent reduction in impact-related damages to leased vehicles.10

Manufacturing flow management. Manufacturers have long used programmable logic controller (PLC) sensors and automation techniques to optimize product flow through their facilities. But ensuring optimal product flows through a manufacturing plant requires coordinating a multitude of processes and activities, and these aging systems often function independently of one another. With the emergence of the IoT, however, a more sophisticated, connected network is emerging. These smarter, highly integrated networks are creating efficiencies for manufacturers by making it possible for various types of equipment to communicate autonomously, and (perhaps more significantly) by directing the equipment's actions. Before it integrated a new sensor into its production line, Bic, the shaving razor manufacturer, found the quality-inspection process to be inefficient and time-consuming. Because of the shiny blade surface, it was difficult to successfully automate the detection of product inconsistencies, a problem that resulted in line-slowing manual inspections and hand sorting. The adoption of a more sophisticated sensor that can adapt to variations in real time and is connected to a network enabled the company to increase its detection reliability, eliminate costly manual sorting, and optimize the flow of product through the production line.

Product development and commercialization. Enterprising businesses are leveraging the IoT's greater connectedness to develop and commercialize new products, creating both increased opportunity and competition. These companies are cultivating relationships with partners outside their industries and drawing on one another's expertise to enhance existing products and bring entirely new ones to market.

One example is Volvo's "Drive Me" project, which the company says aims to develop the world's first "self-driving car for sustainable mobility." Volvo has identified new, unconventional uses in its older-model vehicles for the technology, which connects and transmits operational and mechanical data for maintenance and travel guidance. Relying on the technical expertise of partner companies, Volvo is using output data from a combination of interconnected devices, such as global positioning system (GPS) units, inertial navigation software, laser rangefinders, and video to enable autonomous system control.

Risk management. The significant operational benefits associated with the IoT also come with a great deal of risk that companies must manage. The growth in the number of increasingly complex systems and networks of connected devices means there is a greater need for enhanced information technology (IT) security. Further, ensuring the quality of connected systems and devices requires the thoughtful creation of new quality-assurance measures. Strict adherence to strategy objectives must outweigh the lure of inexpensive memory and powerful processing; otherwise it creates unnecessarily complex networks that will prove difficult to maintain and will expose the company to avoidable risk.

An instructive example is that of the automaker Toyota. In 2013 an Oklahoma (USA) court found Toyota negligent in regard to its design of acceleration-control software. The court ruling highlighted the Toyota Camry's electronic throttle-system source code; the defective source code ultimately led to unintended engine acceleration that caused the death of at least one person. The implication drawn from Toyota's lack of sufficient quality measures for its firmware emphasizes the necessity for all businesses to develop and implement quality-assurance strategies for all connected networks, systems, and automation processes.

Operational efficiency. Leveraged correctly, the IoT improves communication, productivity, and management. New systems and devices are creating more connected networks with exponentially higher data output and processing power. The resulting wealth of data can be analyzed and used to connect systems and inform decisions about operational functionality, such as loading-dock management and machine-to-machine communication. Connecting systems and equipment helps businesses realize previously untapped operational efficiencies.

A system such as that developed by Zebra Technologies, a provider of bar-code and RFID technology, shows what can be accomplished in this regard. Zebra has developed a software platform that connects networked devices to a cloud-based infrastructure. The software gives users a global, real-time snapshot of asset locations, the average wait time for customer service, and production-line speeds, to name just three examples. In addition to having its own individual status updates, each device that is connected to the network contributes to a general data feed so that users get a more comprehensive view of overall operations. For an example of how this can be used in the warehouse, see the sidebar.

Improved fleet management. Equipping fleets with sensors designed to improve vehicle performance and diagnostic capabilities extends the life of costly assets. Vehicle-generated data-collection activities like location tracking, tire-pressure monitoring, stability control, and collision avoidance converge to make fleets not only more efficient, but also safer. Utilizing this wealth of data to adhere to vehicle-maintenance schedules and address unanticipated repairs as soon as they appear keeps budgets predictable, more extensive repairs at bay, and more vehicles on the road.

New commercial trucks manufactured by Daimler Trucks North America, for example, are now equipped with sensors that feed data to a Daimler-operated call center—what equates to a "virtual service station." Sensors detect and diagnose maintenance issues in real time; the system communicates that information to the Daimler network, and then connects the driver with the call center to receive instructions. Drivers with critical issues are directed to nearby mechanics by means of a GPS system, which determines the truck's location. This automation and centralization of fleet management responsibilities have allowed for substantial gains in efficiency. For an example of how this can be used in the warehouse, see the sidebar.

Looking forward

As the examples in this article have shown, the Internet of Things is already having a big impact on supply chains. Moreover, as the number of devices grows and the capabilities of IoT devices continue to evolve and develop, the impact on the supply chain will become even greater.

Developments are moving along so quickly that Gartner warns that supply chain strategists should be looking at the potential of the IoT right now, not later. But the impact of the IoT is not just a matter for strategists and theorists; it is also important that supply chain professionals look at the IoT's capabilities and potential. The transparency and end-to-end visibility afforded by the IoT creates new opportunities that supply chain professionals can leverage in order to optimize supply chains and generate value.

The sheer amount of real-time data afforded by the IoT is game-changing. As more companies integrate the IoT and connected devices into their operations, a gap will be created. On one side will be companies that have embraced the Internet of Things, and on the other side will be those that have not. Companies that embrace the IoT will move forward, leaving those who do not behind.


1. McKinsey Global Institute, Disruptive technologies: Advances that will transform life, business, and the global economy (June 2013): 51.
2. One Network Enterprises, The Internet of Things: How 'Process Robots' Are Transforming Supply Chains, (2014): 2.
3. Cisco Systems, The Internet of Things: How the Next Evolution of the Internet Is Changing Everything, (April 2011): 3.
4. Ibid.
5. Ibid.
6. Tony Danova, "Morgan Stanley: 75 Billion Devices Will Be Connected To The Internet Of Things By 2020, Business Insider.
7. Gartner Inc., "Gartner Says It's the Beginning of a New Era: The Digital Industrial Economy," press release (October 7, 2013).
8. Joseph Bradley, Joel Barbier, and Doug Handler, Embracing the Internet of Everything To Capture Your Share of $14.4 Trillion (2013): 1.
9. Gartner Inc., Gartner Says a Thirty-Fold Increase in Internet-Connected Physical Devices by 2020 Will Significantly Alter How the Supply Chain Operates," press release (March 24, 2014).
10. TotalTrax, "Reduce costly forklift damage".
11. Aaron Mamiit, "Amazon Order Fulfillment More Efficient with its Fleet of Robots," TechTimes (December 1, 2014).
12. Peter Bradley, "Bobcat excavates productivity, inventory improvements," DC Velocity (September 17, 2014).