Since Nobel Prize-winning economist Ronald Coase wrote that the purpose of an organization is to reduce transaction costs1, the approach to supply chain management (SCM), logistics, and even customer engagement has been focused on simplifying and reducing these transaction costs through greater efficiency and better use of resources. SCM was modeled from a linear view of internal and external partner connections, with buffers of inventory and time between each stage of production. Supply networks were narrowed to vendors that competed on continuous price reductions rather than on quality of materials. Transportation and logistics also had limited suppliers due to complexity of scheduling and business transactions. As a result of this model, brick-and-mortar business processes were disjointed.
Achieve Outcomes in the Digital Economy
Today, digital transformation is changing individual companies, customer expectations, and the economy as a whole. Companies must now focus first on the customer — and the customer experience. To do so, they need omnichannel coordination, connected products, personalized user experiences, and responsive supply chains. Instead of limiting business partners, companies are using business networks to intentionally leverage the increased complexity and access innovative products and materials; create responsiveness in supply; find reliable transportation; and even enhance internal manufacturing, warehousing, and distribution management. Technology-savvy customers expect innovation, continuous availability, and outcome-based experiences rather than the purchasing mentality of old business models.
To realize valuable outcomes, a company must digitally transform itself. It takes more than just collecting oceans of data from more inputs. Ultimately, companies must reinvent key business processes that drive value by extending and enriching them to function with the efficiency and speed expected in this diverse and networked economy.
To meet this need, SAP has created business networks for supplier collaboration, logistics and transportation, workforce and engagement, and omnichannel customer experiences. At the heart is SAP S/4HANA, the digital core that can facilitate true digital transformation. Coupled with the Internet of Things (IoT), SAP S/4HANA helps extend and enrich business processes — whether it’s externally through business networks or internally by coordinating supply and operations planning and execution and logistics and warehousing, and providing flexible customer interactions and ongoing engagement.
SAP S/4HANA and IoT
The simplification of the data model in SAP S/4HANA is critical to IoT scenarios. IoT signals are generated in milliseconds and can only be properly contextualized when interpreted with real-time transactional data such as stock shortages in material requirements planning or slow-moving items from inventory management systems. What use would there be for collecting IoT data from a sensor on a production line or a radio frequency identification (RFID) device embedded in a material in transit if that data is analyzed against aggregate inventory, hours-old production information, or even worse, yesterday’s data? IoT analysis requires working with data at the line-item level for true data-to-outcome capabilities.
The speed and response of business processes, analytics, and data integration must all operate at the same rate to enable the right action to be taken at the right time. This is why modern organizations must use a single, unified system to be truly capable of operating at the speeds necessary for the digital economy. This is the essence of the digital core — bringing processes, analytics, and data together — and why companies must leverage SAP S/4HANA in IoT scenarios to help realize business outcomes. Together, SAP S/4HANA and IoT empower companies to convert things (data) into insight, turn insight into action, and transform action into outcomes by enriching and extending critical business processes (see Figure 1).
Convert Things into Insight
First, it is imperative to know where opportunities and risks exist. With IoT sensors recording a staggering amount of data, sifting through it and finding meaning is challenging. Now that SAP S/4HANA serves as the digital core, that IoT data can be transformed into valuable insights that can be used to identify risks before they happen and to seek out new business opportunities. Consider consumer industries: By leveraging data from various customer-facing interactions, companies can determine the appropriate engagement strategy that may appeal to customers and prospects, such as recommended items or reward programs, to gain and retain brand loyalty.
SAP S/4HANA brings a new, unified data model and more accurate connectivity to data sources. With IoT connectivity natively included and operational capabilities in the extended supply chain, critical operational data is now brought into the digital core. As a result, companies gain, for example, real-time insight into asset performance; a common view of process risks related to workers, assets, and the environment; and visibility into manufacturing stockouts and material availability.
Turn Insight into Action
Next, companies need to evolve their business processes to turn this insight into action. By leveraging the insights distilled from IoT data, companies can extend and enrich SAP S/4HANA business processes to better position themselves to take action. The more a company understands about its business, the more steps it can take to simplify and streamline business processes to create efficiency — both externally and internally. For instance, when devices, people, and partners are connected, companies can better use dynamic business networks. In today’s responsive, demand-driven extended supply chain, business networks reach far and wide — and can be harnessed to yield faster reaction times to demand changes, reduced manufacturing costs and stockouts, and lowered inventory and safety stocks.
Transform Action into Outcomes
Finally, organizations can create new business value and ecosystem advantages. SAP S/4HANA and IoT work together to provide companies with a complete view of data, informing actions and delivering true outcomes. These outcomes can lead to new revenue streams across the entire business. For instance, logistics companies can differentiate themselves by providing up-to-date status records of in-transit shipments. With IoT, not only do companies have access to shipment information, but they can also harness other capabilities, such as cold-chain condition tracking, more detailed component traceability, verification of material sourcing, and maintenance of necessary conditions affecting food and pharmaceutical safety. This enables a company to realize the potential of the networked economy and gives the company an edge over competitors in terms of quality, traceability, compliance, and transparency.
With SAP S/4HANA and IoT working in unison, organizations can experience benefits such as higher inventory turns and revenues, reduced stockouts and revenue loss, higher on-time delivery, reduced order lead times, reduced warehouse and transportation spend, and lower customer order cycle times.
IoT Is About More Than Being Connected
IoT is about more than insight; it’s about actions and outcomes, both of which cannot happen in a vacuum and require business context delivered through SAP S/4HANA. Without business context, organizations cannot fully leverage the power that IoT can bring to the enterprise. Companies can build data lakes to store a large amount of IoT data and uncover trends with standalone analytic tools, but without understanding the business context that existed when the data was generated — such as what were the inventory levels or what production orders were being processed — they cannot glean the relevant business insights or take significant actions based on this data.
It’s with that in mind that SAP built SAP S/4HANA as its digital core to bridge the gap between business processes and IoT scenarios, leveraging native capabilities to connect and integrate IoT data directly with business processes in manufacturing, supply chain and procurement, and other areas of the extended supply chain. Critical operational data is now brought into the digital core, enabling SAP customers to know more, evolve further, and create value across the enterprise. For more information, visit sap.com/s4hana.
1 Ronald H. Coase, “The Nature of the Firm” (1937; bit.ly/Coase). [back]