When things talk to things, the internet gains another dimension. So does your operation.

The Internet of Things (IoT) is exploding—the worldwide number of connected devices — is expected to exceed 20 billion by 2020, according to analytics firm Gartner. While it’s just coming of age in the consumer space with the proliferation of devices like Internet-enabled thermostats and Fitbit-like wearables, IoT in manufacturing represents the maturation of decades of work to automate and connect equipment and systems.

Manufacturing and IoT

On the manufacturing floor, the “things” that make up the Internet of Things are critical components of the production process. Many pieces of equipment and whole systems are now embedded with sensors and networked to each other for autonomous machine-to-machine (M2M) communication. This trend is gaining as the costs of sensors and the systems that connect them falls:

• Some 35 percent of U.S. manufacturers are currently collecting and using data generated by sensors to enhance manufacturing and operating processes, according to a 2015 report by PricewaterhouseCoopers. Another 41 percent have plans to do so, according to PwC.

• The annual manufacturing investment in IoT worldwide is projected to jump from $29 billion in 2015 to more than $70 billion by 2020, according to BI Intelligence.

• Industrial manufacturing companies are reporting larger increases in revenue from IoT than any other sector, with average revenue gains of 28.5 percent, according to a 2015 study by Tata Consultancy Services.

• The potential value of IoT for manufacturing over the next decade is nearly $3.9 trillion in increased revenues and lower costs, according to a study by ARC Advisory Group.

Connected Machines Change Workflow

IoT provides manufacturers with unprecedented insight into their operations—everything from sensors that track the temperature and humidity on the production floor to RFID tags that allow systems to follow individual products—not batches—through every step of the manufacturing process.

In one often-cited example, Raytheon Co. tracks how many times each screw is turned during assembly at a missile plant in Alabama—stopping production if a defective screw is only turned 12 times instead of 13.  (“It’s either right or not right,” Raytheon executive Randy Stevenson told The Wall Street Journal.) When Harley-Davidson revamped its Pennsylvania motorcycle factory, IoT-powered data helped standardize painting procedures and led to time-saving changes in the process to install rear fenders.

Sensors and data analytics have long been used to help identify potential mechanical problems in time to schedule preventative maintenance, reducing downtime and costs in the process. Now, the growth in autonomous systems will mean that these decisions will increasingly be made by machines, with little or no intervention.

And the focus is shifting beyond the production floor. For many manufacturing businesses, the opportunity today is shifting to the “I” of the IoT—using the Internet to extend the reach of these smart devices and systems both up and down the supply chain. Doing so creates a communication continuum among plant operations, suppliers, product design, and consumers in many ways:

• Connecting warehouse operations and the extended supply chain can accelerate efforts to create lean manufacturing operations with just-in-time delivery of materials and components. It can also provide information about specific lots of raw materials or other components to track quality.

• Monitoring IoT-enabled products once they are in use by customers can help identify potential problems and opportunities for improvement, speeding the product design cycle and accelerating upgrades.

• Products with IoT capabilities can also open new revenue opportunities. Manufacturers like Caterpillar Inc. use IoT systems linked by cellular and satellite technology to monitor customer fleets of vehicles, alerting them to maintenance issues.

This broad change is evolving. About a third of IoT-enabled manufacturers have put the technology in place only in their manufacturing facilities, according to PwC. Only 26 percent have also extended IoT to their warehouses, while 22 percent incorporate their extended supply chain and 19 percent include their customers, thus spanning their entire manufacturing ecosystems.

The Data Challenge

This tightly integrated, data-rich approach to manufacturing enabled by IoT is sometimes likened to a “fourth industrial revolution”—marrying the production gains from advanced manufacturing with those from the IT revolution.  But for manufacturing companies to fully leverage the opportunities the IoT brings, they need systems and skills to process and convert the massive amounts of real-time data produced by thousands upon thousands of connected devices into useable information.

Big data, data science, and analytics may be new competencies for many manufacturers, who will need to identify skill sets as they make investments in technology to make the potential of IoT real.

“Analytical talent is becoming increasingly rare in the labor market, so there will be fierce competition for mathematicians and analysts,” Siegfried Dais, deputy chairman of the board of management at German engineering company Robert Bosch GmbH, said in a conversation with McKinsey & Company analysts. “The opportunities presented by the Internet of Things are clear—but so are the challenges.”

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