How IoT will dramatically impact Enterprise Resource Planning (ERP) systems

By Ted Rohm, Senior ERP Analyst at Technology Evaluation Centers

Enterprise Resource Planning (ERP) systems have always been limited because they mainly look at the data being managed inside the four walls of a company. The rise of the Internet of Things (IoT), however, is having an impact on enterprise applications. And while most enterprise application vendors are talking about how the IoT will impact current applications, many are not looking past the current system’s design and operating models. In reality, the IoT will fundamentally change ERP applications. Current approaches to managing enterprise data will literally be turned outside in.

The IoT will allow for data to be sent in real-time from all manner of external touchpoints back into the internal business systems. No longer will organizations struggle to connect these internal ERP business systems and processes to the external data. The data collected from IoT devices will take on primary importance for managing the health of a business.

As Satya Nadella, CEO of Microsoft, said in his address to an event in London, “Digital technology, pervasively, is getting embedded in every place: everything, every person, every walk of life is being fundamentally shaped by digital technology — it is happening in our homes, our work, our places of entertainment.” The result is that ERP systems, as they exist today, will be less important as these new business models take hold. It is the external data from the IoT that will be the fuel to drive the next generation of business systems.

Background on ERP
ERP systems are business management systems that have been developed to track, manage, and report on a company’s operations. Today’s dominant ERP systems have their roots in software that was developed in the 1990’s, when ERP centered around a combination of financial and manufacturing management processes. See TEC’s article on ERP History: Origins and Evolution for more background.

ERP software has since been built out to encompass every aspect of a company’s operations. ERP systems manage financials, human resources (HR), customer relationship management (CRM), inventory, manufacturing operations, sales, marketing, field service management, and almost every imaginable business process that can be tracked in a system.

When looking at these enterprise systems, one sees that a huge amount of effort goes into bridging the initiation of some business transaction to its final use or outcome. For example, when someone wants to buy a new pair of sneakers, tracking the business process will require tracking the creation of a sales order, the manufacture of the product, the shipment of the product, the receipt of the product, and invoicing and settlement of the financial transactions. Similar series of transactions are required to manage professional or service industry operations, e.g. hiring an accountant, lawyer, or even plumber to provide services. Of course, there are an almost unlimited number of variations to these steps depending on the type and size of business. Tremendous effort has gone into building systems that can manage the data that flows from the initial product/service request to the receipt and use of the product or service.

These ERP business processes remain essentially unchanged from the way they were designed decades ago. But the IoT and its industrial counterpart, the industrial internet of things (IIoT), will change everything about these processes.

What is the IoT?
The IoT and IIoT are a combination of technologies that together are allowing virtually any “thing” to communicate and send data over the internet. A better definition for these “things” are smart, connected devices. These devices are smart because they have some on-board computing capabilities. The other key feature of these devices is that they are connected to the internet.

The transformative nature of these products was articulated by Michael Porter and James Heppelmann in the Harvard Business Review article How Smart, Connected Products are Transforming Competition. Smart, connected device examples include Tesla automobiles, robotic vacuum cleaners, the ubiquitous smartphone, connected refrigerators and even smart toothbrushes. The cost of these smart and connected compute capabilities has dropped so significantly over the past few years, making it possible to embed smart, connected capabilities into almost any object for as little as a few dollars.

IoT will Transform ERP and Business Processes
IoT and IIoT are now supplementing and replacing the sources for many orders and transactions processed in ERP systems, whether they are sales orders in the Order to Cash (OTC) process, purchase orders in the Purchase to Pay (P2P) process, work orders for plant maintenance and operations, or service orders.

Let’s take a typical OTC or Quote to Cash (Q2C) process: the first step of the OTC or Q2C process is the creation of a quote or an order for a product or service. The IoT makes it possible for orders to be initiated from a growing variety of sources. The previous generation of electronic ordering centered around making the ordering process less error-prone and automated. Orders for goods and services in this older generation were created by technologies like electronic document interchange (EDI) or ecommerce web sites. However, these tools didn’t fundamentally change the way that products are ordered.

Other types of orders that are commonly created in ERP systems include work orders and service orders. For this example, let’s assume that work orders refer to the class of orders that are created to perform work on a factory floor, including orders to execute some manufacturing step and orders to perform some kind of maintenance task on a machine. Another class of orders are the service orders that are created to perform tasks like the maintenance or repair of a customer’s refrigerator.

Currently, ERP systems are looking at the data from smart, connected devices as a supplement to the current major business processes. The ERP systems are currently being modified to bring the IoT data into some data lake or data store and then update their systems along the lines of current (and archaic) business processes. But in the future, business systems will need to see the IoT data as the primary source and record used to manage business processes.

The Future of Business Processes
A consumer can now order a custom pair of smart, connected shoes on his/her phone (one of the most evolved smart, connected devices) and that order can be sent directly to the manufacturer to process the order. In the near future, we will also see that the order for these shoes could be sent directly to an autonomous manufacturing line operation which is run using connected robots and 3D printers. In this case, it will be the 3D printer that directly receives the order and initiates the various manufacturing and fulfillment tasks. The printer would request the material needed and it would be automatically ordered from existing stock or procured.

Many large-asset manufactures have already moved to the model in which the customer is only charged for the time period during which the asset is in use. For example, aircraft engine manufactures GE and Pratt and Whitney charge for the time the engines are operating. The manufacturer takes on all maintenance and repair responsibilities for the engines. The airline only pays the manufacturer a service fee. There are many cases where this “servitized” business model will become the norm.

Almost every electronic device with a price of more than $100 comes with some level of mobile connectivity. Cell phones are probably the most mature example. When you purchase an Amazon Fire Stick or a Roku device and plug it in, you are automatically connected to the supplier’s full range of services available on that device. Smart home appliances and devices, personal products like Fitbits and even smart shoes are coming to market. Connected automobiles will be the norm. One no longer needs to go to the manufacturer’s registration site, enter the serial number, etc. 5G network connectivity will enable the next level of connected devices.

It will be these devices that initiate and track many of the business processes in the future. The smart, connected refrigerator will place an order to replenish the milk and juice. It will be a machine on the factory floor that puts in the request for the material needed to fulfill the order that was just placed by the car that has sensed that that the brake pads are wearing down. It will also be the smart home’s monitoring robot that notifies the robotic vacuum cleaner that the dog just spilled its bowl and needs to be cleaned up.

Other entire software suites that were built on top of and around these ERP systems will also change dramatically or even be eliminated. The article, IoT-enabled Smart Factory Visibility and Traceability using Laserscanners describes the Internet of Things (IoT) -enabled Smart Factory Visibility and Traceability Platform (iVTP for short) to ultimately achieve real-time production visualization within a smart factory. Another interesting article about IoT applications to manufacturing is Physical assets and service sharing for IoT-enabled Supply Hub in Industrial Park (SHIP).

Other examples include product lifecycle management (PLM) and planning and forecasting tools. The IoT makes it possible to manage the product lifecycle in real-time. Similarly, forecasting and planning tools will be able to access real-time snapshot of the state of the entire installed base of a product. There is no need to plan or forecast or guess at how many new brake pads will be needed to keep last year’s Teslas on the road. In the future, with the help of artificial intelligence (AI), many parts of the economy could become self-driving and self-managing. There will be no need to try to apply an inexact number on top of what was already an inexact set of error-prone business processes.

Overall, we will see a fundamental shift in many of the business processes used in the future economy in which smart, connected devices proliferate. These smart devices will communicate directly and not have to go through the long, people-managed processes that are the heart of ERP systems. These devices will communicate directly through a set of protocols which are designed for machine-to-machine communication, not person-to-person or even person-to-machine communication. The business processing systems of the future (if they are still called ERP; some are saying “postmodern ERP”) will look more like robotic and machine-to-machine processing systems.

Other Reading
Combining ERP and IoT
How the Internet of Things can Boost ERP.
IIoT and ERP: Powerful combination
The rising tensions between IoT and ERP systems.

About the Author
Ted Rohm is a Senior ERP Analyst at Technology Evaluation Centers. He specializes in large-scale selection, design, development, and implementation projects; an expert in these fields for over 20 years. Rohm’s expertise covers enterprise resource planning (ERP), customer relationship management (CRM), enterprise asset management (EAM), supply chain management (SCM) and more.

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Technology Evaluation Centers (TEC) is the world’s leading provider of software selection resources, services, and research materials, helping organizations evaluate and select the best enterprise software for their unique needs. With its advanced decision-making process and software selection experts, TEC reduces the time, cost, and risk associated with enterprise software selection.

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