Publication Date

Supply Chain Frontiers issue #58

How will supply chains be affected by the Internet of Things (IoT)? BASF, the world’s largest chemical company and a strategic partner of the MIT Global SCALE Network, posed this question as a topic for a master’s thesis at the Malaysia Institute for Supply Chain Innovation (MISI). Two MISI graduates, Rahul Ravi and Milton Wu, took on the challenge of providing answers under the supervision of Dr. Shardul Phadnis, MISI’s Director of Research.

The IoT represents a scenario in which sensors embedded in omnipresent devices—such as fitness trackers, mobiles phones, vehicle cameras, building thermostats, etc.—communicate with each other and regulate actions through autonomous decision-making algorithms.

The technology promises a paradigmatic shift in the way everyday tasks are performed across the globe. An air-conditioner in a Kuala Lumpur, Malaysia condominium could automatically start just in time for the owner to arrive home from work by tracking him via his car’s GPS and using the traffic app Waze to estimate his arrival time. A domestic dishwasher machine in Berlin, Germany could start washing a heavy load when the price of electricity – as informed by real-time sensors in the grid – is low. Picture a car starting automatically to warm the engine on a frigid January morning in Boston, US, having been forewarned of the driver’s imminent trip to work by sensors in the fitness tracker she is using. The day-to-day applications of IoT are limited only by the boundless creativity of the world’s entrepreneurial minds.

To answer how IoT could affect industrial supply chains, the researchers mapped the value chain of one of BASF’s business units. Through site visits and interviews, they mapped the logistics processes involved in meeting customer demand at the business. They looked at the processes used for receiving and fulfilling customer orders, forecasting and production planning, material requisition, production, and raw material procurement. They also catalogued relevant IoT technologies and associated capabilities. Next, the researchers brainstormed the future state of the studied value chain assuming that IoT technologies were deployed. Their findings offer some important insights into potential supply chain applications. Below, are five potential benefits that these applications could bring as identified by the researchers.

  1. Dampened variability of orders and shipments: Smart containers automatically record details of the goods being transported and their location, and communicate this data over a variety of networks such as Bluetooth, local area network, Wi-Fi, 3G/4G/5G, etc. The containers could provide accurate measures of inventory in the supply chain in real time, and enable automated ordering using reorder-point policies.
  2. Same or superior performance with lower levels of inventory. The availability of real time information about consumption can help improve the accuracy of demand forecasts and reduce safety stock. This variability-dampening benefit of real-time product usage can extend up the supply chain, allowing firms to provide the same or superior level of service with lower levels of inventory of finished goods and raw materials.
  3. Fewer losses and phantom stock-outs.  Real-time knowledge of a product’s physical location can reduce phantom stock-outs, where a particular item exists somewhere in the supply chain but cannot be physically located. This high level of visibility might also deter thefts of material in transit and from warehouses, and could help in the recovery of stolen goods.
  4. Automated procurement and production planning. IoT technologies can obviate the need for manual periodic stock-checking and ordering of raw materials by enabling automated reorder-point replenishment policies. The production of make-to-stock items can be scheduled without human intervention in the planning process.
  5. Improved process quality and safety. Manufacturing Execution Systems could perform pre-production checks to validate that the right amount of the right materials are being brought to process equipment. This is made possible by near-field communications with containers carrying the materials. Tracking materials movements in this way would eliminate human error in the selection and measurement of process-bound materials, leading to fewer quality defects and increased safety.

The benefits promised by a new technology are often accompanied by a novel set of challenges. In the case of the IoT, two of the biggest challenges firms are likely to face are data theft and industrial espionage, and stalling of the supply chain due to the failure of electronic communication.

Firms will need to ensure that the integrity of their data is never compromised by using strong encryption protocols for inter-device communications. In addition, they need to be aware of several potential modes of communication failure and safeguard against them. Two examples are power outages and device breakdowns owing to the overloading and jamming of communication networks.

The benefits and pitfalls described by the researchers may or may not materialize, but at this point in the evolution of the IoT represent realistic assessments of what could lie ahead. Moreover, the supply chain applications described offer only a brief glimpse of the potential for innovation.

The ubiquitous presence of sensing devices connected via high-speed information highways is new. This combination creates the potential for a host of innovations that could transform supply chain practices in the future.

“MIT is one of the leading research institutions worldwide. We appreciate the research work carried out at MISI and are looking forward to further collaborations,” said Dr. Robert Blackburn, President Information Services & Supply Chain Operations, BASF Group.

This article was written by Dr. Shardul Phadnis ( For more information on the research and the MISI thesis project contact the author.