Cloud Computing one of the success factors for Industry 4.0

Table of Contents

List of Figures

List of Tables

Abbreviations

1 Introduction

2 Drivers of Industry
2.1 Internet of Things
2.2 Aspects of Industry
2.3 Technology Stack
2.4 Cloud Computing
2.4.2 Cloud Levers
2.4.3 Outsourcing of Cloud – Typical Pay System

3 Strategic Potentials of Cloud Systems

4 SWOT: Cloud and Industry
4.1 Strengths
4.2 Weaknesses
4.3 Opportunities
4.4 Threats
4.5 Service Capacity of Industry

5 Economic Aspects of Classic IT
5.1 Profitability Analysis - Classic Methods
5.1.1 Basic - Static method - RoI
5.1.2 Basic - Dynamic method - NPV
5.2 IT cost-based profitability analysis on TCO

6 Conclusion of adaption fields of action
6.1 Speed
6.2 Capex vs. Opex
6.3 Optimization of Total Costs
6.4 Scalability and flexibility
6.5 Profit maximization
6.6 Meeting regulations and guidelines
6.7 Adaptation of the direct and indirect costs of TCO
6.7.1 Adaptation of the direct costs of TCO
6.7.2 Adaptation of the indirect costs of TCO
6.7.3 Cloud-related adjustments of the TCO model

7 Conclusion

List of Literature and Sources

Appendix

List of Figures

Figure 1: Historical gross domestic product of the world

Figure 2: The four stages of the Industrial Revolution

Figure 3: Four aspects of Industry

Figure 4: The New Technology Stack

Figure 5: Gartner emerging technology hype cycle

Figure 6: General attitude towards Cloud Computing in enterprises

Figure 7: Investment calculation method in IT

Figure 8: Cloud-related changes of the TCO model

Figure 9: Gartner emerging technology hype cycle

Figure 10: Basic classification of TCO on their base cost factors

Figure 11: Basic structure of the TCO model by Gartner

List of Tables

Table 1: Service Capacity of Industry 4.0 – KMU Online Survey

Abbreviations

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1 Introduction

Powered by hydro- and steam-power, at the end of the 18th century mechanical production facilities began to replace human labour. What is today known as the Industrial Revolution allowed for a more efficient use of resources such as labour and soil. At the same time, it was the corner stone for the increased use of capital as a resource. Figure 1 shows the impact of industrialization on gross domestic product (GDP).^[1]

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Figure 1: Historical gross domestic product of the world

Source: www.statista.com (A) (2016)

During the second Industrial Revolution towards the end of the 19th century manual labour was replaced by mass production (as developed by Frederick Winslow Taylor) and the introduction of assembly-line work (promoted by Henry Ford). The introduction of electronic control systems and information technology in the 1970s finally heralded the third Industrial Revolution.^[2]

All three Industrial Revolutions until today have brought about accelerated processes and a degree of automation. In an increasingly global market, the Internet of Things (products, production facilities, tools) connects the real and the virtual world and Cyber Physical Systems (CPS) are the foundation of the fourth Industrial Revolution (Industry 4.0 – see Figure 2). CPS is an umbrella term for software-intensive embedded systems (ES) which are based on connected, integrated hardware- and software components in products or industrial production facilities (smart production) that are able to communicate with each other.^[3]

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Figure 2: The four stages of the Industrial Revolution

Source: www.bestemnetwork.com (2016).

Cloud Computing in this context is the enabler with regards to the architectural requirements of smart factories which in turn are the basis of Industry 4.0.^[4]

The aim of this term paper is to outline the opportunities and risks connected with the introduction of cloud systems. In addition to the strategic aspect the term paper will evaluate the economic aspect of cloud strategies by examining how to adapt the Total Cost of Ownership (TCO) method to suit cloud services.

The first chapters of this paper will present the underlying relationships between Industry 4.0, Internet of Things (IoT), Smart Production and the underlying technology stack behind, followed by an overview of the cloud solutions available as of today. This paper then evaluates the strategic potential of cloud strategies before finally providing a valuation model to deal with the challenge of ascertaining the economic potential of cloud solutions.

The first objective of the term paper work is to evaluate the potential of a cloud strategy based on SWOT analysis. The second key question is how to adapt and extend information technology typical commercial valuation models to a cloud strategy based business case.

2 Drivers of Industry 4.0

2.1 Internet of Things

Thanks to wireless communication technology and the internet, nowadays, technical products, components, sensors, software and machines can be connected with each other. Via these connections they are able to exchange information and interact. For business and the industry sector the most apparent consequences will occur in fields like:

- automation,
- industrial manufacturing,
- logistics,
- business/process management,
- intelligent transportation of people and goods.^[5]

Particularly the capabilities of collecting data and communicating it, are the basis for a number of far-reaching, innovative concepts which allow manufacturers to obtain much more detailed feedback on the use of their products. Based on this information, the design of products can be improved and short- as well as long-term conclusions, with regards to the production process, can be drawn. Such solutions, apart from connectivity requirements, also require the underlying systems to possess Big Data functionality.^[6]

2.2 Aspects of Industry 4.0

It exist different possibilities to create value through the industrial use of IoT. The referenced architecture model of VDI/VDE society presents four main approaches (see figure 3).^[7]

Horizontal Integration along value chain ^[8]

Horizontal integration is based on vertical integration. It allows for technical processes to be integrated into overarching business process and to be synchronized in real-time with other participants.

Vertical integration, e.g. within a factory/production site ^[9]

Vertical integration is the first stage and contains the entire cross-linked communication within a company. It ensures that the IT systems of different hierarchical levels are linked and harmonized. In order to run optimization and control systems in real-time, embedded systems communicate with each other wirelessly as part of a standardized architecture. This allows for increases in production output and optimized use of resources within the production process.

Lifecycle-Management, Continuous Engineering. ^[10]

Information flows that operate on an in-time basis between service, production, planning, engineering, design, development as well as direct customer feedback allow for efficient, target-oriented engineering and an optimized value chain.

Humans as part of the value chain ^[11]

As the case with earlier Industrial Revolutions, humans have not been replaced but instead have taken on a new role with new tasks as part of the value chain. Due to trends like automation and smart systems the role of humans is now to coordinate and orchestrate the interaction between different objects.

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Figure 3: Four aspects of Industry 4.0

Source: VDI, VDE. (2015)

IoT as well as Industry 4.0 rest on two basis requirements. First, the increased connectivity of devices, machines and products. Second, on automation and the increasing intelligence of devices, machines and products. While IoT is focused on digitalization, Industry 4.0 concentrates on using digitalization to optimize the processes within a ‘smart factory’.^[12]

2.3 Technology Stack

‘Smart, connected products require companies to build and support an entirely new technology infrastructure. This “technology stack” is made up of multiple layers, including new product hardware, embedded software, connectivity, a product cloud consisting of software running on remote servers, a suite of security tools, a gateway for external information sources, and integration with enterprise business systems.’^[13]

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Figure 4: The New Technology Stack

Source: www.hbr.org ( 2014)

This new technology stack requires companies to align their processes, production and IT strategies with the requirements of Industry 4.0. The technology stack shown above in figure 4 illustrates the status of the product cloud as the backbone of this new smart industry. The following chapters will take an in-depth look at different cloud technologies and application possibilities.

2.4 Cloud Computing

In order to allow for a better understanding of the strategic and economic evaluations later in this paper, the following sub-chapters will introduce the basics of Cloud Computing. The focus will be on basic principles relating to the flexibility and scalability of new IT technologies.

Definitions of Cloud Computing by experts vary to a great extent, however, all definitions share the view that Cloud Computing has to be divided into different levels and types. The following paragraphs will introduce the four main types and levels proposed in Cloud Computing theory.

Individual cloud types from different realms of science and business overlap to a high degree and one is well able to integrate them into an overall picture. Differences between the individual cloud types mostly relate to the location of the cloud solution which will be the focus of the following paragraphs.

2.4.1.1.1 Public Cloud

The most distinctive characteristic of the public cloud is the fact, that it does not operate in the IT-environment of a company. The majority of public cloud offers is provided by IT service operators or by manufacturers of IT equipment. A second distinctive characteristic, which differentiates the public cloud by the community cloud, is the availability of the offering. The public cloud in theory is open to any person or company. However, in reality entry barriers prevent precisely this. Where a company uses the public cloud, the company’s infrastructure is not physically separated from the infrastructure of other customers. The division of infrastructure takes place on a purely logical level.^[14]

The US-based NIST (National Institute of Standards and Technology) defines public cloud as follows: ‘The cloud infrastructure is made available to the general public or a large industry group and is owned by an organization selling cloud.’^[15]

2.4.1.1.2 Community Cloud

Where different companies or institutional customers have a similar or identical approach to Cloud Computing, but do not want to use the public cloud, a community cloud is a possible alternative. The community cloud is only accessible to those companies or institutions that have joined the respective group with its specific requirements. Common requirements among the customers may include aspects pertaining to data security and privacy. With regards to the operation of a community cloud solution there are two possibilities.

NIST defines the Community Cloud as ‘the cloud infrastructure is shared by several organizations and supports a specific community that has shared concerns (e.g., mission, security requirements, policy, and compliance considerations). It may be managed by the organizations or a third party and may exist on premise or off premise.’^[16]

2.4.1.2 Private Cloud

The private cloud is only available for one individual company or institution. It’s infrastructure requires a fullyautomated virtual environment on which the cloud runs. The unique feature of the private cloud is the fact that the infrastructure is only available to the company that also operates it. In comparison to the previously-mentioned cloud types, there is not only a logical connection with the customer, instead the infrastructure is also physically located within the company network.^[17]

The NIST definition for this variation reads as follows: ‘The cloud infrastructure is provisioned for exclusive use by a single organization comprising multiple consumers (e.g., business units). It may be owned, managed, and operated by the organization, a third party, or some combination of them, and it may exist on or off premises.’^[18]

2.4.1.3 Hybrid Cloud

In order to set up a hybrid cloud different types have to be combined with each other. For instance, one can combine public and private clouds in order to do so. In such a scenario the individual cloud types communicate via pre-determined interfaces which are offered by the provider of the public cloud. For the user this creates the impression of working within one single environment rather than working on two physically separated systems.

The NIST defines hybrid cloud as: ‘The cloud infrastructure is a composition of two or more distinct cloud infrastructures (private, community, or public) that remain unique entities, but are bound together by standardized or proprietary technology that enables data and application portability (e.g., cloud bursting for load balancing between clouds)’.^[19]

While in 2011 the private cloud was seen as a key industry trend (see Appendix, Figures 9) see Appendix, Figures 8), Gartner Group anticipates the combination of different cloud variations to play a key role within the next 2 to 5 years.

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Figure 5: Gartner emerging technology hype cycle 2015

Source: www.blogs.gartner.com (2016)

The key question addressed by ‘Gartner Emerging Technology Hype Cycle’ is the anticipated development of key technological trends and how companies should accordingly deal with these technologies:

- ‘Should you make an early move?’
- ‘Is a moderate approach appropriate?’
- ‘Should you wait for further maturation?’^[20]

The strategic and commercial evaluation follows in chapters 3 and 4 of this paper.

2.4.2 Cloud Levers

While the key difference among different cloud types is the location of the solution, different cloud levels can be divided according to the offered service. The following paragraphs will introduce the most important types: services infrastructure, platform and software.

2.4.2.1 Infrastructure as a Service (IaaS)

^[21] The term Infrastructure as a Service refers to a Cloud Computing service that provides IT services as a basis for an IT infrastructure. Such services are commonly divided into three areas:

Storage: In order to save data, companies require storage space. In some instances storage can also be offered as its own separate cloud service: Data storage as a Service (DaaS).

Computing Resources: Computing resources are fully-automated, virtual environments for computing capacities that sometimes also rely on DaaS level storage capabilities in order to ensure a high degree of scalability.

Communications: Communications as a Service (CaaS) refers to the creation of a communication infrastructure.

2.4.2.2 Platform as a Service (PaaS)

^[22] While the IaaS level is more geared towards administrators of IT systems, the PaaS level provides resources for the development of software and services. The conceptual design, programming, testing and packaging takes place ‘on-premise’, that means in the immediate environment of the developers. Upon completion of the development the software is not put into use on-premise, but instead on a PaaS platform chosen by the developers. Application programming interfaces (APIs) allow developers to use IaaS services and for the developed solutions to access the necessary storage resources and databases. This in turn ensures improved scalability.

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^[1] Cf. Dorst, W. (2012). p. 34.

^[2] Cf. Härting, R. et. al. (2005). p. 9.

^[3] Cf. Dorst, W. (2012). p. 34.

^[4] Cf. Porter, E. & Heppelmann, J. (2015). p. 100.

^[5] Cf. Atzori, L. et. al. (2005). p. 2787.

^[6] Cf. Härting, R. et. al. (2005). p. 10.

^[7] Cf. VDI, VDE (2015). p. 12.

^[8] Cf. VDI, VDE (2015). p. 12.

^[9] Cf. VDI, VDE (2015). p. 12.

^[10] Cf. VDI, VDE (2015). p. 12.

^[11] Cf. VDI, VDE (2015). p. 12.

^[12] Cf. Vogt, A. et. al. (2016). p. 2.

^[13] Cf. Porter, E. & Heppelmann, J. (2015). p. 101.

^[14] Cf. Armbrust, M. et al. (2010). p. 51.

^[15] Cf. Mell, P. & Grance, T. (2011). p. 3.

^[16] Cf. Mell, P. & Grance, T. (2011). p. 7.

^[17] Cf. Armbrust, M. et al. (2010). p. 51.

^[18] Cf. Mell, P. & Grance, T. (2011). p. 7.

^[19] Cf. Mell, P. & Grance, T. (2011). p. 7.

^[20] Cf. www.gartner.com (2016).

^[21] Cf. Mell, P. & Grance, T. (2011). p. 7.

^[22] Cf. Mell, P. & Grance, T. (2011). p. 7.