1    SAP S/4HANA—Requirements and Benefits

Increasing digitalization and interoperability in the economy doesn’t just impact industrial production processes. This chapter explains how SAP S/4HANA addresses the requirements of the digital transformation.

Enterprises have always had to deal with technological changes and innovations. Since the 1970s (since the so-called industrial revolution), automation has increasingly become prevalent in production. Since computers have been introduced and electronics and information technology have been used in production, previously manual process steps are now performed by machines.

The interoperability of products, processes, and infrastructures in real time has led to another critical change in industrial production processes, introducing a fourth stage of industrial revolution. All areas of the value chain, such as supply, production, delivery, customer service, and maintenance, are linked via the Internet, and information on each individual step is available in real time. The Internet of Things (IoT), as well as data and services, entail a holistic digitalization of the traditional industries, which can be summarized by the concept Industry 4.0.

As shown in Figure 1.1, in the past, people and enterprises had about a hundred years to migrate to the next industrial level. After industrialization, mass production, and automation, Industry 4.0 now leads to global and extensive changes in production processes, business models, technologies, the world of work, and people’s everyday lives.

This paradigm shift, which is often referred to as digital transformation, offers opportunities and risks for new business models and existing value chains. Established enterprises can increase the efficiency of existing business models or develop new ones. Enterprises that ignore transformation risk being forced out of business by more innovative enterprises because their own business processes remained too stagnant.

Figure 1.1    Levels of the Industrial Revolution

This chapter first addresses these opportunities and risks in detail. Section 1.2 then introduces the solutions offered by SAP S/4HANA to take advantage of the digital transformation. Section 1.3 describes individual SAP S/4HANA components for marketing, procurement, logistics, finances, and human resources.

1.1    Future Business Challenges

The 2000s also involved changes requiring enterprises to adapt their business models. In comparison to the previous industrial revolutions, the radical character and speed of the latest digital transformation are specific and new. In the past, changing business models often led to large enterprises acquiring small enterprises; today, in the digital economy, dynamic enterprises acquire slow, passive enterprises. Product suppliers that had been previously unknown can become market leaders in no time at all and can thus turn established industries upside down.

1.1.1    Digitization of Business Processes

Today’s business processes are influenced by the increasing penetration of IT, which forces enterprises with traditional business processes to rethink their business processes and adapt them to the digital transformation. Table 1.1 lists some examples of how traditional business processes have changed over the last years.

Enterprises	Traditional Business Processes	Digital Business Processes
Airlines	Order processing via travel agencies	Online order processing
	High-quality service	No services
	Departure/arrival at central airports	Departure/arrival at provincial airports
Fashion enterprise	Outsourced production in Asia	Backsourcing of the production to Southern Europe
	Design cycles of several months	Collections changing every week
	Fashion retail in specialized shops	Distribution via online channels
Company for heating systems	Thermostats for heating systems in households and enterprises	Thermostats including integration into smart home technology
	High quality and holistic server portfolio	Proactive Maintenance Schedules
		Portfolio of additional products for smart home technology
Taxi company	Assignment of taxi services via telephone	Taxi order via smartphones
	Cash payment	Automatic payment by credit card
Tool manufacturer	Tools for construction companies	Site management including leasing tools at fixed prices per month (including repair and maintenance services)
	High-quality and holistic server portfolio	24/7 last-mile delivery service of tools to the site
	On-premise retailer	Online order processing
Guitar manufacturer	Standard production	Additional custom shop as distribution channel for customized guitars
	Outsourced production to low-cost countries	High-price segment with production in home country

Table 1.1    Comparison of Traditional and Digital Business Processes of Various Industries

How high the pressure for changing traditional business processes actually depends on the segment in which the enterprise operates. Table 1.2 shows various industries categorized into the following groups:

• Enterprises with a high level of digitalization
  Enterprises in industries with conditions strongly supporting digitalization with regard to processes, value chains, investments for digitalization, and integration of digitalization into the business strategy
• Enterprises with an average level of digitalization
  Enterprises in industries with conditions moderately supporting digitalization
• Enterprises with a low level of digitalization
  Enterprises in industries in which digital processes only play a minor role

  High Level of Digitalization	Average Level of Digitalization	Low Level of Digitalization
  Enterprises in the information and communications technology (ICT) sector Knowledge-based service providers	Finance and insurance sector Retail Energy and water supply Mechanical engineering Chemical and pharmaceutical industry Transport and logistics Automotive industry	Healthcare Other manufacturing

  Table 1.2    Evaluation of Industries Based on Their Level of Digitalization

Organizations that do not adapt to the changes resulting from the digital transformation will be massively impaired by their own business processes. In today’s world, customers want to buy products whenever and wherever they want. Organizations using processes that do not meet this requirement will vanish from the market if they do not adapt their processes to this market condition.

The increasing digital transformation comprises three types of changes for business models:

• Existing traditional business models can be complemented by the digital transformation.
• Existing traditional business models can be superseded by the digital transformation and replaced by digital business processes.
• The digital transformation can allow for business models that would not be possible without the digital transformation.

If the existing traditional business model is complemented by the digitalization, usually the enterprise can keep or even reinforce its market position. Take, for example, optimizing machine tools and production facilities. For example, if sensor technology costs can be reduced, the enterprise can measure the maintenance requirements for a production machine and only take maintenance actions when actually required. In this case, the digital transformation supports and improves an existing traditional business model. The existing product and service portfolio is extended to ensure future business growth.

In some areas, traditional business models might be superseded by the digital transformation and replaced by digital business processes. This digitalization can radically change the rules of the market, often referred to as disruptive transformation or disruptive innovation.

Radical change can also open traditional sales markets for new enterprises. Who would have thought that a manufacturer of Wi-Fi routers would add radiator thermostats and switchable outdoor outlets to its product portfolio? Using online services provided by the router manufacturer, customers can control the thermostats in their homes or control their garden sprinklers via the Internet. Traditional providers of radiator thermostats, as well as new competitors entering the market, can respond to this digital transformation and also provide Internet-based smart home products. Some providers go a step further and use the connected radiator technology to involve maintenance technicians and calculate maintenance schedules proactively.

One example of a business model that has been made possible by the digital transformation is crowdsourcing or crowdfunding. For crowdsourcing, project tasks are distributed across Internet users via Internet platforms. For crowdfunding, investors are found who want to (partly) invest in a project. The interaction of these actors has been made, not only possible, but economic and efficient by the Internet, thus forming the basis for these business models.

The digital transformation provides a wide range of options for creative business actions, and certain themes, such as focus on the customer and the quality of the infrastructure, have come to the fore. Focusing on the end consumers and their benefits is becoming a key success factor.

1.1.2    Trends of the Digital Transformation

In the context of digital transformation, the business and technical trends shown in Figure 1.2 play a major role. The following sections discuss each of these trends in greater detail.

Figure 1.2    Trends of the Digital Transformation

Smart Products and Services

Increasing interoperability and the development of rapid sensor technology have transformed every device and machine into an information hub. Also called the Internet of Things (IoT), these capabilities have changed established value chains and industrial production processes. Previous business models focused on the quality, price, and delivery times of products; in the digital world, personalized products and services with additional benefits (smart products and smart services) have become increasingly important.

The following three examples illustrate how the digital transformation can change established value chains and production processes:

• Smart maintenance
  In smart service processes, sensor data can be used to predict the maintenance status of machines. The goal is to optimize maintenance processes by performing maintenance actions only when the status of the machine makes maintenance necessary. If this capability is supported by IT, not only will you be able to measure the current status of a machine, but you’ll also be able to predict, based on historical data, when the machine is likely to break down, a capability known as predictive analytics.
  Smart automation is involved if a sensor on a machine or a prediction triggers a spare parts procurement in the ERP system. This enhancement of traditional business models also demonstrates how production facilities and the ERP system of the enterprise can converge. You’ll benefit greatly from these smart maintenance processes because your machines will function better for longer.
• Digital farming
  Digital production processes have also entered traditional industries such as farming. A tractor can become a data hub, which—if equipped with the corresponding sensor—can determine how much fertilizer or seed different fields need. Harvesters can become data collectors, used by agricultural machinery manufacturers to supplement traditional business models with additional services. Conversely, mobile harvesters can also be integrated into smart maintenance processes. Agricultural machinery can be centrally monitored, and smart maintenance periods can be determined so that harvest processes run smoothly.
• Lot Size One
  Let’s say a guitar manufacturer adds custom products to its standard product portfolio. For selected, high-price guitars, a customer can compose their own individual guitar (selection of the wood type, shape of the guitar neck, integrated pickups, individual artificial aging of the guitar, etc.). Providing these individual pieces requires a highly flexible structure in production processes regarding order processing. In the context of digitalization, this kind of production is an individual production till the lot-size of one (“unit-of-one”). An interesting dimension of unit of one products is that these highly emotional products involve a relationship to the guitar maker. The enterprise’s website introduces customers to the guitar makers who design these individual products. These individual production processes have been made possible by the easy customer communication facilitated by the Internet. In general, decreasing the number of units with increasingly changing orders, and consequently increasing setup times for machines, are a digitalization trend that many organizations should take into account.

These examples illustrate how interoperability increases automated, software-based value chains and supplements and supports traditional business processes with corresponding services. In the future, value chain elements will be increasingly connected across the involved enterprises. The communication between the individual steps of an end-to-end business process will increasingly take place in real time. Correspondingly, the need for standards in the context of Industry 4.0 will increase, which is also demonstrated by the publication of DIN SPEC 91345 as a standard for the “Reference Architecture Model Industrie 4.0 (RAMI4.0)” in April 2016.

Platforms

Compared to both new and modified value chains, digital platforms are a completely different business model. Some examples of digital platforms include:

• The Apple iTunes App Store on which independent providers offer apps for iPhones and iPads
• The Amazon Marketplace into which independent retailers and their products are integrated into Amazon’s product portfolio
• Airbnb, a platform for leasing and letting accommodations in private homes
• Uber, an online agency service for transport services
• Industry-specific platforms such as First4Farming, a technology platform that connects participating enterprises in the farming industry

Digital platforms, the Internet, and the cloud are inextricably intertwined. Search and purchasing processes are performed online; customers can order products using any mobile end device anytime. Digital platforms enable external providers to be a part of the value chain without having a specific technology infrastructure. The platform provider is responsible for the operation and maintenance of the infrastructure but also defines the rules and costs for using the platform.

Digital platforms follow a completely different approach than traditional value chains. While the focus is on the product in the traditional economic world, platforms turn their attention to infrastructure services. For example, the services provided by Airbnb and Uber (only) consist of connecting users with providers of accommodations in private homes and of private taxi services, respectively. Digital platforms provide service providers with simplified access to digital real-time markets and cloud technologies. Many providers could not offer their services without the platform.

Human Capital

The migration to digital business processes requires highly qualified employees. If you want to support highly flexible and customer-specific production processes, you’ll need highly flexible employees supported by critical information and data. Your employees’ specific capabilities, especially their flexibility, are key factors of the digital transformation. Enterprises need to support their employees with more flexible working hours, home office options, the required infrastructure, and flextime.

The increasing requirements of flexible and complex business models additionally require further employee qualifications. To ensure continuous development, enterprises must integrate modern qualification approaches that are based on digital technologies. For example, specific e-learning courses (so-called massive open online courses, MOOCs) convey knowledge through videos and forums and allow trainers and students to communicate with each other and establish communities. The significance of employee qualifications must also be reflected in the context of a shortage of skilled workers, which is seen as a barrier to digitalization by many large enterprises.

User Experience

The wide usage of smartphones, tablets, smart TV, the Internet, messenger services, and emails generally affect the customers’ expectations for user interfaces. Today’s customers, who order products and services on the Internet, have the same high expectations for all the user interfaces they encounter.

The assignment of taxi services via smartphone apps has created a new business model, which replaces traditional taxi companies using radio communication to assign taxi services. In both cases, the customer orders a taxi. However, why is this (often quoted) example of the digitalization of business models successful and interesting? Because of the excellent user experience created by the taxi app on the customer’s smartphone. The central feature of this experience is that an attractive order process (with an interactive map that displays taxis nearby) is linked with an attractive payment process. The app is so easy that you can simply leave the taxi after the ride and don’t have to do anything, because the invoice is paid via credit card details specified earlier. This example illustrates that digital business processes also differentiate themselves from each other by means of the user experience. Digital business processes will only be successful if they create outstanding user experiences.

Thus, with the digital transformation, all enterprises need to focus on the consumer. The technology is not as important as the value added by the digital business process for the customer. The interface that supports the business process plays a major role for user acceptance.

Cloud Computing

Another digitalization trend is that IT services and business processes are outsourced to the cloud. An increasing number of cloud offerings enables you to overthink the tasks of your internal IT department. For example, specific services that cannot be efficiently provided by your own IT department can be outsourced to cloud providers. The data centers of cloud providers can usually respond more efficiently and flexibly to workload fluctuations that require computing and memory capacities to be flexible and adaptable. In addition, the costs of these flexible adaptations to fluctuations are easier to calculate. If you outsource services to external cloud providers, you don’t necessarily have to support the new employee skills required by the digital transformation, which we mentioned in the “Human Capital” section earlier.

If you consider the impact of cloud computing on business processes, speed and flexibility play a major role. For example, an enterprise that outsources new business processes to the cloud, which results in shorter implementation cycles, can respond more quickly and more flexibly to changing market conditions. Cloud computing also enables enterprises to redefine business processes. A growing number of cloud offerings allows enterprises to standardize business processes and outsource them to the cloud if they do not have to differentiate themselves from competitors in this area. Enterprises do not necessarily have to run their online shop themselves, and you can use common Internet trading standards as a guide. In contrast, core business processes might emerge where you might want to, or have to, differentiate yourself from your competitors. Perhaps you want to implement highly specialized and individual business processes that are not compatible with the standardized processes in the cloud. In this case, you’ll usually want to run these business processes yourself within your enterprise.

Security and Trust

On the one hand, the increasing interoperability of value chains and the collection of large data volumes, using sensors that have become cheaper and cheaper, allow for new and supplementary business models. On the other hand, these developments also present security risks, which business organizations must address.

One of the greatest barriers to cloud solutions is security, which must be considered when designing the applications. While monitoring production facilities was once rather an enterprise-specific topic, in the context of smart maintenance processes, the system can be opened up to network access, which requires the corresponding security measures.

Digital business processes also place stricter requirements on security and the protection of the collected data. You must ensure that, in the relevant business processes, only authorized and authenticated partners can communicate with each other. Modern IT security and encryption systems can ensure security for this communication but must be tailored for this purpose.

For data security, the employee qualifications again play an important role. To innovate and ensure the competitive edge of your enterprise, your employees need to be qualified in cybersecurity. The digital skills of your employees regarding the handling and disclosure of data must be supported. What good is a modern cybersecurity concept if your employees use the same, insecure password for all systems?

Outsourcing business processes to the cloud can be the ideal solution for cybersecurity, because reliable cloud providers usually have higher security standards than the IT department in many organizations can ensure. Centrally managed cloud environments can also provide the benefits of backup and recovery processes.

In the context of digital transformation, the success of an enterprise also depends on the users’ trust. Customers will turn away from an enterprise that cannot ensure personal data is protected. But users’ trust is not limited to data security; customers might also consider ethics and values when assessing a business model. Would customers prefer a taxi app if they knew that the drivers were treated more fairly and that a higher share of revenue was used for car inspections? Possibly!