Recent disruptions in commerce, fueled by tariffs, trade wars, and the global pandemic, have propelled supply chains into the spotlight of business discussions. Concepts such as supply chain risk, visibility, and resilience, previously exclusive to the manufacturing sector, are now frequently featured in mainstream media and business dialogues.
Organizations that proactively invested in sustainable supply chain practices were better equipped to adapt to these unexpected shifts and witnessed the benefits of their efforts.
The most significant investments were directed towards technologies that support the development of a robust digital supply chain and the implementation of processes that enable seamless integration.
Understanding the Digital Supply Chain
A conventional supply chain is a linear process. It begins with designing a product, followed by sourcing and procuring the raw materials and components. The product is then manufactured, demand is estimated, and a marketing strategy is developed for the final product. The subsequent steps include taking orders, arranging logistics and sales channels, and finally providing customers with order visibility.
This approach, albeit straightforward, hinges on each phase performing as anticipated. In such a model, any underperformance or failure by a supplier or shipper may go unnoticed for days or even weeks, often resulting in missed deadlines and dissatisfied customers.
Contrastingly, a digital supply chain offers substantial enhancements in visibility across the entire chain. The real-time insights into supplier performance and customer requirements empower supply chain managers to foster more intricate relationships with an expanded network of suppliers, thereby mitigating potential disruptions. The digital supply chain pivots towards a more customer-centric approach, striving to excel in the three key aspects of demand fulfilment: speed, personalisation, and choice.
The practical implications of a digital supply chain hinge upon an organisation’s specific goals. Ultimately, a digital supply chain facilitates the integration of internal systems and data with external structured and unstructured information. It enables two-way communication with suppliers and comprehensive visibility into the supply chain for all stakeholders. Leveraging cutting-edge technologies, digital supply chains collect, monitor, and analyse data in real time, making predictive insights and providing recommended actions.
Decoding the Digital Supply Chain: Harnessing Advanced Technologies for Optimal Decision-Making
A digital supply chain employs a suite of processes powered by state-of-the-art technologies and detailed insights into each stakeholder’s role, enabling improved decision-making about sourcing materials, assessing product demand, and managing relationships within the chain.
The initial crucial step involves fully integrating existing supply chain management technologies, including demand planning, asset management, warehouse management, transportation and logistics management, procurement, and order fulfilment. However, the true essence of digital transformation lies in extracting valuable data from these processes and equipping the enabling machinery with the right instruments to generate the required data.
This instrumentalisation of the supply chain utilises sensors and monitors, often referred to collectively as the Internet of Things (IoT). Typically employed to oversee manufacturing or logistics processes, this technology communicates data to stakeholders via gateways. This data is then consolidated and used by stakeholders to ascertain the reliability of product availability.
For instance, a clothing retailer can have real-time visibility not only into how many medium-sized, green shirts of a specific style are in the warehouse, but also into the number currently under production and the status of their order in the manufacturing queue. By aggregating this data from multiple suppliers, the retailer can optimally manage its inventory across all stores without the need for surplus stock.
The systems that gather and analyse this data operate in near-real time, providing unprecedented, timely insights into the supply chain’s workings.
Deciphering this enormous amount of data necessitates advanced analytics to model it and predict outcomes, especially as the complexity escalates with increasing numbers of suppliers, parts, distributors, and customers.
One such technological solution is a digital twin — a virtual model of a physical product or process. This technology allows businesses to create a “digital replica” of their supply chain to simulate various “what-if” scenarios. For instance, if one vendor’s green shirts cost 15% more than another’s, but demand necessitates sourcing from both, the model can predict whether dropping the three costliest providers will still meet the demand. Machine-learning algorithms empower this technology to perform predictive modeling and recommend responses to fluctuating conditions.
Understanding the Concept of a Supply Chain
Supply chains, whether traditional or digital, involve a series of integrated functions. These include the design of a product, procurement of necessary raw materials and parts, demand estimation, planning for product launch, arranging supply logistics, selecting sales channels, offering customer support, and providing customers with order visibility.
Take, for example, a supply chain in the pharmaceutical industry. It connects a drug manufacturer with a network of companies engaged in various stages of the product lifecycle, including raw material supply, manufacturing, packaging, regional warehousing, wholesale distribution, retail pharmacies, recycling, and return management.
On the other hand, a retailer’s supply chain may incorporate variations on this basic structure. It might also direct certain products to an ecommerce marketplace in addition to the traditional retail outlets, indicating the diversity and adaptability of supply chains according to industry needs.
Blockchain technology, a public, unalterable ledger known for recording highly accurate transaction data, shows immense potential in ensuring global transparency and precise, real-time asset tracking.
Comparing Traditional and Digital Supply Chains: From Reactive to Predictive Decision-Making
In a traditional supply chain, the approach is primarily reactive – plan and respond, whereas a digital supply chain adopts a proactive stance, enabling it to predict and recommend corresponding actions.
Traditional supply chains are predominantly static and rule-based, relying on historical transactional inputs and associated delays. In contrast, digital supply chains operate in real time, showcasing dynamism and adaptability to fluctuating circumstances. While traditional supply chains follow a linear model, digital supply chains take the form of interconnected networks.
Traditional supply chains typically operate on isolated systems, whereas digital supply chains integrate information from both IT and operational technology (OT) systems. Rather than optimizing on a per-node, per-shipment, or per-order basis, digital supply chains strike a balance between profitability and service levels.
Identifying potential issues and predicting their impacts can be labor-intensive in a traditional supply chain. Businesses often need to regularly conduct resilience assessments of their most crucial suppliers, based on specific stock-keeping units (SKUs), and manually devise contingency plans to sustain production in case of any disruptions.
Contrastingly, a digital supply chain leverages shared quality and control data from suppliers, enabling businesses to anticipate problems and proactively respond without the need for exhaustive preplanning.
Supply chain management encapsulates the planning and management of all activities linked to sourcing, procurement, conversion, and logistics management. It also involves coordination and collaboration with various stakeholders, including suppliers, intermediaries, third-party service providers, and customers.
Perhaps the most significant difference is in decision-making: in traditional supply chains, humans make decisions informed by machine inputs, while in digital supply chains, machines drive decisions under human supervision.
Navigating the Risks of a Digital Supply Chain
Embracing the digital supply chain implies leveraging cutting-edge technologies and connecting systems on the shop floor that were never originally intended to be internet-enabled. While this transformation holds immense promise, it can also usher in certain risks.
A prominent area of concern revolves around the security vulnerabilities of the Internet of Things (IoT). The true potential of IoT is realized in the industrial IoT sphere, where assets and machines exchange data through sensors and software to enable breakthroughs like predictive maintenance. Sensors can keep track of a machine’s temperature, noise level, or vibration intensity, with increases in any of these factors potentially indicating an impending failure. Timely monitoring allows maintenance teams to address issues before they escalate.
Such a system significantly reduces manufacturing downtime. However, the heightened connectivity necessitated by this digitization can allow risks to spread across the supply chain network, reaching to or from the customer. Threats could come from various quarters, including overzealous competitors or criminals intent on disrupting processes. These malefactors could tamper with data, force machines to operate unsafely, misdirect shipments, or intercept orders.
Furthermore, upgrading a supply chain entails capital expenditures, which may pose a challenge at a time when many companies might be considering other investment priorities. There could also be divergent data preferences between supply chain stakeholders and manufacturers. For example, a manufacturer might prefer throughput data at a granularity that doesn’t provide the retailer with sufficient insights into production schedule adherence.
Key Metrics for Evaluating Digital Supply Chain Performance
The prioritisation of supply chain digitisation within an organisation is typically guided by its business objectives. However, the ultimate goal of these efforts should be centred around enhancing the customer experience.
Research conducted by Bain & Company highlights several advantages derived from investments aimed at bolstering supply chain resilience:
- Perfect order rates witness a surge between 20% and 40%, indicating improved efficiency and accuracy in order fulfilment.
- Customer satisfaction experiences an uplift of up to 30%, reflecting the positive impact of streamlined operations on customer service.
- Inventory turnover improves by 10% to 40%, leading to reduced storage costs and enhanced cash flow.
- Lead times are significantly diminished, ensuring timely deliveries while maintaining cost efficiency.
Navigating the Path of Digital Supply Chain Management
Analysts unanimously acknowledge the challenging task faced by today’s supply chain leaders in reaping the benefits of digital transformation.
A “Supply Chain 4.0” report by McKinsey & Co. suggests that driving digital supply chain transformations necessitates leaders to possess a combination of conventional functional supply chain skills, newfound technical skills, and an understanding of how technological advancements can further business objectives.
IT involvement is crucial, yet the driving force should always be functional requirements and domain knowledge. The initial step involves ensuring high levels of competence and performance across traditional supply chain functions. McKinsey advises a comprehensive review of your supply chain strategy, order and demand management, forecasting, inventory management, production planning, supply chain planning, operational logistics, and performance management to pinpoint areas of difficulty.
Upon identifying these pain points, you can embark on the digital transformation journey with a clear set of priorities, ensuring a systematic and effective transition.
Transitioning from Traditional to Digital Supply Chains: Key Considerations
The shift from traditional to digital supply chains is a complex and unique journey for each company. However, there are certain critical decision points that can help organizations present a convincing case to executives for allocating resources to this transformation:
- Identify driving factors: A genuine digital supply chain enables visibility and comprehension of multiple supply chain partners’ activities, facilitating collaboration. Leveraging diverse data allows for faster predictions and actions than competitors. Consider goals such as increasing supply chain resilience through localization or managing a larger number of suppliers.
- Address technology apprehension: Companies with traditional supply chains may adopt an “if it’s not broken” mindset due to the rapid pace of technological advancements. While revamping a supply chain is high-stakes and cannot be taken “offline” during updates, falling behind competitors is a greater risk.
- Establish success metrics: Define clear objectives, such as reducing time-to-market by 5%, cutting costs by 20%, or continuously monitoring suppliers for potential risk factors like corporate restructuring, mergers and acquisitions, profit warnings, or regional labor strikes and natural disasters.
- Assemble a dedicated team: Recruit staff or consultants with expertise in IoT, big data, blockchain, automation, security, and integration. Equally important is securing an executive sponsor and forming a cross-departmental group with insights into every aspect of the supply chain to guide technology specialists.
With a dedicated team, a comprehensive plan, and the determination to move forward, it’s time to embark on the digital transformation journey.
Seven Key Steps Toward a Digital Supply Chain Transformation
The path to digital transformation is not one-size-fits-all. However, there are essential steps that can guide your journey, all beginning with the simple question: How can we leverage data to solve problems?
- Establish a solid foundation: Identify and rectify any existing supply chain performance issues before implementing new technology. This step ensures that you’re not simply digitizing inefficient processes.
- Foster cross-functional collaboration: Avoid isolating functions like procurement and manufacturing. Instead, concentrate on how various stakeholders can collaboratively achieve business objectives. Consider conducting a survey to understand needs and evaluate awareness.
- Set business goals beyond just operational efficiency: For instance, improved demand planning could be a target. A digital supply chain can provide a more transparent view of the relationship between raw materials and finished products, answering questions like: How would a missed purchase order from Supplier A affect our product catalogue?
- Secure enterprise-wide buy-in: Beyond your dedicated team, ensure that the digital transformation message reaches everyone in the organization, from senior leadership to shop floor staff. On the technology front, adopt an agile development approach, which focuses on achieving incremental goals within cross-functional teams working toward a larger objective.
- Assess your existing data: Evaluate the supply chain information you’re already collecting and identify opportunities for enhancement. For example, could an algorithm automate the process of calculating safety stock, providing more accurate predictions?
- Expand your data horizons: Start considering what information can be shared between you and your suppliers in an automated way, using IoT and APIs. This reciprocal data sharing can enhance visibility and efficiency.
- Prioritize initiatives: Identify quick wins that can generate immediate value. Perhaps it’s employing predictive analytics for demand planning, enhancing order processing reliability, optimizing logistics planning, automating warehouse operations, or improving end-to-end transparency and real-time disruption response.
The Future of Digital Supply Chains: From Cost Centers to Profit Engines
For organisations striving for supply chain excellence — optimizing assets, controlling costs, and ensuring timely and accurate deliveries — adopting a digital strategy is no longer an option but a necessity.
In their report, McKinsey noted the absence of a universally acknowledged ‘gold standard’ for digital supply chains, akin to the “Toyota Way”, which other organisations could emulate. The journey towards digitization can often be hindered by a fixation on a single process or metric, an overly IT-centric approach lacking a robust business champion, or challenges in securing necessary funding and talent.
Yet, even before the pandemic, 66% of 234 supply chain professionals surveyed by benchmarking consultancy APQC indicated that implementing new technologies and capabilities was a top priority. Recent surveys reiterate this sentiment, with technology investments emerging as the top area where CFOs are willing to increase spending.
In an era of persistent uncertainty, these investments are not just desirable but essential. The digitization of supply chains can build more resilient operations. According to Boston Consulting Group, digital supply chains can reduce costs by up to 20%, augment EBITDA, increase revenue by up to 6%, and enhance customer service by up to 30%.
As digital supply chains evolve, they transition from being mere cost centers to profitable entities, becoming the nucleus of innovative business models. The future of supply chains is digital, and the journey towards this future has already begun.
