Digital transformation: Raising supply-chain performance to new levels

For all the effort that companies devote to improving the performance of their supply chains, relatively few have unlocked the full potential of digital technologies.

Combining digital applications with operational changes helps yield significant performance improvements that stand the test of time.

One Recent Study states that the average supply chain has a digitization level of 43 percent, the lowest of five business areas that were examined. A mere 2 percent of the surveyed executives said the supply chain is the focus of their digital strategies. Are their priorities misplaced? Perhaps. 

Researches suggests that, on average, companies that aggressively digitize their supply chains can expect to boost annual growth of earnings before interest and taxes by 3.2 percent—the largest increase from digitizing any business area—and annual revenue growth by 2.3 percent.

Technology gaps have occurred because advances in supply-chain technologies tailed off after an initial burst of innovation. This yielded technologies that enabled companies to streamline routine activities, expand the capabilities of particular systems, and enhance analytical practices. Valuable though these technologies have been, they didn’t perform the sophisticated functions that transform supply-chain management. It has taken some time for technology innovations to accumulate and coalesce into new offerings. Now that better digital solutions have become available, companies can make greater improvements in supply-chain performance.

The right approach to digitizing supply chains integrates suitable leading-edge technologies with revamped operations. Many managers will be familiar with the basic transformation approach: establishing a vision for the future supply chain, assessing the supply chain’s current state, and developing a transformation road map. In a digital transformation, this approach has some new features. The vision will call for a combination of no-regrets improvements as well as more speculative changes that can be pursued over time. The assessment needs to consider whether operations and technology are sufficiently integrated, and whether the company has the talent strategy and organizational structure that will favor innovation and continual improvement. Furthermore, the transformation road map will have compressed timeframes, given the ease with which the latest digital solutions can be scaled up. In this article, we offer CEOs and senior executives further detail about each step, with examples showing how digital transformations work in practice.

How supply-chain capabilities and technologies have evolved

Supply-chain management was one of the first business functions to undergo substantial technology upgrades, as developers created applications to take advantage of data generated by ERP systems. Those applications largely focused on improvements in three areas: streamlining transactional activities such as those involved in end-to-end planning, supporting major operations such as warehouse management, and sharpening the analysis on which decisions are based.

*  linking and combining cross-functional data from internal and external sources.

* Uncovering the origins of performance problems by delving into ERP.

* Warehouse-management & upgradation.

* Advance-planning & forecasting mechanism.

* Forecasting demand and performance with advanced analytics, so that planning can become more precise and problems can be anticipated and prevented.

Once a company sets out a vision for its supply chain, it should articulate that vision in terms of business and technical capabilities. These might include the following:

• Better decision making. Machine-learning systems can provide supply-chain managers with recommendations for how to deal with particular situations, such as changing material planning and scheduling in response to new customer orders.

Automation. Automated operations can streamline the work of supply-chain professionals and allow them to focus on more valuable tasks. For example, digital solutions can be configured to process real-time information automatically (for example, automated S&OP preparation and workflow management), thus eliminating the manual effort of gathering, scrubbing, and entering data.

• End-to-end customer engagement. Digital technology can make customer experiences better by giving supply-chain managers more control and providing customers with unprecedented transparency: for example, track-and-trace systems that send detailed updates about orders throughout the lead time.
• Innovation. A digital supply chain can help a company strengthen its business model (for example, by expanding into new market segments) and collaborate more effectively with both customers and suppliers (for example, by basing S&OP decisions on information that is automatically pulled from customers’ ERP systems).
• Talent. Digitally enabled supply chains have talent requirements that can be quite different from those of conventional supply chains. At least some supply-chain managers will need to be able to translate their business needs into relevant digital applications.

Assessing the supply chain

The vision for the supply chain provides a company with reference points for the second step in transformation planning: a comprehensive assessment of the supply chain’s business and technical capabilities. To make the assessment simpler, companies might ask the following questions to find capability gaps in five cross-cutting categories:

• Data. Do we collect and generate all the data we need to enable our vision? Is that data stored in a manner that makes it easy to access and use?
• Analytics. Do we have the analytical capabilities to extract useful insights from the data that we collect?
• Software and hardware. Do our software and hardware systems enable the analytical and process capabilities that the company requires?
• Talent. Do we attract, develop, and retain the “digital native” talent needed to run and transform our supply chain? Does our culture and organizational model encourage experimentation, innovation, and continual improvement?
• Processes. Do we have the right processes in place across different supply-chain subfunctions? Are those processes clearly defined and well understood by everyone who is involved in them?

Vision of the future state

The digitization of the supply chain enables companies to address the new requirements of the customers, the challenges on the supply side as well as the remaining expectations in efficiency improvement. Digitization brings about a Supply Chain 4.0, which will be …

• … faster. New approaches of product distribution reduce the delivery time of high runners to few hours. The basis for these services is built by advanced forecasting approaches, e.g., predictive analytics of internal (e.g., demand) and external (e.g., market trends, weather, school vacation, construction indices) data as well as machine status data for spare-parts demand, and provides a much more precise forecast of customer demand. Forecasts are not carried out on a monthly basis, but weekly, and for the very fast-moving products even every day. In the future we will see "predictive shipping," for which Amazon holds a patent - products are shipped before the customer places an order. The customer order is later on matched with a shipment that is already in the logistics network (being transported towards the customer region) and the shipment is rerouted to the exact customer destination.
• … more flexible. Ad hoc and real-time planning allows a flexible reaction to changing demand or supply situations. Planning cycles and frozen periods are minimized and planning becomes a continuous process that is able to react dynamically to changing requirements or constraints (e.g., real-time production capacity feedback from machines). Once the products are sent, increased flexibility in the delivery processes allows customers to reroute shipments to the most convenient destination.
• New business models, such as Supply Chain as a Service for supply chain planning functions or transport management, increase the flexibility in the supply chain organization. Supply chain can be bought as a service and paid for on a by-usage basis instead of having the resources and capabilities in-house. The specialization and focus of service providers allow them to create economies of scale as well as economies of scope and also attractive outsourcing opportunities.
• … more granular. The demand of customers for more and more individualized products is continuously increasing. That gives a strong push towards microsegmentation, and mass customization ideas will finally be implemented. Customers are managed in much more granular clusters and a broad spectrum of suited products will be offered. This enables customers to select one of multiple "logistics menus" that exactly fits their need.
• New transport concepts, such as drone delivery, allow companies to manage the last mile efficiently for single and high-value dense packages.
• … more accurate. The next generation of performance management systems provides real-time, end-to-end transparency throughout the supply chain. The span of information reaches from synthesized top-level KPIs, such as overall service level, to very granular process data, such as the exact position of trucks in the network. This range of data provides a joint information basis for all levels of seniority and functions in the supply chain. The integration of data of suppliers, service providers, etc. in a "supply chain cloud" ensures that all stakeholders steer and decide based on the same facts.

Digital waste prevents supply chains from leveraging the potential of Supply Chain 4.0

1) Data capturing and management. Often, available data is handled manually (data collection in a system, paper-based data handling, etc.) and not updated regularly, e.g., master data on supplier lead time that is entered once (sometimes even only dummy numbers) and then remains unchanged for years. Another example in warehousing is advanced shipping notifications, which are received but not used to optimize the inbound process.

2) Integrated process optimization. Many companies have started to implement an integrated planning process, but very often this is still done in silos and not all information is leveraged to achieve the best planning result possible. In addition, it can frequently be observed that automatically determined planning or statistical forecast data is manually overwritten by planners. Especially for parts moving at medium or high speed, the manual overwrites usually have a negative impact on the forecasting accuracy. 

3) Physical process execution of humans and machines. Nowadays, warehousing, assembly line replenishment, transport management, etc. is often done based on gut feeling, but not leveraging available data, e.g., to improve pick paths in the warehouse. Warehouse operations are still managed in batches of one to two hours, not allowing the real-time allocation of new orders and dynamic routing. Also, opportunities arising from new devices, such as wearables (e.g., Google Glass) or exoskeletons, are not leveraged.

Increasing operational efficiency leveraging Supply Chain 4.0

Supply Chain 4.0 will impact all areas in supply chain management. We have developed the McKinsey Digital Supply Chain Compass (see figure on next page) to structure the main Supply Chain 4.0 improvement levers and to map them to six main value drivers. In the end,

the improvements enable a step change in service, cost, capital, and agility.