Digitization of Industry - How and Why?

Supply chain managers struggle with optimizing inventory and are faced with globalization, complex products, personalized preferences, and meeting a fluid customer demand. All of this has to be balanced in strategic ways to ensure that inventory levels are optimized and stock outs never occur. Then there’s the concern with overstocking and inventory that’s not moving. It can become out-of-date, out-of-season, and out-of-fashion quickly.

Imagine a manufacturer with huge amounts of inventory levels. They think they are accommodating customers, but are actually sacrificing resources and wasting working capital. To try to anticipate customers’ needs requires maintenance, production, human resource, inventory, wholesalers, and more. There is a better approach. For supply chains, it can be challenging to balance inventory levels with service-related goals. They may not accurately understand and account for customer demand or market volatility. Excess inventory that isn’t properly balanced leads to wasted capital and poor profitability. That’s where digitization can help.

Immature companies commonly use 20-day forward coverage or similar ERP-based planning but can’t account for their demand uncertainty. They might also use inventory segmentation that groups SKUs into categories that are too broad, which doesn’t accommodate variations and seasonal changes. Hence, the reason a lot of supply chains have switched to demand planning software and demand forecasting software.

While digitization is a key driver of the fourth industrial revolution (Industry 4.0), organisations have different approaches to deal with this topic to get a clearer picture of the opportunities and challenges concerning the digital transformation.

Various types of optimization determine that which types are important for inventory management. Knowing which types are important to your business is an important step in determining which solution best fits your needs.

Inventory Configuration addresses the issue of in what form should I hold my inventory; as raw material, finished goods, or something in between? Optimized inventory configuration is achieved via postponement strategy which optimizes the trade-off between upstream and downstream inventory to identify the most globally efficient balance.

Stage Optimization applies the same postponement principles, but to the distribution network, where the form of the inventory usually does not change, only its place in the network. It addresses decisions about whether to stock inventory at the factory, in a centralized distribution center, at regional network, or some combination of the above.

Mix Optimization (Service Optimization or Service Level Optimization) allows the business to position the inventory across the distribution network to meet high customer service level objectives in a much more efficient manner than simply creating a homogeneous mix of “one size fits all” inventory.

Lot Size Optimization is the simultaneous optimization of safety stock versus cycle stock values. Optimal lot sizes are a function of the targeted service levels, safety stocks, set-up cost (for manufacturing) or the handling cost (for replenishment) versus the inventory holding cost and other factors.

Prebuild Optimization (Build Ahead Optimization) is used in two cases. The first case is a finite supply capacity environment with strong seasonal demand or reduced supply due to shut-down or maintenance. The second case occurs towards end of product life when companies define an end of production date.

There are many pieces of the modern manufacturing supply chain, and when it comes to inventory management, each one must operate single system to be most effective. To truly serve the end customer, all manufacturing echelons, such as raw materials suppliers, factories, distribution centers, and wholesalers, need to ensure that the right stock is at the right place at the right time.

Making matters worse, many manufacturers are currently using legacy systems with rules of thumb, outdated algorithms, or personal instinct to manage inventory. For example, an organization may set inventory targets for a specific SKU-Location based on average demand for a broad product family across a wide geographic region. This approach does not account for variability: individual products may have a similar average demand but dramatically different incoming order patterns.

To stay competitive, manufacturers are turning to echelon digitized solutions to handle their supply chain. The overarching goal of these solutions is to efficiently match inventory levels to accommodate forecasted demand. This enables manufacturers to keep inventory levels low, move inventory as quickly as possible, and ensure high service levels for customers.

Digitization of supply chain can yield several benefits including: supporting daily business and administrative tasks, supporting complex decision-making processes, procurement will become more focused on strategic decisions and activities, procurement will become a strategic interface to support organisational efficiency, effectiveness, and profitability, and supporting the creation of new business models, products, and services. There are barriers to digitizing procurement process and supply chains and such barriers found in existing procedures, processes, capacities, and capabilities needs more utilization of digitization due to which significance of a number of enabling technologies to the digitization process gets revealed.

The digital structure of the supply chain captures customer’s real choices in real-time and transmit them digitally to other participants within the network. This kind of structure emphasizes simultaneous communication between different parties and the total supply chain integration, as well as communication between the consecutive phases of the process. Seamless material flows are achieved by replacing the notion of a sequential and linear chain of information exchange with the set of simultaneous information exchange that span the members of the supply chain. Material flows can be coordinated spatially and temporally from multiple sites. For example, shipments of customized components produced by suppliers at several locations can be arranged for concurrent delivery as required as the customer. In addition, the information about status of orders can be monitored continuously by multiple parties, including the customer. Information flows electronically around the network. Instead transmitting information to nearest neighbor, it is essential to be able to interconnect simultaneously with all network members.

Different concepts interrelate and emphasize the network-nature and the supply chain digitization, as well as agility, i.e. “virtual supply chain”, “demand satisfaction community”, “value net”, “value web”, “value chain constellation”, “information hub”, “extended enterprise”, “virtual enterprise” , and “agile enterprise”. While each of these concepts differs in particular details, they all represent the new form of the digital supply chain, where information flows play an integral role within the network. Digitization can be executed by different technologies, especially by the Internet. Internet-based supply chains are frequently referred to as “e-commerce supply chains”. These chains that use Internet and web technology – can be seen simply as processes necessary to transfer the goods sold over Internet to the customers, but an e-supply chain is broadly a wide-ranging topic related to the supply chain integration. The common factors of all these digital supply chains distinguish a novel business structure which provides a competitive advantage over a traditional structure which relies on supply chain thinking. When establishing digital supply, companies need to learn new ways of relating to customers and suppliers, to re engineer their internal processes and digitize them as well. The work of some functions may be eliminated or outsourced.