Published on the 28/04/2016 | Written by The Boston Consulting Group
Technical limitations have curbed supply chain ROI but the use of new digital technologies can dramatically improve supply chain performance...
For years companies have used digital supply chain technologies to improve service levels and reduce costs, however, the inability to connect disparate systems, provide end-to-end supply chain visibility, and crunch massive amounts of data, has hobbled many. Now, the wide availability and adoption of much more powerful digital technologies, including advanced analytics and cloud-based solutions, means companies are able to significantly extend the potential of their supply chain.
A study by The Boston Consulting Group shows that the leaders in digital supply chain management are enjoying increases in product availability of up to 10 percentage points, more than 25 percent faster response times to changes in market demand, and 30 percent better realisation of working-capital reductions, on average, than the laggards. They have 40 percent to 110 percent higher operating margins and 17 percent to 64 percent fewer cash conversion days.
What the leaders are doing
Fix performance gaps.
Some companies apply digital technologies to relatively straightforward supply chain problems that are too cumbersome to address with conventional approaches.
For example, advanced analytics help managers dynamically calculate optimal inventory allocations and forecast demand more accurately—two areas that have always been difficult with traditional processes based on static, monolithic enterprise resource planning (ERP) systems. Often, newer digital technologies ride on top of legacy systems, making them more flexible and easier to operate. That avoids the workarounds that can plague new-technology rollouts and encourages employees to use the integrated system rather than dispersed Excel spreadsheets. Ultimately, companies can create a single version of the truth, thus improving decision making, customer service, and asset and working-capital utilisation.
Innovate business processes.
Digital supply chain technologies are helping some companies achieve a step change in performance in more complex areas. Consider the potential of automated replenishment to transform manual processes, or the use of supply chain control towers – cross-functional teams whose members are co-located in hubs. For example, a global life-sciences company that generates nearly half of its $3 billion in revenue through an e-commerce platform uses a control tower and advanced analytics for replenishment and inventory planning. Depending on the pattern of customer clicks on the website in a country or region, a team member can adjust inventories even though customers have not yet placed orders. The company can also hold more stock in the right locations, which decreases the lead time promised to customers and increases their willingness to buy.
Increasingly sophisticated and integrated control-tower technologies can automatically track components down to the individual unit in real time. Some customers will even pay more for up-to-the-minute supply chain information and reliable delivery of mission-critical components. Companies can also find more intelligent and integrated ways to balance supply and demand in asset-intensive, inflexible production systems. For instance, one global chemical company introduced an advanced allocation algorithm to decide which customers should receive goods that are in limited supply. The new asset-utilisation system offered a customer-centered approach and margins rose by an average of 0.5 percentage points.
Disrupt the supply chain.
Leading companies are using digital supply chain technologies to redesign their operating models and go-to-market approaches in order to generate significant growth in revenues and margins. Companies can find new routes to customers, decentralise activities, and substantially speed up delivery, among other tactics.
For example, a company can eliminate a distribution channel by developing direct-to-customer capabilities in-house, powered by digital technologies cloud-based solutions let centralised expert teams oversee increasingly complex networks, while building products radically closer to the customer in mobile manufacturing units can speed up delivery substantially.
We’re already seeing disruption in the pharmaceutical business thanks to more detailed and accurate sensing of demand. US law requires companies to give each drug a unique ID and track it throughout the supply chain to battle counterfeiting. By placing sensors at the bottom of a pill bottle, companies can also track whether patients are taking their medications. The fill level can be transmitted in real time, allowing drug companies to ship another bottle to the pharmacy and then to prompt the patient to refill the prescription.
To put these strategies into practice, operations leaders move through the following stages.
How to begin
- Immerse yourself in the possibilities – Companies should form their best people into a ‘digital immersion team’ to scan the landscape of digital supply chain management and collect innovative ideas on how to disrupt their business
- Prioritise the opportunities – Out of the hundreds of ideas that may result, companies should select the digital applications that have the most potential to create significant value for the business and address gaps in performance.
- Launch pilots – Companies should design a handful of pilots that can help them learn what works before they scale initiatives throughout the company.
- Build the infrastructure for success at scale – Even the best-designed pilots will fail if the organisation is not ready for them.
Companies cannot afford to wait. The competition is already making moves, and the leaders in digital supply chain management are building a financial advantage that will be more difficult to overcome with each passing year.
*This is an abridged version of an article by The Boston Consulting Group, entitled ‘Three Paths to Advantage with Digital Supply Chains’. Click here to read the extended version, which includes additional real-life examples and a full explanation of the points covered in the ‘How to begin’ section.