Digital Transformation of the Supply Chain: Now and Next
The digital transformation of supply chains has been underway since 2010, but COVID-19 kicked it into top gear.
The pandemic brutally exposed the shortcomings of a near-complete dependence on single-sourcing of raw materials and finished goods. Organizations’ supply chains were ill-prepared, and faced a total stoppage of supply due to facility closures. At the same time, customer demand precipitously dropped for many products while skyrocketing for others, such as sanitizers, cleaners and toilet tissue. Thus, an already precarious system was hit with enormous demand variability. A lack of key data upended demand-management models, including those based on artificial intelligence and machine learning.
In response, companies are taking the following steps:
Multi-sourcing of supply. They are finding alternative sources globally, evaluating different manufacturing methods, modifying designs to reduce parts and identifying replacement materials.
Investing in alternative materials and manufacturing processes. They are collaborating with international suppliers on lower-risk alternatives, identifying “at-risk” components and refining manufacturing and distribution capability — all for the purpose of de-risking supply to the fullest extent possible.
Responding to trade wars. Current trade tensions have impacted supply chains by limiting goods flow. Meanwhile, manufacturers and suppliers that have cultivated stable supplies for years are facing a sudden drawdown in demand and being forced to explore new markets with fewer resources. This trend is placing a tremendous strain on the existing supply chain, with uncertainties affecting every stage from production to final delivery.
Focusing on flexible and resilient supply chains. Organizations are looking to eliminate redundant processes, automate wherever possible and electronically link with suppliers and distributors for near real-time status of orders.
Increasing the use of technology. The industry is adopting cloud-based tools for on-demand cost and manufacturing intelligence in the product-design phase; alerting customers and networks about sudden variabilities across regional supplier bases; and using technology to map and link tiered supplier networks.
While COVID-19 has catalyzed the need for swifter and more focused action, the transformation was already well underway prior to the pandemic due to a number of factors, including:
Raised customer expectations. Internet-based giants such as Amazon.com Inc., Uber Technologies Inc. and Airbnb Inc. have raised the bar on personalized customer experience. A variety of e-commerce fulfillment models, including pickup at store and direct delivery to homes, is requiring quicker coordination between retailers, wholesalers, distributors and manufacturers. The entire supply chain is being driven by more demanding customer shopping preferences, leading to an increased focus on digital capabilities.
Technology trends. The availability of faster and cheaper processing, cloud capabilities and data modeling and analytics is enabling closer coordination between supply-chain partners. Software providers are enhancing applications in a number of areas, including shipment tracking, data integration at hand-off points, alerts about local supply disruptions, tiered supplier network mapping and overall supply-chain visibility.
Commodity pricing and delivered cost. The push to lower commodity pricing and seek alternative sourcing is driving the frequent review of raw materials, production and distribution. This is leading to further enhancements of applications for acquiring better information on suppliers.
Emphasis on speed to market of new products and services. Product lifecycles are continually being shortened. As a result, it becomes more critical for supply chains to provide accurate information on the cost of design, materials, manufacturing and service.
Global volatility and trade uncertainty. Over the past decade, the world has encountered extensive geopolitical uncertainty. Organizations must continuously monitor changes in systems, processes, regulatory frameworks and technical maintenance requirements. The effort increases overall supply-chain management costs, and motivates companies to adopt digital capabilities to help minimize them.
For companies looking to build supply-chain resilience and respond quickly to shifts in customer demand, technology and global trade, what should be their call to action? Following are some areas to consider:
Supply-chain mapping. Do supply chain maps exist for the organization? Are they complete, covering multiple tiers? When done right, mapping can significantly aid in business recovery and rebuilding, Technology can assist by automating the process.
Stronger supplier alliances. The objective is to develop a keiretsu or a chaebol type of manufacturer-supplier alliance, not just for normal production and support but for crisis management as well. With a strong structure in place, a manufacturer can rapidly rebalance its supplier network during a pandemic or other type of disruption. Such an effort requires both time and collective will, often supported by government or local organizations.
Supply-chain digitization. Companies can apply digital transformation to map and manage their supply chains; acquire near-real-time visibility of alternative sourcing; create digital twins of key processes; foster collaboration with suppliers through electronic data interchange and value-added networks; and create control towers for achieving an end-to-end view of shipments, inventory and potential risks.
These are all challenging but necessary tasks. Having achieved them, companies can create the crucial shock absorbers that their supply chains desperately need.
Shubho Chatterjee is a digital transformation, strategy, technology and operations executive.