Eliminating today’s digital waste and adopting new technologies is a major lever to increase the operational effectiveness of supply chains. The potential impact of Supply Chain 4.0 in the next two to three years is huge – up to 30 percent lower operational costs and a reduction of 75 percent in lost sales while decreasing inventories by up to 75 percent are expected, at the same time increasing the agility of the supply chains significantly.
How did we calculate these numbers? The impact numbers are based on our experience from numerous studies and quantitative calculations – the three performance indicators are highly correlated, e.g., an improved inventory profile will lead to improved service level and lower cost.
Supply chain service/lost sales
Low customer service is either driven by a wrong promise to the customer (e.g., unrealistic lead times), a wrong inventory profile (ordered products are not available), and/or unreliable delivery of parts. Lost sales in addition occur if the required products are not available on the shelf or in the system – customers will decide to switch to another brand. This is true for both B2C and B2B environments.
By significantly improving the way we interact with the customer, leveraging all available POS data/market intelligence, improving the forecast quality significantly (up to more than 90 percent in the relevant level, e.g., SKU), and applying methods of demand shaping in combination with demand sensing to account for systematic changes/trends, the service level will increase dramatically and with this lost sales will decrease significantly.
We clearly need to keep in mind that industries like Pharma Rx, where the service level is often in the upper 90ies, will benefit less from the reduction of lost sales, but more from insights into the patient – and by providing individual service, they will be able to increase revenue.
Supply chain costs
Driven by transportation, warehouse, and the setup of the overall network, the costs can be reduced by up to 30 percent. Roughly 50 percent of this improvement can be reached by applying advanced methods to calculate the clean sheet (bottom-up calculation of the “true” costs of the service) costs of transport and warehousing and by optimizing the network – the goal should always be to have minimal touch points and minimal kilometers driven, still meeting the required service level of the customer. In combination with smart automation and productivity improvement in warehousing, onboard units in transportation, etc., the savings potential can be achieved. The remaining 15 percent cost reduction can be reached by leveraging approaches of dynamic routing, Uberization of transport, leveraging autonomous vehicles, and – where possible – 3-D printing.
Supply chain planning
The planning tasks such as demand planning, preparation of the S&OP process, aggregated production planning, and supply planning are often time intensive and conducted mainly manually. With advanced system support, 80 to 90 percent of all planning tasks can be automated and still ensure better quality compared to tasks conducted manually. The S&OP process will move to a weekly rhythm and the decision process will be built on scenarios that can be updated in real-time. This
accuracy, granularity, and speed have implications for the other elements, such as service, supply chain costs, and inventory. Systems will be able to detect the exception where a planner needs to jump in to decide.
Inventory is used to decouple demand and supply, to buffer variability in demand and supply. By implementing new planning algorithms, the uncertainty (the standard deviation of the demand/supply or forecast error) will be reduced significantly, making safety stock unnecessary. The other important variable to drive inventory is the replenishment lead time – with more production of Lot Size 1 and fast changeover, the lead time will be reduced significantly. Also, long transport time, e.g., from Asia to the EU or the US, will be reduced due to a significant increase in local-for-local production. In addition, 3-D printing will reduce the required inventory. We believe in an overall inventory reduction of 75 percent.
Capturing the value is a journey that can be started right away. Where it starts depends on the digital maturity of the current supply chain. The McKinsey digital walk-through helps companies appreciate the current digital maturity of the organization, create a sound understanding of the required levers to pull to reach the next performance level leverage Supply Chain 4.0 tools to shape the road map for digitization, and estimate the potential impact.
The diagnostic tool assesses the supply chain systematically based on six value drivers and five assessment dimensions (e.g., data, analytics). It differentiates between three archetypes of maturity levels. Supply Chain 2.0 characterizes “mainly paper-based” supply chains with a low level of digitization. Most processes are executed manually. The digital capabilities of the organization are very limited and available data is not leveraged to improve business decisions. Supply Chain 3.0 describes supply chains with “basic digital components in place.” IT systems are implemented and leveraged, but digital capabilities still need to be developed. Only basic algorithms are used for planning/forecasting and only a few data scientists are part of the organization to improve its digital maturity. Supply Chain 4.0 is the highest maturity level, leveraging all data available for improved, faster, and more granular support of decision-making. Advanced algorithms are leveraged and a broad team of data scientists works within the organization, following a clear development path toward digital mastery.
Transformation into a digital supply chain
The transformation into a digital supply chain requires two key enablers – capabilities and environment. Capabilities regarding digitization need to be built in the organization (see the chapter on capability building) but typically also require targeted recruiting of specialist profiles. The second key prerequisite is the implementation of a two-speed architecture/ organization. This means that while the organization and IT landscape are established, an innovation environment with a start-up culture has to be created. This “incubator” needs to provide a high degree of organizational freedom and flexibility as well as state-of-the-art IT systems (two-speed architecture independent of existing legacy systems) to enable rapid cycles of development, testing, and implementation of solutions. Fast realization of pilots is essential to get immediate business feedback on the suitability and impact of the solutions, to create excitement and trust in innovations (e.g., new planning algorithms), and to steer the next development cycles. The “incubator” is the seed of Supply Chain 4.0 in the organization – fast, flexible, and efficient.
Author: Danish Mairaj, CISCOM, PMP