Most supply chains are made up of disjointed business processes that are not especially well integrated. In fact, many suppliers have been historically reluctant to share anything beyond basic information with their customers unless it’s an absolute requirement. But changes in consumer behavior may finally be forcing that issue.
It’s becoming less acceptable for suppliers to not be able to pinpoint when a specific good will be delivered. Consumers want to be able to track, for example, where the car they ordered is being manufactured and delivered.
Consumers are also starting to exhibit a lot more interest in where the components or ingredients that go into a product are sourced. A Fairtrade International movement, for example, is promoting awareness of the need for sustainable farming practices.
Lastly, companies are being required to customize products more than ever as part of a “mass customization” phenomenon. That level of customization requires an organization to have much more granular control of the supply chain to make it possible to dynamically replace one component with another.
Faced with those requirements, many organizations are in the early stages of digitizing their supply chains, says Jamie McCall, an industry consultant with Deloitte.
“Getting suppliers to share information has been a perennial challenge,” says McCall. “But what’s changing now is the expectation of the customer.”
McCall notes that customers are not likely to pay extra for a cup of coffee that was made using beans that allowed traceability of origin, but that something like this may become more common soon.
Digitizing Supply Chains Relies on Massive Analytics Data
Digitizing supply chains, however, is not a simple undertaking. A truly digital supply chain not only requires a lot of integration between backend systems, there also needs to be a layer of advanced analytics applied to a massive amount of data.
In addition, because supply chains invariably involve multiple companies, there’s a need to deploy backend applications on a cloud platform that provides a neutral place to collaborate.
The good news is that advances in technologies such as blockchain databases will soon make it much simpler to reliably track every ingredient or component that goes into a product.
Digitizing the supply chain also provides several other benefits to the business that help cost justify such initiatives. Billions of dollars of goods still go missing around the world when, for example, trucks are highjacked. Sensors attached to individual items in a truck should make it harder for criminals to sell those goods on the black market, especially if they’ve been recorded in an immutable blockchain database.
At the same time, goods are frequently damaged in transit. Sensors can now be used to make sure, for example, a change in temperature in a shipping container doesn’t wind up spoiling a shipment of fruit.
Finally, the amount of warehouse capacity required could substantially shrink if supply chains were more efficient, says Nils Herzberg, senior vice president for IoT for SAP.
“There’s a lot of working capital tied up in warehouses,” says Herzberg.
SAP is working with customers to create Internet of Things (IoT) applications that make use of sensors to create demand signals that are then relayed to a supply chain application. Armed with that data, a company can more efficiently replenish goods using a smaller number of warehouses, says Herzberg.
Some companies are even going so far as to transform their business models. Because they have more visibility to their supply chain, it’s now more feasible for companies to provide a service around, for example, an engine on an aircraft that is now essentially rented rather than bought.
All told, a report published by the Center for Global Enterprise, a non-profit research institution, estimates digital supply chains will on average lead to a 20 percent reduction of procurement costs, a 50 percent reduction in supply chain costs, and an increase in revenue of 10 percent. Some organizations are even going so far as to implement zero-based supply chains, in which costs have to be justified every year, rather than assumed based on how much was budgeted the previous year.
Naturally, digitizing a supply change requires major investments in business process management. It’s next to impossible to get all the organizations in a supply chain to standardize on the same suite of applications. That creates a need to integrate multiple business processes spanning a broad range of application platforms. Many of those systems may have been in place for decades. More often that not, ripping and replacing those systems simply isn’t feasible.
Making those investments, however, is rapidly becoming a business necessity. Organizations are starting to make significant investments in artificial intelligence (AI) to optimize business processes. AI systems, however, require a platform through which recommendations generated by analyzing massive amounts of data flowing through business processes can be implemented. A BPM platform provides both the means of collecting all that data, and just as importantly, a way to automate processes based on the insights gained via the AI system.
BPM, of course, has been around in one form or another in supply chains for decades. But most of the usage of BPM has been confined to a well-defined set of closed-loop processes. As BPM continues to evolve, it’s becoming possible to now also automate more loosely coupled processes. Infused with predictive analytics, BPM platforms are now also making it much simpler to visualize the relationship between loosely coupled processes. In fact, in many instances, cause and effect relationships that were previously unknown are being discovered.
Supply chains are not going to magically transformed overnight. Digitizing a supply chain requires a complex set of interactions spanning machines and people. In many cases, the biggest challenge will be organizational inertia. Unless the board of directors or CEO creates a mandate for change, most organizations are not going to be able to successfully transform their supply chains. In the absence of that mandate, however, it’s also likely that organizations that don’t digitize their supply chain are about to face an existential threat to their continued existence.