Why do we need Digital Supply Chains?
Over the last 50 years as companies have become bigger and more complex, traditional departments have formed specialising in making those areas as slick as possible. In retail, this has typically resulted in the formation of functions such as sourcing, logistics, buying and merchandising as well as the different channels (e.g. retail, wholesale, ecommerce). All of these working together, but also working to their own sets of targets and KPIs, often at odds with each other.
For example, channels to market wanting 100% availability on day one of a season to maximise selling opportunities but causing massive peaks of activity further up the supply chain to satisfy this requirement. Supply chains typically work most efficiently when there is a steady flow of supply being fed through the pipeline to minimise redundancy and also minimise costs. However, demand is rarely a steady flow, impacted by weather, holidays, sales and promotions, wider economic factors, political events, pandemics and so on! Balancing the pull of demand and the push of supply is key.
Over the years, we have also seen a swing from supply chain efficiencies driving how businesses operate to businesses becoming more customer centric. Having previously been seen as a differentiator, giving customers the products they want, when and where they want it is now seen as table stakes. Add in the cost pressures of modern retail, the need to keep stock levels and working capital tight, and also retain the ability to keep a degree of resilience and flexibility in the supply chain, you have a complex beast to manage with many moving parts.
Imagine having hundreds of stores across different parts of the world, global ecommerce customers buying your products based on factors local to them, suppliers across different continents dealing with production or shipping issues, your stock split across different warehouses in different countries, some products performing better than expected and some worse, competitors holding flash sales that impact your demand…
With so many moving parts, different scenarios at play and the need to make decisions quickly, it is now impossible for your teams to absorb all of these inputs and pull the right levers to come up with the optimal course of action.
This is where digitising your supply chain can add huge value to the way that you operate.
What is a Digital Supply Chain?
So, what are the main features of a digital supply chain (or more accurately a digitally-enabled supply chain)?
Instead of departments working at odds to each other, a set of holistic measures are required provide the operational guardrails. These need to be informed by the overall strategy and customer proposition. If we want to drive sales by now offering 24 hour next day delivery across Europe, we need to accept that we’re going to have higher delivery costs to enable this and also decide if we want the customer to pay for this. If we want to limit our stock exposure and markdown by buying little and often, we might have to accept higher raw material costs because we’re not buying in bulk. By thinking in value streams and total cost to serve/achieved margin, we start to make better end-to-end decisions for the business. For that, we need to collate and understand the end-to-end data in the supply chain.
As well as collating supply chain data, democratising departmental data and performance metrics so that they are visible to everybody, all the time, allows improved planning and replanning. Functions rarely want others to know if there is a potential issue as they would rather rectify it and not raise the alarm bells for fear of looking incompetent. This typically results in a concertina effect through the different departments of the value chain where hand-offs are missed, despite the best efforts to resolve them. By opening up end-to-end visibility of live performance, we allow the business to operate as a single, joined up entity with the ability to react quickly to opportunities as well as issues.
Today, hundreds or even thousands of decisions are made by people working in a company’s supply chain based on some form of data. The issue is that this data is often just the tip of the iceberg when it comes to all the factors that truly impact performance. Temperature going to be warm next week in Scotland? Push out more summer gear to Scottish stores. Some retail systems will help to break this down to more granular levels to fine tune and even automate some of these calculations, but there are so many other factors at play…what’s the long term forecast look like, how close to the end of the season are we, how do we make sure we don’t leave ecommerce short of stock, does a particular store sell more shorts than another store. Similarly, surfacing and sharing data around the latest shipping data of stock coming into your warehouses allows planners to make counter moves when there are delays by pushing alternatives into channels or adjusting marketing campaigns. All these data points mean that there’s a huge amount of opportunity to optimise stock movement and capture more sales at a higher margin, by harnessing all of the data that is available to us.
Many companies have developed a well-trodden cadence for planning and replanning the supply chain. For big changes, there are typically monthly S&OP type processes, with weekly and daily processes at the operational level. The monthly processes tend to be driven by the need to extract data, coordinate with different functions, adjust and amend forecasts, review with suppliers, model different scenarios and then make some recommendations and decisions. By moving to a digital supply chain, enabled by having access to the latest data at all times, the ability to increase this cadence to be much more frequent builds more flexibility and opportunity to optimise into the process. Taking out the manual manipulation or alignment of data between different systems means that decisions can be made 24/7 if needed.
Predicting and learning
Finally, digitising the supply chain presents the opportunity to automate many of the decisions that are made. The vast amounts of data can be used to predict different scenarios and what might happen if you pull one or many operational levers. Certain decisions can be automated (inside pre-defined guardrails) and options and likely outcomes presented for the big decisions. The results of those decisions can then be used to improve the predictions next time around through constantly evolving machine learning technology. By using the supply and demand signals from live data in the digitised supply chain, we have the opportunity to both improve the consumer facing performance and the supply chain efficiencies, and for it to teach itself to get better every single day.
With more pressure being placed on the supply chain, both from consumer expectations and from the cost and resilience pressures in the post-COVID world, the case to move to a digital supply chain is compelling. McKinsey predicts that moving to this type of model will reduce supply chain operating costs by up to 30%, reduce lost sales by up to 75% and decrease inventories by up to 75%. Whilst those numbers seem ambitious, achieving even a fraction of those benefits would be attractive to most companies right now.