Digitalize or perish — a new norm in supply chains
Digitalization is a buzzword today, and the supply chain is not an exception this. But digitalization of supply chains is not something new. Around 25 years ago, Dell revolutionized the entire computer industry by digitalizing the supply chain. The consumer could specify his desired features and the laptop would be configured according to the requirements. Similarly, Zara, a fashion industry firm that is known for its responsiveness, revolutionized the fashion industry around fifteen years ago, promising 2-3 weeks of lead time to the retailer on the make-to-design products. It could achieve this by limiting its manufacturing in Spain unlike most of the contemporary fashion industry players that were outsourcing to China, which used to take 3-4 months for supply.
The modern supply chains in a world of Volatility, Uncertainty, Complexity, and Ambiguity (VUCA) need to be highly agile, nimble, versatile, and efficient. In the age where every player is trying to maximize the annual inventory turns, the collaboration between supply planning and demand planning in the backdrop of business uncertainties, macroeconomic ambiguity, and contemporary geo-political chaos is of paramount importance. To enable this, the supply chain processes have to be quick, intelligent, and reliable, which requires them to be integrated with the smooth flow of transparent and timely information. Therefore, information is the backbone of smart supply chains. Only digital technologies can enable such supply chains that are not only enabled but also driven by information.
Digitalization, though a buzzword today, is not new!
Digitalization is a buzzword today, and the supply chain is not an exception this. But digitalization of supply chains is not something new. Around 25 years ago, Dell revolutionized the entire computer industry by digitalizing the supply chain. The consumer could specify his desired features and the laptop would be configured according to the requirements. Similarly, Zara, a fashion industry firm that is known for its responsiveness, revolutionized the fashion industry around fifteen years ago, promising 2-3 weeks of lead time to the retailer on the make-to-design products. It could achieve this by limiting its manufacturing in Spain unlike most of the contemporary fashion industry players that were outsourcing to China, which used to take 3-4 months for supply.
The COVID-19 pandemic jeopardized the supply chains and has given a push to digital initiatives in firms globally. It can be evident from the fact that at most of the firms, the amount of effort that went into getting approvals from the leadership for digitalization projects used to be much higher than what it is today. Let us take an example of an automotive OEM, where there are around 10000 to 50000 SKUs that need to be procured at the right time at the right cost and the right quality not only from India but also from international vendors. During the pandemic, the factories of suppliers were closed for months together, and the supply chains were hit very badly, giving a big wake-up call to the supply chain managers.
And supply chain disruption continued to exist even after COVID substantiating that it is the new normal. In 2021, the Suez Canal got blocked, and there was another nightmare of supply chain disruption. The companies had to identify how many containers and which parts were kept on hold and how many units they had to air-lift to deliver the end product to the customers on time. Again in March 2022, amidst the Russia-Ukraine war, the cost of nickel, one of the important raw materials for the electric vehicles industry, grew by almost five times, and the London Metal Exchange had to stop the trade for a couple of hours.
Risk mitigation is critical to success in supply chains
Thus, the last three years have reinforced the fact we are living in a VUCA world in which we have to also understand the supplier of suppliers and then create risk mitigation measures. So, we need to ask our suppliers how much of their sourcing is from China, Russia, Ukraine, Taiwan, etc. Though it is noteworthy here that digitalization cannot help us mitigate the risks fully. For example, in today’s context, if China goes to war with Taiwan, the entire semiconductor industry could potentially face significant challenges. But no risk mitigation mechanisms can be 100 percent fool-proof, because of the unknown degree and nature of geo-political risks, changing consumer behavior, changing supplier dynamics, etc. However, it does not mean that we sit idle. Rather, digitalization can help us give our best shot.
Digital supply chains are a fundamental element of the business model at some of the most popular new-age companies, such as Amazon, Flipkart, Jiomart, Tata Cliq, Uber, Oyo, Airbnb, Swiggy, Zomato, etc. Going further into quick commerce, Zepto is promising a 10-minute delivery of grocery products, which is possible only through digitalization. You can imagine what would happen to the other delivery players with the advent of a competitor promising delivery in as low as 10 minutes. Supply chain agility, which can be supported significantly through digitalization, is becoming the key differentiator here.
Five key capabilities that are prominent features of digital supply chains
The first prominent feature is the “Track and trace capabilities” that are helping the logistics managers know where the trucks (connected with GPS) are. These can predict the availability of incoming goods better in the inbound network. Even the traffic at the plant docks and the utilization of the docks can be predicted. In outbound logistics, the availability of the trucks en route to the dealers can be predicted better as well. This has also enabled the execution of well-defined contracts between the OEMs and the logistics services provider specifying the delivery time and enabling the easy measurement of the process performance.
The second feature, “Robotic Process Automation (RPA)”, is providing a big, quick, and cheap way to boost productivity in repetitive jobs. For example, the manufacturing units need to monitor various process KPIs, for which the information has to come from various sources on the shop floor. Earlier, people used to collect it manually, and by the time reports used to be available, they were not so helpful. Now, all the RPA programs start running in the early morning hours, so that the Business Intelligence reports are ready on the table when the managers join the office at 8 am. Thus, these RPA solutions have made the life of supply chain managers very easy. Many other repetitive activities, such as processing vendor invoices, can be easily executed using RPA.
The third feature of modern supply chains is “Paperless logistics” that is helping protect trees in a significant manner. It is made possible through warehouse automation with the use of scanners, iPad-enabled forklifts, automated guided vehicles, automated storage and retrieval systems, barcode scanning, etc. All the transactions can be confirmed by a barcode scan. Today, we have advanced warehouse execution systems, and there are multiple types of robots being used like auto-picker robots (that can pick up or put away material in the racks) and floor mobile robots.
The advanced versions of Warehouse Management Systems (WMS) have AI and ML integration and suggest ways of improving efficiency, rather than just following the instructions given by managers. Thus, it would not be an exaggeration to say that a brain has been given to the WMS packages. Even if you recollect the traditional form of last-mile delivery, the courier guy used to get the consignee's signature as the delivery confirmation. But now, the times have changed, and the delivery boys have a portable scanner to confirm that they have delivered the shipment.
The fourth feature is “Analytical models,” which can be run on digital planning tools. These models are helping in supply chain network planning and optimization. One can just feed the process parameters, the decision variables, the constraints, and the objective function; and the digital planning tools can prescribe the action to be taken. This is leading to the optimal utilisation of limited resources by virtue of advanced algorithms that can work on large-scale data.
The fifth and last feature, called “Blockchain technology”, can be a potential game-changer in manufacturing and supply chains, although it is taking time to pick up since the ecosystem is not conducive now, with the cost being much higher. Around 5 to 10 years from now, if the cost of Blockchain technology becomes much cheaper, it is expected to be the new normal. It can improve the transparency and traceability to another level altogether (although we still have decent performance on these aspects using GPS systems). It will also assist in the design of a paperless supply chain, and will reduce administrative costs significantly. The purchase orders, that are released through the ERP currently, will become smarter with blockchain and will benefit not only the purchasing side but also the customer side. We often see that the account reconciliations between the supplier and customer take a lot of time since the system records do not match. All this will potentially be eliminated with the advent of blockchain. Currently, the pharmaceutical industry has already started using it because of the strict traceability requirements.
Automation and digitalization leading to optimization and overall efficiency
According to a study by McKinsey, the automation and digitalization interventions have been proven to lead to benefits, such as lower time-to-market, increased productivity, lower cost-of-quality, lower machine downtime, lower maintenance costs, better space optimization, smoother inventory reconciliations, and increased forecasting accuracy. Therefore, manufacturing in industry 4.0 is characterised by cloud computing, 3D manufacturing, big data analytics, the internet of things, advanced robotics, mobile technologies, machine-to-machine communication, cybersecurity, and cognitive computing.
Most companies have gone a step forward by forming exclusive teams that are working on digitalization projects within the supply chain function. Such teams can help in reducing process inefficiencies and create immense value for the organization. With this, productivity is bound to improve and the morale of the employees would also go up. Over the next few decades, there is certainly a huge scope in the area of supply chain digitalization, and addressing it effectively would be critical to the success of supply chains.