Supply Chain Strategy in a Digital Era

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The Future Factory meets with Jose Arturo Garza-Reyes, Professor of Operations Management and Head of the Centre for Supply Chain Improvement at the University of Derby to look at how companies can effectively manage their digital supply chain transformation.

Artificial Intelligence, Cyber Physical Systems, Cloud Computing and Blockchain have transformed traditional, linear Supply Chain systems into highly connected, agile and intelligent digital supply networks. These digital technologies enable Supply Chains to increase their operational efficiency and generate a competitive advantage through a wider offering and availability of products, often at a lower cost. An insight report on Supply Chain 4.0 by McKinsey & Company suggests that a digitalised supply chain is expected to lower operational costs by 30% and reduce lost sales and inventory by 75% (Alicke, Rexhausen and Seyfert, 2016).

However, despite the potential benefits that Digital Supply Chains can offer to organisations, the Korn Ferry Institute found, through a survey of 100 senior Supply Chain executives, that 70% of them consider their organisations were far from realising the promised benefits (Lambert and Raschke, 2018). The Inter-American Development Bank (IDB) and World Economic Forum (WEF) have established a number of internal and external strategic, economic, technical and managerial factors that can play a role in preventing companies from transforming their supply chains into digital networks:

  • The lack of a clear business case and alignment with customer requirements

  • Limited access to talented human capital and finance

  • The incongruent nature of digital technologies, including issues with cyber security, interoperability, and managing the large amount of data generated

  • The restricted availability of transport infrastructure, including roads, ports and telecommunications

  • The low efficiency of transport services

An additional factor that is often overlooked is the formulation and deployment of an effective strategy to enable a company’s transition towards the digitalisation of its supply chain.

Digital Supply Chain Strategy at Adidas

Image Credit: adidas AG

Image Credit: adidas AG

An effectively formulated and properly executed Digital Supply Chain Strategy becomes a value driver for organisations. In the case study of Adidas Russia reported in Digital Supply Chain (Benton, 2017), Adidas decided to experiment with the implementation of an omni-channel approach that would allow its customers to buy any product that was available anywhere in Russia, including its warehouses, distribution centres or stores, in a number of ways, i.e. online or in the store. Adidas was able to deliver the product in any form at home, at a pick-up point or in a store, thanks to the support of digital technologies such as RFID identification chips, “click and collect” solutions, “endless aisle” technology, and “ship from store” tools. Adidas had initially expected to receive 10 to 20 orders per week, but these reached 1,000. Due to such unexpected success, Adidas decided to halt the experiment and construct the supply chain infrastructure needed to cope with such demand. Although the case study is unclear as to whether Adidas had explicitly formulated a Digital Supply Chain Strategy, it shows that it had a plan to move towards introducing new services to its customers that could have been enabled only through the digitalisation of its supply chain.

Enabling Supply Chain Strategies for digital conversion

It is clear that organisations need to transit their supply chain systems and operations into digital entities to remain competitive. To formulate a Digital Supply Chain Strategy companies should:

  1. Consider the digital maturity, circumstances and capabilities of the Supply Chain Management function that forms the group. A Digital Supply Chain Strategy may also emerge from a bottom-up perspective.

  2. Take into consideration market requirements including what supply chain partners (suppliers and customers) want and value, what the competition is doing and the product/service life cycle.

  3. Evaluate the capabilities and constraints of the organisation to adopt Industry 4.0 technologies.

Creating a Digital Supply Chain Strategy is just the first step, effective implementation is also critical. To do this, Howells (2018) suggests that companies need to redesign their supply chain business processes considering four fundamental principles:

Customer-centricity: This refers to automating supply chain operations wherever possible and managing by exception to focus on processes and value added activities which are customer-centred, improve the accuracy of forecasts and capture demand signals in real time from multiple data sources including IoT sensors, point of sales technology, and even unstructured data such as texts, e-mails, social media.

Predictive business and digital twins: A digital twin is a designed, manufactured and deployed digital representation of an asset or physical product. This digital representation is possible through a connection enabled by IoT sensor data. Digital twins can provide organisations with a 360-degree view of their entire network’s products, assets and equipment. The more companies know about these, the more effectively they can anticipate problems that may arise in their supply chain operations. Howells (2018) advocates the use of digital twins to anticipate operational issues such as adjusting shipments to avoid traffic or weather problems, fixing machines before they break down and adjusting sentiment analysis through realigning manufacturing.

Smart automation: Howells (2018) suggests that the automation of manufacturing is also key in enabling Digital Supply Chains by facilitating production cells that can be flexibly moved and used in almost a plug-and-play manner. A result of this is that organisations can more effectively and efficiently manufacture and customise product demand. Digital technologies that can contribute to enabling this principle include 3D printing, smart sensors, machine learning, IoT and robotics.

Total visibility: Besides automation, responsiveness and individualisation, Howells (2018) considers that a real-time visibility of all the roles and activities of an extended supply chain is crucial to succeed. The ultimate goal of visibility is to see everything that occurs through a supply chain from the movement of products that are in production or transit to demand signals and data/information obtained from market and sentiment analyses, point-of-sale systems and other sources. This includes total visibility on anything that can disrupt the normal operation of a supply chain. Digital twins can also connect the ‘planned world’ with the real world and in combination with a ‘track and trace system’ make supply chains more visible.

About the author

Jose Arturo Garza-Reyes is a Professor of Operations Management and Head to the Centre for Supply Chain Improvement at the College of Business, Law and Social Sciences, University of Derby, UK. He is actively involved in industrial projects where he combines his knowledge, expertise and industrial experience in operations and supply chain management to help organisations achieve excellence in their internal functions and supply chains. He has led and managed international research projects funded by the British Academy, British Council and Mexico’s National Council of Science and Technology (CONACYT). As a leading academic, he has published over 150 articles in leading scientific journals, international conferences and five books in the areas of operations management and innovation, manufacturing performance measurement and quality management systems.

References

Alicke, K., Rachor, J., Seyfert, A. (2017), “Supply Chain 4.0 – the next-generation digital supply chain”

Benton, D. (2017), “Supply Chain 4.0: Adidas and Amazon re-write the rules on supply chain management”

Howells, R. (2018), “Four Supply Chain Strategies to drive digital transformation”

Lambert, P., Raschke, B. (2018), “Digital Transformation: Struggles with the Digital Supply Chain”

 
Daniel Camara