Digital transformation: Raising supply-chain performance to new levels
Combining digital applications with
operational changes helps yield significant performance improvements that stand
the test of time.
For all the
effort that companies devote to improving
the performance of their supply chains, relatively few have unlocked the full potential of
digital technologies. A recent McKinsey study found that the average supply chain has a
digitization level of 43 percent, the lowest of five business areas that were examined. A mere 2 percent of the
surveyed executives said the supply chain is the focus of their digital
strategies. Are their priorities misplaced? Perhaps. The same McKinsey research
suggests that, on average, companies that aggressively digitize their supply
chains can expect to boost annual growth of earnings before interest and taxes
by 3.2 percent—the largest increase from digitizing any business area—and
annual revenue growth by 2.3 percent.
In our experience, most of the disparity
between potential and actual gains from supply-chain digitization can be
explained by technology gaps and management choices. Technology gaps have
occurred because advances in supply-chain technologies tailed off after an
initial burst of innovation. This yielded technologies that enabled companies
to streamline routine activities, expand the capabilities of particular
systems, and enhance analytical practices. Valuable though these technologies
have been, they didn’t perform the sophisticated functions that transform
supply-chain management. It has taken some time for technology innovations to
accumulate and coalesce into new offerings. Now that better digital solutions
have become available, companies can make greater improvements in supply-chain performance.
Seizing that opportunity, however, has
proved surprisingly difficult for many companies. A common error is to overlook
operational changes that would let a company take full advantage of digital
technologies. One major healthcare company upgraded its
enterprise-resource-planning (ERP) system, with the aim of reversing a decline
in supply-chain service levels. Yet its service levels continued to drop—until
it reworked processes such as demand forecasting. Fixing operations without
making complementary technology improvements can be equally problematic. At a
large consumer-goods company, supply-chain service improved rapidly following a
series of operational changes, but soon reverted to its original level because
the technologies weren’t in place to support the new operations.
The right approach to digitizing supply
chains integrates suitable leading-edge technologies with revamped operations.
Many managers will be familiar with the basic transformation approach:
establishing a vision for the future supply chain, assessing the supply chain’s
current state, and developing a transformation road map. In a digital
transformation, this approach has some new features. The vision will call for a
combination of no-regrets improvements as well as more speculative changes that
can be pursued over time. The assessment needs to consider whether operations
and technology are sufficiently integrated, and whether the company has the
talent strategy and organizational structure that will favor innovation and
continual improvement. Furthermore, the transformation road map will have
compressed timeframes, given the ease with which the latest digital solutions
can be scaled up. In this article, we offer CEOs and senior executives further
detail about each step, with examples showing how digital transformations work
in practice.
How
supply-chain capabilities and technologies have evolved
The low rate of supply-chain digitization
has much to do with the capabilities of the technologies that companies have
had available until recently. Supply-chain management was one of the first
business functions to undergo substantial technology upgrades, as developers
created applications to take advantage of data generated by ERP systems. Those
applications largely focused on improvements in three areas: streamlining
transactional activities such as those involved in end-to-end planning,
supporting major operations such as warehouse management, and sharpening the
analysis on which decisions are based.
What these technologies didn’t yet
provide, though, were transformative
capabilities for supply-chain management: linking and combining cross-functional data (for example, inventory,
shipments, and schedules) from internal and external sources;
uncovering the origins of performance problems by delving into ERP,
warehouse-management, advance-planning, and other systems all at once; or
forecasting demand and performance with advanced analytics, so planning can become more precise and problems can be anticipated and prevented.
Now, an ever-expanding
ecosystem of technology vendors and service providers offers digital solutions that meet these supply-chain-management needs. Powerful and user-friendly
analytical tools make it possible to compile large sets of unstructured data
and extract useful insights from them. Artificial-intelligence applications can
automatically trace performance problems to their root
causes, and even predict declines, and then recommend corrective measures to
managers. Major decisions can be put into action more quickly, with systems
that convey adjustments across functions—for example, from sales and operations
planning (S&OP) into other areas—and from the executive level down to
business-unit or location managers.
In other words, the latest digital
technologies make it possible for companies to comprehensively transform the
way that their supply chains operate. At the enterprise level, digital
transformation means employing analytics, artificial intelligence, robotics,
the Internet of Things, and other advanced technologies to collect and process
information automatically and either support decision making and other
activities or automate them altogether. A supply-chain digital transformation,
then, is about establishing a vision for how digital applications can improve service,
cost, agility, and inventory levels and consistently implementing process and
organizational changes that use these technologies to drive operational
excellence.
An example from one advanced industrial
company illustrates the possibility for transformation. The company had
completed a major multiyear effort to integrate its supply-chain processes as
it implemented a new ERP system. As part of this effort, it had set up data
streams from sources within its organization and across its supply network. Yet
it still struggled to monitor activity across every part of its supply chain
and diagnose systemic problems affecting the supply chain’s performance. The
problem was that the company hadn’t linked related data sets together in ways
that would allow it to glean useful insights: for example, by determining that
delays in the component-manufacturing stage were likely to make certain
customer orders late.
It chose to feed all the incoming data
into the same processing engine, where data from different sources could be
connected to show how activities and decisions in one part of the supply chain
would influence operations elsewhere. Within a few weeks of deploying the data
engine, the company had uncovered several systemic issues, such as mismatched
lead times and past-due purchase orders that prevented reliable indicators of
future demand from reaching suppliers. Since then, the data engine has enabled
the company to reduce its inventory by 20 percent and improve the productivity
of its planners by 20 to 30 percent.
This company’s experience with analytics
illustrates another benefit of the latest digital technologies: they are easier
to set up and use than earlier ones. Cloud-based offerings, for example, can be
piloted readily and then extended rapidly across organizations. Many new
technologies are also simple to integrate with existing systems. There are now
off-the-shelf S&OP software packages, for example, that can be connected to
ERP systems using standard application programming interfaces (APIs).
Improving supply-chain performance isn’t
just a matter of buying and installing new systems or software. Supply-chain
management is a collaborative endeavor. Most efforts to improve supply-chain
performance should therefore involve changes to the ways that employees and
teams share information, consider problems and opportunities, reach decisions,
and carry out actions they agree on.
What’s distinctive about the newest
digital technologies is that they can integrate better methods for
collaboration into a company’s processes and prevent a company from regressing
to its previous, less effective methods. Developing a balanced plan for supply
and demand, for instance, requires input from multiple business functions.
Without digital technology, those business functions likely would have
submitted information to the S&OP team and left them to resolve any
conflicts. But the latest digital S&OP platforms come with a standard
planning process, which compels every business function to contribute to the
planning exercise in a coordinated manner. As companies prepare to transform
their supply chains with digital technologies, they need to envision the
business and technical capabilities they want and plan to develop those
capabilities in tandem.
Planning
an effective digital transformation of a supply chain
An effective transformation depends on a
creative, forward-looking concept for the future supply chain. This means
thinking about the outlook for the company, amid the pressures and trends that
influence its competitive situation, as well as the changing expectations of
its customers. Ultimately, the supply-chain vision should be aligned with the
company’s strategic goals. While the need for such alignment has always
existed, what’s new is that both the strategic goals and the vision now have to
account for the pressures and opportunities that companies face in an
increasingly digitized economy.
A retailer, for example, might define its
supply-chain vision with respect to its aims for enhancing omnichannel customer
experiences: “We will provide customers with seamless, satisfying experiences,
from their first visit to a store or digital channel to the moment when they
receive exactly what they ordered, when we promised it.” A pharmaceutical
company, on the other hand, might define a supply-chain vision that will help
it adapt to the financial constraints of healthcare providers: “We will enable
our customers to save money by establishing the lowest-cost supply chain among
our peers and by providing them with experiences that make their operations
more efficient.”
Once a company sets out a vision for its
supply chain, it should articulate that vision in terms of business and
technical capabilities. These might include the following:
·
Better decision making. Machine-learning systems can provide supply-chain
managers with recommendations for how to deal with particular situations, such
as changing material planning and scheduling in response to new customer
orders.
·
Automation. Automated operations can streamline the work of
supply-chain professionals and allow them to focus on more valuable tasks. For
example, digital solutions can be configured to process real-time information
automatically (for example, automated S&OP preparation and workflow
management), thus eliminating the manual effort of gathering, scrubbing, and
entering data.
·
End-to-end customer
engagement. Digital technology can make customer
experiences better by giving supply-chain managers more control and providing
customers with unprecedented transparency: for example, track-and-trace systems
that send detailed updates about orders throughout the lead time.
·
Innovation. A digital supply chain can help a company
strengthen its business model (for example, by expanding into new market
segments) and collaborate more effectively with both customers and suppliers
(for example, by basing S&OP decisions on information that is automatically
pulled from customers’ ERP systems).
·
Talent. Digitally enabled supply chains have talent
requirements that can be quite different from those of conventional supply
chains. At least some supply-chain managers will need to be able to translate
their business needs into relevant digital applications.
Performance goals complete a company’s
vision for its transformed supply chain. Setting performance goals requires a
company to gauge its current performance and then determine achievable
improvements. Goals can be defined in terms of agility, service, capital, and
cost measurements. A company that aims to reduce lost sales by a specific
amount, for example, would need corresponding supply-chain performance
goals—for example, improving the speed and reliability of shipments to
customers.
Assessing
the supply chain
The vision for the supply chain provides a
company with reference points for the second step in transformation planning: a
comprehensive assessment of the supply chain’s business and technical
capabilities. To make the assessment simpler, companies might ask the following
questions to find capability gaps in five cross-cutting categories:
·
Data. Do we collect and generate all the data we need to
enable our vision? Is that data stored in a manner that makes it easy to access
and use?
·
Analytics. Do we have the analytical capabilities to extract
useful insights from the data that we collect?
·
Software and hardware. Do our software and hardware systems enable the
analytical and process capabilities that the company requires?
·
Talent. Do we attract, develop, and retain the “digital
native” talent needed to run and transform our supply chain? Does our culture
and organizational model encourage experimentation, innovation, and continual
improvement?
·
Processes. Do we have the right processes in place across
different supply-chain subfunctions? Are those processes clearly defined and
well understood by everyone who is involved in them?
Traditional methods of conducting
supply-chain assessments rely heavily on interviews and surveys of employees
and business partners, as well as manual data analysis. With digital
technologies, companies can perform deeper, more insightful assessments.
Off-the-shelf analytics applications can be used to make sense of large,
detailed sets of transactional data and extract insights that are more reliable
than insights based on data samples. For example, a company can study several
years’ worth of order data to understand trends affecting service levels, and
it can do this in just a few hours. These initial analytics efforts can have
benefits beyond the assessment phase, too. Companies can leave in place the
applications they install for their assessments and continue to use those
applications as “one click” diagnostic tools for ongoing performance
monitoring.
Creating
a transformation road map
The final step in planning a supply-chain
transformation is to develop a road map looking several years ahead. That means
identifying operational improvements and digital solutions that will build on
the company’s existing capabilities to produce the capabilities described in
its vision. Root-cause analyses are essential to identifying potential changes,
since they expose the problems that underlie performance shortfalls.
Once a list of possible changes has been
established, the company needs to prioritize them. The traditional method of
prioritization, which weighs the expected value of a change against the ease of
implementation, is still effective. But it also needs to be updated according
to the complexities of digital transformations. Value remains relatively easy
to quantify in terms of agility, service, cost, and capital. But it is more
difficult to gauge the ease of implementing changes, partly because technology
is continually improving—what is impractical today might become practical in a
year. Most companies will benefit from immediately pursuing “no regrets”
changes, which have high value and few barriers to implementation, while
preparing to make other changes that come with greater uncertainty .
Once the company has prioritized potential
changes, it can organize them into a multiyear road map. As the no-regrets
projects are progressing, a company can start making changes in other areas,
such as talent and processes, that will set the stage for future
digital-transformation efforts.
Advances in digital technology enable
companies to improve their supply-chain performance quickly at a modest cost.
The appeal of these technologies has led some companies to mount hasty, and
ultimately disappointing, implementation projects. Our experience suggests that
companies reap greater benefits when they develop a comprehensive vision for
the future of their supply chains, carry out a disciplined assessment of
existing performance, and draw up a long-term transformation road map. They
should also recognize that supply-chain transformations must extend to both
technology and operations. Companies that employ these approaches to
supply-chain transformations stand a better chance of capturing the full value
that digital technology can provide.
By Enis Gezgin, Xin Huang, Prakash Samal, and Ildefonso Silva November 2017
https://www.mckinsey.com/business-functions/operations/our-insights/digital-transformation-raising-supply-chain-performance-to-new-levels?cid=other-eml-alt-mip-mck-oth-1712
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