Digital disruption challenging supply chain dynamics

Digital age has changed a lot of things like DVDs, Cameras, cassette players, phones etc. and this space will keep on disrupting itself in near future also. A recent study published about Fortune 500 organizations, said that since 2000, 52% of the companies in the Fortune 500 have either gone bankrupt, have been acquired, ceased to exist, or dropped out of the Fortune 500. End to end supply chain visibility, which is also impacted by Digital Disruption, has changed a lot. Some of the organizations (very few) have adapted and are using digital technology to their advantage whereas the others are facing new challenges. According to Gartner, by 2016, less than 20% of the organizations will be able to provide end to end supply chain visibility. Also, as per them, 70% of large companies cannot achieve the Supply Chain Maturity required to be winners in 2020. Logistics, which is intrinsic part of any efficient supply chain, is becoming most important than ever and while its costs vary from a low 2.4% for a pharmaceutical industry to a high of 10.8% for CPG industry, the challenges are very similar across industries.

Modern Supply Chain needs to be more mobile with ubiquitous visibility and access, have more insights with real time information for best decisions, more collaborative for faster responsiveness from all stakeholders/participants and more engaging. Let us take an example of optimization of logistics. Digital tools available these days not only help in route and capacity optimization but also landed cost simulators will provide costing in different scenarios so that a decision can be taken after considering all parameters in terms of mode of transport, inco terms, exchange rates etc. These tools combine the knowledge of Wiki, social bookmarks, forums, blogging, in house multi team collaboration and even photo sharing & video campaigns to provide strong input to the supply chain planners.  New ideas that keep floating at different digital platforms will form the core of supply chain planning and innovation around it. Going forward, digital platforms will capture, develop and prioritize ideas, generate proposals, optimize investment and will help in commercializing ideas.  

The major benefits expected are faster speed to market, higher product revenue, improved product margins, better fill rates, improved product launch performance and improved sales effectiveness. 

 

The above article has been written by our guest Sam Page – Supply Chain Leader in a Fortune 500 organization.

Evolving Role of a chief Supply Chain Officer

The main objective for a chief supply chain officer has long been to bring cost savings in supply chain, logistics, warehouse and manufacturing with the key objectives being reduction of lead times, leaner processes, higher staff efficiency and lately collaboration with suppliers. The combination of the recent downturn as well as marketplace competitive strategies has started changing rather adding upto the key objectives of a chief supply chain officer, like acting as a facilitator for added ability to differentiate in customer service, marketing strategy etc. A CSCO is also seen to be managing risks around supply chain like risks related to trade compliance, raw materials, demand fluctuations, product quality, financial instability, risk profile of suppliers and customers, currency volatility, catastrophic events, logistics capacity and congestion, supply chain security, and environmental disasters etc. With this, the CSCO has become a key stakeholder in the organization and is responsible for growth and expansion too in addition of improving efficiencies and coming out with innovative cost reduction measures beyond low cost sourcing and other similar strategies.

These changes though, are not there in all organizations and in these organizations where the role of CSCO is still evolving and is largely seen as a cost center rather than a profit center or an engine for growth in revenues, the key objectives of a chief supply chain officer remain as:

• Inventory reduction / optimization
• Improvement in efficiencies by restructuring and automating supply chain
• Improved service levels
• Deflation in procurement costs
• Releasing working capital
• Reduce cash to cash cycle
• Improved financial arrangements with customers and suppliers (largely payment terms)
• Reduced lead times of procurement and manufacturing
• Improved visibility of supply chain metrics, data, disruptions etc.

With enhancement in the role of the CSCO, the best in class organizations are leveraging their enhanced visibility into supply chain processes to make their supply chains more agile: if the market demands, they are able to change the direction of their shipment not just during the scheduling process, but at later points in the supply chain – after the cargo has been shipped (visibility). Best-in-Class organizations are also are much more likely to perform various kinds of data analysis in support of supply chain decisions which ensures that the visibility data they collect are used to help them achieve the market advantage (responsiveness).

Many organizations do not even have the role of CSCO today but these organizations have started clearly seeing the benefits of centralizing supply chain operations, and to make SCM truly strategic, a strong leader as a CSCO will be a critical differentiator. No longer can organizations run different supply chains for different products within the same business units. Consolidation and rationalization of business processes within supply chain organizations is a reality that has to be embraced. So, they have realized that having a CSCO role orchestrate the supply chain across these different business units is a key requirement.

In nutshell, the role of CSCO is evolving wherever it exists today and it is being introduced where it is not there currently. Infact, it has become one of the key differentiators for a company to increase not just the bottom-line but also to establish them as the market leaders in managing complex supply chains too.

SCM Trend: Linking pricing with supply chain

Pressure on supply chain efficiency and effectiveness increased during the just concluded recession and even after the lean period ended, the pressures remained there, as the customer is becoming more and more demanding everyday. This pressure can be eased a little bit by weighing the cost of improving the supply chain with the discounts that can be offered to the customer in case they are ready to wait for a certain period of time which is above and beyond the stated lead times. The trend has already taken shape in few industries and the best in class players have started using this as a strategy to ease the pressure on supply chain. This not only give customers a welcome cost benefit for their wait time as well as give time to the organization for strengthening the supply chain while not losing sales due to capacity constraints.

To explain the scenario a little bit in detail, let me cite a case study here:

A camera manufacturer/retailer sells its most popular model at $200 and the lead time it promises their online customers to deliver the camera at their home is 7 working days if the destination is within USA. Now, what they do is to implement a two tier pricing for the camera model and provide an option to the customers as below:

• Camera price with 7 day lead time : $200
• Camera price with 21 day lead time : $180

So they offered a 10% discount on their most selling camera model if the customer agrees to delay the shipping by 2 weeks. They found that 28% of their customers opted for the 2 week delay and hence the organization not only could maintain better on-time delivery performance for the one week lead time products but also could ease the pressure on the supply chain. Customers also did not go to the competitors products and also were happy to get some discount on their favorite product. Since, this pricing strategy was for a limited period, it soon ended and by the time, using their demand and forecasting intelligence, the organization made arrangements to improve supply chain capacity.

In above case, though the pricing strategy implemented by the organization was for a limited period but it makes sense to have such a strategy for those of your products where bringing the lead time to the promised or to match competition, costs you more than providing some discount to customers for some delay in lead time. But, beware of setting dangerous precedents as if the competitors start following this (which they will), then you might not be able to go back to original pricing and this can erode your margin for ever. A well thought out strategy is needed in this case to make sure that you get the benefits of this pricing strategy and not lose in the long run.

Supply Chain Trend – Can this happen in near future?

The other day when I was travelling back from office to home, I saw a van belonging to a famous hotel chain carrying huge bunch of vegetables, fruits and milk and a thought came into my mind. Can this be an automated process driven by the historical as well as current demand pattern and managed by a system itself? I started thinking if an IT driven process can be deployed at hotels that not only tells them what material to procure, when to procure and how much to procure but also place orders directly with the vendors. Looks like an ideal supply chain in an manufacturing company but the days are not far, when hotels start using this as their chief methodology for procurement management.

 

Let me do a dissection of what exactly will they need to fulfill this:

• To start with, they will need multi bin refrigerators or deep freezers depending on their needs
  
• The bins needs to have a capability to store vegetables with level sensors so that an alert can be sent to the IT system in case of level of vegetables, fruits or milk changes
  
• An IT system that can be integrated with the refrigerator and have the ability to name the bins as well as define minimum and maximum required levels of eatables
  
• The IT system should also store the minimum and maximum shelf life of eatables which will help in calculating the size of batch of eatables that is going to be procured
  
• This IT system will store the contracts between the hotel and its vendors and will also be able to decide on prices base don historical patterns and logic defined in it
  
• The vendor either needs to have an IT system or a fax or a mail box or phone that can receive the automatic orders from the hotel system and have the capability to communicate the orders internally
  
• Finally a home delivery and logistics ability at the vendor’s end that can ensure delivery of the eatables as per need by date of hotel
  

Did I complicate this completely? Well, not completely but yes, it does not seem to be a simple way as lot of initial infrastructure and systems need to be in place for this to work. Now, let us go through the process taking milk as an example:

1. As soon as the level of milk goes down from the minimum level defined in the refrigerator, an alert will be triggered and will be sent to the IT system
   
2. Another validation of milk level will be done in the system and after this, an purchase release will be sent to the milk vendor with the pre-decided order quantity fed in the system
   
3. The prices will be decided by following options:
   
• Looking at the pre-identified websites and finding out milk prices on that day
  
• Using the contracted rates with the vendor
  
• Initiating an quick e-auction between couple of qualified vendors (too futuristic)
  
• Ordering at mean price for pre-decided period
  
4. This purchase release will go to the vendor(s) system of receiving orders and it will be processed at their end
   
5. In case vendor can not meet the need by date, their IT system will communicate back to the hotel IT system and a mail will be sent to the procurement in-charge for alternate planning
   
6. When vendor send milk to the hotel, it will be received at hotel’s end and the refrigerator milk bin is replenished
   

Multiple controls can be built in to make the above simple looking process foolproof and exceptions can be handled automatically with few logics defined in the system. So, what do you think now? Can this happen in near future or we will keep on doing manual buying of eatable for hotels for sometime to come?