What is the Digital Supply Chain?

Closing the Performance Gap

Business transformations enabled by technology are not a new phenomenon. For decades, advances in manufacturing, distribution, and information technologies have offered opportunities for businesses to reduce costs while improving their products, managing their distribution, and understanding their customers better. In the modern era, ERP systems, such as SAP, PeopleSoft, and Oracle, have promised users more integrated, enterprise control of their business operations, and launched numerous “transformation” projects in firms to implement them. Similarly, the growth of the internet also created opportunities and challenges for firms seeking to remain competitive while taking advantage of new business models enabled by greater connectivity with trading partners and customers. Businesses are now faced with a new chapter in the technological change continuum in the growth of digital business models. As we are now in the midst of this particular change, it is critical to understand what is meant by “digital” business, how it differs from traditional business models, and, subsequently, how we can lead our organizations through the key dimensions of the new models.

Like many business disciplines, supply chain management has hosted a succession of popular theories prompted by industry analyst researchers and forward-thinking leaders that are discussed and sometimes acted upon. As supply chain ERP projects in many firms began to be augmented by web-enabled applications, such as Ariba, serious thinkers dedicated to supply chain performance improvement began speaking of an “end-to-end” supply chain referring to a more integrated supply chain that designed and accounted for a broader range of a business partner’s interests, such as suppliers, third-party logistics firms, and customers and consumers. Supply chain leaders, not content to simply focus on functions and performance in-house, were enabled by new online forms of communications to build a broader chain of interrelated partners and customers. Large, global supply chain leaders were beginning to speak of end-to-end supply chain transformations in their firms, signaling the desire for a larger-than-incremental need for change. End-to-end supply chain integration requires a greater degree of fluidity of data and information sharing, both internally as well as external to the firm. The “Digital Supply Chain” (DSC) started gaining traction as a distinct term around the midpoint of the previous decade (Michel, 2017). In many ways, the shift to DSC was, in reality, the technological enablement of a more end-to-end supply chain. Digital tools, processes, and the resulting data were the glue that allowed for the construction of the upstream and downstream supply chain actors and their activities. Digital information is an essential ingredient to fueling end-to-end business integration. More significantly, businesses that can shift to DSCs are discovering that they may unlock performance improvements previously unreachable by traditional methods. Digital transformation is a shift, a change to new ways of operating (AE Consultancy, 2015). It requires changes in business models and the innovative use of technology to improve the experiences of your value chain partners and your customers (AE Consultancy, 2015).

Arguments in support of digital business transformation abound and some benefits which have been elaborated on include; increased revenues, lower costs to produce and deliver products, increased competitive advantage, customer satisfaction improvements, amongst others (Bui, 2019). For supply chain leaders, the cited benefits of a DSC are especially exciting, as they offer a potential way of overcoming a most perennial operational trade-off: the balance between inventory holding costs and being able to quickly satisfy customer demand. DSCs offer a potential pathway to shifting the trade-off paradigm while allowing for both conditions, existing previously in direct conflict, to be met simultaneously (Figure 1.1).

Figure 1.1 illustrates the cost savings and performance improvement potential when investing in DSC strategies and actions. Supply chain leaders have always struggled with a core dilemma: the inevitable tradeoff between customer satisfaction and the cost of delivering it. Supply chain leaders know that inventory is not free and that maintaining overly high levels of safety stocks is costly for the firm. Inventory holding costs, damage, and obsolescence, have historically been some of the most keenly managed and measured of all supply chain performance metrics. Many supply chain leaders recognize that the single most important metric they manage is inventory turns realizing that this metric cascades directly to a firm’s overall financial and operational performance. At the same time, however, firms are competing to earn customer trust, loyalty, and satisfaction. Customers want and often expect on-time in-full (OTIF) delivery. The easiest way to ensure OTIF is to fill warehouses full of products so that orders can be immediately shipped once they come in. This is not the reality most firms are facing. OTIF is a moving target stabilized by keenly managed inventories and

DSC Performance Increase Potential

Figure 1.1 DSC Performance Increase Potential.

low-cost transportation. In the best firms, these two completing demands are considered trade-offs, a kind of optimal curve where few business options are available to make significant improvements in either dimension. Figure 1.1 illustrates a DSC opportunity with each curve being a function consisting of a sampling of key performance measures. For customer satisfaction, factors such as OTIF, Net Promoter Score (a proxy for customer satisfaction), and some net growth in orders might be measured to indicate how well a firm is doing in meeting customer needs and expectations. On the supply chain cost side, the all-important inventory holding costs are measured, as well as transportation costs, the cost of stock outs, and the added costs of manufacturing required to meet customer demands. This equation, again as proxies, suggests that when it comes to satisfying a valued customer planning must be carried out properly, otherwise firms might face emergency transportation costs for expediting goods, and if forecasts have been calculated poorly, firms might run out of stock leading to ramifications far beyond the simple loss of current sales. Increased manufacturing costs may arise from an unexpected changeover of a production line needed to produce additional product exceeding the forecasted demand. Added together, these curves represent a functional amalgamation of these integrated factors. Looking at the Traditional Supply Chain curve, on the right side of the chart, we can imagine an upward slope of costs that roughly tracks increases in customer satisfaction. These curves will likely be very different by product segment and customer. For the purposes of this visualization, let’s assume we are looking at one product segment of one firm. The argument in favor of a

DSC is that digital actions, emerging from investments in technology, analytics, problem-solving talent, or new business models, may actually shift the supply chain trade-off curve. Rather than trading off along a relatively fixed set of points available through traditional actions, the DSC may enable cost savings without any loss in customer satisfaction. Target levels of OTIF quality, at a lower supply chain cost, could be delivered. This isn’t just moving along the trade-off curve, this is actually shifting the entire trade-off curve to a more optimal position. Shifting the curve through traditional methods (non-digital) is becoming increasingly difficult as efficiencies have started to reach their maximum.

In theory, everything sounds perfect. Greater performance, enabled through smart technological and process innovations, results in better customer satisfaction with less waste, resources, and cost. Shouldn’t all organizations, especially traditional ones, be clamoring for this transformational improvement? What is holding back many organizations from making the necessary changes, investments, and taking immediate action to become more digital?

Many organizations want to change, are willing to change, and plan to change, yet they are either not moving at all, or at best moving very slowly. Change is difficult, and research shows that a majority of large- scale change efforts in organizations fail no matter the complexity (Biiyiikozkan & Go^er, 2018). Becoming a DSC, especially if your organization is coming from a more traditional operation, is a highly complex endeavor. There are numerous barriers to transforming to a DSC in both management and technology dimensions (CapGemini, 2016). The interconnectedness of the challenge is uniquely daunting. Stakeholders successfully cooperating across organizational boundaries represent a substantial challenge, even for relatively modest business units (Radanliev et ah, 2019). The stakes for business transformation are high, yet the barriers to making progress are preventing many organizations from moving forward.

This book is about overcoming these transformational barriers. It is designed to help leaders of organizations seeking to benefit from DSC transformation move the needle. Think of it as a road map, a catalyst, or simply a guidebook of how to get the DSC going in your company.

The key to creating the momentum needed to overcome the complexity of DSC transformation is to break down the effort into discrete performance areas that are more manageable while allowing for the possibility of quick wins, improved organizational support, and the acquisition of needed talent. Attempting a large-scale transformation aggressively may be counterproductive to success as traditional change management methodologies have not been adapted for digital business (Westerman et ah, 2014). New approaches are needed to account for the essential ingredients of modern digital business models. A powerful metaphor for this new kind of change is to think of DSC transformation

The Digital Supply Chain Transformation Framework

Figure 1.2 The Digital Supply Chain Transformation Framework.

as a mosaic. Supply chain leaders should focus on the “tiles” of performance, technology actions, in analytics, in talent, and segmented business models. By building a strategically selected sequence of performance tiles, and arranging them in the shape of transformation, the odds of success will increase. This book is designed to help create such strategic pathways to change (Figure 1.2).

 
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