Definition

supply chain transformation

Contributor(s): Wesley Chai

Supply chain transformation is the addition and integration of technology to improve supply chain performance. Although the term can extend to any overhaul of supply chain management (SCM) practices and processes, it is typically linked to the digitization of supply chains, specifically.  

Supply chain transformations consist of two main parts: digital investments and transformation management. Digital investments are the specific technology and equipment assets that are to be adopted in the transformation. Transformation management refers to the use and implementation of digital assets. Successful transformation management processes should include:

  • A strategic vision with clear, quantifiable long-term goals. This plan should allow for flexibility, as technology moves very fast.
  • Structured governance, preferably with centralized oversight of digital implementation.
  • A culture that is customer-obsessed, data-informed and innovative.

A 2017 McKinsey study found that average supply chain digitization levels were relatively low when compared with other business areas. On average, aggressive digital supply chain transformation efforts correlated with the largest boost in annual growth of earnings before interest and taxes, amongst business areas undergoing digital transformation.

What is the goal of supply chain transformation?

The overarching objective is to optimize the supply chain flow to best fit the business's needs. In the context of today's business and technology landscape, this often tends to mean implementing new technologies to digitize supply chain processes.

Companies like Amazon, which use technologies such as autonomous vehicles, are seen as leaders in supply chain transformation -- setting the standard for what can be accomplished by redefining how it's done. As a result, other companies must adapt with similar measures themselves to stay competitive with organizations successfully transforming their supply chains.

Supply chain capabilities to consider

The most widespread technologies implemented in supply chain transformations are:

  • Virtual reality (VR) -- for specific use cases, as opposed to broader one-size adoption. It can help with functions such as interactive visualization capabilities, enabling presences to collaborate from different physical locations, data capture and high-fidelity virtual environments (such as for employee training in high-risk scenarios).
  • Augmented reality (AR) -- smart glasses with AR functionality can help guide workers through warehouses to pick items in an efficient manner that reduces human error. Workers on site can access information such as schematics, workflows, instructions or charts to help aid decision-making.
  • Blockchain -- creates transparency in transactions to build trust between businesses, gives permission-based security access, can be used for smart contracts, offers tracking of deliveries and shipments in real time, better asset and order management through a digital ledger system.
  • Artificial intelligence (AI) -- can boost warehouse efficiency, help with systematic inventory management, help analyze workplace safety data to identify risks, offer better customer service with lower cost through chatbots, accelerate warehouse procedures, reduce operational costs through automation and help supply chains respond to disruption.
  • 3D printing -- provides better inventory management, less obsolete products, faster production times, digital files can be used for on-demand printing, higher levels of responsiveness, fewer suppliers and a local supply that results in less transport and more simple logistics.
  • Autonomous mobile robots (AMRs) -- can aid warehouse workers with picking optimization, fleet management.
  • Drones -- can move small items efficiently within distribution centers, eliminate the need for equipment such as forklifts and make quick deliveries.
  • Autonomous vehicles -- self-driving cars and trucks in the supply chain can reduce the density of warehouse networks, lower transportation costs and improve safety by reducing human driving error.
  • IoT devices -- smart sensors, cloud systems and analytics can create better inventory control, monitor product conditions throughout shipping, manage warehouses, synchronize routes by arrival times, log/track delivery vehicle conditions, simplify onboarding processes for suppliers, control project schedules and lower operating costs.

Evolution of supply chain capabilities

Supply chain management has evolved significantly in the last century. Initially, the main concern was to streamline and improve the simple, labor-intensive processes. In today's landscape, supply chain management largely refers to the engineering and use of complex global networks and technologies.

Supply chain innovations in the 1940s and '50s focused on mechanization, material handling and the organization of warehouse layouts. The use of pallets was adopted on a widespread basis, as was the concept of "unit load"-- the principle that moving large quantities of items together brings down handling costs while making it easier and more flexible, as opposed to shipping each item individually.

Innovations introduced in the 1960s and 1970s included moving time-dependent shipments from railways and trains to trucks, warehousing and the introduction of supply chain research into academia. Furthermore, this time frame introduced the first use of computers into supply chain processes. The computerization of supply chain data and processes led to changes in record-keeping, transactions, logistics planning, managing inventory levels, shipment routing and material requirements planning (MRP) systems.

In the 1980s, supply chain technology advances included map-based interfaces, flexible spreadsheets as well as optimization algorithms and models. In this decade, supply chain processes and logistics began to grow significantly more complex and sophisticated, and companies began to invest in hiring employees who specialized in logistics.

In the 1990s, enterprise resource planning (ERP) systems emerged; by 2000, most large enterprises had adopted an ERP system. The introduction of ERP systems led to improvements in data handling and created awareness for detailed integration needs that led to the creation of Advanced Planning and Scheduling (APS) software.

From the 2000s onward, computer technology began to evolve at a rate far faster than it could be adopted into supply chain management practices. With this rapid expansion, as well as higher fulfillment standards created in the era of online e-commerce, companies began to incorporate these new and emerging technologies into their supply chain practices. In this era of digital supply chain transformation, companies started to integrate technologies such as blockchain, augmented and virtual reality, artificial intelligence, 3D printing, robots, drones, self-driving cars and IoT devices.

Steps in the supply chain transformation process

The supply chain transformation process aims to both align and optimize a business's supply chain model as well as to fit business objectives. The supply chain transformation process has four main steps in the form of questions that each company must answer:

Supply chain transformation
Supply chain transformation steps
  1. What is the end goal for after the transformation is complete?

At this step in the supply chain transformation, it's important to develop a target or long-term vision. Companies should include a cross-functional survey that assesses the supply chain's needs for certain capabilities, such as data, analytics, automation and reporting. Information from this survey can then be used to define a realistic set of specific technologies and capabilities, and the strategies to implement them.

  1. How do current supply chain capabilities stack up in comparison to the end goal?

In this step of the transformation process, organizations should start evaluating current capabilities within the supply chain. This is to assess where capabilities are relative to the target goal. To achieve this, companies should conduct thorough interviews with representatives involved in each of the core functions. The value and role of each specific capability should be defined for the company's supply chain processes, as well as financial impacts.

  1. What changes are needed to bridge the gap in capabilities?

As current and target capabilities for the supply chain have now been defined, companies should begin to assess technology options to close the gap. The most important factors for organizations to consider for these specific capital investments should be how well they satisfy current and long-term needs and strategic business goals. Furthermore, companies should consider if implementation will require additional expansions in workers or facilities and buy-in amongst organization leaders, and how it will fit into the organizational structure. Thorough value assessments should be made for each technology use case.

  1. How would the implementation of these changes impact the business?

Companies should now have a short list of potential technology buying options. At this stage in the transformation, organizations should analyze the short, medium and long-term benefits of each prospect, relative to the implementation timeline. From here, companies can prioritize which projects best fit their strategic business needs over these time frames and create specific implementation roadmaps.

Benefits and challenges of a supply chain transformation

Undergoing a supply chain transformation can come with specific benefits and drawbacks. Benefits of a supply chain transformation include:

  • Improved lead times, ability to satisfy customer demands.
  • Typically result in quick, measurable results.
  • Better ability to meet current and long-term goals.
  • Greater control over supply chain functions, capabilities and processes.
  • More visibility of sales, inventory and overall supply chain.
  • Better service level
  • The supply chain is better integrated and aligned with overarching business goals.
  • Data-driven processes can reduce damages, minimize delays, optimize demand planning and improve overall inventory management.

Challenges and drawbacks of undergoing a supply chain transformation can include:

  • Potential resistance within the organization.
  • Steep learning curves.
  • Siloed decision-making can interfere with coordination.
  • Potentially high costs for customizable technology systems.
This was last updated in September 2020

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