How SKF uses a supply chain twin to enable integrated planning
The threat of disruption and a range of market forces drove global bearings manufacturer SKF to think differently about managing its global supply chain. Building a "digital supply chain twin" allowed the company to globalize and automate planning and "futureproof" the business.
At first glance, it might seem like SKF Group has nothing to worry about. With revenues of US$9 billion, we are currently the largest player in the bearings and rotating equipment market. We also have more than 100 years of history in the industry, which would make it hard, you would think, to displace us from the top of the heap. (For more information about the company, see the related sidebar, "Five quick facts about SKF.")
We knew better, however. In 2015, we realized that in spite of all our past success, our supply chain was in need of a transformation. We believed that one of the first steps that we needed to take in order to modernize our supply chain was to move from having a local planning structure that occurred at the manufacturing plant to having a global, integrated planning structure. To accomplish this, we found that we needed to create a "digital twin" of our supply chain that could enable more automation of our planning process. This is the story of our journey.
The threat
Bearings may seem like a relatively simple machine element with a very specific job: reducing friction between moving parts while also constraining relative motion to only a desired amount. But in spite of that perceived simplicity, the bearing market is set for a high growth rate. According to the market research group Stratistics MRC, the global bearings market is expected to grow at a compound annual growth rate (CAGR) of 7.2 percent from 2017 to 2023. The research firm cites multiple factors behind this growth including a rising demand for ceramic ball bearings in electric vehicles and large-scale railway, aerospace, and wind power projects. The top threats cited are cheap and fake products entering the market, along with the growing utilization of used bearings.
With this level of growth potential, the bearings market is set to attract increased competition. In fact, it's not only our traditional competitors that keep me up at night these days; it's the threat of a completely new business model disrupting our market. I look at what happened over the last years in different markets: Airbnb is the world's largest housing provider, yet owns no hotels. Uber is the world's largest taxi company, yet owns no vehicles. And while these companies and many other recent disrupters are now acquiring assets, who's to say such a competitor with new ideas and a different business model won't emerge in our space, significantly disturbing our growth or even threatening our existence?
It can be tough to convince people of the need to change before a crisis actually hits. But the larger and more set in its ways a company becomes, the harder it is and the longer it takes to change. The sudden demise of once great companies, like the photography company Kodak, provides a valuable lesson: Large-scale transformation must begin well before a major threat appears on the horizon.
Fortunately for us, a new CEO, Alrik Danielson, joined SKF in late 2015. He came in to shake up the status quo and asked: "What is our demand chain vision? What is our guiding star for the next 10 to 15 years?" He encouraged us to take inspiration from any source and not be constrained in our thinking by any technical, organizational, or other limitation. "Start with a blank sheet of paper!" So we did.
The vision
In setting our vision, we not only tapped into some of the most experienced brains in our company but also reached out to leaders in manufacturing and other industries like fast-moving consumer goods. In addition, we contracted with the supply chain consulting and applications company Optilon to support us in this journey. Early in 2015, a diverse team of supply chain experts, visionaries, planners, and information technology and data experts worked up a rough sketch of our vision, and it literally fit on a single sheet of paper. That vision was to consolidate and integrate planning on a global basis.
We felt that moving to a global planning structure was our highest priority because we had observed that doing planning at the local level led to operational inefficiencies and friction between internal organizations. An integrated planning process would optimize how we made daily, operational decisionson such matters as production, stocking, and distribution. For example, it could help us better decide how many of a lot of 1,000 items we should ship to Shanghai, and how many we should ship to Mexico. Or, we could use it to decide what product should be produced next week based on the demand we are seeing now from customers around the world and the inventory we currently have in different warehouses. These decisions would no longer be made based on what would be best for a particular location or function but rather based on what would be optimal for the supply chainas a whole.Â
It was just as well that our CEO had asked us to brainstorm without limitations, because we knew this would be a mammoth transition. First off, there was a lot of complexity involved. SKF has grown both organically and through acquisition. Consequently, over the years, we have accumulated many manufacturing sites, distribution centers, and warehouses. These new sites introduced more complexity into the planning process, especially as we were running different enterprise resource planning (ERP) systems in different regions. The transition would also affect many people and their incentives, and it would require many of our employees to develop new skills.
For example, we decided that to do integrated planning effectively we needed to create a new role, the global planner, who would see, manage, and supervise all of the material and information flows associated with our products, including finished goods, components, and raw material. The global planner would have end-to-end responsibility for these flows from analyzing customer demand up to submitting purchase orders to suppliers. Orchestrating all the associated activities, however, is a lot of work. The only way the global planner could do it efficiently was if we achieved a much higher degree of automation throughout our supply chain, which would be enabled by what's known as a "digital twin" of the supply chain.
The digital twin
Our supply chain's large size and complexity means that it's difficult to consistently make optimal trade-offs at the planning level between "cash" (such as safety-stock levels and goods in transit), "cost" (such as staffing and output of production and transportation methods) and "customer" (service levels). To gain the needed visibility to make these trade-offs and feed accurate, timely data into our new planning system, we immediately realized that we needed a "digital twin" of our supply chain, or a digital model that's an exact copy of the entire supply chain. Essentially, it is a cluster of structured tables of master data and operational data.
We needed to have this structured data so that we could feed it into the automation and visibility tools that would improve our operational planning processes. The digital twin would enable us to create visibility for truly fact-based decision making; to link low-level, operational decisions to high-level strategic goals; and perform simulation and "what-if" analysis.
Fortunately, we already had an "embryo" for this new approach because we had previously worked with our partner Optilon to establish a tactical multi-echelon inventory optimization (MEIO) process. MEIO optimizes complex distribution networks like ours by using simulation and what-if scenarios to determine the right level of inventory to keep in each location, by time period, in order to best serve the customer. Having a simulation-based process in place meant our extended team was already in the right mindset for the cross-functional groundwork needed to build and maintain the digital twin. For example, team members already understood how powerful it was to have structured data and how important it was to optimize end-to-end.
Here are the steps we took to build the digital twin and then apply it to our planning process:
Step 1: Create a supply chain network map. The first step to representing our global supply chain in the digital twin was building what we call a supply chain network map. This is essentially a view of how our items are manufactured, stored, moved, and sold around the world. A key part of this step is preparing data (including cost, service-level targets, lead times, and bill-of-material information) for our roughly 500,000 stock-keeping units (SKUs). This involves pulling in data from about 40 instances of five different ERP systems, then "normalizing" the data (cleaning and making it more consistent), before moving it into a central repository. Taking the time to normalize the data is important. An item might be produced in one facility, stocked in 20 warehouses, and sold through 40 sales operations. Normalizing SKU data ensures that it will be interpreted in a consistent way across the entire network.
This map is not a fancy graphical representation of the supply chain but simply a relationship database model. However, it really made our hearts sing to now have supply chain information at the lowest level of detail readily available at our fingertips.
Step 2: Bring the digital twin to life. Once the map was designed and the SKU data normalized, the next step was bringing the supply chain network map to life by adding operational data: things like open customer orders, goods-in-transit, and inventory levels. This alive, digital twin provides visibility to answer questions like: What's the total number of external customer orders for one item across all our global sales operations right now? How much inventory do we hold of that item in all our locations? How many of those items are currently in transit in all our transportation lanes? These are just a few examples of simple questions that the digital twin can answer about the present; its value really increases when we apply it to plan for the future.
Step 3: Use the digital twin in planning. The next step was feeding the data from our central relational database repository into our supply chain planning software, ToolsGroup's SO99+. We had already been using part of this software for the aforementioned MEIO process to set safety-stock levels. Now we started using it for daily operational planning. SO99+ enables us to optimize demand, inventory, and planning for all the SKUs in all locations in our supply chain. We can now more easily sense demand deviations and address them more proactively. Crucially the software lets us optimize inventory levels against desired service levels so that we are able to compete effectively in our industry without incurring excessive storage, transportation costs, and obsolescence. For example, when we face supply shortages, we are now able to make informed decisions about which warehouses to prioritize sending inventory to, minimizing the impact on customer service levels. The planning tool was in place, but the journey to transform the whole of SKF had just begun.
One production line at a time
To ease SKF through this ambitious transformation, we are introducing our new planning process—and all the associated changes for adjacent departments like customer service, manufacturing, controlling, and human resources—one production line at a time. Today we have two factories—one in Steyr, Austria, and one in St. Cyr, France—where global planners now supervise the worldwide distribution of their product's assortment and balance the supply and demand for it. These planners use SO99+ to focus on handling exceptions rather than planning manually. They are globally responsible for all inventories and customer service levels for their share of SKF's products, which are often stocked in more than 20 warehouses stretched around the world from Latin America and the United States to Europe; Dubai, United Arab Emirates; Russia; Shanghai, China; and Singapore as well as smaller warehouses in places like Thailand and New Zealand.
Using the data from the digital twin, SO99+ automatically calculates each item's external demand forecast, factors in lead times and actual stock levels throughout the supply network, calculates safety-stock levels and net forecasts for every warehouse, and creates replenishment plans to satisfy future customer demand to set service levels.
SO99+ also alerts our planners before any potential problems reach a critical point. For example, if we are in danger of not being able to supply an item to one of our warehouses, the planner is alerted and can then act on this exception before it becomes a crisis. Or, if we observe unusual customer demand, the planner is alerted and able to proactively investigate and manage the suspected deviation.
SCOR-ing well
Soon each product will have one global forecast, one planning method, one person responsible, and true end-to-end accountability. This means we will align much better to the Supply Chain Council's Supply Chain Operations Reference (SCOR) model, a diagnostic tool for benchmarking performance. Before we started, our organizations and people were taking on multiple roles and struggling to perform them all effectively. Now our planners in factories have the global planning mandate. In essence, we have consolidated the Source, Plan, and Make functions of the SCOR model into one organization. This makes end-to-end optimization possible, empowers individuals, and reduces internal competition.
With integrated planning in place, we are looking forward to the next stage in our transformation. It is a big change we are driving, but in the grand scheme of things, we have just laid the foundation. We are already exploring multiple options to extend the horizon of planning upstream and downstream. This might include doing planning for and on the behalf of customers. This planning would be based not only on customer orders but also on signals from SKF sensors in customers' machineries and other demand signals. All of these signals would be connected to our core planning procedures. We expect these changes will allow us to reach greater service levels, operational efficiency, and waste reduction.
After devoting my entire career to SKF, I will probably always find some reason to stay up at night, thinking about how to improve our supply chain. At least now that we have embarked on a journey to transform ourselves, the threat of a major industry disruption taking us by surprise is considerably less likely.
Five quick facts about SKF
SKF is a global supplier of bearings, seals, mechatronics, and lubrications systems.
The company also provides services such as technical support, maintenance, engineering consulting, and training.Â
SKF is present in more than 130 countries and has around 17,000 distributor locations worldwide.
Annual sales in 2017 were 77.9 million Swedish krona (or approximately US$8.7 million).
A hefty 42% of procurement leaders say the biggest threat to their future success is supply disruptions—such as natural disasters and transportation issues—a Gartner survey shows.
The survey, conducted from June through July 2024 among 258 sourcing and procurement leaders, was designed to help chief procurement officers (CPOs) understand and prioritize the most significant risks that could impede procurement operations, and what actions can be taken to manage them effectively.
"CPOs’ concerns about supply disruptions reflect the often unpredictable nature and potentially existential impacts of these events," Andrea Greenwald, Senior Director Analyst in Gartner’s Supply Chain practice, said in a release. "They are coming to understand that the reactive measures they have employed to manage risks over the past four years will not be sufficient for the next four.”
Following supply disruptions at #1, the survey showed that the second biggest threat to procurement is seen as macroeconomic factors, which include economic downturns, inflation, and other economic factors. While more predictable, those variables can substantially influence long-term procurement strategies.
And the third-most serious perceived risk was geopolitical issues, including tariffs and regulatory changes, and compliance issues, including regulatory and contractual risks.
In addition, the survey also revealed that “leading organizations” are 2.2 times more likely to view energy availability and cost as a top risk; indicating a focus on future emerging risks. As electrification drives demand for power, brittle grid infrastructure raises concern about whether the energy supply can keep pace. Therefore, leading organizations recognize that access to energy will become a significant future risk.
The market for environmentally friendly logistics services is expected to grow by nearly 8% between now and 2033, reaching a value of $2.8 billion, according to research from Custom Market Insights (CMI), released earlier this year.
The “green logistics services market” encompasses environmentally sustainable logistics practices aimed at reducing carbon emissions, minimizing waste, and improving energy efficiency throughout the supply chain, according to CMI. The market involves the use of eco-friendly transportation methods—such as electric and hybrid vehicles—as well as renewable energy-powered warehouses, and advanced technologies such as the Internet of Things (IoT) and artificial intelligence (AI) for optimizing logistics operations.
“Key components include transportation, warehousing, freight management, and supply chain solutions designed to meet regulatory standards and consumer demand for sustainability,” according to the report. “The market is driven by corporate social responsibility, technological advancements, and the increasing emphasis on achieving carbon neutrality in logistics operations.”
Major industry players include DHL Supply Chain, UPS, FedEx Corp., CEVA Logistics, XPO Logistics, Inc., and others focused on developing more sustainable logistics operations, according to the report.
The research measures the current market value of green logistics services at $1.4 billion, which is projected to rise at a compound annual growth rate (CAGR) of 7.8% through 2033.
The report highlights six underlying factors driving growth:
Regulatory Compliance: Governments worldwide are enforcing stricter environmental regulations, compelling companies to adopt green logistics practices to reduce carbon emissions and meet legal requirements.
Technological Advancements: Innovations in technology, such as IoT, AI, and blockchain, enhance the efficiency and sustainability of logistics operations. These technologies enable better tracking, optimization, and reduced energy consumption.
Consumer Demand for Sustainability: Increasing consumer awareness and preference for eco-friendly products drive companies to implement green logistics to align with market expectations and enhance their brand image.
Corporate Social Responsibility (CSR): Companies are prioritizing sustainability in their CSR strategies, leading to investments in green logistics solutions to reduce environmental impact and fulfill stakeholder expectations.
Expansion into Emerging Markets: There is significant potential for growth in emerging markets where the adoption of green logistics practices is still developing. Companies can capitalize on this by introducing sustainable solutions and technologies.
Development of Renewable Energy Solutions: Investing in renewable energy sources, such as solar-powered warehouses and electric vehicle fleets, presents an opportunity for companies to reduce operational costs and enhance sustainability, driving further market growth.
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Peter Weill of MIT tells the audience at the IFS Unleashed user conference about the benefits of being a "real-time business."
These "real-time businesses," according to Weill, use trusted, real-time data to enable people and systems to make real-time decisions. By adopting that strategy, these companies gain three major capabilities:
Increased business agility without needing a change management program to implement it;
Seamless digital customer journeys via self-service, automated, or assisted multiproduct, multichannel experiences; and
Thoughtful employee experiences enabled by technology empowered teams.
The benefits of this real-time focus are significant, according to Weill. In a study with Insight Partners, he found that those companies that were best-in-class at implementing automated processes and real-time decision-making had more than 50% higher revenue growth and net margins than their peers.
Nor is adopting a real-time data stance restricted to just digital or tech-native businesses. Rather, Weill said that it can produce successful results for any companies that can apply the approach better than their immediate competitors.
Weill's remarks came today during a session titled “Becoming a Real-Time Business: Unlocking the Transformative Power of Digital, Data, and AI" at at the “IFS Unleashed” show in Orlando, Florida.
For example, millions of residents and workers in the Tampa region have now left their homes and jobs, heeding increasingly dire evacuation warnings from state officials. They’re fleeing the estimated 10 to 20 feet of storm surge that is forecast to swamp the area, due to Hurricane Milton’s status as the strongest hurricane in the Gulf since Rita in 2005, the fifth-strongest Atlantic hurricane based on pressure, and the sixth-strongest Atlantic hurricane based on its peak winds, according to market data provider Industrial Info Resources.
Between that mass migration and the storm’s effect on buildings and infrastructure, supply chain impacts could hit the energy logistics and agriculture sectors particularly hard, according to a report from Everstream Analytics.
The Tampa Bay metro area is the most vulnerable area, with the potential for storm surge to halt port operations, roads, rails, air travel, and business operations – possibly for an extended period of time. In contrast to those “severe to potentially catastrophic” effects, key supply chain hubs outside of the core zone of impact—including the Miami metro area along with Jacksonville, FL and Savannah, GA—could also be impacted but to a more moderate level, such as slowdowns in port operations and air cargo, Everstream Analytics’ Chief Meteorologist Jon Davis said in a report.
Although it was recently downgraded from a Category 5 to Category 4 storm, Milton is anticipated to have major disruptions for transportation, in large part because it will strike an “already fragile supply chain environment” that is still reeling from the fury of Hurricane Helene less than two weeks ago and the ILA port strike that ended just five days ago and crippled ports along the East and Gulf Coasts, a report from Project44 said.
The storm will also affect supply chain operations at sea, since approximately 74 container vessels are located near the storm and may experience delays as they await safe entry into major ports. Vessels already at the ports may face delays departing as they wait for storm conditions to clear, Project44 said.
On land, Florida will likely also face impacts in the Last Mile delivery industry as roads become difficult to navigate and workers evacuate for safety.
Likewise, freight rail networks are also shifting engines, cars, and shipments out of the path of the storm as the industry continues “adapting to a world shaped by climate change,” the Association of American Railroads (AAR) said. Before floods arrive, railroads may relocate locomotives, elevate track infrastructure, and remove sensitive electronic equipment such as sensors, signals and switches. However, forceful water can move a bridge from its support beams or destabilize it by unearthing the supporting soil, so in certain conditions, railroads may park rail cars full of heavy materials — like rocks and ballast — on a bridge before a flood to weigh it down, AAR said.
Imports at the nation’s major container ports should continue at elevated levels this month despite the strike, the groups said in their Global Port Tracker report.
To be sure, the strike wasn’t without impacts. NRF found that retailers who brought in cargo early or shifted delivery to the West Coast face added warehousing and transportation costs. But the overall effect of the three-day work stoppage on national economic trends will be fairly muted.
“It was a huge relief for retailers, their customers and the nation’s economy that the strike was short lived,” NRF Vice President for Supply Chain and Customs Policy Jonathan Gold said in a release. “It will take the affected ports a couple of weeks to recover, but we can rest assured that all ports across the country will be working hard to meet demand, and no impact on the holiday shopping season is expected.”
Looking at next steps, NRF said the focus now is on bringing the International Longshoremen’s Association (ILA)—the union representing some 45,000 workers—and the United States Maritime Alliance Ltd. (USMX) back to the bargaining table. “The priority now is for both parties to negotiate in good faith and reach a long-term contract before the short-term extension ends in mid-January. We don’t want to face a disruption like this all over again,” Gold said.
By the numbers, the report forecasts that U.S. ports covered by Global Port Tracker will handle 2.12 million twenty-foot equivalent units (TEU) for October, which would be an increase of 3.1% year over year. That is slightly higher than the 2.08 million TEU forecast for October a month ago, and the strike did not appear to affect national totals.
In comparison, the August number was 2.34 million TEU, up 19.3% year over year. The September forecast 2.29 million TEU, up 12.9% year over year, November is forecast at 1.91 million TEU, up 0.9% year over year, and December at 1.88 million TEU, up 0.2%. For the year, that would bring 2024 to 24.9 million TEU, up 12.1% from 2023. The import numbers come as NRF is forecasting that 2024 retail sales – excluding automobile dealers, gasoline stations and restaurants to focus on core retail – will grow between 2.5% and 3.5% over 2023.
Global Port Tracker, which is produced for NRF by Hackett Associates, provides historical data and forecasts for the U.S. ports of Los Angeles/Long Beach, Oakland, Seattle and Tacoma on the West Coast; New York/New Jersey, Port of Virginia, Charleston, Savannah, Port Everglades, Miami and Jacksonville on the East Coast, and Houston on the Gulf Coast.