Digital supply chain transformation: Taking the first step

Digitization of the supply chain has been an elusive goal over the past five years—always on the horizon but slow to materialize. What is a "digital supply chain"? While there are several variations of the definition depending on who you are talking to, arguably it is most often described as the following: Application of technology to digitize and analyze data in an accurate and rapid manner to improve supply chain performance.

The benefits are obvious: rapid demand sensing enabled by machine learning and alternate data sources to lower inventory costs and improve fill rates; agile omnichannel distribution enabled by real-time asset tracking to lower freight costs and improve on-time deliveries; and automated distribution centers and factories driven by robotics and 3D printing to lower production costs and improve yield. But companies are increasingly coming up against the operational limits of what they can achieve without the ability to better integrate and manage complex data flows across their ecosystems. To successfully implement their plan-make-source-deliver models going forward, they realize they need to do things differently.

Article Figures

[Figure 1] The digital supply chain can generate real business benefitsEnlarge this image

[Figure 2] Conduct deep-dive interviews to establish a digital capabilities baselineEnlarge this image

[Figure 3] Key digital capabilities and related technologyEnlarge this image

[Figure 4] Development of the digital supply chain roadmapEnlarge this image

[Figure 5] Oil and gas company example: processes reviewedEnlarge this image

[Figure 6] Oil and gas company example: technologies consideredEnlarge this image

The path forward can be daunting: a steep learning curve, internal resistance to change, siloed decision making, multiple sources of information, and the scarcity of cost-effective, customizable technology solutions have left many companies stuck in the experimenting and testing stages. The good news is that new technology players are now bringing specialized applications to market which, in combination, support easily customizable solutions. Wider acceptance is bringing costs down. Cloud computing and artificial intelligence are generating the critical mass of data and analytics needed to identify supply chain patterns and create actionable insights. And as the expert knowledge base of best practices matures, the digital supply chain is becoming a more tangible reality.

Most companies struggle, however, with scaling digital supply chain capabilities to run their end-to-end business. The key to success is to start with the business challenges, then define the "nirvana state" business processes and clearly articulate the expected financial benefits from achieving this nirvana state. This vision helps define the critical business requirements for developing digital supply chain capabilities.

Big change in little time

The digitization of the supply chain is different from the technology boom that happened in the late 1990s and early 2000s because of one major reason: easy access to accurate data and digital technologies (such as, Internet of Things devices) that can capture and analyze that data. The adoption of digital technologies has surged in only a few short years, and trends point to a sustained acceleration going forward. Global cloud computing traffic grew eightfold from 2015 to 2017, to 8.6 zettabytes (ZB) annually, and could more than double again by 2021. During the same period, annual big data analytics traffic quadrupled to 1.2 ZB in 2017 and is expected to more than triple from there. Internet of Things (IoT) devices doubled from 2015 to 2017 to 10 billion and are predicted to reach 27 billion in 2021.

These technologies are essential for digitizing the supply chain and have the potential to produce important benefits across the entire plan-source-make-deliver spectrum. (See Figure 1.) Data generated via advanced analytics and enabled by the IoT, for example, can lower net working capital costs in planning and logistics. In combination with augmented reality, wearables, and robotics, IoT devices can speed up response times to potential supply disruptions or production deviations. On the factory floor, robotics can optimize materials usage and reduce error rates, while 3D printing adds manufacturing and design flexibility. Structured collaboration tools and marketplaces (for example, FourKites' platform for asset tracking) can allow value chain partners (such as suppliers, distributors, peer companies, retailers, and consumers) to operate their infrastructures in an integrated fashion. Crowdsourcing can add sourcing flexibility and resilience to the supply chain while also improving asset allocation and lowering transport costs.

Many companies see the potential benefits of these digital technologies but struggle with taking the right first step to start their digital supply chain transformation effort. What we typically see with companies in a multitude of sectors, from retail and automotive to chemicals and energy, is an initial recognition that the supply chain is central to their business and that digitization is on the horizon. However, they lack a clear sense of urgency, a full understanding of how to scale the effort and benefits associated with it, and the necessary buy-in across the organization to make digitization a serious priority.

Instead supply chain and technology teams often work on digital projects on the side, in addition to their day-to-day responsibilities. These projects are perceived as creative endeavors that are not core to the mainstream business. In fact, digital projects are seldom linked to longer-term, overarching corporate strategies, and they often are not linked to clear quality, service, and cost improvements.

Additionally, companies tend to have a portfolio of digital and nondigital projects with little or no coordination amongst them. The nondigital projects—such as streamlining the sales and operations planning (S&OP) process, improving transportation sourcing, or implementing lean manufacturing initiatives—usually far outnumber the digital, with roughly 70 percent being nondigital. Furthermore, unlike the digital projects, the nondigital ones are often associated with a profit and loss statement goal. As a result, nondigital projects typically are prioritized over digital ones for investments and scale-ups. At the point that companies seek our help with digital supply chain transformation, we find that, in nearly two-thirds of cases, their digital projects have demonstrated no measurable cost, productivity, or other tangible benefits.

To be successful, digital projects need to be tied to other business projects that are linked to the corporate strategy and have a financial goal associated with them. For example, as part of an effort to improve inventory, a project team could explore new demand planning tools. Similarly, a team might explore utilizing express bidding and crowdsourcing tools to reduce freight costs. Or as part of a plant reliability initiative, a team could test the use of IoT devices to help prioritize maintenance tasks. This linkage ensures that digital projects are addressing the right business problems. It also ensures that digital projects are not in conflict or redundant with nondigital projects. Instead the two types of projects are now integrated together. Finally, when there is a financial business case tied to digital projects, they are more likely to receive investments and be scaled up beyond a pilot project.

Additionally, as firms pursue these projects, we believe they can benefit significantly from seeking fresh perspectives outside their own companies—and even their own industries. We have seen many leading global manufacturers devote less time and cost to execution because of the insights that they have gained from others. ExxonMobil, for example, sought outside help in updating its engineering, maintenance, planning, and scheduling system. In 2016 it went outside the energy industry and retained Lockheed Martin as the lead system integrator for its next-generation process automation system. ExxonMobil believed that it would benefit from Lockheed's expertise in helping U.S. military clients transition out of inflexible, expensive legacy systems into more agile, secure, open ones.¹

Steps toward successful transformation

It is vitally important to understand that successful technology deployment is a relatively late-stage step in a longer process of discovery and planning that leads to digitization. Instead a successful digital transformation journey begins by answering four key questions:

1) What is the company's digital ambition level, or end vision, for the transformation when it is complete?

2) How does the company's current digital capabilities compare with that of the end vision?

3) What technologies and digital use cases are needed to close the gap between the two?

4) What would be the business impact of implementing those technologies and use cases on the organization?

One effective approach to answering those questions involves a workshop-driven program, typically lasting four to five weeks, known as a "digital supply chain quick scan." The program consists of the following four steps:

1) Assess digital awareness and ambition levels across the organization to develop a "digital target picture," or future vision.

2) Evaluate the digital capabilities of key stakeholders at each point in the supply chain, and then measure the gap between those and the capabilities needed to realize the target picture.

3) Explore technology options, assess the value and impact of potential use cases, and develop an appropriate project short list.

4) Prioritize measures and revise the digital target picture based on findings to create a high-level digital road map for proceeding with the transformation.

Step 1: Develop a digital target. An initial cross-functional survey assessing both the awareness levels and the perceived data, analytics, reporting, and automation needs of principal supply chain stakeholders is a good way to start to create a digital ambition for the company. The survey builds a base of knowledge that can be used to define a set of realistic digital capabilities, implementation strategies, and applicable technologies that will yield specific, predictable benefits. For example, a company looking to reduce its inventory and improve customer fill rates will likely see survey respondents saying that they need to improve forecast accuracies, reduce order processing lead times, and create dynamic allocation of inventory across the distribution network.

Step 2: Evaluate current capabilities. After developing a target picture, the organization can start conducting deep-dive interviews with representatives from all core functions to establish a baseline of its current digital capabilities. (See Figure 2.) This process provides a good opportunity to create a list of ongoing and planned digital initiatives spanning the entire planning, manufacturing, sourcing, and delivery value chain. For each digital element or capability—whether it be a data source, an analytical tool, a reporting system, or some other technology—the organization should record its role across functions and processes; the supporting technology; and the impact it has in terms of costs, service, and working capital. This shared baseline snapshot of existing digital capabilities and limitations forms the basis for measuring, and ultimately closing, the gap between an organization's existing capability set and the digital target.

Step 3: Assess technology options and create a short list. The next step is to explore various technology options to address specific current and future needs. Too many companies, unfortunately, view this part of the process as simply comparison-shopping among solutions based on relative performance and price, or as a binary choice between off-the-shelf or proprietary, highly customized options. Those are certainly valid considerations, but the more crucial initial decisions involve identifying and prioritizing desired digital capabilities in the context of immediate needs, long-term strategic goals, buy-in throughout the organization, required investment in facility and workforce upgrades for successful execution, and other factors. Figure 3, for example, shows how companies can start by identifying the key capabilities that they need and then find which technologies can provide those capabilities.

It is particularly useful, in weighing various technology approaches, to look at how similarly situated organizations have addressed comparable challenges. The success stories of early adopters can also help from a buy-in standpoint by providing compelling arguments for making and completing the journey. A thorough value assessment, therefore, should include relevant digital use cases and best practices as a way to benchmark potential benefits. To the extent possible, these detailed case studies should be able to roughly quantify the productivity, asset utilization, cost reduction, and other benefits delivered by each improvement measure, and then calculate equivalent benefits when applied to the cost structure under assessment.

Step 4: Prioritize potential projects and create a digital roadmap. Next the organization should take this short list of potential projects and technology and assess the project's benefits versus how long it would take to implement. The information gathered in the case study review should be helpful here. An example of such an analysis can be seen in Figure 4.

Based on this analysis, the organization will prioritize digital projects over the short, medium, and long term, providing a clear, pragmatic roadmap to digital transformation.

Success story

It should not be assumed that digital transformation necessarily entails an end-to-end reengineering of the supply chain. Digital solutions can also be targeted to address specific issues within an organization, as illustrated by a recent digital transformation that A.T. Kearney was involved in at an integrated oil and gas company.

The company had found that poor information flows, inadequate facilities, and broken processes were making it hard for downstream refinery workers to monitor, inspect, and maintain field equipment. The majority of the maintenance and repair work was reactive, lead times for approvals were long, and much of the entire process was paper-based. In addition to negatively affecting productivity, these challenges also made it hard for the company to attract and retain new field operators, many of them younger workers and women, in an already shrinking workforce.

After this review process, the company decided on the following digital projects: 1) set up an onsite private network for phones, tablets, and apps to enhance field communications; 2) launch pilots for using sensors and other infrastructure to monitor the condition of nonvital equipment and predictive analytics to establish optimal timing and frequency of maintenance for vital equipment and processes; and 3) adapt workplaces for new ways of working, change related work practices, and reassign roles and responsibilities.

Among the results: The company is now using proactive, predictive, and exception-based maintenance instead of reactive maintenance. Field operators now generate maintenance warnings, not just incident reports, which help create a sense of urgency around addressing the issue. Field operators are also kept in the loop about the status of warnings after the fact, circulating more accurate information and cutting response time. A new transparent shift scheduling process enables greater flexibility in schedule-change requests, as field operators and managers share updated information in real time. Plant-procedure master checklists now are developed and managed electronically instead of being paper-based. As a result, they provide greater accuracy and allow common procedures to be accessible to all and reused by multiple plants. The ePermit to Work process, which authorizes plant access for field operators, has been streamlined by digitizing authorization using mobile devices and electronic signatures.

It's important to note that the transformation effort did not just focus on implementing new technology. It also involved changes to processes, culture, and workplace environment. For example, work spaces for field operators have been created, relocated, consolidated, or redesigned to improve engagement, collaboration, and ease of working. In all, more than 100 people participated in the work space and cultural co-creation effort.

One step at a time

Long viewed as a cost center and an afterthought, the supply chain is now seen as central to companies' push for service differentiation and competitive advantage. At the same time, the past five years have seen a quantum leap in digital supply chain technology that promises to help with the growing complexities of data flows, sourcing and distribution logistics, and inventory management. In manufacturing, and particularly in legacy industries, digital supply chain transformation has emerged as a dividing line between future growth and gradual decline.

Companies starting that transformation can benefit from the increasing availability of customizable, off-the-shelf technology solutions. Meanwhile company success stories and best practices have increased across most verticals demonstrating the tangible benefits digital transformation can deliver. Now is the time for companies to move, or risk spending months or years struggling to catch up later. Yes, the technology is complex, the process will be disruptive, and the proliferation of product, service, and strategy options can be confusing. But as the old saying goes, every thousand-mile journey begins with one step. A clear plan that ties into the company's overall strategy and creates buy-in from stakeholders can provide that first step.

Notes:

1. Keith Larson, "ExxonMobil puts process automation suppliers on notice," SI Update, Smart Industry (February 25, 2016), https://www.smartindustry.com/blog/smart-industry-connect/exxonmobil-puts-process-automation-suppliers-on-notice/