Not only will this demand lead to overexploitation of the world’s natural resources, but it will also result in high and volatile commodity pricing. The need for resources will rise to approximately $33 trillion by 2030, according to our estimates (see Figure 1). This will put stress on our natural systems, resources, and supply chains.
However, companies can reduce or even mitigate these threats, while saving billions of dollars, by optimizing production and supply chains through digitization. As billions of connections are created among companies, people, devices, sensors, data, and processes, this new era of hyperconnectivity will be critical for competitiveness. Indeed, 60% of companies surveyed by the Economist Intelligence Unit said that digitization is the biggest risk they face. More than half feel competitive pressure from traditional competitors, new market entrants, or digital start-ups.1
As well they should, because 32% of the revenues of large companies will be under threat from digital disruption in the next five years, according to a study by MIT Sloan Management Review.2 Estimates are that 75% of the companies in the 2027 S&P 500 will be new, reflecting the increasing pressure on today’s companies.3 In the hands of creative and ambitious people, digitization is a versatile method to create a better business and more value.
It is also a critical part of becoming a Live Business, in which the entire organization is focused on sensing and responding to customers both in the moment and in all the moments that matter to them. Digitizing the supply chain and procurement processes is an important step toward that goal.
Digitizing the supply chain is not merely good for business, it also plays a role in solving some of the most important issues the world faces. According to the World Economic Forum, in the years ahead we have to solve three major global issues, all of which are affected by supply chains:
- Act on climate change
- Realize economic growth and social inclusion
- Secure our environment and resources
No business today can afford to ignore these global issues because our trade systems connect every market and enterprise on the planet. However, the solutions to these issues will have to start in local markets and production sites. Each company that can continue to grow while minimizing its resource footprint will become more responsible and accountable, which will increase customer loyalty, especially among younger generations increasingly concerned about the global impact of the products they buy. However, doing good isn’t merely about looking good, as is the common misconception today, it’s also about being more competitive under the resource restrictions that are coming.
Customers Also Create Volatility
In the era of the networked customer, the customer experience is becoming nearly as important as the products and services themselves and has emerged as the main competitive edge. Nearly 90% of the business leaders surveyed by Gartner believe that customer experience has become their primary basis for competition, according to Accenture.4
To stand apart, companies need to offer more customized solutions faster. For the supply chain, that means operating more efficiently on a global and local scale, increasing responsiveness and flexibility, and tightening integration between planning and execution while coping with ever-diminishing operational planning windows.
Follow Nature’s Example
With volatile demand, fast-changing customer tastes, and increasing demand for customized products, companies have to modify their existing offerings more frequently and introduce new ones earlier. In many cases this means adding new suppliers to the existing network and having the flexibility to quickly exchange one supplier for another.
The classical industrial supply chain model, rigidly and linearly organized and centered on a small set of decision makers, is no match for the demands of a digitized marketplace. To adapt, supply chains must become more like swarms of insects, which form highly coordinated networks that are based on real-time data and decision making. Creating an analogous swarm of suppliers with these attributes requires a fully digitized supply network.
As the effects of global warming become more evident and poor working conditions for employees in the developing world create widely shared stories of misery and disaster, consumers are pushing companies harder for fair trade and ethical production. Companies have to become more aware of the realities of production in all of their suppliers – and their suppliers’ suppliers – and eliminate health risks for workers. They must also know the potential risks of the substances used to make their products. Finally, they must become more transparent about waste from production and about whether and how products are recycled. If companies digitize production processes and create a real-time repository of information about their products and resources, they can act more ethically, drive more customer loyalty, and create new efficiencies.
Many companies don’t see the business value of digital supply networks. Here are four common myths.
Real-Time Is Not a Necessity
Sticking with analog supply chain models puts companies at a competitive disadvantage. Only if companies embrace highly connected networks and run as Live Businesses will their demand, supply, and logistics rise to the level that modern customers want and expect.
Sustainability Has No Business Impact
As we enter an era of global resource constraints and high volatility, companies that actively manage their resource footprints will save costs and be more competitive.
Let the Extended Supply Chain Manage Itself
The days when companies could afford to know little about their suppliers and their business practices are over. Beyond the ethical issues, companies need full visibility into their supply chain to reduce business risk, understand which resources are being used and their potential volatility, uncover bottlenecks, and search for improvements. Digital supply networks give companies a full view of their value chain and help them optimize their practices.
Customers Have Always Been Fickle
Without the help of digitization, companies will lose sight of customer trends, diminish their ability to innovate, and be unable to manage live demand and supply, all of which play a role in maintaining customer loyalty.
Today’s supply chains are supported by technology, but only a fraction of companies are actively using technology to transform their businesses. The mobile revolution exemplifies how digital markets can grow exponentially, yet only a third of companies think that digitization can drive growth.5
Those that believe in digitization have a head start on competitors, however. By 2025 digital supply networks could impact 25% of global trade, according to SAP estimates. Here are some of the biggest opportunities for digital supply networks.
Most companies have limited knowledge about the participants in their supply chains. With more competition in the global market, faster changes in demand, and higher resource volatility, companies with complex supply chains need to create a Live Business that is data-driven, real-time, and context-sensitive, and that allows a comprehensive view of the extended supply chain. A key part of the transition is learning how to drive insight and innovation from an increasing volume of structured and unstructured data.
The transformation to Live Business will allow companies to reimagine processes throughout the extended supply chain and to react faster to changes in demand and supply. They will also be able to onboard new partners much faster based on demand and need.
The benefits of increased networking with more and better information will also accrue to partners, who can access the information for learning, innovation, and a faster and more coordinated response to market dynamics.
Manage Assets Strategically
Most companies currently do not have a real-time repository of information about their assets. However, fixed assets can account for as much as one-third of all operating costs. The ability to manage those assets strategically can help save costs and resources and create a new path for innovation. Using the information generated from digitization and the Internet of Things (IoT), businesses can evaluate the use patterns and maintenance routines of their inventory and assets to optimize their operations. Examples include smarter routing for cars and trucks in logistics services and reduced machine downtime through remote maintenance and predictive analytics. Combining IoT data with demand and logistics data also enables companies to improve logistics and production planning. By connecting the unconnected and digitizing their supply chain, companies can transform themselves from analog to digitized businesses.
Intelligence Tames Resource Volatility
As resource constraints continue to rise, companies will feel the pressure. When dealing with issues such as rising commodity prices and energy costs, volatile markets for raw materials, and climate change, reliance on analog information is not an option. As part of supply-chain digitization, companies can share live resource information with the extended supply chain. This enables companies to improve demand planning along the entire value chain while reducing risk and volatility, such as resource and supply chain bottlenecks.
In addition, gaining a better understanding of their resource footprints can help companies pinpoint volatile or cost-intensive materials in their products so they can consider seeking alternatives. Meanwhile, they can design new products based on real-time cost estimates.
Digital Grows Revenue and Margins
As buyers become more active in the digital economy, they become less predictable and may no longer tolerate limited product choices. They are also demanding more live interaction and customized products.
To answer the needs of digital customers, companies are reconstructing their supply chains and supplier networks into a flexible, live web of business partners that spans regions, allows customers to actively participate through digital channels, and accelerates the introduction of new products and innovation. A study by MIT Sloan Management Review shows that companies that understand their customers better than the average competitor, and that generate 50% or more of their revenues from digital transactions, have 32% higher revenue growth and 27% higher profit margins than the industry average. It definitely pays to walk the digitization path.6
The challenge is to interact with the customer at every important step in the supply chain and buying experience. IoT and smart devices can be used to serve customers better with services such as tracking products, predictive maintenance, and smart vending machines. Connecting to the digital customer is necessary to reduce demand volatility and improve overall reaction time. It also improves the customer experience and drives more loyalty.
Through seamless digital transformation, a business can improve and simplify how it senses, predicts, learns, adapts, and responds to changing customer demands and market dynamics.
Not only do these capabilities fine-tune decision making, operations, supply chains, products, and the partner network, they also allow employees at all levels to create and meet customer demand at the moment of opportunity. By linking the company to a reimagined digital core, every part of the business is united to create a fluid, nimble Live Business. The business essentially becomes a living and consistently evolving entity. We see four business models for going live and creating a platform for resource optimization and future business innovation.
We are moving from a product-oriented economy into a service economy, where customers expect solutions instead of products, demand services to improve the use and experience of products, and determine value based on the overall outcome of the experience.
Most supply chains are set up to deliver products rather than outcomes. In order to improve the customer experience, companies must create supplier networks that capture all interactions with partners and customers. Companies must use advanced analytics to transform that data stream into a live operating network with greater insight into demand, supply, production, and logistics. In turn, the network will be able to react more quickly to changes in the business ecosystem by proactively reducing risk and resource use, spotting opportunities earlier, and improving outcomes for customers.
By determining the resource footprint for all the products and resources across the supply chain, companies can save precious resources and costs, reduce risk, and improve products. Companies should start by identifying volatile or cost-intensive resources used in their products and design them out. Innovating and designing new products can then be based on real-time cost and quality estimates gathered from the overall supplier network, allowing companies to better calculate the margins of new products, reduce volatility and other risks, and find new partners and markets.
Omnichannel Customer Experience
Today’s digital customers demand a seamless shopping experience in all channels, whether they be online or offline. Both consumers and business-to-business customers expect to be able to interact with companies in real time and receive highly customized products quickly.
To answer the needs of digital customers, companies have to connect all their real-time demand, procurement, production, and supply chain data with those of their supplier partners across all regions and markets. Companies also need to follow customers along the complete value chain and through every step of the shopping experience. Setting up extended digital supplier networks and creating new digital IoT-driven channels will improve customers’ brand experience, increase loyalty, and open up opportunities for co-innovation with partners and customers.
Today’s businesses are operating in a real-time, 24×7 environment. Companies can significantly improve their competitiveness and resilience by becoming faster and more skilled at gathering information about demand changes and altered buying behaviors and by predicting potential disruptions as well as identifying opportunities.
Companies should strive to create a live view of their critical business operations. The underlying structure to create that view is an extended supplier network and real-time data analytics to transform internal and external data into insightful information. Using the IoT as additional antennae for business processes such as remote maintenance, logistics, and tracking consumer behavior can further improve businesses’ level of awareness.
Without a doubt, the digital economy is changing everything around us – especially our supply networks. However, no company should become a victim of these changes. This is the time to imagine – and reimagine – how your company can be transformed into a Live Business to better serve your customers. And your supply network is a great place to start.
Kai Goerlich is Research Director, IoT, Supplier Networks, and Digital Futures for SAP
- Michael Kapoor, “Hyperconnected Organisations: How Companies Are Adapting to Hyperconnectivity,” Economist Intelligence Unit, 2015, http://www.economistinsights.com/sites/default/files/EIU-SAP%20Hyperconnected%20Economy%202%20-%20Briefing%20Paper%20PDF.pdf
- Peter Weill and Stephanie L. Woerner, “Thriving in an Increasingly Digital Ecosystem,” MIT Sloan Management Review, June 16, 2015, http://sloanreview.mit.edu/article/thriving-in-an-increasingly-digital-ecosystem/
- Minutemen, “Increasing Churn Rate in the S&P 500: What’s the Lifespan of Your Stock?” Seeking Alpha, November 6, 2014, http://seekingalpha.com/article/2651195-increasing-churn-rate-in-the-s-and-p-500-whats-the-lifespan-of-your-stock
- Accenture Technology Vision 2015, “Digital Business Era: Stretch Your Boundaries,” Accenture, 2015, http://www.accenture.com/us-en/_acnmedia/Accenture/Conversion-Assets/Microsites/Documents11/Accenture-Technology-Vision-2015.pdf
- Capgemini, “Infographic: Are Manufacturing Companies Ready to Go Digital?”
- Peter Weill and Stephanie L. Woerner, “Thriving in an Increasingly Digital Ecosystem”