Supply chain leaders are navigating a challenging environment.
Today’s leading companies are working very hard to be intelligent enterprises, capable of harnessing the power of end-to-end experience and operational data, to connect their demand chain with their customers, who are social, mobile and shop in many channels, to their supply chain. This is very challenging, considering today’s global supply chain is built on a foundation of increased complexity, globalization, outsourcing, trading partners, geopolitical tensions, trade wars, and risk. Fully 70% of companies say their supply chain is either very or extremely complex and only 6% of companies have full visibility within their supply chains. All of these and many other challenging factors have resulted in an ever-extending supply chain footprint, one holding onto inventory 8% longer than it did 30 years ago.
With its main purpose of balancing supply and demand, supply chain planning is arguably one of the largest contributors to deteriorating days inventory outstanding (DIO) performance. Further analysis of key supply chain planning metrics suggests there is plenty of room for improvement in most organizations, with large gaps between average and top performers documented in benchmarks. For example, there is a 14% difference in forecast accuracy, a roughly 60% difference in both planning and S&OP cycle times, and a 92% difference in obsolete inventory.
Dan Georgescu of PwC Middle East shares his insights on the challenges his clients are facing and some practices top performers are adopting.
“Despite the significant increase in complexity across the supply chains, we still see companies focusing efforts and resources on optimizing inventory for the 5% of demand with the highest demand variability (which are nearly impossible to predict as they follow no trend or seasonality) whilst the 95% of demand could be just slightly improved but yield significantly higher benefits. We have seen a few practices across the top performers globally which make the difference:
- Segmenting the portfolio based on demand patterns and use the right targeted strategies and algorithms
- Getting the basics right and ensuring optimal inventory planning on items with low and medium demand variability
- Providing information upstream and downstream in the supply chain, indirectly resulting in reduced lead times or costs”
Knowledge is power
To support the vision of an intelligent enterprise, supply chain planning is under pressure to evolve from reacting, anticipating, integrating, and collaborating to orchestrating. However, orchestrating supply chain planning is highly dependent on information. Luckily, in this digital era where 2.5 quintillion bytes of data are created every day, we are now overflowing with information, and supply chains are no exception.
- With large-scale digital innovations in the cloud (business networks and IoT, for example), companies are able to dramatically improve the ease, access, accuracy, and reliability of information flows between stakeholders and even equipment. Trading partner operations can be integrated into your supply chain planning and execution, automatically transmitting forecasts and enabling partners to commit. If suppliers cannot fully commit over your planning horizon, you can receive an early warning alert and source alternatives. Digital solutions also enable collaborative ordering, subcontracting, supplier-managed inventory, and quality processes – all across multiple tiers of trading partners
- Digital innovations have also made it easier to process this information. With advancements in Big Data, artificial intelligence, and machine learning, for example, companies are able to intelligently analyze and interpret growing quantities of information very quickly, leverage smart algorithms to optimize forecasts, improve business planning, plan in real time, model what-if scenarios, and quickly adapt as information changes
In the intelligent enterprise, information feeds intelligence, which, in turn, ultimately feeds better decision-making. The old adage of “knowledge is power” still reigns true today for supply chains, as these digital solutions provide the power to transform your supply chain to a collaborative, digitally connected supply network that lets you sense and respond to demand changes quickly. You gain greater flexibility and visibility to reduce inventory buffers while increasing service levels and on-time shipments resulting in cash flow and cost improvements.
- Reduce inventory
- Move from push to pull replenishment
- Optimize inventory levels
- Structure stock builds via demand and supply constraints
- Optimize capacity planning
- Reduce excessive safety stock levels
- Reduce capacity changeover
- Improve asset utilization
- Reduce off-balance sheet liabilities
- Optimize planned labor
- Reduce expedited shipments
- Reduce obsolescence and scrap
- Improve customer service levels
- Increase agility and minimize risk
- Reduce shortages/substitutions
- React timely to market changes
Balancing supply and demand is all about material flows; material flow decisions are triggered by information, and information comes from many sources including customers, buyers, and suppliers.
Digital adoption is lagging
It’s clear we’re in a state of rapid change; organizational goals are evolving to meet the growing demands of customers, supply chain leaders are facing many new and unique challenges, the status quo is not working very well, nor will the status quo meet the needs of the future, and digital solutions have the capabilities to solve many of today’s and future challenges. What’s not so clear is what’s taking so long and how do we motivate the minds that matter to embrace this vision of the future?
- Many strongly believe enterprise digital transformation is in the diffusion and imitation phase, with digital disruption being recognized but not sufficiently invested in yet.
- 96% of executives identified digital as a strategic business priority, but only 26% report their organization has an enterprise-wide digital strategy in place.
- The average supply chain has a digitization level of 43%, the lowest of five business areas examined.
- Only 2% of executives said the supply chain is the focus of their digital strategies.
Motivating the minds that matter
The first and perhaps most important step in any change effort is developing the business case. Developing the business case can increase the buy-in and likelihood of success for any business transformation effort by:
- Clearly defining the current state, gaps to best practice, and areas of opportunity
- Quantifying the potential financial benefits and business outcomes
- Speaking the executive’s language
- Increasing appreciation for the possible
- Making the transformation tangible
- Improving alignment, bringing all key stakeholders together for a common goal
Business case best practices:
- The business case contains an executive summary, problem statement, assessment, solution, value proposition, cost-benefit analysis, timeline, and recommendations.
- All functional areas that will be involved in the implementation and affected by planned changes are included in the process of preparing and/or reviewing the business case.
- The organization creates detailed quantitative business cases for all major implementations, including all benefit areas with proposed operational changed and impacts.
- There is a clear and documented linkage between the organization’s strategic objectives and the business case.
- Business cases incorporate financial outcomes into the annual operating plan or budget.
- Business cases follow a clear, consistent, standard, company-defined format.
- Business cases include external benchmarks and thought leadership to bring in outside perspectives.
A starting point, external benchmarks, and thought leadership
At a time of so many difficult challenges and dramatic change, supply chains are under increased pressure to be better informed, transform information into intelligence, improve decision-making, and orchestrate the supply chain, all while not just meeting but exceeding customer expectations. Supply chain leaders are encouraged to consider the value of digitally transforming their supply chain in support of a holistic intelligent enterprise strategy. The value of achieving these goals is compelling, creating significant benefits in revenue, costs, inventory, working capital, and service.
For example, PWC expects digitization to bring significant economic benefits to both top and bottom lines, as companies with highly digitized supply chains and operations can expect efficiency gains of 4.1% annually while boosting revenue by 2.9% a year. Additional benchmarking from SAP indicates:
Find out more
SAP Integrated Business Planning and SAP Supply Chain Collaboration solutions digitize the supply chain, reduce latency in information sharing, improve forecast accuracy, increase supply chain visibly, enable the orchestration of planning, and enable better decision-making.