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LOGISTICS & SUPPLY CHAIN MANAGEMENT Supply Chain 4.0 – The next-generation digital supply chain

Dec 12, 2019

The application of IoT in supply chain has automated the supply chain, created a network and has significantly improved the performance and brought in customer satisfaction. The article explores the enormous changes supply chain & logistics have undergone, trends, obstructions and the transformation it can bring into one’s management system. - Knut Alicke, Partner, McKinsey & Company; Juergen Rachor, Senior Expert, Supply Chain Management, McKinsey & Company; Andreas Seyfert, Senior Expert, McKinsey & Company

Over the last thirty years, logistics has undergone a tremendous change – from a purely operational function that reported to sales or manufacturing and focused on ensuring the supply of production lines and the delivery to customers, to an independent supply chain management function that in some companies is already being led by a Chief Supply Chain Officer (CSO). The focus of the supply chain management function has shifted to advanced planning processes, such as analytical demand planning or integrated S&OP, which have become established business processes in many companies, while operational logistics has often been outsourced to third-party LSPs. The supply chain function ensures integrated operations from customers to suppliers.

Trends in supply chain management

Several mega trends have a heavy influence on the supply chain management; there is a continuing growth of the rural areas worldwide, with wealth shifting into regions that have not been served before. Pressure to reduce carbon emissions as well as regulations of traffic for socioeconomic reasons add to the challenges that logistics are facing. But changing demographics also lead to reduced labour availability as well as increasing ergonomic requirements that arise as the workforce age increases. At the same time customer expectations are growing; the online trend of the last years has led to increasing service expectations combined with a much stronger granularisation of orders. There is also a very definite trend towards further individualisation and customisation that drives the strong growth of and constant changes in the SKU portfolio. The online-enabled transparency and easy access to a multitude of options regarding where to shop and what to buy drives the competition of supply chains. To build on these trends and cope with the changed requirements, supply chains need to become much faster, more granular and much more precise.

Vision of the future state

The digitisation of supply chains enables companies to address the new requirements of customers, the challenges on the supply side as well as the remaining expectations in efficiency improvement. Digitisation brings about a Supply Chain 4.0, which will be:

  • Faster: New approaches for product distribution reduce the delivery time of high runners to a few hours. The basis for these services is built by advanced forecasting approaches, e.g. predictive analytics of internal (e.g. demand) and external (e.g. market trends, weather, school vacation, construction indices, etc) data as well as machine status data for spare-parts demand, and provides a much more precise forecast of customer demand. In the future we will see ‘predictive shipping,’ for which Amazon holds a patent – products are shipped before the customer places an order. The customer order is later matched with a shipment that is already in the logistics network (being transported towards the customer region) and the shipment is rerouted to the exact customer destination.

  • More flexible: Ad hoc and real-time planning allows a flexible reaction to changing demand or supply situations. New business models, such as supply chain as a service for supply chain planning functions or transport management, increase the flexibility in the supply chain organisation. The specialisation and focus of service providers allow them to create economies of scale as well as economies of scope and attractive outsourcing opportunities. For example, we will see an ‘Uberisation’ of transport – crowd-sourced, flexible transport capacity, which will lead to a significant increase in agility in distribution networks.

  • More granular: The demand from customers for more and more individualised products is continuously increasing. That gives a strong push towards micro segmentation, and mass customisation ideas will finally be implemented. Customers are managed in much more granular clusters and a broad spectrum of suited products will be offered. This enables customers to select one of multiple ‘logistics menus’ that exactly fits their need. New transport concepts, such as drone delivery, allow companies to manage the last mile efficiently for single and high-value dense packages.

  • More accurate: The next generation of performance management systems provides real-time, end-to-end transparency throughout the supply chain. We will see performance management systems that ‘learns’ to automatically identify risks or exceptions and will change supply chain parameters in a closed-loop learning approach to mitigate them. That enables the automatic performance management control tower to handle a broad spectrum of exceptions without human involvement and to only leverage the human planner for the disruptive events/new events. With this, a supply chain is continuously developing towards its efficient frontier.

  • More efficient: Efficiency in the supply chain is boosted by the automation of both, physical tasks and planning. Robots handle the material (pallets/boxes as well as single pieces) completely automatically along the warehouse process – from receiving/unloading to putting away to pick, pack and ship. The network setup itself is continuously optimised to ensure an optimal fit to business requirements. To create an ideal workload in the supply chain, various transparency and dynamic planning approaches are leveraged to drive advanced demand shaping activities (e.g. special offers for delivery time slots with low truck utilisation).

Digital waste hindering Supply Chain 4.0

In today’s supply chains, many sources of digital waste can be found (in addition to the existing waste) that prevent the potential of Supply Chain 4.0. It is crucial to understand the sources of waste and develop solutions to reduce/avoid it in the future state. The sources of digital waste can be classified in three types:

  1. Data capturing and management: Often, available data is handled manually (data collection in a system, paper-based data handling, etc) and not updated regularly, e.g. master data on supplier lead time that is entered once (sometimes even only dummy numbers) and then remains unchanged for years. Another example in warehousing is advanced shipping notifications, which are received but not used to optimise the inbound process. On top of these examples, it is typically not clear which additional data could be leveraged to improve processes, e.g. sensing of supply disruptions – if the lead time of a supplier is continuously increasing, a warning should be sent out to make planners aware of the situation and enable them to mitigate supply disruptions at an early stage. In current systems, this signal will not be recognised and will lead to a lower supplier service level reported at the end of the month. If the worst comes to the worst, the issue will cause trouble in the assembly line replenishment and operational problems.

  2. Integrated process optimisation: Many companies have started to implement an integrated planning process, but very often this is still done in silos and not all information is leveraged to achieve the best planning result possible. Beside the intracompany optimisation, the process optimisation between companies has not been fully leveraged yet and improvement potentials created by increased transparency are not realised. To get to the advanced level of integrated process optimisation, the organisational setup, governance, processes and incentives need to be aligned within and between partners in the supply chain.

  3. Physical process execution of humans and machines: Nowadays, warehousing, assembly line replenishment, transport management, etc are often done based on gut feeling, but not leveraging available data, e.g. to improve pick paths in the warehouse. Warehouse operations are still managed in batches of one to two hours, not allowing the real-time allocation of new orders and dynamic routing. Also, opportunities arising from new devices, such as wearables (e.g. Google Glass) or exoskeletons, are not leveraged.

Transformation into a digital supply chain

The transformation into a digital supply chain requires two key enablers – capabilities and environment. Capabilities regarding digitisation need to be built in the organisation but typically also require targeted recruiting of specialist profiles. The second key prerequisite is the implementation of a two-speed architecture/organisation. This means that while the organisation and IT landscape are established, an innovation environment with a start-up culture has to be created. This ‘incubator’ needs to provide a high degree of organisational freedom and flexibility as well as state-of-the-art IT systems (two-speed architecture independent of existing legacy systems) to enable rapid cycles of development, testing and implementation of solutions. Fast realisation of pilots is essential to get immediate business feedback on suitability and impact of the solutions, to create excitement and trust in innovations (e.g. new planning algorithms) and to steer next development cycles. The ‘incubator’ is the seed of Supply Chain 4.0 in the organisation – fast, flexible and efficient.

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  • Digitisation of supply chains enables companies to improve efficiency & address customer requirements better

  • Knut Alicke

    Partner

    McKinsey & Company

  • Juergen Rachor

    Senior Expert

    Supply Chain Management

    McKinsey & Company

  • Andreas Seyfert

    Senior Expert

    McKinsey & Company

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