Supply chain management (SCM) is a young function even on a global scale. It involves coordination and planning of all actions during the movement of goods and the life cycle of orders – from the purchase of raw materials to the delivery of products to end consumers. The cross-functional approach covers and balances all traditional functions – purchasing, logistics, production, sales. The objective of SCM is to maximize profit through value proposition management within the integrated business planning system.
Planning at four levels
Rising inflation and interest rates, as well as geopolitical tensions, require a quick and reliable response from supply chains. Companies need to take into account the complication of customer requirements, reorientation to new markets and directions, correction of the distribution network: the availability of seaports, the creation of new transport hubs and the activation of the transport and logistics services market. There is a need for more flexible supply chain planning at the strategic level.
In addition, customers become more demanding, and this can be traced at different levels of planning. It is becoming increasingly difficult to take into account the uncertainty of the demand forecast in medium-term planning, and uncertainty in terms of the presence or absence of orders in operational planning. The behavior of customers has become much more difficult to predict: they began to choose a different time for placing an order, focusing on important conditions for themselves. Despite the fact that orders began to appear on an increasingly short horizon, customers wait for a quick response when confirming the order and its operational implementation, split large sets into small ones, ask to take into account additional technical requirements. At the same time, customers make changes to orders the day before or during their execution. This requires a quick response in the short term, that is, the presence of flexible detailed planning, where the main uncertainty is change management.
At the same time, companies need to stop improving the accuracy of demand forecasting as some super task, as it was before: let’s hire a research institute so that it predicts to us what will happen in 5 years. In today’s world, it doesn’t work. We are on the path of increasing the speed of decision-making and reaction to these changes. In terms of the promise window – it is necessary to work in such a way that, in fact, abolish the promise window, get rid of the promise window “month,” “week”, and “day.” In fact, you have to work under an adaptive promise window: that is, if the client said that he wants to receive an order from 7:00 to 18:00 on Tuesday, then based on this, it is necessary to form an action plan for fulfilling the order. That is, the classical concept in the UTP of the promise window in turbulence leaves as a class.
It is not enough to implement separate IT tools to manage supply chains in such an environment. We are talking about updating the SCM strategy and the new design of the supply network itself. The operating model is changing – and this is impossible without new technologies, the company’s integrated digital core and a change in the approach to talent management.
Global technology trends
There are no separate information systems in the technology trend lists of international consulting companies, such as Gartner and Accenture. Experts talk about industrial platforms, artificial intelligence, and metaverse. That is, not about IT tools, but about technologies that help companies reinvent business models. This is the only way to make a leap into the future and outstrip competitors.
Among the global trends, four main ones can be distinguished:
- Bet on AI. Companies that can build data at the heart of their supply chain and deploy AI on a large scale can build a connected and truly intelligent supply chain network. On the one hand, this will provide an idea of the latest disruptions or leaps in demand – and solve problems in real time. On the other hand, this will increase flexibility to meet unique customer requirements quickly, accurately and on a large scale. This can be achieved by increasing product availability and service levels, reducing sales losses and inventory costs, and increasing production efficiency and order execution discipline.
- Democratization of technology and the need for seamless integration. To be ready for the future, according to Accenture, eight out of ten top executives recognize the need to accelerate the digitalization of supply chains. However, digital maturity in this area is low, development has been constrained by outdated decisions and a lack of sufficient investment. Now there is a window of opportunity: bringing IT products to the market has become easier. Many solutions are now available and do not require significant investment. At the same time, it is the digital core that ensures the connectivity of all processes and data that becomes the main source of competitive advantage.
- Mixed or hybrid reality (combining virtual and augmented reality). Mixed reality technology is already being successfully used in trade, medicine, production, design and engineering, education, and gaming. So, for example, at factories, it allows you to test production processes while sitting in the office: you do not need to go down to the workshop, start machines, units and conveyor lines, thereby disrupting the work of personnel.
- Changing decision patterns. The vast majority of problems that people have not even tried to deal with before will soon be resolved. We are talking about a complete rethinking of enterprises: a thoughtful strategy aimed at establishing new productivity frontiers for the companies and industries in which they operate. Based on a strong digital core, the strategy helps drive growth and streamline operations. Gartner analysts expect real-time supply chain decisions to increase 5-fold by 2028.
Time of “reinventors”
Starting in 2020, companies are facing constant disruptions in supply chains. Now is the time when many company executives recognize that new and larger steps need to be taken, transforming more and faster than ever before. Incremental improvements are no longer enough to increase resilience amid instability and persistent constraints. This is how numerous companies – “transformers” operated; their number was estimated as 86% by Accenture. Their strategies were to use more and more technologies.
Today, a limited number of companies are quietly and systematically changing the game and their industries. They are called “reinventors,” and they are now (according to Accenture estimates) only 8% in the world. They are betting on a complete rethink of the enterprise and supply chains.
Their goal is to reinvent every part of their company, focusing on the digital core and new ways of working that create culture and opportunities for continuous renewal. At the same time, they will establish a new productivity frontier for their companies – improving financial performance, the ability to introduce constantly breakthrough innovations, increasing resilience during any disruption and expanding value creation opportunities for all stakeholders. And while this rethink strategy begins with creating a strong digital core, it means much more – technology plus a completely new operating model.
At the same time, it is important to understand that creating a digital core is not a one-time project. This is a continuous connection of new technologies and business opportunities. The integrated operating model and new ways of working rely on an integrated, enterprise-wide technology and data platform that enables information flow between teams. This is not a “patchwork” transformation of various functions of the company separately, often leading to disappointment from the inconsistency of its elements, but a full and one-time transformation of the company.
People are the engine of progress
Rethinking supply chain management processes will require, among other things, a review of the talent management strategy.
Labor shortages, according to Gartner, are the main problem for 60% of organizations, and the main priority of the boards of directors of such companies for 2023 are people. Yet one-third of organizations lack an effective value proposition for employees to help attract and retain talents. Next-generation supply chains are changing working practices and workforce requirements, with new skills, roles and responsibilities, and new organizational structures that enable customer service and competitive advantage. If the company does not have employees who can optimally use new technologies, then the efficiency of the supply chain and overall success will be at risk. In terms of strategy, it is necessary to ensure independence from specific people. If necessary, you need to be able to update or expand the staff as soon as possible.
In the past, many roles, competencies, and skills of employees were determined by decentralized settings of the supply chain, which consisted of disparate operations. They lacked integration as they relied on manual processes and struggled to adapt to change. Today, companies are working to create a new reality of integrated digital supply chains. However, many current job profiles neither have been updated nor reflected this need. Companies lack important skills such as: comprehensive supply chain thinking, cross-functional communications, flexibility and adaptability, data ownership, and analytical abilities. Research shows that investing in these new skills can help provide competitive advantages.
Russian realities
At the beginning of 2022, Russian companies behaved differently. The main options are to do nothing and become invisible for a while, avoid and ignore reality, turn on the regime of aggression and defense, or leave the market and country. Some companies have tried all the models.
Large Russian companies are used to buying large integrated IT systems that gave them hope to “solve all problems at once” – like a “magic pill”. But after the departure of Western vendors, the question arose about how to work with Russian suppliers. Many of their products at that time did not reach the required level of development.
At the same time, another problem arose – how to develop existing technologies. In turbulence, it is not algorithms and optimizers that are much more important. Competitiveness in the new reality lies in the field of operational models, application architecture and a general rethinking of the rules of operation of the company, its strategy for building and managing supply chains. With the development of technology, companies expect much stronger business changes.
To rethink supply chains, companies should not only engage in endless “fire fighting”. It is time, finally, to engage in the formation or adjustment of a supply chain management strategy. Think about how to shape a new strategy in terms of transformation of organization, IT, people and assets. The real strategy is not to define the road leading to the goal, but to ensure the conditions under which all roads lead to the goal. The real strategy should enable it.
A total rethink of enterprise and supply chains is a thoughtful strategy aimed at establishing new frontiers of efficiency for companies and, in most cases, the industries where they operate. Based on the digital core, it helps drive growth and streamline operations.
Instead of conclusion
Business now needs real-time traceability across the extended supply chain, including Tier 2 and Tier 3 suppliers. It is provided using analytical solutions, the so-called Control tower. Data and analytics can accelerate decision-making by increasing competitiveness. At the same time, leading companies are already creating digital supply chain twins to test the response.
And to prepare for risks, it is worth moving from a just-in-time approach to a just-in-case approach. This means diversifying supply bases, planning alternative transportation routes, making distribution centers flexible and increasing stocks. It comes at a cost, but it makes sense during testing of the “insurance strategy”. Use tools such as zero-based cost management to offset additional costs and the ongoing effects of inflation.
Supply chains “ready for the future” must provide a customer-centric and tailored experience. Moving from centralized, linear delivery models to decentralized networks that use on-demand production, and in some cases even bringing production closer to point of sale, can help organizations better meet customer expectations for fulfillment.
As Yitzhak Adizes said, “neither robots nor AI will be able to replace the heart”. The management guru meant that the heart in the “age of the development of AI” is the next stage in the development of humanity after the eras of the development of the “age of muscles” (industrial society) and the “age of the brain” (information society). According to him, “all successful companies will have access to AI and robotics, and therefore the competitive advantage will be how much you love your customers, employees, and suppliers”. A competitive advantage is to take care of them through the formation of an up-to-date value proposition, as well as the conditions and actions that allow them to be provided.
The main challenge lies not in the technologies themselves, but rather in how companies will apply them and how ready they are for change. After all, technological innovations have already passed, but organizational ones are still lagging behind. New operational models in the current situation are the principle of survival and growth.
Supply chains are no longer seen as a cost center – they are the engine of growth and profit. A complete rethink of the SCM process alone will help companies meet the growing consumer demand for hyper-personalized services on a large scale. To achieve this, the supply chain – and wider supply chain networks – must become much more flexible, resilient and ever-changing. This is exactly the key to success for the coming years.
By Victoria Bryazgina, Head of the “UCP Strategy” Axenix