Leveraging The Extended Supply Chain To Counter Digital Disruption

IDC anticipates massive digital transformation in a newly emerged digital economy. Gartner predicts this widespread digitalization will revolutionize the supply chain. Forrester forecasts these forces will make 2016 the “age of the customer.”

To make sense of these converging trends, I caught up with Hans Thalbauer, SAP senior vice president of Extended Supply Chain. Thalbauer provided insights on how new business models are upending industries, and how companies need to respond.

Q: What are the key drivers of digital transformation across the extended supply chain?

Hans Thalbauer: Companies are leveraging digital technologies to create entirely new business models. In some cases these are new companies, and in other cases they’re existing companies doing things in a new way.

Common examples include Airbnb, Uber, and Alibaba, but there are many others. Early movers have been in retail or service industries, but these new models are beginning to appear in consumer products, manufacturing, and asset-intensive industries.

Because these models can disrupt an entire industry, all players in the industry need to respond. They need to rethink their processes and even their business. And nowhere is this need more acute than in the extended supply chain.

These forces are driving what we refer to as the four pillars of the extended supply chain: individualized products, the sharing economy, resource scarcity, and customer-centricity.

Q: How do these drivers differ by industry?

HT: The drivers are similar, but how they play out varies by industry. Let’s look at some examples.

In the apparel and footwear industry, the British luxury brand Burberry just held a fashion show in New York. The new designs it displayed were available for purchase immediately after the show. In the past, it might take six months or a year for new fashions to make their way to the marketplace.

That completely changes Burberry’s supply chain. They need to predict demand, source materials, and manufacture products with much greater accuracy and speed. And as apparel and footwear companies move more toward individualized products — through 3D printing of shoes, for instance — their supply chains will be transformed even further.

The logistics industry is another example. Disrupters like Uber can easily extend their model from taxis to “last-mile” shipments. An army of small trucks could displace established players like FedEx, UPS, and DHL for local shipments.

The big logistics service providers, for their part, are already experimenting with 3D printing or additive-layer manufacturing. If they’re going to be disintermediated out of the local shipping business, they can reposition themselves as “last-mile” manufacturers, producing individualized products close to the end consumer.

In discrete manufacturing, the focus will be on greater variations of products. As end consumers demand the ability to specify unique product configurations, the complexity of manufacturing will increase substantially. Manufacturers will need to leverage Internet of Things [IoT] sensors and machine-to-machine [M2M] connectivity to achieve the necessary speed and flexibility.

Q: Across industries, how is demand for individualized products affecting business processes?

HT: Individualized products must be designed, made, delivered, and serviced in new ways. To start with, you need a product innovation platform that supports direct communication from innovation to production. Because now we’re talking about not just a demand-driven supply chain, but also demand-driven manufacturing.

When your product designers define the variants you will offer, you need to communicate that to your sales offices and your e-commerce web channel. Then, when customers start ordering customized products, your manufacturing processes must instantly respond. Rather than design, produce, and sell in distinct stages, you need end-to-end visibility and integration.

Q: How will the sharing economy manifest itself in supply chains?

HT: The sharing economy isn’t just collaborative consumption like Airbnb. It’s a much broader interconnection of information, products, and services, typically coordinated through an online business network.

In the past, manufacturers worked with suppliers to source materials, parts, or components. Today, that’s not nearly enough. The speed and complexity introduced by individualized products means you need real-time, always-on connectivity with your suppliers and other partners.

Suppliers need visibility into your operations — for example, through Internet of Things connections to your production lines — so they know exactly what to supply, how much to supply, and when to supply it. And you need visibility into their processes so that you know instantly — or can even predict — if they won’t be able to deliver. Or, you may need to integrate with partners to move certain operations closer to the end consumer.

Q: How should businesses respond to resource scarcity?

HT: There are two types of resource scarcity: natural resource scarcity and human resource scarcity. Natural resource scarcity has to do with sustainability and environment, health, and safety issues. End consumers are demanding that products be sustainable, that they be healthy, and that their production doesn’t involve exploited labor. At the same time, regulations in markets around the world are increasingly stringent.

Human resource scarcity has to do with skills, flexibility, and automation. Throughout the supply chain, companies will require more data scientists who understand how to capture, analyze, and interpret demand signals and other Big Data. They’ll also require more contingent labor that can respond quickly to demand, which individualized products will render more variable.

In addition, manufacturers will rely more on machine sensors, robots, and other forms of automation, both on the shop floor and in the warehouse. Robots and other automated processes will increasingly work side by side with people, and those people will require new skills, such as how to manage and maintain automation technologies.

Q: Where should companies focus to achieve customer centricity?

HT: They key driver of the extended supply chain is the end customer, whether you’re in a business-to-consumer [B2C] or a business-to-business [B2B] market. Customer-centricity is about understanding your customers, capturing demand signals, meeting requirements for individualized products — and then delivering quickly, at a reasonable price point, and with the level of quality customers want.

This will also change markets. For example, Amazon now offers same-day delivery in nearly 20 U.S. cities. That’s raising the bar for everyone. To respond, you need to change your entire supply chain. You can’t take multiple days or even multiple hours to make the pass from your warehouse to transportation. And you need to replace weekly demand forecasts with predictive demand sensing.

Finally, customer-centricity will require that manufacturers master omnichannel commerce. As you sell products and services in person, in stores, over the web, and through mobile and social channels, supply chain complexity increases dramatically. For example, you need to allocate products across channels, and optimize inventory so you can keep levels as low as possible without having stock-outs in any channel.

You’ll also need to understand demand in new ways. You can no longer rely just on sales orders or retail point-of-sale signals. Let’s say you offered same-day delivery of products for Super Bowl 50, which was recently held in Santa Clara, Calif. You’d need to be able to predict demand. But you’d also need to coordinate that with traffic data, weather data, and more.

As the digital economy grows, complexity will increase. The only way to master that complexity and gain competitive advantage is to respond to individualized products, the sharing economy, resource scarcity, and customer-centricity — and achieve that end to end throughout your supply chain.