25/4/2017 Supply Chain 4.
0 in consumer goods | McKinsey & Company
Consumer Packaged Goods
Article
April 2017
SupplyChain4.0inconsumergoods
By Knut Alicke, Daniel Rexhausen, and Andreas Seyfert
InSupplyChain4.0,supply-chainmanagementappliesIndustry4.0
innovationstheInternetofThings,advancedrobotics,analytics,
andbigdatatojump-startperformance,andcustomersatisfaction.
O
verthelast30years,supplychainhasundergoneatremendouschange.What
wasonceapurelyoperationallogisticsfunctionthatreportedtosalesor
manufacturingandfocusedonensuringsupplyofproductionlinesanddeliveryto
customershasbecomeanindependentsupply-chainmanagementfunctionthatinsome
companiesisalreadybeingledbyaCSOachiefsupply-chainofficer.Thefocusofthe
supply-chainmanagementfunctionhasshiftedtoadvancedplanningprocesses,suchas
analyticaldemandplanningorintegratedsalesandoperationsplanning(S&OP),which
havebecomeestablishedbusinessprocessesinmanycompanies,whileoperational
logisticshasoftenbeenoutsourcedtothird-partylogisticsproviders.Thesupply-chain
functionensuresthatoperationsarewell-integrated,fromsuppliersthroughto
customers,withdecisionsoncost,inventory,andcustomerservicemadefromanend-to-
endperspectiveratherthanbyeachfunctioninisolation.
Digitizationcreatesadisruptionandrequirescompaniestorethinkthewaytheydesign
theirsupplychain.Atthesametime,customerexpectationsaregrowing:recentonline
trendshaveledtogrowingserviceexpectationscombinedwithmuchmoredetailed
orders.Also,adefinitetrendtowardfurtherindividualizationandcustomizationis
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drivingstronggrowthofandconstantchangesintheSKUportfolio.Theonline-enabled
transparencyandeasyaccesstoamultitudeofoptionsregardingwheretoshopandwhat
tobuydrivethecompetitionofsupplychains.
Tobuildonthesetrends,copewithchangedrequirements,andenableawiderangeof
newtechnologies,supplychainsneedtobecomemuchfasterandmuchmoreprecise
(Exhibit1).
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Exhibit 1
Visionofthefuturestate
Thedigitizationofthesupplychainenablescompaniestoaddressthenewrequirements
ofcustomers,thechallengesonthesupplyside,andtheremainingexpectationsin
efficiencyimprovement.DigitizationleadstoaSupplyChain4.0,whichbecomes
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faster.Newapproachestoproductdistributioncanreducethe
deliverytimeoffastrunnerstofewhours.How?Advanced
forecastingapproaches,suchaspredictiveanalyticsofinternaldata
(e.g.,demand)andexternaldata(e.g.,markettrends,weather,school
vacation,constructionindices),whencombinedwithmachine-status
dataforspare-partsdemand,provideamuchmorepreciseforecastof
customerdemand.Whatonceweremonthlyforecastsinstead
becomeweeklyand,fortheveryfastest-movingproducts,daily.In
thefuture,wewillevenseepredictiveshipping,forwhichAmazon
holdsapatent:Productsareshippedbeforethecustomerplacesan
order.Thecustomerorderislatermatchedwithashipmentthatis
alreadyinthelogisticsnetwork,andtheshipmentisreroutedtothe
exactcustomerdestination.
moreflexible.SupplyChain4.0sadhoc,real-timeplanningallowscompaniesto
respondflexiblytochangesindemandorsupply,minimizingplanningcyclesand
frozenperiods.Planningbecomesacontinuousprocessthatisabletoreact
dynamicallytochangingrequirementsorconstraints(e.g.,real-timeproduction-
capacityfeedbackfrommachines).Evenafterproductsaresent,agiledelivery
processesletcustomersrerouteshipmentstothemostconvenientdestination.
Newbusinessmodelsincreasethesupply-chainorganizationsflexibility.Rather
thanmaintainingresourcesandcapabilitiesin-house,companiescanbuy
individualsupply-chainfunctionsasaserviceonaby-usagebasis.Service
providersgreaterspecializationcreateseconomiesofscaleandscope,increasing
thepotentialforattractiveoutsourcingopportunities.
AnUberizationoftransportcrowdsourced,flexibletransportcapacitywill
significantlyincreaseagilityindistributionnetworksaswell.Manufacturersmay
thereforeseenewdirect-to-consumeropportunitiesinwhatoncewasaplaying
fieldonlyforretailers.
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moregranular.Withcustomerslookingformoreandmore
individualizationintheproductstheybuy,companiesmustmanage
demandatamuchmoregranularlevel,throughtechniquessuchas
microsegmentation,masscustomization,andmore-sophisticated
schedulingpractices.Innovativedistributionconcepts,including
dronedelivery,willallowcompaniestomanagethelastmilemore
efficientlyforsingle-pieceandhigh-value,densepackagesfulfilling
customerscustomizationneedswhiledeliveringtheirorderseven
fasterthanispossibletodaywithmass-market,standardproducts.
moreaccurate.Next-generationperformancemanagementsystemsprovide
real-time,end-to-endtransparencythroughoutthesupplychain.Thespanof
informationreachesfromsynthesizedtop-levelkeyperformanceindicators,such
asoverallservicelevel,toverygranularprocessdata,suchastheexactpositionof
trucksinthenetwork.Theintegrationofthatdatafromsuppliers,service
providers,andothersinasupplychaincloudensuresthatallstakeholdersin
thesupplychainsteeranddecidebasedonthesamefacts.
Indigitalperformance-managementsystems,clean-sheetmodelsfor
warehousing,transport,orinventorysettargetsautomatically.Tokeep
performance-managementaspirationsinfocusevenifsupply-chaindisruptions
occur,thesystemswillautomaticallyadjusttargetsthatcannolongerbe
achievedtomorerealisticaspirationlevels.
Wewillseeperformance-managementsystemsthatlearntoautomatically
identifyrisksorexceptions,andthatchangesupply-chainvariablestomitigate
harm.Thesecapabilitiesenabletheautomaticperformance-management
controltowertohandleabroadspectrumofexceptionswithouthuman
involvement,engaginghumanplannersonlyfordisruptive,unplannedevents.
Theresultingcontinuous-improvementcyclewillpushthesupplychainscloser
toitsefficientfrontier.
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moreefficient.Theautomationofbothphysicaltasksandplanningboosts
supply-chainefficiency.Robotshandlethematerial(palletsorboxesaswellas
singlepieces),completelyautomaticallythewarehouseprocessfrom
receiving/unloading,toputtingaway,topicking,packing,andshipping.
Autonomoustruckstransporttheproductswithinthenetwork.
Tooptimizetruckutilizationandincreasetransportflexibility,companiesshare
capacitythroughcross-companytransportoptimization.Thenetworksetup
itselfiscontinuouslyoptimizedtoensureanoptimalfittobusiness
requirements.
Tocreateanidealworkloadinthesupplychain,thesystemleveragesthehigh
degreeoftransparencyanddynamicplanningapproachestodriveadvanced
demand-shapingactivities,suchasspecialoffersfordeliverytimeslotswithlow
truckutilization.
Increasingoperationalefficiencybyleveraging
SupplyChain4.0
SupplyChain4.0willaffectallareasofsupply-chainmanagement.Thisisevidentinthe
waythemainSupplyChain4.0improvementleversshownintheoutercircleofExhibit2
maptosixmainvaluedrivers(theinnercircle).Intheend,theimprovementsenablea
stepchangeinservice,cost,capital,andagility.
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Exhibit 2
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Planning
Supply-chainplanningwillbenefittremendouslyfrombigdataandadvancedanalytics,
aswellasfromtheautomationofknowledgework.Afewmajorconsumer-goodsplayers
arealreadyusingpredictiveanalyticsindemandplanningtoanalyzehundredsto
thousandsofinternalandexternaldemand-influencingvariables(e.g.,weather,trends
fromsocialnetworks,sensordata),usingmachine-learningapproachestomodel
complexrelationshipsandderiveanaccuratedemandplan.Forecastingerrorsoftenfall
by30to50percent.
Heavilyautomated,fullyintegrateddemandandsupplyplanningbreakstraditional
boundariesbetweenthedifferentplanningstepsandtransformsplanningintoaflexible,
continuousprocess.Insteadofusingfixedsafetystocks,eachreplenishment-planning
exercisereconsiderstheexpecteddemandprobabilitydistribution.Consequently,the
implicitsafetystocksaredifferentwitheverysinglereorder.Pricescanthenbe
dynamicallyadaptedtooptimizeprofitandminimizeinventoriesatthesametime.
Intheconsumer-goodsindustry,severalofthemostprominentglobalconglomeratesare
leveragingadvancedplanningapproaches,andastronginterestinbroaderapplication
canbeobserved.
Physicalflow
Logisticswilltakeahugestepforwardthroughbetterconnectivity,advancedanalytics,
additivemanufacturing,andadvancedautomation,upendingtraditionalwarehousing
andinventory-managementstrategies.Easy-to-useinterfacessuchaswearablesalready
enablelocation-basedinstructionstoworkers,guidingpickingprocesses.Advanced
roboticsandexoskeletonscouldhaveequallydramaticeffectsonhumanproductivityin
warehouses.
Autonomousandsmartvehicleswillleadtosignificantoperating-costreductionin
transportationandproducthandling,whileatthesametimereducingleadtimesand
environmentalcosts.Linkingwarehousestoproductionloadingpointsmayevenenable
entireprocessestobecarriedoutwithonlyminimalmanualintervention.Finally,as
productionfacilitiesstarttorelymoreon3-Dprinting,theroleofthewarehousemay
changefundamentally.
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Performancemanagement
Performancemanagementalsoischangingtremendously,withseveralmajorfood
companiestakingaleadinmakingdetailed,continuallyupdated,easilycustomizable
dashboardsavailablethroughouttheirorganizations.Gonearethedayswhengenerating
dashboardswasamajortaskandperformanceindicatorswereavailableonlyat
aggregatedlevels.Instead,performancemanagementisbecomingatrulyoperational
processgearedtoreal-timeexceptionhandlingandcontinuousimprovement,rather
thanaretrospectiveexerciseonamonthlyorquarterlybasis.
Usingdata-miningandmachine-learningtechniques,thistypeofrevamped
performance-managementsystemcanidentifyanexceptionsrootcausesbycomparing
itwithapredefinedsetofunderlyingindicatorsorbyconductingbigdataanalyses.The
systemcanthenautomaticallytriggercountermeasures,suchasbyactivatinga
replenishmentorderorchangingsafety-stockorotherparametersettingsinthe
planningsystems.
Ordermanagement
Ordermanagementisimprovedthroughapairofmeasures:no-touchorderprocessing
integratestheorderingsystemtotheavailable-to-promise(ATP)process,andreal-time
replanningenablesorder-dateconfirmationsthroughinstantaneous,in-memory
rebuildingoftheproductionscheduleandreplenishmentneedsinconsiderationofall
constraints.Thenetresultisreducedcosts(viaincreasedautomation),improved
reliability(viagranularfeedback),andbettercustomerexperience(viaimmediateand
reliableresponses).
Collaboration
Thesupply-chaincloudformsthenextlevelofcollaborationinthesupplychain.Supply-
chaincloudsarejointsupply-chainplatformsbetweencustomers,thecompany,and
suppliers,providingasharedlogisticsinfrastructureorevenjointplanningsolutions.
Especiallyinnoncompetitiverelationships,partnerscandecidetotacklesupply-chain
taskstogethertosaveadministrativecostsandlearnfromeachother.
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Oneleadingconsumerconglomeratehasalreadyfoundthatcollaborationalongthevalue
chainallowsformuchlowerinventoriesthroughanexchangeofreliableplanningdata.It
alsoslashesleadtimes,thankstoinstantaneousinformationprovisionthroughoutthe
entirechain,whileprovidinganearly-warningsystemandtheabilitytoreactfastto
disruptionsanywhere.
Supply-chainstrategy
Followingtheneedforfurtherindividualizationandcustomizationofthesupplychain,
supply-chainsetupsadoptmanymoresegments.Toexcelinthissetting,supplychains
needtomastermicrosegmentation.Adynamic,bigdataapproachallowsforthemass
customizationofsupply-chainofferingsbyseparatingthesupplychainintohundredsof
individualsupply-chainsegments,eachbasedoncustomerrequirementsandthe
companysowncapabilities.Tailoredproductsprovideoptimalvalueforthecustomer
andhelpminimizecostsandinventoryinthesupplychain.
ImpactofSupplyChain4.0
Eliminatingtodaysdigitalwasteandadoptingnewtechnologiestogetherformamajor
levertoincreasetheoperationaleffectivenessofsupplychains.Thepotentialimpactof
SupplyChain4.0inthenexttwotothreeyearsishuge.Expectationsincludeupto30
percentloweroperationalcosts,75percentfewerlostsales,andadecreaseininventories
ofupto75percent.Atthesametime,theagilityofthesupplychainsshouldincrease
significantly.
Howdidwecalculatethesenumbers?Theyarebasedonourexperiencewithnumerous
studiesandquantitativecalculations.Thethreeperformanceindicatorsarehighly
correlated;forexample,animprovedinventoryprofilewillleadtoimprovedservicelevel
andlowercost.
Supply-chainservice/lostsales.Whencustomerserviceispoor,thedriveriseither
awrongpromisetothecustomer(e.g.,unrealisticleadtimes),awronginventory
profile(orderedproductsarenotavailable),and/oranunreliabledeliveryof
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parts.Lostsalesinadditionoccuriftherequiredproductsarenotavailableonthe
shelforinthesystem;customerswilldecidetoswitchtoanotherbrand.Thisis
trueforbothB2CandB2Benvironments.
Servicelevelwillincreasedramaticallywhenthesupplychainsignificantly
improvesinteractionswiththecustomer,leveragesallavailablepoint-of-sale
dataandmarketintelligence,improvestheforecastqualitysignificantly(upto
morethan90percentintherelevantlevel,e.g.,SKU),andappliesmethodsof
demandshapingincombinationwithdemandsensingtoaccountforsystematic
changesandtrends.Withtheresultingserviceimprovement,lostsaleswill
decreasesignificantly.
Supply-chaincosts.Drivenbytransportation,warehouse,andthesetupofthe
overallnetwork,thecostscanbereducedbyupto30percent.Roughly50percent
ofthisimprovementcanbereachedbyapplyingadvancedmethodstocalculate
theclean-sheetcosts(bottom-upcalculationofthetruecostsoftheservice)of
transportandwarehousingandbyoptimizingthenetwork.Thegoalshould
alwaysbetohaveminimaltouchpointsandminimalkilometersdrivenwhilestill
meetingtherequiredservicelevelofthecustomer.Incombinationwithsmart
automationandproductivityimprovementinwarehousing,onboardunitsin
transportation,etc.,theseeffortscanachievethesavingspotential.
Theremaining15percentcostreductioncanbereachedbyleveragingapproaches
ofdynamicrouting,Uberizationoftransport,useofautonomousvehicles,and
wherepossible3-Dprinting.
Supply-chainplanning.Theplanningtaskssuchasdemandplanning,
preparationofS&OPprocess,aggregatedproductionplanning,and
supplyplanningareoftentimeintensiveandconductedmainly
manually.Withadvancedsystemsupport,80to90percentofall
planningtaskscanbeautomatedandstillensurebetterquality
comparedwithtasksconductedmanually.TheS&OPprocesswill
movetoaweeklyrhythm,andthedecisionprocesswillbebuilton
scenariosthatcanbeupdatedinrealtime.Thiscombinationof
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accuracy,granularity,andspeedhasimplicationsfortheother
elements,suchasservice,supply-chaincosts,andinventory.Systems
willbeabletodetecttheexceptionwhereaplannerneedstojumpin
todecide.
Inventory.Inventoryisusedtodecoupledemandandsupply,tobuffer
variabilityindemandandsupply.Implementingnewplanning
algorithmswillsignificantlyreducetheuncertainty(thestandard
deviationofthedemand/supplyorforecasterror),makingsafety
stockunnecessary.Theotherimportantvariabletodriveinventoryis
thereplenishmentleadtime:withmoreproductionoflotsize1and
fastchangeovers,theleadtimewillbereducedsignificantly.Also,
longtransporttimesay,fromAsiatotheEuropeanUnionorthe
UnitedStateswillbereduced,duetoasignificantincreaseinlocal-
for-localproduction.Inaddition,3-Dprintingwillreducethe
requiredinventory.Wewouldexpectanoverallinventoryreduction
of50to80percent(Exhibit3).
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Exhibit 3
Transformationintoadigitalsupplychain
Thetransformationintoadigitalsupplychainrequiresthreekeyenablers:aclear
definition,newcapabilities,andasupportiveenvironment.Definingthedigitalsupply
chainstartswithanunderstandingofthecurrentoperationsdigitalwaste.Capabilities
regardingdigitizationthenneedtobebuilt;typicallytheyrequiretargetedrecruitingof
specialistprofiles.Thefinalprerequisiteistheimplementationofatwo-speed
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architecture/organization.ThismeansthattheestablishmentoftheorganizationandIT
landscapemustbeaccompaniedbycreationofaninnovationenvironmentwithastart-
upculture.
Thisincubatorneedstoprovideahighdegreeoforganizationalfreedomandflexibility
aswellasstate-of-the-artITsystems(two-speedarchitectureindependentofexisting
legacysystems)toenablerapidcyclesofdevelopment,testing,andimplementationof
solutions.Fastrealizationofpilotsisessentialtogetimmediatebusinessfeedbackon
suitabilityandimpactofthesolutions,tocreateexcitementandtrustininnovations(e.g.,
newplanningalgorithms),andtosteernextdevelopmentcycles.Theincubatoristhe
seedofSupplyChain4.0intheorganizationfast,flexible,andefficient.
Abouttheauthor(s)
KnutAlickeisamasterexpertinMcKinseysStuttgartoffice,whereDaniel
Rexhausenisapartner.AndreasSeyfertisanassociatepartnerintheBerlinoffice.
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