Mid-market companies are investing heavily in digital transformation of their supply chain in an attempt to improve both efficiency and competitiveness. The hope is that digitising aspects of their operation will drive improvements in key business metrics and, ultimately, enhance corporate performance. In Europe, 62 per cent of organisations expect a “significant increase” in the pace of change of digital transformation in 2020. Thus, the writing is very much on the wall.
But what do we mean by digital transformation? And how are supply chain firms putting it into practice, both now and in the future?
What Is Digital Transformation?
The term “digital transformation” has become a buzzword across the supply chain, especially among mid-market firms looking to upgrade their operations. To the layperson, it simply means incorporating digital technology into operations and management. However, it comes in a variety of flavours, and these have real-world ramifications.
- Digitisation. Digitisation is often the first step that companies take when dabbling with the idea of digital transformation of their supply chain. This process typically involves converting physical paperwork into digital formats, making it easier to store, transfer, search and find.
- Digitalisation. Managers will often use the term “digitalisation” to describe the process of using software to automate tasks. When properly applied, digitalisation can increase the speed of operations and reduce administrative costs.
- Digital transformation. Digital transformation goes beyond converting physical processes into digital ones. It seeks to change the underlying business model by taking advantage of the inherent benefits of digital technology offers. The results are often “game-changing.”
Both digitisation and digitalisation can improve productivity and performance. Still, many mid-market supply chain firms are aiming for full-blown digital transformation. They see disruptive technology coming down the pike, and they want to position themselves strategically, as the nature of the industry changes.
Forward-looking firms, for instance, are taking note of changes that occurred in other sectors when they embraced digital technology. Just as in media and advertising, they foresee the rise of direct-to-consumer models and platform services, both of which are mortal threats to existing business models. For instance, 50 per cent of manufacturers believe that digital business planning is critical to supply chain transformation. Firms that use digital transformation, they hope, will get ahead of the curve and be better able to prepare for inevitable upcoming changes.
Savvy mid-market companies also predict changes in the way they use their assets. Digital transformation typically leads to “asset-lite” modes of operation. Data and software are potent management tools that reduce dependence on plant and capital and improve utilisation rates. So companies managing supply chains who reduce the size of their balance sheets could achieve higher profitability and scale faster than their asset-heavy rivals.
Broadly speaking, the potential applications of digital transformation to mid-market companies are limitless. Supply chain enterprises, however, may stand to gain the most, especially when they combine digital innovations with integrated business planning (IBP). Dashboards, platforms and automation could all serve to make this management ideal a reality, without the usual administrative overhead.
In the following sections, we will cover some of the reasons why mid-market manufacturers and distributors are investing so heavily in digital transformation. This list is by no means exhaustive, but it makes a strong case that most firms in the sector should be more digital in their outlook than they are today.
The Current State of Digital Transformation
Around 66 per cent of mid-market company leaders say that becoming more digital is among their priorities. There are, however, substantial differences between firms. Some are well advanced on the road to digital transformation, while others are languishing at the digitisation stage, (or doing nothing at all).
The Middle Market Indicator Report, Q4, 2018, suggests that only around 19 per cent of mid-market firms are engaged in genuine digital transformation as described above. Nearly half – approximately 49 per cent – are at the digitization stage, converting paper records into digital format, but not doing much else.
Larger companies in the segment are more likely to have digital transformation projects underway, perhaps because they have more resources. But penetration still stands at just 27 per cent, indicating that there is a long way to go even here.
How Are Supply Companies Spending On Digital Transformation of their supply chain?
So far, the vast bulk of digital spending has gone to improving back-office functions. Manufacturers and Distributors have concentrated their energies on so-called “low-hanging fruit,” moving to digital invoicing, accounting and payroll. Most firms are using off-the-shelf solutions, designed to slot seamlessly into their current operations without significant disruption. A subgroup of these firms is using tools that help improve HR function.
For the most part, though, spending focuses on the basics: managing costs, arranging billing and digitising aspects of staff management. Companies aren’t doing much that couldn’t be done in the late 1990s. Progress is slow.
The next task for companies with supply chains to manage is to apply digital transformation to new areas, including sales, logistics, demand generation customer interactions, analytics
& strategy and innovation. Opportunities abound for these mid-market companies to make progress outside the backroom – they just need to take advantage.
Digital transformation, for instance, is helping mid-market Manufacturers and Distributors to change their operational paradigm to better suit both their needs and those of their customers. New technology allows firms to build IT “stacks” of applications and systems that let them adjust the way that they fulfil orders. Production can go from providing products based on what’s in stock to making them to order. Businesses in the Supply Chain world are no longer reactive, but can actively forecast how demand is likely to pan out.
Likewise, there are potential applications in demand generation – the process of drumming up a desire for a particular product or service. As B2B enterprises, mid-market supply chain companies rely heavily on building demand from other firms. And like enterprises in different sectors, they need to engage new audiences, convert leads to prospects, make sales and upsell to existing customers.
Demand generation, therefore, is a natural bedfellow of digital transformation. The concept necessarily involves critical metrics, such as pipeline value and lead velocity, both of which are amenable analysis.
There’s a big difference between demand generation and demand fulfilment. The former encompasses all the ways that companies can use digital tools to drive sales. The latter involves satisfying that demand via company operations. This contrast provides a good example of where digital transformation is heading in the future. Businesses managing supply chains are increasingly looking to apply technology outside of the backroom, making it more business-wide.
Mid-market supply chain focused companies must deal with the realities of logistics to keep goods flowing from primary producers to the consumer market. Arranging storage and transport of products and equipment, however, is notoriously challenging when done with paper.
Here, again, though, digital transformation is making its impact felt. Companies aren’t just converting bills of lading into digital format. Instead, they’re using data resources at their disposal to fundamentally change how logistics works.
Currently, most companies managing supply chains have large balance sheets, containing assets like warehouses and trucks. They are the responsibility of the firm itself. Software and the emergence of platform companies, however, could disrupt the prevailing business model.
Companies, for instance, may no longer have to keep warehouse or fleet entries on their books. Instead, services are emerging that provide storage or transportation on-demand, thereby lowering costs. If demand rises and suppliers require more inventory, they can
simply rent additional square footage automatically to compensate. If it falls, then they can rent less. Costs fluctuate with demand, allowing firms to roll with the vicissitudes of the market.
Digital transformation can also help in other ways. For instance, companies that use CRM systems – a technology that would fall into the “digitalisation” category above – report more effective sales teams than those that don’t. And those that digitise their fulfilment and inventory can improve customer service between 2 and 3 per cent.
Full-scale transformation brings omnichannel customer interactions together, helping to streamline services and avoid client frustration. Supply chain companies, for instance, can prioritise complaints by combining customer service allocation with data collection.
Analytics & Strategy
Perhaps the most significant gains from digital transformation come from investing in projects with strategic intent. Companies that can make critical aspects of their business digital stand a better chance of positioning themselves in the market for future success.
Note here that digital transformation is fundamentally forward-looking. Firms are not only considering how analytics improve aspects of their existing operation, but also how it might change their overall strategy in the future. They’re using it for demand planning, forecasting, and the adoption of disruptive business models.
According to the Middle Market Indicator Report 4Q, 2018, companies place minimal emphasis on innovation. Only around 7 per cent said that their information technology spending goes in this direction.
Product lifecycle planning (PLM), and innovation, however, are intrinsically linked. If firms want to remain competitive, they need to move beyond focusing merely on improving existing products towards building entirely new ones.
The most sophisticated firms have one eye on product innovation, but they also engage in process innovation. In the supply chain context, this could mean building systems that allow companies to switch quickly between suppliers in the event of a shortage, integrate buyers and sellers further up and down the chain, or offer new forms of logistics to customers. Industrial equipment manufacturer, Caterpillar, for instance, recently invested in new processes that enabled it to deliver spare parts to customers faster than its competitors.
The Future Of Digital Transformation And Integrated Business Planning
The impact of digital transformation on integrated business planning will be profound. With proper use of data, companies will be able to increase forecast accuracy, increase the efficiency of supply chains, improve customer satisfaction and, ultimately, increase profitability.
Evidence suggests that most digital companies are also the fastest-growing. The Middle Market Indicator Report, for instance, found that companies that adopted a strategic approach to digital transformation grew at an impressive 10.2 per cent over the preceding twelve months. Those who were only “digitizing” but not transforming how they did business only saw 6.3 per cent growth.
Most mid-market companies, however, are only marginally satisfied with digital practices at their firms. The majority of leaders give themselves a B or C grade for their efforts in this direction. Only around a quarter of companies surveyed, for instance, have successfully integrated omnichannel customer service.
Companies rely on IBP/S&OP to manage their supply chains to ensure that their firms can navigate a highly complex and involved market. Most are taking advantage of digital technologies in back-office areas. Still, relatively few are considering new business models that fully exploit the current technological landscape. Thus, there’s a need to push out into new areas and apply digital transformation more widely.
Many aspects of IBP require digitalisation. For instance, the need to develop systems that will allow them to predict levels of demand in the future – something that would fall under the analytics and the Strategy heading above. They also require tools that let them organise resources to manage disparities between supply and demand. Smart software, for instance, can better predict customer demand and then automatically make changes to input orders, allowing firms to react faster to sales volumes. Furthermore, these systems can collect ancillary data to increase forecast accuracy.
Digital transformation could also help to commoditise the supply chain in a way that we haven’t seen before. For instance, we could see a bifurcation between suppliers and the tools that they use to carry out their work, similar to the difference between e-commerce sellers and platforms like Shopify. Supply chain managers might oversee resource allocation, while providers would simply provide plant and equipment on-demand.
While digital transformation offers critical advantages for companies that are brave enough to get on with it, there are significant challenges:
- Finding talented people who can carry out strategic digital transformation projects
- Allocating resources to change: digital transformation can be expensive
- Changing management and mindset throughout an organisation to view digital transformation as something positive
- Moving to a digitally-intensive culture and changing staff assumptions
- Accommodating new digital risks, such as the threat of a cyber attack
Digital transformation offers mid-market supply chain companies a host of benefits across multiple aspects of their operations. Firms, however, need to move from basic digitisation of backroom tasks to more comprehensive and strategic use of the latest digital tools. Ultimately, enterprises need to fundamentally rethink how they manage supply chains in the context of powerful new technology.
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