Trends Transforming Supply Chain Infrastructure

Wednesday, February 20, 2013

Fundamentally, the health of a supply chain is the dominant factor in ensuring a company’s overall financial health and shareholder value, says J. Paul Dittmann, Ph.D., the executive director of the Global Supply Chain Institute at the University of Tennessee, author of two books about supply chain strategy, including “Supply Chain Transformation: Building and Executing an Integrated Supply Chain Strategy,” released in October 2012.

While most corporate executives readily acknowledge that fact, continues Dittmann, “thousands of these companies never consider supply chain strategies when creating business plans—even though the supply chain accounts for roughly 60% of a firm’s total costs, 100% of the inventory, and is essential to providing the customer service required to drive sales.”

Dittmann has surveyed a vast number of U.S. companies about their supply chain practices. His findings may come as something of a surprise: Just 15% have a strategy in place for achieving supply chain excellence.

As for the 85% of companies without a supply chain strategy, most recognize its importance but have stopped short of putting something in place because of the perceived costs—in resources, manpower or consulting fees—as well as the daunting challenge of managing such a cross-functional undertaking, says Dittmann.

C. Dwight Klappich, vice president of research, has seen similar trends in the studies he’s conducted at information technology research and advisory firm Gartner Inc. But, with the release of 2012’s fifth-annual “Supply Chain User Wants and Needs Study,” he discovered that the corporate stance on supply chain had taken a turn.

“We’ve surveyed this field annually for several years. From 2008 to 2009 the focus was primarily on cost cutting by slashing costs, cutting inventory and laying off people,” says Klappich. “But coming into 2010, companies began to realize that they could only slash and burn so far if they wanted to stay in business.”

That realization, Klappich explains, prompted companies to shift toward increasing supply chain productivity and efficiency. “In 2012, we found companies taking more of a longer-term, almost optimistic view, by now focusing on: improving customer service, implementing strategies that support business growth and innovation.”

Although, says Klappich, most companies traditionally think “product” when they think “innovation,” more have come to recognize that in order to be more competitive they have to start looking at supply chain innovation. “The trend is focusing not on doing what we’ve always done and doing it better, but on challenging the way that we run our business.”

Richard H. Thompson, managing director at Jones Lang LaSalle Americas, Inc., agrees. “Corporations are always going to seek out the lowest total operating cost model. But they have come to understand the tradeoffs between the key operating costs in that model—freight, inventory, labor, real estate—have to be balanced by service requirements,” he says.

From a flexibility and cost-cutting perspective, observes Thompson, one supply chain trend is the change from traditional software licensing and sourcing to Cloud computing, also known as the Software-as-a-Service (Saas) model.

“SaaS creates a more variable cost structure, allowing smaller companies to attain technologies that they couldn’t have taken advantage of in the past,” he explains. “You’d think everybody would have a warehouse management system (WMS) now, but the majority of companies don’t, partly because of the cost. With Cloud computing, more companies have access to these really sophisticated tools on a pay-per-play basis.”

That jibes with Klappich’s research findings, too. “Cloud computing is currently growing at a rate of 20% per year, revenue-wise,” he says. “I suspect it’s growing even more than that in terms of net new deals, but the numbers look smaller because the cost for SaaS is less than a traditional full license for software technologies.”

Thompson also sees risk mitigation as a big, recent development in supply chain strategies. “It’s difficult to put numbers to it, but companies have to include risk in their supply chain models now. For example, if freight costs go up 25% over the next two years, or a natural disaster like an earthquake and tsunami hit a particular Asian country where a key component of your product is manufactured, or a labor strike affects your main port of entry into the U.S., how will you transform your supply chain infrastructure to accommodate?”

Returning some (or all) manufacturing processes closer to American shores and away from foreign countries is another trend fueled by the increased desire for risk mitigation. Known as near-shoring—or “right-shoring,” as Thompson prefers to call it—this is one way companies are adjusting their supply chain infrastructure.

“Right-shoring recognizes a more regionalized manufacturing or sourcing model as part of the overall supply chain strategy,” he says. “All things being equal, you want to be closer to your customers. As a result, you get improved speed to market for better customer service levels. You reduce complexity and risk by being closer, and you shrink inventory levels because you can respond faster and because your product or component isn’t traveling quite such a long distance across the ocean. And, you lower your freight costs.”

But, says Thompson, in order for companies to better understand the potential risks to their business, it’s important to have a solid grasp of the analytics involved. “Most companies have good data on their costs—freight, labor, inventory, real estate—and those can be more easily modeled, however it is harder to assess the various risk management considerations, such as natural disasters or currency fluctuations. In that context, companies are going to start to demand better predictive analytics and business intelligence tools,” he says.

Klappich—and his survey findings—agree: an evolution in supply chain software is at hand. “When we asked respondents to our survey, ‘What do you consider to be the top three obstacles to achieving your organization’s supply chain goals and objectives?’ we saw a leap in ‘lack of visibility across the supply chain’ and ‘supply chain network complexity,’ when compared to responses to the same question in 2010.”

In Klappich’s opinion, companies will now begin to invest more in software applications that further enhance visibility and communication across the supply chain.

“Supply chain investments have mostly been in transactional types of applications that are excellent at process automation, but not as good at providing transparency and forward looking analytics. Over the next 15 years, supply chain software development will focus more on enabling better decision making and managing the warehouse,” he says. “The software will not only look at trends ex-post facto, but also predict what might or could happen, how changes are occurring, and when problems are going to occur—as opposed to telling management about a problem after it’s occurred.”

Such system advancements will empower warehouse managers by allowing them to manage events in the here and now, as well as look forward and adjust their tactical plans to accommodate, says Klappich: “For example, the software will alert the manager that Thursday is going to be a heavy receiving day—not on Thursday morning, but on Tuesday instead—giving the manager some extra time to rethink the staffing plan for Thursday.”

A portion of that predictive analysis functionality will likely take the form of 3D simulations that borrow heavily from the latest trends in consumer gaming development, speculates Klappich. “Some of the things being done in computer games are much more sophisticated than what’s being done in business today—I think we’ll see software developers adopting more of those concepts into business.”

Klappich cites European warehouse management company Consafe Logistics as an example of a firm that has adapted some gaming concepts into their application, using it to create a 3D visual representation of a warehouse for simulation purposes. The user can view the floorplan from overhead or from an “on the warehouse floor” perspective to analyze the flow of fork trucks, for example.

“This type of modeling incorporates a breadcrumbing function, showing the flow of all forktrucks and areas of potential bottlenecks, for example,” he says. “The software is not going to replace people, but it’s going to give people much better tool than today’s bias toward trying to fit everything into a table or a bar graph or a spreadsheet.”

Each of these trends will contribute to the transformation of corporations’ supply chain infrastructure as they strive to grow their business. By implementing both innovative practices and technologies, supply chains will become faster and more nimble, enabling better informed decisions and rapid fire adaptations to accommodate changing conditions. Because, as Klappich summarizes: “You can’t expect to run a report once a week and that be enough to tackle an environment where things change on an hourly basis.”

About the author:
Sara Pearson Specter has written articles and supplements for MODERN Materials Handling and Material Handling Product News as an Editor at Large since 2001. Specter has worked in the fields of graphic design, advertising, marketing, and public relations for more than 15 years, with a special emphasis on helping business-to-business industrial and manufacturing companies.