Supplying Value: Digital Transformation and the Supply Chain
How will manufacturing and supply chains be impacted by digital disruption? Steven Wood, Senior Commercial Manager at Digital Catapult, explains how Industry 4.0 is helping businesses benefit.
It is estimated that around 80%(1) of everything we consume has, at some point, crossed an ocean; this could be as a finished product, a component or an ingredient. Moving things around is clearly big business.
Efficient global supply chains have been a major source of competitive advantage for years and overall investment has been considerable. Excellence in supply has been one of the key mantras of the automated, centralised mass production paradigm that has dominated the industrial world since the 1970s.
Despite this care and attention, examples of stock excess, lost orders and unused capacity still abound. The problem is that the supply chain is still a series of largely discrete, siloed steps, taken through product development, manufacturing and distribution, finally landing into the hands of the customer.
Each stage has developed its own method of collecting information, and little has been achieved in the way of integration. No single entity has ever had full end-to-end visibility even in the most vertically integrated global enterprise. There is also the small matter of the environmental impact of shipping products and components halfway around the world just to suit the needs of these well-tuned logistics machines.
This is all about to change. The driving force behind this is the advent of a new approach to manufacturing increasingly being heralded as ‘Industry 4.0’. This has a number of underlying features, but two in particular are of key relevance to supply chains: the digitisation of all steps in the process; and the shift towards flexible production.
The concept of flexible production is to manufacture goods at the optimum location for the market need. It is no longer about centralising and standardising to achieve the required economies of scale and the ability to maximise quality. Nor is it about everything being ‘3D printed’ at the point of use, just before it is needed. It is about establishing a balance based on the product and how it is consumed – a balance that is likely to change dynamically and unpredictably. This will have a marked impact on a company’s supply philosophy.
Fortunately, the digitisation of manufacturing offers an opportunity for companies to respond. As each Original Equipment Manufacturer (OEM) and supplier undergoes its own digital transformation, it will develop an ability to participate. Increasing transparency through sharing data will enable smaller, more agile and specialist providers to monitor their position in the supply system and thereby compete with larger companies on a more level playing field.
What we are seeing is a shift from hierarchical supply chains towards the concept of a supply network consisting of different types of company with a much wider range of expertise and capability: something now being referred to as a ‘supply web’. It is a much flatter system with linkages and relationships between different clusters and companies. The approach is naturally more collaborative, something facilitated by a more open transfer of information regarding the actual needs of the end consumer.
One example is the Chinese motorcycle company Dachangjiang(2). This has succeeded as a new entrant in a highly-competitive market by breaking its design into a number of modules and awarding several suppliers the responsibility for each. The suppliers are encouraged to collaborate and the outcome has been highly innovative and successful.
The advantages for the company are: an ability to reduce waste and cost, improve service levels and time to market for new products. It also allows them to mitigate risk. They are no longer making difficult strategic decisions about who their supply partners should be, risking failures, natural disasters and supply bottlenecks if things go wrong. They are now creating a ‘market’ – a system that is open, dynamic and flexible: one that is able to learn and will crackle with ideas and innovation.
However, most corporate supply chain departments are not created to work with hundreds, if not thousands, of smaller partners. In order to stay competitive in a changing market, they must find ways to adjust. This needs to be part of a company’s path towards ‘digital maturity’. Even seemingly simple things need to be addressed, such as being able to generate and process digital invoices and pay small supply partners in a timely fashion.
Digital Catapult has already helped a number of large manufacturing organisations to embark on widespread digitisation programmes. This has included improving businesses ability to work differently with supply partners. The emphasis has been on how to engage with wider ecosystems of small, specialist companies, including early stage start-ups with fragile business processes and cash flows. In many cases this is about establishing a new corporate culture based around open innovation.
Want to learn more about Industry 4.0? Make sure you take a look at the Industry 4.0 Summit, happening 4-5 April in Manchester.
- Future Agenda, Six Challenges for the Next Decade. Caroline Dewing & Tim Jones, 2015
- Supply Chains and Value Webs. Deloitte University Press, 2015