[Intern Insights] Digitolution: How digitalisation changes the global retail supply chain
A supply chain covers all businesses and individual contributors that are involved in creating a product, ranging from suppliers of raw materials to the end-customer.
Technological innovations can be used to upgrade traditional supply chains to smarter, more connected and highly efficient digital supply chains. This is not an easy process, as supply chains are very complex systems embedded in an even more complex global economy. Contributors often are internationally located, which involves dealing with different politics, trade and traffic laws, and quality control regulations.
I like to imagine it like the Butterfly Effect: a small wing flutter, a slight change of a process or regulation, might affect another stage in the chain.
Today, a supply chain is often a series of isolated steps taken through different stages of logistics such as manufacturing, warehousing, and transportation.
In a digital supply chain, those stages will be seamlessly connected and fully transparent to all individual contributors involved. A completely digital chain does not exist yet, but to keep up with demands and technology, and to profit from the financial benefits, many companies within different industries now started digitising their supply chains.
Whilst industries such as electronics are already further in the process of digitalising their chains, asset-intensive companies or consumer-facing companies, such as retail and fast-moving consumer goods, stayed behind [PWC, 2016].
How is the general supply chain going to change?
A digital chain becomes more transparent, which contributes to a better understanding of what every link in the chain is doing. Amongst others, this leads to:
- Improved collaboration: Real-time insights in the needs and challenges of others will be possible.
- Fast communication: Information that used to be delayed, as it had to move through each step and reach all stakeholders will be available to all simultaneously.
- Demand driven supply chain: Planning will be fast and flexible and away from just forecasting, instead of being demand driven.
The transformation to optimise supply chains becoming more reliable and responsive is driven by new technologies such as track-and-trace technologies, big data, cloud computing or the Internet of Things, but it’s not technology alone. People’s behaviour changed, they became multichannel consumers, more demanding, wanting the product delivered instantly and conveniently.
What do the changes in people’s behaviour and expectations mean for the retail supply chain?
Today, people purchase digitally. Online shopping is booming, even categories that relied on an in-person shopping experience moved online. In 2016, nearly two-thirds of consumers shopped online at least once a week, an increase of 41% from 2014.
People shop using multiple channels, be it in-store purchases, mobile, tablet or laptop, consistency, high quality and excellent service is expected, of course to the lowest costs (The Future of Retail Supply Chains, McKinsey, 2016).
Comparing competitors’ prices online or ‘showrooming’ – browsing in stores but buying from a cheap competitor online – give the consumer more power. Customers define more and more how companies have to structure their supply chains.
The shift to multichannel, the customer’s expectations such as same-day deliveries or returning online ordered goods free of charge – using any channel – lead to blurring the boundaries of channels. For example, goods ordered online but not liked can be returned back in-store.
This requires adaptation, to give a simple example:
Instant deliveries require a high stock of inventory in strategically positioned distribution centres. One centre might is enough to secure delivery within 2 or 3 days, same-day shipping requires more distribution centres. A piece of clothing that was ordered online gets returned in-store, means that the store now must stock an item that might is not sold usually or bring up time and costs of returning it to the distribution centre.
What does an optimised retail supply chain look like?
In the example above, technology that allows seeing inventory levels across the store network can help managing inventory levels across the store using various channels. A returned item that the store normally does not manage, can be delivered straight away to the next online order that comes in, saving time and operation costs to return that item to a distribution centre whilst cutting time on the delivery side. With technology, information about products that are stored anywhere, be it a store, a warehouse, can be made available to customers instantly.
But it can go further than just inventory management.
Imagine that drones could be used to deliver goods faster, a move Amazon is looking into. Or imagine virtual reality, used to shop online, letting customers enter a virtual store with products they actually can engage with whilst just sitting on their sofa in the living room. A whole new level of customer experience! – and a way to collect more data about the customer than was possible before. Every move, every product just looked at could be tracked.
Retailers that want to stay competitive need to find a right balance between quick wins and long-term strategic vision. The supply chain needs to become more customer-focussed, agile to fast respond to the changing needs of the consumers and cost-effective. Big data helps better predicting demand, even though combining internally available data with external, less transparent data as well as correctly interpreting the data will be challenging [KPMG, 2016].
What will change is the way the supply chain is looked at, seen as a cost driver – factors such as total cost of ownership, spend analysis and so on are very well understood – however, with technology, that brings an understanding of how customers’ behave, the supply chain will become a sales driver.
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