Port

Digital transformation in the supply chain

José Lara
26/02/2021
Port

Why do some companies profit from advances in technology and best practices while others don’t? In the early 1990s, Crowe Costa Rica participated in projects that connected manufacturers with distributors to improve forecasting and inventory management. Previously, companies had not been able to forecast sales appropriately. As a result, these companies had high levels of inventories. For example, several companies in the pharmaceutical industry were connecting their own systems to customers’ systems to watch sales activity farther down the supply chain.

At that time, monitoring was not done in real-time due to communications constraints, but it was still done on a daily basis. We recommended that our clients develop a similar system. Most of them disagreed and thought it was unnecessary because the benefits were not clear and they were doing fine with their current processes. Yet, almost thirty years later, even the best of supply chains still has trouble envisioning the potential benefits of technology.

To discover what is hindering technology adoption, we:

  • Interviewed eight top supply chain executives from all types of companies, including large retail organizations, consumer goods firms, pharmaceuticals, chemicals, logistics, and medical devices,.
  • Reviewed ten supply chain transformation projects and consulting firms to determine their approach to digital transformation.
  • Participated in supply chain planning meetings to better understand the challenges these companies face.
Iron

Survey and Research Results

When we asked what companies are expecting from a digital transformation, most executives replied artificial intelligence, advanced analytics, machine learning, automation, and blockchain. However, when asked about specific applications in their businesses, most were unable to elaborate. This gap indicates widespread lack of clarity about digitalization opportunities.

Yet, there was some understanding among young planners as they defined priorities. For example, a packaging materials customer service representative questioned the implementation of an MRP system where it would not achieve a competitive advantage. Instead, the junior member of that management team advocated for better management of expensive capacity through a finite capacity algorithm. Implementing this idea resulted in lower production costs and exceptional customer service, teaching us that success more often arises from a company’s culture of innovation.

In the consumer goods industry, the more successful trend has been to focus on planning end-to-end operations from demand planning to finished goods scheduling and materials planning, where one person plans and tracks a synchronized product flow from the raw materials supplier to the customer´s shelf. This approach provides excellent customer service, lowers cost and inventory levels, and results in an end-to-end view of the entire supply chain.

In both success stories, the companies see clear opportunities and a transformation roadmap. People at all levels of the organization can propose radical change. But, we have also seen companies that routinely abandon basic supply chain projects or struggle with implementation for years. Why the difference? Let´s look at some examples.

Our first example is also in the consumer goods industry where we encountered an acute forecast bias. Sales were routinely forecasted either below or above actual sales. Since production plans and material needs plans depend on the forecast, requirements were consistently overestimated or underestimated. Planners often had to negotiate changes in raw material purchase orders with suppliers, causing high freight costs and excessive expediting. It was impossible to “freeze” production plans for any period of time and allow for an efficient shop floor schedule both in the company’s plant and in the suppliers’ plants. This was because the sales force was paid according to actual sales over the forecasted amount, which encouraged them to forecast less than they knew they would sell.

Surprisingly, some organizations understood that a new ERP system could solve the problem. When we explained a few simple steps that they could take, the company still felt that what they had was fine and that any change could disrupt a rising sales trend. This last scenario should not be new to anyone who has worked with supply chain processes. Still, the question remains: What accounts for the difference between the high performers and low performers?

 

High Performers vs. Low Performers

All the executives interviewed agreed that, while the fundamentals of planning processes remain the same, digital transformation will shorten the cycle time to plan and execute through synchronization, real-time response, and advanced analytics. The end result will be lower working capital amounts and exceptional service levels to leverage the rewards of digitalization in the short-term.

Cultural transformation is a key differentiator between low and higher performers. The transformation requires enough trust and confidence in the team to enable them to propose seemingly absurd ideas. The overrun of a materials requirements plan, according to the AI recommendation, requires different analysis capabilities and varying levels of empowerment and accountability. Those charged with the transformation trust that the AI will detect a supplier lead time extension need before it happens.

In the best-performing companies, people work every day to improve their past performance. That means there is both a performance measurement system and accountability. In most other companies, people start work in the morning and stop in the afternoon without knowing if they met expectations. With their only purpose being to show up for work, their work is mostly transactional. Some high performers go beyond meeting expectations, but it is not a requirement.

The question is, how does a company establish expectations, measure performance, and motivate its people to raise the bar every day? The first thing is to go beyond the “good enough” paradigm. Our consumer goods clients have many procedures that support a culture of meeting increasingly higher expectations. The question then becomes, how did the company decide to invest in this infrastructure? One of the best-performing companies we visited allocated considerable resources to develop this type of culture. There had to be a point when the company decided that this was a worthwhile investment and transcended the “good enough” paradigm. Prepared and motivate people share a clear vision of what should be done and lead the process.

In our work with organizations, investments in culture have more often than not been difficult to justify and their return has been invisible. Our top performers, however, have invested in developing high-performing cultures that align with new technological capabilities and produce outstanding results. One of the companies we interviewed had many messages on the meeting room walls, elevators, and employee badges, supporting the beliefs and activities of their culture. While this multibillion-dollar corporation could have stayed at the “good enough” level, they knew they needed to create a culture that was relevant to the organization’s goals and meaningful to the entire team. This takes time and effort to develop and achieve. According to our research, exceptional results are a product of technology and organizational schemes that propel employees to achieve.

The best performers excel at establishing a daily performance measurement system that is precise, fair, and aligned with the goals of the organization and have the freedom to propose and change with the full support of the organization’s leadership. Also, these organizations have a structured approach to change management and good decision-makers.

In the final analysis, high-performing digital transformation comes down to establishing a clear goal and a sense of urgency throughout the organization. The planner understands the key problem and then acts on it without having to call a meeting or consult with their supervisor. If the problem becomes recurrent, there is a procedure in place to help develop a permanent solution.

JL
JL
José Lara
Socio Consultor
Crowe Horwath CR, S.A.