Digitization of the Supply Chain Drives Profitable Growth

Opportunities to increase market share will increase when companies are pre-positioned for growth in a resilient and scalable way.

Digitization of the Supply Chain Drives Profitable Growth

By Lisa Anderson, Founder and President, LMA Consulting Group

According to a McKinsey study, investment in supply chain digitization is slowing down after rapid growth in 2020-2023. On the other hand, the McKinsey Global Supply Chain Leader Survey finds that nine out of 10 respondents continue to experience supply chain challenges. And, according to Reuters, supply chain glitches dominated the latest company earnings season, with mentions of the issues by chief executives jumping 412% from last year, according to a BofA tally. Disruptions will continue to plague supply chains, and the successful companies will prioritize digitization to achieve supply chain resilience and profitable growth.

Digitization with Dashboards to Achieve Resiliency

Supply chain resiliency has become an imperative for survival. Keeping ahead of changing conditions to mitigate risk, maximize customer satisfaction, and optimize margins will contribute to resiliency. For example, companies that have implemented digital dashboards were twice as likely as others to avoid supply chain issues caused by disruptions, according to a McKinsey study. Digital dashboards can provide up-to-date information on transportation bottlenecks, changing geopolitical risks, potential weather impacts, manufacturing performance, inventory levels, and other critical data so that the client can proactively navigate changing conditions in the supply chain.

For example, in a custom, engineer-to-order industrial equipment manufacturer, inventory built up after the pandemic to ensure ample supply for customers. Revenues grew by over 25%, but cash flow would become constrained if inventory wasn’t addressed. Thus, it became a corporate priority to right-size inventory to free up cash while maintaining revenue and profitability goals. Digital dashboards were rolled out to monitor inventory levels, projections, and safety stocks by product categories, suppliers, and sites. A simple business-intelligence model provided these dashboards and highlighted exceptions for follow-up. A 40% inventory reduction followed.

ERP, MRP, and Advanced Planning to Drive Customer Satisfaction and Efficiencies

Digitization with the use of ERP and advanced planning systems will level up your organization's ability to meet customer needs efficiently and effectively. By utilizing MRP (material requirements planning) and production scheduling capabilities in a modern ERP system, you can optimize inventory levels while ensuring a superior customer experience and maximum production output. Taking it a step further, organizations expand upon digitization even more with advanced planning and forecasting systems. These systems provide additional demand planning capabilities to handle promotions, special discounts, and predictive capabilities and additional supply planning capabilities with what-if scenario planning and resource optimization.

For example, a building products manufacturer wanted to improve service levels to customers while also reducing costs and right-sizing inventory across their distribution facilities. Thus, they upgraded their use of SAP's MRP and production scheduling functionality to develop improved production schedules that better optimized manufacturing efficiencies with customer, inventory, and storage considerations. They also utilized DRP (distribution replenishment planning) capabilities to ensure their distribution sites could better serve quick turnaround requirements of customers while reducing freight costs with load optimization and decreasing costs of their network. This led to a 30-percentage-point improvement in service levels, as measured by OTIF (on-time-in-full) and customer feedback.

Customer Collaboration and Transportation Optimization

By optimizing transportation and goods movement as a part of a supply chain digitization initiative, customer service and margins improve. These programs can be as simple as utilizing a TMS (transportation management system) to select the optimal mode of transportation and carrier that will ensure delivery performance at the least cost, to a more advanced solution such as a digital control tower that monitors a global supply chain, predicts potential disruptions, and re-routes container ships and logistics systems to meet customer needs, avoiding bottlenecks at the least cost. Since freight costs can frequently be around 10% of cost of goods sold — especially in the current inflationary, supply-chain-disruptive environment — even small improvements can become meaningful.

The Bottom Line

Successful companies will pursue digitization initiatives to transform their supply chain. Not only will visibility and customer loyalty improve, but profitable growth will follow. As inventory is right-sized, customer value and margins improved, and supply chain networks optimized, companies can scale rapidly and deliver profitable growth.