Q&A: Driving efficiency through digital supply chain transformation

May 2020  |  SPECIAL REPORT: BUSINESS STRATEGY AND OPERATIONAL PERFORMANCE

Financier Worldwide Magazine

May 2020 Issue

FW discusses driving efficiency through digital supply chain transformation with Rob Barrett, Peter Liddell, Carmelo Mariano and Maureen O’Shea at KPMG.

FW: To what extent have you seen an increase in the number of companies actively looking to improve the efficiency of their supply chain processes? What factors are driving this desire?

Mariano: There has been a rapid increase in the number of companies actively looking to improve supply chain efficiency in the last month due to major breakdowns discovered during the COVID-19 period of disruption. Very few saw a disruption of this magnitude coming. The danger of being too slow and cumbersome in a fast-changing world has been painfully recognised. Business as usual is not an option.

Liddell: Prior to COVID-19, companies in key Asian markets were struggling to keep up with substantial growth rates from e-commerce platforms and really concerned about declining margins from these channels, despite strong growth. In fact, many were growing their unprofitable business faster than everything else. Additionally, in key industry sectors such as automotive and life sciences, increased global competition was forcing leading brands to look at making supply chain adjustments in order to drive overall operational efficiencies. Other sectors such as agribusiness – especially in Australia, New Zealand and Latin American (LATAM) countries – were experiencing growth opportunities in Asian markets, driving supply chain efficiencies for two reasons: to protect margin as they compete on price for some commodities like beef, pork and others, and to create competitive advantage through highly efficient and effective supply chains.

O’Shea: Of course, technology is a major factor in driving efficiencies. Take healthcare, for example. Online technology allows your doctor to see, diagnose, and treat you virtually – all in the comfort of your own home. Similarly, life science companies are moving away from traditional pharma sales reps driving from one medical office to the next by using digital sales force automation. These digital tools bring together marketing, operations and sales teams onto a single platform. They provide 24/7 training, sales forecasting, physician communications and analysed customer data throughout the customer lifecycle. This integration allows real-time visibility to make better decisions, helps prioritise high-potential physicians and reduces operational cost.

Barrett: In the future, supply chains will not be driven by products and processes, but by customer needs. They will not depend on capital-intensive fixed assets and linear flows, but on an ecosystem of modular capabilities, delivered through a network of trusted third parties that can be scaled and recombined as needed. Imagine, with a click of a mouse or a swipe of a touchscreen, your customer will set your production line in motion, realigning your supply chain in real time to deliver a personalised, frictionless experience. Imagine drawing on data, from smart devices in the field and third-parties, to segment your customers and develop separate micro supply chains to service their needs more effectively. Imagine responding to tariffs and regulatory change by seamlessly moving your entire operations from one geography to another – in weeks.

FW: Could you outline some of the common weaknesses, vulnerabilities or inefficiencies you frequently see within today’s supply chains?

O’Shea: The global COVID-19 pandemic has uncovered underlying fault lines that were in place for some time. It has shown that the supply chain can be one of the biggest sources of vulnerability for a company. Conversely, it has shown that getting the supply chain right can be a huge competitive advantage. The current challenge can be used as a platform to gain deeper understanding of strategic operations and supply chains and, in turn, develop more collaborative and resilient relationships with critical suppliers. In the same way that restaurants responded to declining walk-in traffic by switching operating models to focus on take-away clientele and extended this to the delivery of corporate lunch packages, the triggers of this challenge can help enable organisations to spot opportunities within their current operating model.

Mariano: There are many emerging risks impacting supply chains. Some are geopolitical, such as increased protectionism, the rise of populism, Brexit and tariff changes. Others are caused by technology disruptors, such as the increasing volume and severity of cyber attacks. Increased data privacy regulations, such as the General Data Protection Regulation (GDPR), along with increased compliance and regulatory scrutiny, create more challenges. Recent spotlights on corporate ethics, from environmental protests to resource scarcity issues, have created widespread social media allegations and supply chain questioning.

Barrett: A major contributor to underperformance is the fact that supply chain risk and mitigation strategies are grounded in historical data and hindsight. New predictive modelling can help support informed decisions, allowing action rather than reaction. It is too late when the customer is already disappointed if a delivery is not made in full or on time. Applying resources and time to fix disruptions after the fact does not solve the problem. In fact, one of our recent surveys shows that 30 percent of organisations do not analyse the source of their supply chain disruption. It is highly likely that these events will be repeated with similar impacts. Those misses will not be tolerated because today’s customers are better informed, better connected and more demanding than ever. The supply chain must adapt to these heightened expectations.

Liddell: As companies start to shift from focusing on selling products to offering an all-encompassing customer experience and engagement across the purchase journey, the supply chain must adapt accordingly. This means striving to align the front, middle and back office with the customer promise. For example, we expect to see product development working closely with manufacturing, packaging, logistics and ordering to ensure that every part of the product journey fulfils the customer and brand promise.

FW: What kinds of technology solutions are available to drive supply chain efficiency? What problems do they aim to solve and what benefits can they offer?

Barrett: New technologies are changing the fundamentals of supply chain management. As the quality and quantity of the available data continues to improve, activities predicated on limited or suboptimal information streams are fast becoming unfit for purpose. There is a need to develop entirely new capabilities, utilising the most relevant data to manage operations more efficiently and respond to opportunities and threats more effectively. Businesses that continue to invest in traditional capabilities risk losing out to competitors that can exploit digital technologies to predict better, react faster and maximise value across their channels and product lines.

Liddell: Three solutions stand out as game-changers: predictive supply chain management solutions, blockchain, and advanced track and trace. In terms of predictive supply chain management solutions, leading supply chain managers utilise data analytics, machine learning (ML) and smarter supply chain technologies that predict disruptions stemming from a wide range of financial, geopolitical and environmental events. These solutions adopt a data-driven supply chain approach that collates data from across the entire organisation and combines it with external data from sources such as data providers, news feeds and social media. These solutions help organisations filter out the ‘noise’ of these sources to allow the focus on possible issues and risks that are immediate and relevant. This can help organisations with challenges related to operations planning, inventory management, production planning and proactive risk management. The questions have changed from ‘What happened and why did it happen?’ to ‘What will happen and how can we optimise performance because of it?’

O’Shea: In terms of blockchain – or essentially a distributed, digital ledger – supply chains of the 21st century are faster, more interconnected and require the sharing of greater amounts of data. The complexities of these ecosystems create operational risks and reconciliation challenges, as well as opportunities for fraud and safety concerns. Leaders are applying blockchain technologies to ensure integrity and security of goods as they flow across regional and global borders. And those goods travel through a lot of processes and middlemen. The COVID-19 pandemic has us all sensitive to how many hands have touched the products we bring into our homes. Every one of those product hand-offs is documented in the blockchain, creating a permanent history of a product, from manufacture to sale. This reduces delays, errors and costs.

Mariano: Advanced track and trace solutions allow organisations exceptional visibility and control of their supply chains by tracking raw materials and finished goods all the way from point of origin to the final point of sale. Advanced track and trace solutions enable real-time tracking and immediate location analysis of assets and inventory. Where variations to scheduled freight route or climate controls are detected, the tracking technology allows for the independent verification of time & location and control measurements. This enables fleet rationalisation and optimisation to improve profitability. An example of this is in the pharmaceutical supply chain, where track and trace technology allows the identification of past and current locations, along with conditions of the drug. Through the entire transportation journey, drug compliance rules around such things as humidity and temperature range are measured and reported. If they fall out of allowed range, remediation events are triggered. Every node of the supply chain – from manufacturer to packager to retail store, and perhaps back again for returns or recalls – can easily be tracked through the supply chain. Track and trace also helps combat counterfeit, stolen or adulterated drugs.

FW: What challenges might arise when companies attempt to integrate new technologies into their existing systems? How can they avoid or overcome these issues?

Mariano: New technologies, in themselves, do not improve performance; also required is the ability to incorporate new technologies into existing or redesigned business processes. The three biggest challenges to integration relate to digital overwhelm, the need for cross-functional data, and, as always, change. Digital overwhelm can be paralysing. Many supply chains leaders are aware of the need to urgently digitalise their supply chains but do not know where to start. The sheer variety of available solutions can seem at best confusing, and at worst completely overwhelming. Adding to the choice between software solutions, ‘as-a-service’ business model iterations, cloud-based technologies, robotics and more, organisations face pressure to not only emulate their competitors but to outperform them – while at the same time making the best possible use of their technology budgets in order to do so.

Barrett: Successful organisations are not grasping after the next big thing. They are making decisions based on a clear understanding of their business strategies, identifying technology investments that enable them to do better than their competitors. Smart businesses know that no matter how streamlined and digitally-enabled their operations are, if they make bad decisions, their performance will suffer.

Liddell: Supply chain automation and digitalisation do not just reduce costs and drive efficiencies, they also generate vast and ever-increasing quantities of digital information. Many organisations already use predictive analytics and machine learning tools to analyse, integrate and interpret this data in real time, enabling them to pre-empt rising costs, expose process bottlenecks and augment decision making. However, that is a model that is predicated on data totality, integrating inputs from across the supply chain in order to automate responsive process optimisation. But as supply chains become more digitally sophisticated, their greater and more varied inputs can overwhelm decision makers and slow down systems. Tomorrow’s successful organisations will likely invest in cognitive decision centres (CDCs). CDCs take a cross-functional view of the supply chain, from sales and marketing at one end to finance and procurement at the other. Typically, each of these functions is autonomous, and each is incentivised against targets defined in its own terms, without reference to the organisation’s wider strategic ambitions. Their priorities, moreover, seldom align. As each function strives to optimise against its respective key performance indicators, it inevitably negatively impacts the performance of the others. Tomorrow’s CDCs will likely use state-of-the-art artificial intelligence to capture and interpret cross-functional data, allowing decision makers from across an organisation to recognise points of conflict and simulate different trade-offs in the hunt for a best scenario. Put simply, CDCs are about optimising enterprise-wide performance, not the performance of distinct business units.

O’Shea: As new technologies continue to emerge, the pressure on supply chain leaders to innovate is only going to get more intense. Resistance to change, however, continues to be the biggest obstacle to investment in supply chain transformation among established businesses. And it is easy to see why. The costs associated with replacing legacy technology systems or evolving business models can be high. Where supply chains are reliant on capital-intensive fixed assets and long-term contracts, leaders may be inclined to defer digitalisation and automation, especially if the model seems to be working. Success in the present can sometimes be the most tenacious obstacle to change. Successful organisations will focus their budgets on targeted, high-impact, modular strategies. This may involve, for example, cloud-enabling or outsourcing some parts of their supply chains as a priority. It may involve hybridising some – but not all – supply chain management roles to incorporate greater data science capability. Or it may involve migrating non-standard manufacturing to micro supply chains, while retaining mature global networks for the manufacture of standardised products and parts.

FW: In your experience, what essential steps do companies need to take to achieve a successful digital supply chain transformation? What mistakes do they need to avoid along the way?

Liddell: While the specifics of every company challenge are different, there are nonetheless six broad steps that can help businesses enhance their supply chains, whatever their industry and whatever stage they are at along their transformation journey. First, start with a clear articulation of your business strategy. With strategic priorities in mind, you can assess the need to augment or reconfigure your business model. Second, understand the cost of complexity versus the value of variety. While there is value in meeting growing customer demand for choice, offering too wide a range of the wrong products and services is often not profitable. Third, leverage data to improve core competencies. It is likely that your business intelligence is served by dozens of different data streams, but are you able to leverage the data in a meaningful way to improve existing capabilities? Fourth, lead with performance, not technology. Forget the hype surrounding the latest technological trends and focus on their present capabilities and the needs of the customers they serve. Fifth, upskill your workforce. Whatever the technological maturity of your business, the success of your future supply chain strategy depends on your people. Sixth, embrace new partnerships. In the future, no single organisation is likely to have the full suite of digital capabilities under one roof. Without the specific focus of these steps, the supply chain digital roadmap risks becoming just a collation of good ideas – a bottom-up brainstorm churned into a project plan with little thought given to overall return on investment.

Barrett: Leading with technology is behind one of the primary reasons for failed transformations. Digital is the enablement of the transformation. If the programme is assumed to be solved by technology and a tech stack alone, then this becomes your point of failure because it is never just about a system: it must also include the process, people and culture – all components of the organisation and its partnerships, even the purpose of the transformation. If organisations do not think about the transformation from that holistic view, then it never becomes the silver bullet that they expected. The transformation needs to be the orchestration of all of those things together – the people and the processes within the business.

O’Shea: Transformations are often performed with an inward mindset. However, they need to be more commercial, more customer-focused than ever before. You need to disrupt yourself. A supply chain leader who does not have an understanding of who the customer is, and what drives them, is doing their job with one hand tied behind their back. Customers come from different segments with different needs. For some, it is about fast service which makes logistics critical. For others, it is about delivering additional value and services, therefore maybe less focus on logistics but more on value-added partnerships. Referencing the customer base helps to refine the levers that matter to them. Revolving your transformation strategy around those levers is key.

Mariano: Another point of failure is a lack of alignment that disconnects the front, middle and back of the house. Functional teams often operate in silos, not necessarily integrating to a unified strategy. Because of that disconnect, a transformation may be judged on the wrong metrics. And the time frame to deliver the transformation may be overly optimistic.

FW: How important is it for the senior leaders of an organisation to truly embrace, drive and oversee digital transformation to make it meaningful and ensure buy-in?

O’Shea: Digital transformation changes everything, including company culture. The supply team may be the initial instigators and implementers of new technology and processes, but it takes an engaged senior leadership team to articulate and model a new way of digital thinking. True buy-in involves both backing the transformation and the team that is implementing it. Bottom-up initiatives are uphill battles. They are time consuming, difficult and hard to sustain. There are several red flags that indicate buy-in is lacking, including inadequate budget allocation, weak cross-functional support and limited system use. In a nutshell, digital transformation only works when it is owned by top management.

Barrett: Supply chain leaders have consistently expressed interest in elevating the function to become a true strategic partner to the organisation. To earn a seat at the executive table, supply chain leaders need to educate executives on the impact of digital transformation on present and future business, as well as the risks and opportunities. While many organisations accept the need for digital change, there is significant executive scepticism in their ability to successfully execute. According to our ‘Global CEO Outlook’ study in late 2019, 83 percent of chief executives are not confident that their business can design and implement the future operating models necessary to support digital transformation. The supply chain leader has a unique opportunity in changing that perspective. Few have such a complete view of the enterprise or the wide trust of their peers. While global COVID-19 has completely taken over discussion in all spheres of business, and life, senior leaders have become acutely aware of the importance of the supply chain. It is no longer simply the organisation that buys parts and arranges for deliveries. Getting the supply chain right is one of the biggest value levers that businesses have as they consider sustained relevance. Now is the time to step up as a business transformation accelerator and revenue generator.

FW: Going forward, do you anticipate an increase in demand for digital transformation of supply chains? Is digitalisation poised to fundamentally alter the way supply chains are managed and operated?

Liddell: In our ‘Global CEO Outlook’ study, nearly all chief executives – 94 percent – reported that they were focused on transformation, and 71 percent stated that the transformation being undertaken is radical, that it fundamentally changes the operating model and their future ways of working. We are at an inflection point. Intel’s Andy Grove, who coined the term, described that point as, “an event that changes the way we think and act”. It demands a step change in core strategy, operations and organisation – all at the same time. While there is no ‘wrong’ time to transform, we are truly at a pivot or perish point. Transform, invest in new capabilities, rebuild the future operating model – or watch competitors and disruptors pass you by. We are already seeing this play out in many industries. Skype has replaced traditional forms of communication for many. Netflix and other streaming services disrupted the entertainment industry. Wikipedia replaced printed encyclopaedias. Even if disruption does not happen to you directly, it could alter the way your suppliers do business, and thus impact you. If the critical partners you rely upon are not able to quickly respond to disruptions, it will be time to seek alternatives.

Mariano: There is plenty of help in the form of tools and technology. Companies that will be able to correctly manage the opportunities provided by new technologies – such as the Internet of Things (IoT), real-time Big Data, blockchain and 3D printing, among others – will significantly change the way they manage their supply chain. They will change the way they collaborate with their suppliers, using time and investment to build a foundation of trust and transparency. It is the shared visibility into the goals, motivation and limitations of partnerships that builds organisational resilience. In fact, studies have shown that companies that prioritised growth, innovation and risk management in their supplier relationships, instead of just price reductions, achieve savings 26 percent higher.

O’Shea: If your business has a genuinely differentiated supply chain capability, you may be able to offer this to other organisations on an as-a-service basis. Perhaps you are a manufacturer with spare capability and want to make it available to smaller start-ups that cannot afford to invest in expensive assets. Maybe you have a killer last-mile delivery offering that both manufacturers and retailers can use to reach their customers quickly. You might have a specialised reverse logistics operation with a wide range of pick-up points, which other firms can tap into. What if your warehousing is leading edge, enabling you to manage inventory efficiently for packaged goods companies? And if you have an extensive spare parts supplier network, you could use this resource to help others access products. Becoming an as-a-service provider can turn cost centres into revenue centres. It can cement your position as a key player in your chosen area of the supply chain, as well as bring you volume efficiencies as you expand your range of new customers, creating a virtuous circle where you improve margins and offer lower prices.

Barrett: Recognising an inflection point on the horizon is the first step toward successfully navigating it. But it is not enough to just see an inflection point coming. You also need to be able to bring the organisation with you. Supply chains are now undeniably at the heart of businesses. And it is the transformed supply chain that will boldly lead into that future.

Rob Barrett is a principal in KPMG and is the US supply chain advisory leader, with more than 22 years’ experience leading global supply chain, operations, process improvement and technology-enabled projects. His most recent efforts have focused on helping companies implement digital transformation strategies and demand-driven approaches to improve customer centricity and supply chain responsiveness, while improving profitability. He can be contacted on +1 (650) 814 0347 or by email: rhbarrett@kpmg.com.

Peter Liddell is the KPMG Asia Pacific (ASPAC) leader for operations advisory and a partner in KPMG Australia. For more than 30 years he has worked with clients across the ASPAC region to help them enhance their operational and financial performance. Mr Liddell has designed and run large-scale transformation programmes, driving value throughout his clients’ portfolios by accelerating opportunities to reduce complexity and unnecessary operational costs, while helping them achieve the best position for growth. He can be contacted on +61 408 141 037 or by email: pliddell@kpmg.com.au.

Carmelo Mariano leads the customer & operations practice of KPMG in Italy. In this role he helps customers to understand how new digital technology could reshape the supply chain. His recent work includes supporting large scale Industry 4.0 transformation programmes and advising several clients on how to create value by leveraging the Internet of Things (IoT), augmented reality, data and analytics (D&A) and intelligent automation. He can be contacted on +39 348 4518 027 or by email: cmariano@kpmg.it.

Leveraging more than 20 years of industry experience in supply chain and operations, Maureen O’Shea helps deliver transformational levels of performance, productivity and profitability. She is passionate about people and proud to lead the operational transformation team for KPMG International. She believes in the power of business-led, technology-enabled transformation of the supply chain. She holds a chemical engineering degree from University College Dublin. She can be contacted on +44 (0)7385 025 437 or by email: maureen.oshea@kpmg.co.uk.

© Financier Worldwide

THE PANELLISTS

Rob Barrett

KPMG in the US

Peter Liddell

KPMG Australia

Carmelo Mariano

KPMG in Italy

Maureen O’Shea

KPMG in the UK

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