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Time to re-write rules of supply chain management
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In an amazing twist, technology is rendering the old fundamentals of supply chain management obsolete. In Russia, Adidas increased sales in Moscow by double digits in 24 hours, thanks to a supply chain initiative. At the same time Amazon is now looking at using drones to deliver products, a very expensive move, but one the company says will increase sales.
Experts would usually claim that supply chain management is about delivering the right quality at the lowest cost, with the agreed service level, right? Well, not anymore. As the two examples above show, it is also about increasing sales and profits; the supply chain is no longer just about efficiency, working capital reduction and inventory management. So, what happened?
Executives have always known that improving supply chains ultimately improves sales. However, because the impact was very difficult to evaluate, companies traditionally approved investments in supply chains based only on the expected reductions in costs and working capital. The digitalization of supply chains, with the breadth of sales and ordering data available, now makes it possible to calculate by how much supply chain improvements are increasing sales and profits, and the numbers are often amazing.
Another example is how much more Adidas is selling in Russia thanks to the use of ship from store. In the largest country in the world, shipping from one part of the country to the other extreme can take up to 15 days using traditional delivery systems. By being able to deliver from a store, Adidas expected to reduce delivery times and to increase sales, but it also expected to increase delivery costs. To its surprise, delivery costs fell and sales increased substantially.
These successful examples lead to a redefinition of what a supply chain is and of the scope of the role of executives.
Similarly, while many logistics executives see the idea of Amazon using drones for deliveries as an “extravaganza,” it makes a lot of sense. For decades, the world of logistics has been obsessed with lowering costs.
Until recently, we were used to looking at supply chains as cost drivers, not sales drivers. We have a lot of tools to understand supply chain costs, like “total cost of ownership,” “spend analysis” or “total landed cost,” but none about increasing sales. However, technology is bringing about a fundamental change and Supply Chain 4.0 requires a very different view — focusing on increasing sales through a better understanding of how customers behave.
Finally, we should also start to use the term Value Chain 4.0, because we might need to re-combine and re-think how we work and organize companies. The key is how to generate and capture value in the whole chain. And it looks very different from the past. Adidas is combining functions like IT and supply chains. They are doing a lot of trial and error and they are using technology usually associated with Industry 4.0 everywhere, not just in the factory.
In short, the digital revolution is creating a whole new paradigm for what used to be the supply chain. It was once about delivering the right quality at the lowest cost, with the agreed service level; now it is about increasing sales, creating more value and capturing it.
Carlos Cordon is LEGO Professor of Strategy and Supply Chain Management at IMD.
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