How Supply Chain 4.0 Creates Game-changing Customer Experience
Supply Chain Management (SCM) has always embraced new technologies that promised to fundamentally change the way supply chains operate: Sea containers were introduced to efficiently ship goods around the globe; computer-supported planning software improved production schedules beyond imagination; and RFID technology promised to revolutionize processes by identifying products without a direct line of sight.
The accelerating digitization of supply chain in recent years has triggered many new technologies that are now becoming relevant for further investigation. All stages in the supply chain are potentially affected: Planning can benefit from the real-time availability of new data and the automation of processes like demand planning or order management; production can take advantage of additive manufacturing; warehouses are seeing performance improvements due to investments in picking automation and self-driving and platooning fleets of trucks are knocking on transportation’s door. We refer to these massive digital innovations that will transform our supply chains as Supply Chain 4.0, or SC 4.0.
Recent research indicates that most of these technologies have reached their technological prerequisites and many are already in pilot test. Figure 1 illustrates an assessment of SC 4.0 technologies based on a recent McKinsey survey among supply chain professionals on the disruption and impact of 53 innovations like automated planning, 3D printing and SC Cloud to name a few. The results highlight seven game changers (e.g., automation in planning/execution, 3D printing and Cloud/platform applications) and 34 innovations where participants expect high impact like no-touch order management, closed loop planning and the Uberization of cargo.
However, to justify investments, any SC 4.0 technology needs to provide tangible benefits that either result in cost reductions, in revenue increases or, ideally, both. The mechanisms for achieving these benefits differ. We distinguish four key value opportunities (see Figure 2). Process improvement with increased efficiency is the most frequent driver for introducing new technologies: AGV-based goods-to-person solutions such as Amazon’s Kiva robots enable the reduction of the cost of labor while the automation of planning and machine learning enables companies to significantly improve demand forecasts, thus minimizing overstocks and obsolescence.
A second value opportunity is the increased flexibility to react immediately to competitor promotions or to new sales opportunities. Joint planning in the Cloud reduces lead times and 3D printing of slow-moving or obsolete parts enables firms to react quickly to new demands.
A third value opportunity lies in the exploitation of data that is now available as never before. Data on traffic, weather or potential new pickup locations allows firms to improve vehicle routing, minimizing overtime and fuel consumption. So far, untapped data sources enable firms to gather information about the use of their products. Rolls Royce, for example, uses data from the turbines on its jet engines to optimize maintenance schedules and fine-tune the deployment of spare parts across the globe. Business models like “power by the hour” are enabled by more granular and accurate data.
However, a fourth value opportunity is often largely overlooked: SC 4.0 technologies can dramatically boost the customer experience. Automation, analytics, smart sensors and new data sources enable firms to make the customer experience as easy and convenient as never before: Products can be customized in ultra-short lead times, customers can minimize their effort for buying consumables and delivery issues are addressed proactively when a deviation is tracked. In the end game, a customer could order his personalized coffee capsules with the simple push of a button on the coffee machine in the morning and see the delivery person at the door the moment he arrives home in the evening, eager for a fresh cup of coffee. To enable this level of customer experience, supply chain managers have to understand the opportunities that new technologies offer and then create their vision of the customer experience.
In the remainder of this article we discuss how SCM can define its vision for the customer experience and which SC 4.0 technologies are most relevant for boosting the experience.
Building a customer experience vision
Supply chain managers typically think in terms of the material and information flows up- and downstream of the supply chain. They often focus on the key supply chain processes of plan, make, source and deliver. However, few supply chain managers take the time to understand the journey a customer faces when buying, receiving and using the product, and thus fail to understand the impact that SCM has on the customer experience. In a world of hyper-competition, great customer experiences trigger repeat purchases, upgrade requests and attract new customers while service failures alienate customers. Thus, any improvement in service quality—any positive surprise, additional personalization or improved convenience—can secure revenues. SCM plays a pivotal role if managed properly.
To understand the customers’ experiences and their touch points with typical supply chain activities, we have developed a simple customer journey framework (see Figure 3). We use this framework to identify the supply-chain-related expectations and to learn where to best leverage new technologies to enhance customer experience.
Any customer journey starts with the “look for solution” stage. The customer is screening the market and would often like to have a first look and feel. SCM can boost the customer experience at this stage by enabling access to prototypes, by referring the customer to the right store or by shipping test sets. For example, Nilfisk, the market leader in professional cleaning equipment, ships test units to ensure it fits customer requirements.
The next stage of the customer journey is “codesign” if the product can be customized. Here, SCM can boost the experience by offering a wide choice of customization options with instant feedback on options, prices and lead times. It is crucial to connect the available stock in real time to the configuration or shop system—thus enabling reliable delivery time of the configured products. For example, Danfoss Power Solutions—a hydraulics manufacturer—uses a platform that enables “1 day from opportunity to order” to streamline the configuration. Once the customer decides to “buy,” his experience could be enhanced by omni-channel offerings. For example, a consumer could configure and order the product online and pick it up in a store or vice versa.
In the “deliver“ stage, a customer possibly has the most interaction with SCM—important is a short and accurate lead time quote, the ability to change the delivery date and delivery location or the proactive handling of any delivery issues. Nilfisk, for example, aims to inform a customer of any delay before the delivery date with a concrete proposal of alternatives, such as using a different, but more expensive mode of transport or offering an alternative product.
In the “use” stage, SCM can minimize the effort that goes into reordering consumables. Many companies presumably offer subscriptions of consumables to minimize the customer’s effort for ordering (while also locking the customer in)—real-time data enables the replenishment on time.
If a “repair” is required, the expectations are clear: A machine should be instantly repaired or exchanged to minimize downtimes. These expectations translate to SCM requirements such as the very high availability of spare parts, service technicians and express shipments.
Finally, in the “return & replace” stage, customers expect a simple process for return handling and proactive information about the product’s end-oflife. For example, German online fashion retailer Zalando equips packages with advanced glue to make it easy to re-pack the to-be-returned items in the same carton. The address label is already preprinted. In the extreme, the delivery person can wait for the customer to try on the items and take back the return immediately.
Key SC technologies
Based on the expectations outlined above, we identified eight technologies with a particular potential for a disruptive change (see Figure 4 for an overview).
Some technologies are prerequisites for enabling the full set of SC 4.0 technologies. Real time planning is enabled by Cloud platforms that integrate data from different supply chain partners such as information on prices, lead times, capacity or product availability. This information forms the basis for supply chain integration and real-time planning. For example, SAP and UPS will include the total landed cost calculation for industrial 3D-printed parts in their Fast Radius platform, including taxes, manufacturing and shipping costs. The platform enables real-time supply chain design for individual parts. Another example is Uber, which tracks the location and status of its associates to ensure that customers are served instantly with rides or future services such as parcel delivery or grocery shopping. Other companies are focusing their efforts on integrating inventory information to create multichannel visibility. However, many firms still struggle to provide real-time information due to legacy systems and overnight synchronization.
A second basic technology is supply chain analytics that leverages the data gathered for making better decisions. Analytics can be used along the entire supply chain to schedule production in line with expected supplier deliveries, to route trucks through the network or to analyze when a customer has the highest probability to be home to accept a delivery. Analytics provider Blue Yonder has developed forecasting methods now deployed in retailing where 130,000 SKUs and 200 influencing variables generate 150,000,000 probability distributions every day to ensure the right products are replenished in each store. Forecast accuracy can be significantly increased, thus saving on inventory and supply chain cost. More importantly, firms can move toward a just-in-time retail supply chain up to the supplier. In a transportation application, UPS has spent 10 years developing its On-Road Integrated Optimization and Navigation system (Orion) to optimize routes in real time according to traffic. While cost reduction is often the trigger of analytics initiatives, customers benefit from reduced stock-outs and more accurate delivery slots.
Digital manufacturing is currently transforming operations triggering fundamental changes for the customer. In particular, digital manufacturing enables smaller lot sizes and more efficient customization. For example, traditional offset printing requires firms to produce large piles of books even if demand is uncertain. In contrast, publishers using digital printing can start with small lots and reprint as required. Similarly, additive manufacturing (3D printing) allows tool-less production, thus decreasing lot sizes to one. In addition, additive manufacturing enables manufacturers to customize products as required. For example, the hearing aid industry quickly adopted 3D printing to personalize cases to the patient’s ear. However, traditional manufacturing technologies can also benefit from customization as digitization allows the efficient creation of individual bills of materials and production plans. For example, Adidas is currently exploring its Speedfactory concept, which enables largely automated manufacturing of custom-made shoes inside their stores.
To fully leverage these benefits, companies require user-friendly product customization platforms where customers can design products according to their requirements. Many companies have simple Internet product configurators that allow users to browse and choose different options, colors and materials. Well-known examples are companies like Timbuk2, which allows the creation of customized messenger bags, and Adidas or Nike for sports shoes. However, as digital manufacturing technologies advance, platforms need to go beyond pure product configuration. Customers should be able to easily add free-form extras, receive a feasibility check and get a price quote and reliable lead-time estimations. Shapeways, for example, allows customers to upload and sell their designs for 3D printing through its Website. While available materials are prescribed by Shapeways, it sets certain technical boundaries to ensure that the product can be manufactured.
Smart sensors in the supply chain change the way data is gathered. Sensors are considered smart since they gather data and then share the information via the Internet. Sensors can be physically integrated into a product and used to track the location of a truck, to provide status information on a machine’s condition or to trigger effects as customers approach a retail shelf. Other sensors can also be attached to a product as required. For example, DHL tests sensors that are placed in a cargo container or shipping box to measure temperature, pressure and light exposure. Based on the gathered data, the user knows if the product has been stored out-of-specifications or if the box was opened without authorization.
Inventory tracking is a logical extension of smart sensors that are becoming particularly important in a SC 4.0 context. While different technologies have
been applied to track inventory in the retail store, the new generation of sensors will enable inventory tracking at the point-of-consumption. Many firms are introducing technologies that use image recognition to detect inventory levels. For example, Würth, a large wholesaler of fasteners and screws, has introduced the iBin that uses a built-in camera inside a bin to track the inventory levels of C-parts. In a consumer environment, Diageo has equipped Johnnie Walker bottles with tags that can provide information if a bottle has been opened. Likewise, Budweiser has been testing fridges that track the number of remaining bottles to improve the reordering process. Manufacturers of other devices such as household fridges currently introduce inventory tracking technologies that could enable a next-generation VMI at the consumer, resulting in further reduction of inventories and boosting convenience.
Low-/no-touch order processing. A key step to further streamline the order fulfilment process is to minimize the manual effort for order processing. Amazon’s dash button highlights how processes can be simplified if customers are not willing to engage into subscription models or vendor managed inventory. The button is connected to Wi-Fi and is configured with a smartphone to represent a specific product, such as a diaper or a razor blade. The customer can trigger a new order by just pushing the button. However, to ensure that replenishments of individual items are profitable, all fulfilment activities must be carefully aligned to minimize human intervention, including picking, packing, delivery and administration.
New delivery options. While a lot of energy has been spent on the efficient delivery to the customer, new delivery technologies will continue to change the game. Logistics service providers have been rolling out new delivery options like smart public and personal parcel lockers that enable customers to pick up their goods as required. As an example, Audi and DHL are testing the delivery of packages right into the trunk of the customer’s car, which is connected to a network so that it can be opened remotely. Amazon’s drone delivery has been widely discussed in the popular press although certain obstacles remain unsolved. Other companies such as Starship Technologies promote autonomous robots (“bots”) on the street for delivery to the end customer. In B2B settings, new delivery options are focusing on automatic loading and unloading that reduce manual effort and enable 24/7 deliveries.
Two customer experience visions leveraging SC 4.0
To show how customers can benefit from these new technologies, we give two examples—one in a consumer setting and one in a B2B setting. Let’s start with a consumer product everybody uses: a washing machine.
Figure 5 outlines the customer experience vision for a washing machine with SC 4.0 technology. In a first step, the customer could decide to customize the machine on the OEM’s Website according to her specific requirements, based on size, features and colors. Chinese white goods manufacturer Haier already uses such a model and even offers the customer the chance to watch the production in the transparent factory using Webcams—with this idea Haier aims to achieve “zero distance from the customer.” The product configurator not only enables an instant price quotation, but also provides a reliable delivery date based on realtime production schedules, capacities and availability of components. If the consumer is not willing to wait for production of the individualized washing machine, she can buy a similar model that is already available in a store. The OEM’s Website automatically proposes relevant models based on a preference-commonality analysis and shows availability from certified retailers in the customer’s neighborhood to enable a product demonstration. If the consumer decides to place an order, she can choose a specific delivery date (and time) based on the current transportation capacity/standard routing. However, the customer can still easily change the delivery time as the routing of the delivery truck is adjusted on the fly.
Once the washing machine is installed at home, the customer can benefit from a new built-in detergent cartridge. German premium manufacturer Miele already offers a smart washing machine that automatically dispenses detergent based on weight, quality of the water (e.g., lime content) and stain of the load. The cartridge’s filling is constantly monitored and the customer is notified on her smartphone when it is time to replace the cartridge. With the push of a button she can trigger the replenishment order or take advantage of customized promotions. For customer convenience, the cartridge can then be delivered wherever the customer would like to have it, including the trunk of the car while it is parked at work. Besides detergent inventory, the smart washing machine also monitors its status and informs the customer (and the OEM) about abnormal vibrations or water leakage. Thus, service technician visits are scheduled and the technician can already bring a selection of spare parts most likely to be required. As the machine’s life ends or the OEM decides to phase out support for the model, the OEM can use the information on the installed base on machine status to make customized replacement offers. Leveraging the machine data will increase the lifetime of the washing machine.
Figure 6 outlines a SC 4.0 enabled customer experience vision for a telecom operator that is frequently placing large orders for telecom network equipment.
In the design phase, a Web-based product configurator enables the telecom operator to customize products according to his requirement. The tool includes a decision-support model that provides additional technical information about all components, covering topics such as the range, noise ratio or operating conditions, to help select the right parts. It ensures the right coverage for the telecom operator and integrates parts from second-tier suppliers to ensure a one-stop shop for the customer.
As new products are integrated, the software automatically checks compatibility with the customer’s current installed products. In the buying phase, the customer receives a nearly instantaneous quotation in a low-touch process. Thus, the telecom operator is able to configure and order the new network upgrade technology within hours. The administrative effort to manage the order will decrease significantly, thus reducing cost. In addition, the OEM can quickly propose substitutes for out-of-stock items.
Technology enables many improvements for product delivery. In particular, customers are able to easily phase and change delivery times and locations as required. Once the delivery arrives, customers no longer need to count the expensive parts; instead, they can use RFID or camera-based technologies to ensure that shipments are complete. To ensure that highly sensitive parts like electronics or antennas are undamaged, customers can check gyro sensors on the pallets and boxes. Similar to acceleration sensors in smartphones, the gyro sensors measure vibrations, shock or impact. Thus, it is possible to track if (and when) any damage was inflicted during transportation—this will be of tremendous help in the claims process.
During the use phase, customers receive software updates that will improve performance and create features. Some of the features are free while others might require additional payments similar to Tesla’s autopilot where owners have to pay as much as $3,500 to upgrade. In this context, telecom operators could also take advantage of additional switching capacity that can be activated over the Web. This is already well known in computing. For example, IBM’s “capacity on demand” offerings allows users to activate any of the inactive processors on their servers as required. Using these options, customers do not require costly physical shipment and installation and might also extend capacity on a temporary basis.
SC 4.0 will disrupt the way we set up and operate our supply chains—and also change the customer experience—from configuring the product to delivery and repair. Customers will benefit from more choices, added convenience and simpler and more reliable processes. However, firms need to identify and implement
the solutions in their supply chains that provide a business case. To do so, commercial and supply chain departments must work together from opportunity identification to the seamless integration of both processes and supporting technologies. A clear focus on customer experience helps to identify the opportunities and to quantify the impact including how to further shorten lead times, leverage available information, provide access to information that typically isn’t available.
To implement SC 4.0, firms need to overcome many obstacles. In particular, they need to realistically evaluate a technology’s maturity and potential to avoid hypes like supermarket-RFID where expectations went as far as having a tag on every yogurt. Further, firms have to deal with legacy IT architectures, engage with new external partners and quantify the impact new technologies have on the customer’s behavior. In particular, they must convince customers to give up privacy: Only data access and (partial) customer buy-in will enable new integrated processes.
Ultimately, companies need to change the way they operate and improve their supply chains—implementing the speed of a start-up company in a legacy organization is a challenging task, but will provide the right agility. Allowing projects to fail, hiring and nurturing digital talent and thus changing the spirit of an organization will be key for success.
We would like to end with a recommendation. While it might be a long way for some firms to leverage all opportunities of digitization there is an important takeaway: Be sure to build your customer experience vision; digital or not.
By Kai Hoberg is an associate professor of Supply Chain and Operations Strategy at Kuehne Logistics University. Knut Alicke is a master expert in the Supply Chain Practice at McKinsey & Company. Source: mckinsey.com