Supply Chain Report 2017

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Table of Contents
Introduction: State of the Industry (below)
State of Analytics: Defining End to End Transparency
State of Automation: Digitization is Not Digitalization

Introduction: State of the Supply Chain 

By Simon Ellis, IDC Manufacturing Insights

The consumer goods supply chain is poised for a revolution. At no prior time in the history of this industry has there been more change — or potential for change — than there is today. IDC Manufacturing Insights predicts that, by the end of 2018, one-third of companies will find themselves disrupted by digitally enabled competitors. That’s only two years away.

The reality is that this competition often comes from unexpected, unanticipated places. Indeed, in many segments of the manufacturing industry, traditional barriers to entry have fallen, opening up opportunities for smaller “lateral” competitors to take share points from traditional and established large enterprise players.

IDC estimates that these competitors will take between 10 and 15 share points from established players by 2022 — barring acquisitions. The commoditization of production through a range of contract manufacturers, the ability for all companies to leverage market research from services like Google Insights, and other such factors means that the playing field has been leveled.

Digital transformation (DX) is about the consumer and the customer; that’s the world we live in. As many companies use digital competencies in the supply chain to drive better products and services, the ones that don’t will find themselves increasingly uncompetitive.

Digitally enabling the supply chain is critical, but it’s useful for everyone to be “reminded” why this is the case. It’s partly about reconciling “reality” from “aspiration” and accepting that today’s aspiration is tomorrow’s reality. Not all things digital must be necessarily disruptive. We view DX as a continuum ranging from things that are simply evolutionary (to do now for efficiency or effectiveness) to things that are truly revolutionary (to do in the future as a part of a supply chain “reimagining”).

The move to a digitally enabled, “thinking” supply chain must be undertaken in the name of readiness, return and relevance. Early-mover advantage is likely to be significant in DX, so making investments in technology, platforms or other infrastructure must be done in the context of readiness and preparedness.

As significant new capabilities emerge, the best-in-class consumer goods supply chain must be able to quickly consume and disseminate those new capabilities. But these investments must also provide a return, either by doing the same things done in the past better — thus driving efficiency or effectiveness — or by enabling new approaches.

Lastly, there is relevance: How do investments made today relate to the fundamental role of the business, or how do they facilitate new business models, as an example.

The digital mission of consumer goods companies is to create and offer engaging experiences at scale for both the consumer (the end user) and the customer (mainly retail). It’s not enough to meet the needs of consumer segments; you must meet and exceed the needs of individual consumers in both ways they expect and ways they have not yet imagined.

There will be an increased emphasis on innovation excellence, both in terms of new product success rates and in the number of new products that will be required; the ability of the supply chain to manage different engagement models; and the ways in which both consumers and customers are engaged — and how that engagement gets funded. Consumer and customer expectations in brand-oriented value chain market segments will make this strategy mandatory, but implementation success and efficiency will be what determines profitability and competitive differentiation.

The Thinking Supply Chain
IDC has been writing about supply chain modernization for several years now, but adopting a DX strategy sparks a tremendous sense of urgency for creating and enabling capabilities resilient enough to withstand the underlying complexity of satisfactorily delivering the promised experience.

Because of the complex nature of demand and the obligations for a productive innovation ecosystem, consumer goods companies have always had to deal with demand complexity through multiple tiers — both upstream to suppliers and downstream to customers and, now, consumers. Consequently, programs under this strategic priority will focus on closer collaboration with suppliers, more inclusive and faster planning, and smarter logistics (as summarized in Figure 1).

Capabilities-Based Procurement
Although CG companies don’t deal with the same levels of complexity as other manufacturing sub-segments, supply and price management through multiple tiers remains an important part of their supply chains. This is particularly true as many companies move, for example, from making their own products to relying on contract manufacturers for finished goods.

Procurement traditionally has been based on buying defined volumes of ingredients, packaging and finished goods from suppliers, but it will transition to an approach that recognizes and reserves capacity for important inputs at key suppliers — which in turn will give companies the flexibility to respond to demand shifts more quickly.

Extended Planning
DX dictates that supply chain decisions be made using near-real- information on demand and consumption. CG companies will need to improve demand signal insights, engage more broadly within an extended sales & operations process, and recognize opportunities to both learn from prior action and improve future performance. There is, then, an opportunity to use this thinking supply chain to improve how, what and when new products are brought to market.

Logistics Automation
The movement of materials (both in- and outbound) in consumer goods remains relatively inefficient, with many companies addressing the challenge either by requiring suppliers to be within close proximity or by maintaining excessive “buffer” inventories. To improve the cadence of this supply chain, companies will invest to automate logistics processes including transportation, warehousing and global trade.

Where Are We?
The obvious question, then, is where do CG companies stand in terms of digitally transforming the supply chain? To begin to answer this, it’s important to revisit a comment made at the outset: What is the goal of DX? We’ve found it useful to articulate this in terms of different horizons, as summarized in Table 1.

The reality is that most companies are currently in Horizon 1. They’re beginning to employ digital technologies to drive efficiency in their supply chains and using that as a way to improve the customer and consumer experience. We do see a few companies emerging with digital business models (like 3D printing personalized cosmetics at home), exploring value-added adjacencies (Under Armour capturing health data) or digitizing the actual experience (Vivanda’s FlavorPrint process). But these remain the exception rather than the rule — at least for now.

The reality is that DX in the supply chain is moving rapidly. While companies that haven’t started are not that far behind yet, the leaders are moving quickly and, in relatively short order, the laggards will be substantially behind. The key message, then, is to understand the implications of digital transformation and begin the journey to a digitally enabled, thinking supply chain now.