The supply chain optimization imperative

The pandemic brought physical supply chain issues into focus and made organizations recognize dynamic supply assurance as a critical capability for their business. Over the next decade, consumer packaged goods (CPG) and retail businesses, among others dependent on supply chains, will invest in supply chain optimization to solve key industry challenges. The desire for convenience and personalization, awareness of the environmental impact of consumption, and fears about trade disruptions and fluctuations in cost are all challenges that can be solved with more connected, agile, sustainable supply chains.

There is a huge opportunity for supply chain leaders to drive change by implementing the latest digital technologies to build the required agility for new consumption models.​ 

Some examples of key performance indicators (KPIs) and business outcomes that organizations have achieved by implementing supply chain optimization include:

• $4.2 million in new profit from improved order management
• $6.4 million in savings from improved supply chain operations
• Planning Analytics improvements reduced budgeting effort by 63% and forecasting effort by 70%​

Because of the importance and timeliness of this topic, we will be publishing an eight part article series that will focus on use cases derived from analysts and other organizations such as Gartner, McKinsey, Harvard Business Review, IDC and IBM Institute for Business Value that are grounded in IBM and Red Hat customer implementations. For each article, we will start by defining the business problem and describing the challenges and business drivers organizations face. We will then provide:

• An action guide based on The Action Guide in the Own your transformation survey of 1500 CSCOs across 24 industries
• An overview of the solution
• A detailed schematic(s) of the use cases and a list of the technology used in the solution

This is the first post in the series. Subsequent posts will do deeper dives as summarized below.

Supply chain optimization

Retailers, manufacturers and many other organizations are exploring ways to better understand and act on changes in the market as they occur to balance protecting margins, utilizing store and warehouse capacity, and meeting delivery expectations. These sourcing decisions can dramatically increase profits, especially during peak periods. In addition, organizations are exploring how to develop more sustainable footprints as they redefine an enterprise-wide approach to sustainability. For more details on this topic, see the supply chain optimization post.

Demand risk

There are two sides to demand risk: understock and overstock.

Understock refers to not holding sufficient inventory to meet current demand. This includes not having enough inventory today or in the very near future that could be used to meet the demand. The end result is disappointed customers who order but don’t get fulfillment or can’t place an order due to lack of product. This “stock out” position often represents between 4% to 8% of total sales lost, but can also be a failed opportunity to satisfy customers in other ways, through upsell and cross-sell. KPIs related to an understock or stock out position include inventory turnover rate, days on hand and lead time (how long it takes to get more inventory from a supplier).

Overstock refers to holding more stock than required to meet current and future demand. This results in additional costs to store and carry on the books, then possibly disposing of overstocked items at a discount or even destroying them. While the effects of understock are generally measured in terms of customer satisfaction and loss of future opportunity, overstock has a direct impact on the bottom-line costs and profitability of the business. KPIs relevant to overstock include holding costs, dead stock (in-stock items failing to sell) and inventory turnover rates.

A blog post on this topic is coming soon.

Loss and waste management

A key focus when dealing with loss and waste management in relation to inventory optimization is decisively dealing with unplanned or unforeseen situations causing an inventory item to be considered damaged or spoiled. If the situation or problem is rectified within a well-defined time window, there is sometimes a possibility of salvaging the product. In other cases, once the incident occurs, there is no possibility of salvage and the product is considered damaged. Events causing damage or spoilage are typically external factors forced upon the business and cannot always be planned or predicted.

To demonstrate the importance of inventory optimization for any business, we will focus on two main use cases of an unanticipated exception:

1. Environment exceptions such as power outages or temperature changes that create potential spoilage and therefore affect product salability
2. Product contamination or recall such as foreign objects or bacteria occurring earlier in the processing or supply chain

A blog post on this topic is coming soon.

Product timeliness

Foods and ingredients expire or become unusable at some point. Manufactured parts and goods also experience decay and deterioration. Each of these can be measured. In the food industry, you may see different terms and date types on the packaging.There are a variety of common labels and their meanings according to the USDA and FDA as explained in Expiring Products – Food & Ingredients by Michigan State University. 

Many foods (with some exceptions such as infant formula) don’t have expiration dates as such. Instead, they use terms like "best if used by," "use by," "sell by," "freeze by" and "guaranteed fresh" to indicate the date before which a food product should be consumed (or frozen) to be at its best quality. However, in the U.S., the dates don’t explicitly convey anything about food safety—though many stores won’t knowingly sell products past their sell-by date.

A blog post on this topic is coming soon.

Perfect order

Managing inventory efficiently is critical to any business that sells physical goods and is responsible for maintenance, repair and operations (MRO) supplies. Inventory management encompasses procedures and processes that directly or indirectly affect the bottom line. This includes ordering, receiving, storing, tracking and accounting for all of the goods a business sells. It is a key element of supply chain management. In this use case, we will explore how the business can respond to the imperfect order and increase customer responsiveness with:

• Intelligent promising
• Optimization of user expectations with improved demand forecasting
• Automated responses

A blog post on this topic is coming soon.

Intelligent order

Last mile delivery, also known as last mile logistics, is the transportation of goods from a distribution hub to the final delivery destination—the door of the customer. The goal of last mile delivery logistics is to deliver the packages as affordably, quickly and accurately as possible. The last mile describes the difficulty of getting goods (especially large and bulky ones) from a transportation hub to their final destination, which may also include installation and configuration. Delivery is part of providing an excellent experience to the customer. Intelligent order is a process that uses inventory management systems and artificial intelligence (AI) to provide effective last mile delivery.

For businesses this translates into these outcomes:

• Decreased waste
• Order optimization
• Reduced cost

Consumers benefit with:

• Delivery promises fulfilled
• Proof of delivery

A blog post on this topic is coming soon.

Sustainable supply chain

Sustainability provides an opportunity to differentiate your business. Yet, the business must balance the long-term imperative to protect the planet with the immediate need to operate the business in a financially-sustainable way. On a rapidly-warming planet, companies across sectors have transformed business models to forge a sustainable future—one that protects people, the planet and profits. In the race to reduce emissions, consumption and waste, everything is on the table. Supply chains are being recalibrated. Source materials are evolving. Travel requests are carefully scrutinized.

Examples of sustainability in business include:

• Improving energy management efficiency using alternative power sources and carbon accounting
• Deploying infrastructure that reduces greenhouse gas emissions, preserves water resources and eliminates waste
• Operating dynamic and efficient supply chains to empower a circular economy, encourage reuse, design out waste, promote sustainable consumption and protect natural resources
• Enabling sustainable development by assessing risks and improving resiliency while adhering to external regulations and development goals

A blog post on this topic is coming soon.

Summary

Supply chains have evolved from a relatively niche concern of manufacturing companies and retailers to a topic that even consumers are keenly aware of. This series will dig into the topic and share particulars about many aspects of optimizing supply chains.

If you are interested in more solutions built that address a variety of use cases with Red Hat and partner products, visit the Portfolio Architecture website.

References

• Portfolio Architecture: Supply Chain Optimization
• IDC:  Improving Retail Supply Chain Resilience​
• McKinsey: How COVID-19 is reshaping supply chains​
• Harvard Business Review: Three steps to prepare your supply chain for the next crisis​
• Gartner: What is a Supply Chain Control Tower and what's needed to deploy one​
• Gartner: Fulfillment Forecasting: The Key to Optimizing Retail Inventory Positioning​
• Gartner: Supply Chain Risk Management (SCRM): What & Why Is It Important​
• IBM Institute for Business Value Own your transformation