Supply Chain Investment: 5 Reasons to Invest in Digitization
Yulia Fedorova
26 Nov 2021
Supply chain investment and management were important even before the pandemic. However, the Corona crisis has clarified to everyone how dependent we are on functioning supply chains.
The effects are currently becoming even more significant. The Federal Association of Materials Management, Purchasing, and Logistics (BME) survey showed that 89 percent of companies slid into the crisis unprepared.
A lack of spare parts and materials is causing production downtimes. In addition, higher procurement prices are gnawing away at companies' liquidity. The solutions vary widely. In some cases, orders have been canceled, while other companies have built up additional inventories.
The problems are not limited to industry but can also be observed in e-commerce and retail. In the future, it will be essential to provide supply chains with greater resilience. To this end, the BME recommends regular exchanges between buyers and suppliers.
In perspective, the association sees only a digital solution that transparently displays the entire supply chain. It is the fastest and, at the same time, most flexible way to react to disruptions in the supply chain. The basis for this is more robust networking between the companies involved.
However, innovative software ensures faster, more flexible solutions to supply chain problems and reduces the costs of logistics, warehousing, and maintenance. Increased product availability also improves customer service, which can help avoid cancellations and increase sales.
These five reasons make a case for Supply Chain investment in digitization.
Reason 1: Optimize inventories
By optimizing inventory management, companies can free up tied-up capital for Supply Chain investment. As inventories show, analog inventory management is inaccurate and has several other risks. Firms can also optimize inventory by using digital software.
By preventing excessive inventory, storage costs are reduced. In companies that organize their logistics manually, fear of bottlenecks often leads to excessively high inventory levels. It ties up capital unnecessarily. A company must be able to react flexibly to fluctuations in demand to optimize inventory. Intelligent software coordinates the flow of goods in such a way that excessive warehousing is not necessary.
This not only reduces storage costs. Companies also have to worry less about goods that are no longer in demand. The risk of disposing of slow-moving items and thus capital is reduced. In digital warehouses, employees can determine receipt and outflow in real-time. It provides the opportunity to react quickly and flexibly to a changing market situation. Automation also reduces personnel costs in the warehouse.
IT prevents the creation of overcapacity because it indicates in good time when stock is no longer flowing out in the specified time. Digital processes provide precise information when demand increases or decreases. Companies can flexibly align the production or procurement of materials with the market, eliminating the need for extended storage periods. For seasonal goods, the risk of destruction due to lower demand is significantly reduced.
Reason 2: Avoid supply bottlenecks
Supply bottlenecks cause enormous damage to companies. If material, goods, or preliminary products are missing, there is a risk of delays in the production process or even a complete standstill. Something similar happens when an urgently needed spare part for a machine is not available. As a result, customers cannot be supplied on time, and the company loses its reputation. Possibly, a contractual penalty becomes due, which puts a severe strain on the margin.
A digital solution shows the goods turnover in real-time and can determine the exact time to trigger the order process. In the digital supply chain, partners can be networked around the world using cloud-based technology.
Suppliers publish data on their capacities and utilization. It enables capacity bottlenecks to be identified at an early stage and appropriate measures to be taken.
Furthermore, suppliers can report free resources to trigger ordering processes. The data can be changed at any time according to the situation. The producer of the end product can see what quantity of a particular component can be produced. This makes it possible to determine whether the available resources match the order quantity. In the event of bottlenecks, orders can be quickly placed with other suppliers.
The processes can be completely automated. The system immediately recognizes when a supply shortage occurs and can react accordingly. In this way, supply bottlenecks can be avoided, and the company can meet the promised delivery dates to the customer.
Reason 3: Increase sales through high availability
Companies require a high level of availability of capacities and resources to always meet delivery obligations to customers on time. It is not just a question of capacity. Materials and preliminary products must be available on time for the production process. The services of suppliers must also always be available in sufficient quantities. In e-commerce, 65 percent of companies lose customers due to insufficient product availability.
One problem is infrastructure, i.e., roads, rails, pipelines, or waterways. If ports are closed, this has a devastating effect on a company's reliability when the supply network is spread across the globe. Producers cannot manufacture the products, and distributors cannot supply customers. Companies must fear massive losses to their reputation.
It is therefore essential to know the risks to the supply chain. Resilience can then be increased with suitable measures. In addition to problems with infrastructure, natural disasters, accidents, or even pandemics can endanger supply chains. Political conflicts, such as those seen in the tariff dispute between China and the USA, are another danger.
It is becoming more critical than ever to have a portfolio of suppliers that takes such risks into account. In addition to efficiency, resilience must also play an important role. It includes reducing overdependence on any one supplier or to any one region. With a diversified supplier portfolio, digital supply chain management switches to another supplier in the event of problems with the leading supplier. This maintains the high availability of parts or goods, enabling on-time contract fulfillment.
Reason 4: Increase efficiencies, eliminate Excel chaos
Amazon shows how intelligent networking works. All goods are constantly available and are delivered to customers in the shortest possible time. Planning, sales forecasts, delivery processes, inventories, and purchases are entirely automated. All operations involved in the process, from supply ordering to shipping to the customer, are integrated into a networked supply chain.
The system checks demand fluctuations, inventories, and supplier capacities to guarantee the constant availability of goods. Problems are identified at an early stage and promptly remedied by appropriate measures. Data collection and analysis take place in real-time, as do problem solutions. Excel spreadsheets are powerless against this competition. The ideal solution is to digitize the entire supply chain. This not only eliminates expensive, time-consuming manual labor but also prevents mistakes made by employees.
Specially tailored algorithms can optimize ordering and warehousing processes to meet all customer requirements on time. It is possible to link an unlimited number of service partners and data sources without losing the overview. The software also helps to optimize inventories.
Reason 5: Quick responses to volatile influences
Consumer demand is volatile. Industrial companies and retailers alike need solutions that can analyze these fluctuations in real-time. Digitizing the supply chain achieves this and helps retain customers and increase sales.
The system immediately registers to change conditions and suggests solutions to ensure on-time delivery to customers. The algorithms can be adapted to new experiences at any time. Via a smart demand analysis, the system provides an intelligent recommendation for inventory optimization. Automatic forecasts of delivery times and warnings help to minimize customer churn and thus revenue losses.
Business owners can set inventory parameters or product segmentation themselves at any time. The system provides numerous performance data that allow rapid monitoring. Problems can thus be quickly identified and solved. The simulation backs up decisions for problem-solving. Therefore, different solution paths can be compared promptly to choose the most efficient one.