As part of the broader Industry 4.0 trend, the digitalisation of supply chains is happening quickly. Much of the attention is centred on innovations like cloud computing, software-as-a-service (SaaS) and advanced analytics. But there is another aspect to this rapidly changing landscape: companies must rethink their IT management approaches, from their purchasing strategy to the interaction between IT and business processes.
Exciting New Solutions, Unexpected Obstacles
A few years ago one of the authors, a supply chain director at a large multinational company, found himself championing an innovative digital supply chain IT solution for vendor collaboration. The goal was to better share projected forward material production requirements using a SaaS cloud platform provided by a niche vendor. It seemed to be a perfect solution to the vexing challenge of coordinating the vast amounts of planning data for thousands of items with a large, diverse vendor base.
There were understandable questions about potential improvements in staff productivity, inventory and reactivity that fed into the business case. But one challenge was not anticipated, and it nearly scuttled the entire initiative – the company’s internal IT department.
The IT team was reluctant to move forward and raised some valid questions. The cloud was new to them, and they raised data security concerns; they also feared that the small, privately held vendor might not be financially viable and insisted on access to its financial position. In fact, their posture became less constructive as the project progressed. Despite raising questions about the viability of the potential vendor, the IT team declined to assist in prospecting other vendors. They also advocated strongly for using a similar but less performant functionality offered by the company’s large enterprise system provider that was less tested and more costly.
In the end these differences were overcome, the project was implemented successfully with the original vendor and all were proud to have contributed to an early instance of supply chain digitalisation. But the initiative revealed an important dynamic that warrants more reflection. The IT roadmap for sourcing and procuring solutions to cover business processes has to adapt to the advent of supply chain digitalisation. IT management strategies that seek to limit the number of vendors, or do not foster virtuous iterations between evolving business needs and potential digitalisation solutions, will become issues for companies actively looking for ways to evolve their capabilities.
The Expanding Vendor Ecosystem
[su_pullquote]IT management strategies that seek to limit the number of vendors, or do not foster virtuous iterations between evolving business needs and potential digitalisation solutions, will become issues for companies actively looking for ways to evolve their capabilities.[/su_pullquote]
Just a few years ago, most IT purchasing functions relied on a handful of large vendors to manage their IT supply chain solutions. The most prominent example would be SAP, of course, which offers a complete suite of functionalities, even to large and diverse companies. Depending on the company’s priorities and its competitive advantage, SAP would usually be complemented with a management execution system (MES), or warehouse management solution (WMS), supplied by a niche IT vendor with an attractive product.
Anyone who has participated in a major ERP implementation has likely been confronted by the staggering number of legacy applications that a system like SAP is intended supplant. It is often in the hundreds: small niche tools woven together in surprising complexity. There are many advantages to consolidating vendors and unwinding legacy complexity. First, focussing spend increases penetration into the vendors’ customer base and creates leverage for price negotiations. Second, companies can influence vendors’ development priorities – rather than modifying the core vendor product to suit its needs, a company can have its needs integrated into the next version of the vendor’s core package. There are also significant technical considerations. Fewer vendors and solution packages means fewer servers, interfaces and data incompatibility issues. This leads to lighter IT infrastructure, which lowers the cost of maintaining, deploying and enhancing a suite of supply chain solutions.
Not everyone is fully satisfied with this model, however. Users – the business functions that use the solutions operationally – inevitably must compromise. A minimalist approach to IT, and using SAP for most functions, usually means foregoing specialised, niche applications which are tailor-made for specific functions. For example, production functions typically prefer smaller vendors that offer packages that are uniquely designed for MES. They would argue it better suits their specific needs: improved material flow on the shop floor, or improved tracking of equipment efficiency. Distribution teams may feel the same way. Quality service teams, too, may agree, as they seek superior traceability.
But digitalisation is rapidly changing the dynamic. The functionalities associated with digitalisation are coming online too quickly for the large, one-stop-shops like SAP. The expectations of omni-channel have brought to market order management systems and distribution solutions that are designed to manage the complexity and demands of working with e-commerce fulfilment specialists, front-end systems (e.g. POS), and the data needed to power CRM. Another example is the end-to-end supply chain visibility, data, and demand integration capabilities that provide optimisation and traceability. Even if the large IT vendors are offering services in these areas, the speed of evolution is such that they are skeleton solutions when compared with those of innovators. Companies are under pressure to expand their vendor base, and this is coming not just from users, but from the fact that companies must adapt their business models to meet new market expectations.
In a way, supply chain digitalisation is pushing companies to return to the past, where the enterprise system was not the all-in-one answer to every functionality requirement. In this context, it is understandable that functions like IT management, purchasing and business process excellence might struggle to identify business practices to adapt, even in the service of the exciting possibilities of supply chain digitalisation.
One vertically integrated energy company is taking an interesting approach. It understands that it must evolve and move away from trying to limit the IT vendor ecosystem. To manage the transition, the leaders of the business functions have agreed on a core of 15-20% of business functions that the company considers as its competitive advantage. These are the functions that warrant the increased complexity and cost to support smaller, specialised digitalisation vendors.
The remaining functions are not necessarily condemned to settle for pre-packaged ERP options. These processes are transitioning to what the company considers the “industry standard” solution: the most common, readily available, reasonable trade-off between niche player and price/complexity. The company works with influencers like Gartner and industry groups to determine the industry standard solution for each business function. This combination of industry standard and targetted, niche leaders is forming the company’s roadmap for the future. The IT purchasing function is now rethinking its sourcing approach. Rather than looking at the raw spend it used to have with large ERP players, it may now use the fact that it is a large customer for a smaller vendor (albeit with less raw spend) to try to influence the vendor’s development roadmap.
There was understandable resistance at first. No one likes to be thought of as not contributing to a competitive advantage. One of the keys to success in an approach like this is full engagement and support from senior management. A disciplined, consistent message and adherence to the policy is essential.
Rethinking the Role of IT
[su_pullquote]One of the keys to success in an approach like this is full engagement and support from senior management. A disciplined, consistent message and adherence to the policy is essential.[/su_pullquote]
One large, multinational consumer goods company realised that adopting new vendor digitalisation solutions required rethinking the way the company’s support centre was organised. It wasn’t enough to have expectations and requirements set by business process owners and solution delivery, improvement and training provided by an IT function. It found that the IT teams lacked the business expertise to appreciate the potential benefits offered by new vendor solutions, and the business process owners were often too consumed by other responsibilities and not sufficiently exposed to supply chain digitalisation. To address this, the company adopted a multifunctional approach by appointing a Supply Chain Digitalisation Director, to help bring IT and the business process owners together to discover the possibility of new innovations, and explore their impact on both business practices and IT management.
Another major consumer goods company is also embracing the IT management changes brought on by digitalisation. The rapid proliferation of powerful niche tools has led the company to realise it put too much emphasis on process automation, and not enough on the user. In response, the company is not only actively deploying best-in-breed digital solutions but also building central cockpits so that users have the best of both worlds: niche tools that allow them to benefit from exciting new IT solutions, but with a central portal that allows them to move freely between tools. For example, a customer care representative can use the cockpit to move from the order management B2B portal to the CRM tool to chat with a customer, then to the ERP to see the orders in process, and finally to the TMS to check order delivery status. A demand planner can have the most powerful, collaborative planning platform to work with customers, and easily move to the integrated data management tool to change a planning parameter. Indeed, this company has embraced the digital future to such an extent that it uses crowdsourcing and social media to allow its community to propose solution enhancements and to vote for their favourites.
However, both companies said that tension still exists between user desire for specialised vendor offerings for their function and the IT imperatives for managing the complexity of data, and interfaces and maintenance.
Keys to Success
These examples of adapting business practices reveal some key takeaways for firms looking to benefit fully from the possibilities of supply chain digitalisation:
[su_pullquote]A company cannot be a leader everywhere at once. Select, invest and tolerate complexity in the priorities and live with being a follower elsewhere.[/su_pullquote]
Define the IT landscape. Digitalisation is generating a dizzying array of potential for supply chains. But a company cannot be a leader everywhere at once. Select, invest and tolerate complexity in the priorities and live with being a follower elsewhere.
Evolve the organisation. Siloed thinking will not work, since the impact of choices in supply chain digitalisation slices across different functions and challenges the status quo for business process experts, IT and sourcing. Multifunctional teams – including the users – are needed to explore and select the right solutions and manage the complexity.
Obtain senior management sponsorship. Prioritisation means difficult choices, and cross-functional collaboration is always a challenge. The full support of senior management is vital to bring everyone together around a shared roadmap with the necessary resources to succeed.
About the Authors
Richard Markoff has worked in supply chain for L’Oréal for 22 years, in Canada, the US and France, spanning the entire value chain from manufacturing to customer collaboration. He is currently a supply chain coach, consultant, researcher and lecturer.
Ralf Seifert is Professor of Technology & Operations Management at the College of Management of Technology at EPFL. He also serves as Professor of Operations Management at IMD business school in Lausanne, Switzerland, where he directs the Digital Supply Chain Management programme.