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….How Adidas and Amazon rewrite the rules on supply chain management with Supply Chain 4.0

The digital revolution is creating a whole new paradigm for what used to be the supply chain. It was once about delivering the right quality at the lowest cost, with the agreed service level; now it is about increasing sales, creating more value and capturing it.

According to professor Carlos Cordon, at IMD, companies such as Adidas and Amazon rewrite the rules on supply chain management with Supply Chain 4.0

The supply chain is no longer just about efficiency, working capital reduction and inventory management. It’s about driving revenue and profits.

Until recently, we were used to looking at supply chains as cost drivers, not sales drivers. We have a lot of tools to understand supply chain costs, like “total cost of ownership”, “spend analysis” or “total landed cost”, but none about increasing sales.

However, technology is bringing about a fundamental change and Supply Chain 4.0 requires a very different view – focusing on increasing sales through a better understanding of how customers behave.

In Russia, Adidas increased sales in Moscow by double digits in 24 hours, thanks to a supply chain initiative. At the same time Amazon is now looking at using drones to deliver products, a very expensive move, but one the company says will increase sales.
Adidas is the leading sports’ shoe brand in Russia with more than 1,200 stores.
As part of its strategy to please customers, Adidas is implementing an omni channel strategy, allowing people to buy in a number of ways (on-line or in the physical store) any product that is available anywhere in Russia (whether in an Adidas shop, distribution center or warehouse), and for it to be delivered in any way (at home, at the store or at a pick-up point).
This is possible thanks to the use of RFID identification chips, “ship from store” tools, a digital “click and collect” solution and “endless aisle” technology.
Initially, Adidas implemented a trial of click and collect in Moscow expecting that just a few consumers would choose this option – to buy on-line and collect the product at a store. They expected around 10 to 20 orders per week, but consumers embraced the idea and orders reached 1,000 per week. Adidas was forced to stop the experiment and build the supply chain infrastructure needed to support such demand.
Today, up to 70% of online sales are through click and collect.
Similarly, other supply chain initiatives like ship from store, where goods ordered online are delivered from a store, not a distribution center, and endless aisle, in which customers can order products no longer in stock in their local store but is available in another store in another part of the country, have substantially increased sales and, logically, profits.
For Adidas Russia, the supply chain is no longer about reducing costs: It is – more importantly – about increasing sales.
All of this is possible thanks to the technology being used in the supply chain. Most of these technologies belong to Industry 4.0, a high-tech strategy promoting the computerization of manufacturing. Adidas applies these technologies to the supply chain rather than just to manufacturing.
Executives have always known that improving supply chains ultimately improves sales. However, because the impact was very difficult to evaluate, companies traditionally approved investments in supply chains based only on the expected reductions in costs and working capital.
The digitalization of supply chains, with the breadth of sales and ordering data available, now makes it possible to calculate by how much supply chain improvements are increasing sales and profits, and the numbers are often amazing.
Another example is how much more Adidas is selling in Russia thanks to the use of ship from store. In the largest country in the world, shipping from one part of the country to the other extreme can take up to 15 days using traditional delivery systems.
By being able to deliver from a store, Adidas expected to reduce delivery times and to increase sales, but it also expected to increase delivery costs. To its surprise, delivery costs fell and sales increased substantially. It turns out that in certain product categories, consumers tend to return around 50% of the products they buy online, if delivery is made within 24 hours.
However, if delivery takes three days, consumers may return up to 70%. Thus, increasing speed of delivery means fewer returns, which means higher sales – up to 40% higher at full price. Also, by reducing the number of returns, logistics costs go down substantially.
For decades, the world of logistics has been obsessed with lowering costs.
As one logistics executive put it: “We look at savings in terms of cents, not dollars or euros”.
Delivering by drones looks crazy to them. However, if you are Amazon, and you lower the rate of return of products because you deliver in 15 minutes, fewer returns mean higher sales and, therefore, higher profit. The comparison is not about costs but about sales.

The key is how to generate and capture value in the whole chain.

The digital revolution is creating a whole new paradigm for what used to be the supply chain. It was once about delivering the right quality at the lowest cost, with the agreed service level; now it is about increasing sales, creating more value and capturing it.

Digital supply chains – Do you risk falling behind?

Key lessons from the second IMD Global Supply Chain Survey

Ralf W. Seifert

By Professor Ralf W. Seifert with Katrin Siebenbürger Hacki
The second edition of the IMD Global Supply Chain Survey examines how organizations rate themselves on 20 important trends in supply chain management. It shows that experts from leading European companies, in a wide variety of industries, expect the focus of supply chain management over the next three to five years to remain on traditional topics, such as applying sales operations & planning (SO&P) throughout the chain and using specific key performance indicators (KPIs). Interestingly, the experts give less importance to key areas of digital transformation, such as digitalization of interactions with suppliers, channel partners and consumers, and the use of “Big Data”. New technological advances, such as robotics, the Internet of Things (IoT) and 3D printing, are seen as being of even less relevance in the period.

Is this a sign that – despite the feverish talk of disruption from digitalization and new business models – supply chain management is still about focusing on the basics of a physical world business? Or do some business leaders believe that the nature of their physical world products shelters them from rapid technological shifts? Are these organizations holding themselves back by not paying enough attention to new technology and processes? Are they at risk of missing out on the rapid development of “Supply Chain 4.0” or even “Value Chain 4.0”? As my colleague Carlos Cordon, Lego Professor of Strategy and Supply Chain Management, noted in a recent article, the supply chain function at many organizations is rapidly evolving to not only deliver value at the lowest cost but create customer value and translate it into higher sales.

The survey

More than 300 people across more than 30 industries participated in the survey, carried out between mid-September and mid-November 2016. Main industries represented included speciality chemicals, food & beverage, pharmaceuticals, industrial goods, fast-moving consumer goods (FMCG), oil & gas and mining & minerals. The study focused on identifying the gap between how important a key supply-chain topic is perceived to be for a company over the next three to five years and how well it is seen as being addressed in the organization. Respondents were also asked to name their top-of-mind, highest priority initiatives for advancing supply chain performance in their organization.

Key takeaways

We selected 20 topics – some old, some new – that are significant drivers of supply chain performance. Although different industries give different weight to different drivers, the overall trend is clear. Respondents feel generally comfortable with the way their organizations address the basics, such as aligning supply-chain strategy with overall business strategy, supplier management, measuring supply-chain performance using a set of KPI’s and compliance and governance (see Figure 1).

 

Figure 1: The most important drivers of supply chain management and how well they are being addressed in organizations, average ratings  

N=268 respondents, average ratings, only complete results are taken into consideration

 

Few respondents see a high impact over the next three years from drivers such as the internet of things, automation or robotics. Nevertheless, digitalization seems to be a strong focus – in cooperation with suppliers and channel partners, for example, or using “Big Data” for forecasting and demand planning – with more than 33% rating it as important or very important for their organization. But the same percentage rated the degree to which the organization addresses the drivers as low or very low. Respondents were very clear that their organizations are not well prepared to address digitalization drivers showing the largest implementation gaps as of today (see Figure 2).

 

Figure 2: Key drivers rated according to the gap between importance to 2020 and how well addressed in respondents’ organizations

N=268 respondents, average ratings, only complete results are taken into consideration

 

When it comes to key drivers, outside of the tried-and-tested supply chain management basics, differences are to be expected between industries. For example, only 9% of respondents from the mining & metals industry considered the use of “Big Data” for demand forecasting an important or very important driver. This figure rose to 60% for FMCG, freight & logistics and retail. A B2B industry will place much lower importance than a B2C industry on availability of integrated data across all channels and partners or a customer-facing supply chain. But it would be short-sighted to believe that a company and its supply chain leaders do not need to stay abreast of opportunities and trends – change might be driven by your channel partners, i.e. players further down the value chain. The question remains whether the low level of importance attributed by respondents to the internet of things, robotics, 3D printing and the like, points to a larger issue, namely that companies tend to plan for technological shifts only when that technology is ready to replace existing processes and methods. In our fast-moving and increasingly digital age, organizations may be waiting too long to prepare for disruption of their supply chain by digital and technology drivers. Conclusion Supply chain leaders must balance short-term benefits and the longer-term investments needed for an efficient and effective supply chain that is ready for the future. Based on our survey results, this involves the following three key activities:

1] Getting the basics right – implementing supply chain best practices and improving supply chain performance using tried-and-tested methods

2] Having a strategy for an increasingly connected and digital world – no revolution, but continuous evolution of a digital supply chain where greater transparency and analytics leads to improvements in delivery times, reduction of inventory, reduction of supply chain cost and risk, and increased ability to create value for customers and, therefore, sales

3] Being ready for big technology shifts – involving robots and autonomous vehicles, 3D printing and connected products, and the internet of things, to improve product and service offerings and reduce costs Senior supply chain leaders should embrace a holistic approach that aligns people, processes and structures within the supply chain function to the challenges that a digital and increasingly automated world present to companies of all industries and in all stages of maturity. They should not focus only on implementing more and better technologies, but must inspire, manage complexity and develop distinct cultures conducive to success in rapidly changing environments.

Ralf Seifert is Professor of Operations Management at IMD. He directs IMD’s new Digital Supply Chain Management program, which addresses both traditional supply chain strategy and implementation issues as well as digitalization trends and new technologies.