VIEW­POINT

Ralf W. Seifert and Richard Markoff con­sider the man­age­rial im­pli­ca­tions of tech­no­log­i­cal in­no­va­tions, an­swer­ing three key ques­tions

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The man­age­rial im­pli­ca­tions of tech­no­log­i­cal in­no­va­tions

Are­cent sur­vey by IMD busi­ness school asked sup­ply chain lead­ers across Europe to se­lect from a di­verse list of 20 hot top­ics what would be their big­gest sup­ply chain driv­ers in 2020. They were also asked to rank their com­pany’s readi­ness to ex­ploit these driv­ers.

The top five sup­ply chain driv­ers for which the im­ple­men­ta­tion gap was the largest touched on Big Data, dig­i­tal­i­sa­tion, In­ter­net of Things, and Ar­ti­fi­cial In­tel­li­gence, all pil­lars of In­dus­try 4.0 along with au­to­ma­tion, 3D print­ing and other dig­i­tal in­no­va­tions. These are ex­cit­ing new tech­nolo­gies, but the sur­vey shows that the cur­rent re­al­ity of sup­ply chains is that, no­table ex­cep­tions aside, the ma­jor­ity of com­pa­nies are still not ready to use them.

This is the true chal­lenge of In­dus­try 4.0: even as tech­no­log­i­cal ad­vances con­tinue apace, and early adopters reap the ben­e­fits of those tech­nolo­gies that fit their busi­ness con­text, ex­ec­u­tives at most com­pa­nies are be­wil­dered by the ar­ray of tech­nolo­gies and ca­pa­bil­i­ties al­ready avail­able and do not al­ways see an ob­vi­ous en­try point. Even af­ter they have se­lected an in­no­va­tion av­enue, the busi­ness case is not easy to es­tab­lish. And for those com­pa­nies that do se­lect an In­dus­try 4.0 in­no­va­tion, jus­tify the eco­nomic case, and get to im­ple­men­ta­tion, there are still unique bar­ri­ers to change that must be over­come. Taken to­gether, this is a three-part prob­lem that com­pa­nies look­ing to in­no­vate through In­dus­try 4.0 need to solve: How will com­pa­nies build paths to firstly se­lect, se­condly jus­tify and thirdly lever­age the func­tion­al­i­ties avail­able to them? Each of the chal­lenges is worth a closer look.

find­ing the right in­dus­try 4.0 fit

It isn’t al­ways clear for sup­ply chain lead­ers which In­dus­try 4.0 in­no­va­tion ini­tia­tives to adopt. In­dus­try 4.0 of­fers a host of ex­cit­ing tech­nolo­gies, with a rich land­scape of op­tions and ven­dors at­trac­tive to se­nior man­age­ment, but with high com­plex­ity risks for those closer to op­er­a­tions, who see a dizzy­ing ar­ray of ven­dors and op­tions. Adding to the puz­zle, there are ‘in­ter­nal’ and ‘ex­ter­nal’ busi­ness driv­ers that might dic­tate which in­no­va­tions have the great­est po­ten­tial ben­e­fit and war­rant pri­ori­ti­sa­tion.

The ex­ter­nal mar­ket forces that pull sup­ply chains to­wards In­dus­try 4.0 so­lu­tions could be linked to mass cus­tomi­sa­tion, agility in the face of ever more vari­able de­mand, us­ing Big Data to un­der­stand and pre­dict con­sumer be­hav­ior, and cloud col­lab­o­ra­tion net­works with sup­pli­ers and cus­tomers.

There are prom­i­nent ex­am­ples that show the po­ten­tial of In­dus­try 4.0. One is the use of 3D print­ing to pro­duce cus­tomised hear­ing aids within hours, lead­ing the way to wider use of 3D print­ing in med­i­cal de­vices such as ti­ta­nium knees or spinal pros­thet­ics. The po­ten­tial is high enough that the FDA just re­leased guid­ance that es­tab­lishes the path to reg­u­la­tory ap­proval for 3D printed med­i­cal de­vices. FMCG com­pa­nies are now us­ing pre­dic­tive an­a­lyt­ics fed by big data to un­der­stand how con­sumers may re­act to new prod­uct launches in or­der to bet­ter size de­mand plans.

These are ex­cit­ing op­por­tu­ni­ties that ex­tend be­yond sup­ply chain and must be part of an over­all def­i­ni­tion of busi­ness strat­egy led by the CEO, wherein sup­ply chain is one of many im­por­tant ac­tors in the con­ver­sa­tion but that In­dus­try 4.0 helps make pos­si­ble. For ex­am­ple, in­vest­ing in cloud-based or­der man­age­ment tools that make it pos­si­ble to lever­age stores, ware­houses and even third-party stocks to op­ti­mally

A busi­ness case is more com­pelling when it is pos­si­ble to pilot a new tech­nol­ogy in a small, con­trolled en­vi­ron­ment be­fore scal­ing up com­pany-wide.”

ful­fil ecom­merce or­ders is a task for sup­ply chains to solve. Even de­ci­sions on the con­fig­u­ra­tion of the phys­i­cal net­work are now de­pen­dent on the ecom­merce or­der ful­fil­ment strat­egy. How­ever, the de­ci­sion to use stores to ful­fil ecom­merce or­ders, ei­ther with stock or via clickand-col­lect, is clearly part of an over­all busi­ness strat­egy. The busi­ness strat­egy must po­si­tion the pri­or­i­ties of ecom­merce, store traf­fic and or­der lead time, and weigh staff train­ing and com­plex­ity. Sup­ply chains have a voice in the dis­cus­sion to be sure, and the dis­cus­sion must be had be­fore rush­ing to im­ple­men­ta­tion.

Go­ing fur­ther up­stream, de­ploy­ing au­to­ma­tion to in­crease the agility of line changeovers makes more sense if the busi­ness strat­egy is to have a larger prod­uct port­fo­lio with smaller vol­umes and more pro­mo­tional ac­tiv­ity. The in­dus­trial strat­egy is a func­tion of the busi­ness strat­egy, not the other way around. For ex­am­ple, Adi­das is in­no­vat­ing in the shoe mar­ket by de­ploy­ing 3D print­ing to sup­port a strat­egy of of­fer­ing cus­tomised in­soles and lim­ited-edi­tion mod­els. Their com­peti­tor Nike has an­nounced an au­to­ma­tion pro­gram that is re­mak­ing their geo­graph­i­cal pro­duc­tion foot­print and bring­ing in­creased agility to their sup­ply chain.

In terms of in­ter­nal busi­ness driv­ers, au­to­ma­tion, trans­par­ent S&OP plan­ning suites, con­nected pro­duc­tion sen­sors, pre­dic­tive main­te­nance and shop floor aug­mented re­al­ity can have im­me­di­ate ben­e­fits for safety, qual­ity, and ef­fi­ciency. These so­lu­tions are in­ter­est­ing be­cause of in­ter­nal per­for­mance am­bi­tions, rather than ex­ter­nal mar­ket in­flu­ences, and they are more in­de­pen­dent of the over­all busi­ness strat­egy.

They may seem to lie purely within the do­main of sup­ply chain and op­er­a­tions, but in fact are of­ten mul­ti­dis­ci­plinary. Even some­thing like de­mand sens­ing, us­ing Big Data and pre­dic­tive an­a­lyt­ics to ‘sense’ short-term trends in con­sumer de­mand, is best done with the col­lab­o­ra­tion of com­mer­cial and cat­e­gory man­age­ment teams. With­out their sup­port, ac­cess­ing, un­der­stand­ing, and lever­ag­ing the data will be dif­fi­cult for the sup­ply chain to achieve.

Once the chal­lenge of iden­ti­fy­ing and pri­ori­tis­ing the most com­pelling pos­si­bil­i­ties of In­dus­try 4.0 has been ad­dressed, the next step is jus­ti­fy­ing the eco­nomic busi­ness case.

cal­cu­lat­ing a busi­ness case

Adopt­ing an In­dus­try 4.0 tech­nol­ogy, be it in re­sponse to in­ter­nal or ex­ter­nal busi­ness driv­ers, re­quires a uniquely chal­leng­ing eco­nomic jus­ti­fi­ca­tion, since it goes be­yond straight­for­ward re­turn on in­vest­ment sce­nar­ios.

This is partly be­cause many In­dus­try 4.0 tech­nolo­gies have not yet been widely de­ployed, and there may be re­luc­tance to be the first adopter. New tech­nol­ogy so­lu­tions are of­ten met with skep­ti­cism, which can raise the bar for the re­turn on in­vest­ment as there are few demon­stra­ble busi­ness cases avail­able for com­par­i­son. When the pro­posed tech­nol­ogy is truly cut­ting-edge, the risks of fail­ure are higher and the eco­nomic case is held up to greater scru­tiny. Not ev­ery com­pany has lead­ers ready to cham­pion and spon­sor in­no­va­tion in the face of un­cer­tain or less tan­gi­ble out­comes.

One FMCG com­pany we spoke to was an early adopter of AGVS – au­to­mated guided ve­hi­cles that re­place driver-pi­loted fork­lifts. The pilot project showed a best-case pay­back of five years – just long enough for the project to be halted in its tracks for lack of a com­pelling re­turn. How­ever, the head of op­er­a­tions pushed for­ward, see­ing the less tan­gi­ble but crit­i­cal value that in­vest­ing in AGVS would rep­re­sent. This would send a clear mes­sage that the com­pany placed im­por­tance on safety, clean­li­ness, and in­no­va­tion. To­day AGVS are widely de­ployed world­wide and their con­tri­bu­tion is not ques­tioned. How many com­pa­nies have sim­i­larly vi­sion­ary lead­ers ready to take risks on In­dus­try 4.0? In­deed, most of the In­dus­try 4.0 suc­cess sto­ries we have en­coun­tered reached im­ple­men­ta­tion through man­age­ment’s con­vic­tion that their com­pany had to be an in­no­va­tion leader rather than an iron­clad eco­nomic jus­ti­fi­ca­tion.

When In­dus­try 4.0 so­lu­tions are due to ex­ter­nal forces, this adds a layer of com­plex­ity. Sup­ply chain man­agers are more used to jus­ti­fy­ing in­vest­ments that pro­vide ef­fi­ciency or are re­quired to meet a stated, pro­jected de­mand. When the in­vest­ments are part of a shift in busi­ness strat­egy, both the top and bot­tom lines in the eco­nomic model are mov­ing, cloud­ing the ques­tion even fur­ther. This is an op­por­tu­nity for sup­ply chain man­agers. They may now have a voice in shap­ing busi­ness strat­egy, rather than be­ing uniquely a func­tion of it.

An es­sen­tial el­e­ment to con­sider is scal­a­bil­ity. A busi­ness case is more com­pelling when it is pos­si­ble to pilot a new tech­nol­ogy in a small, con­trolled en­vi­ron­ment be­fore scal­ing up com­pany-wide. Where pos­si­ble, this can limit the size of the in­vest­ment, but might dis­cour­age in­no­va­tions that re­quire high up­front fixed costs re­gard­less of scale, such as a col­lab­o­ra­tion plat­form.

over­com­ing bar­ri­ers to im­ple­men­ta­tion

Any tech­nol­ogy de­ploy­ment will in­evitably en­counter bar­ri­ers to im­ple­men­ta­tion. There are the usual hur­dles of em­ployee en­gage­ment, skep­ti­cism and fear of be­ing un­able to adapt that can­not be ig­nored. But In­dus­try 4.0 en­tails other di­men­sions of im­ple­men­ta­tion chal­lenges.

The po­ten­tial lack of a clear busi­ness case might un­der­mine the mo­ti­va­tion of key im­ple­men­ta­tion ac­tors, es­pe­cially if the trans­verse na­ture of the trans­for­ma­tion un­der­mines their eco­nomic in­cen­tives (our re­search on this will be pub­lished in a forth­com­ing ar­ti­cle in The

Euro­pean Busi­ness Re­view). For ex­am­ple, fac­tory man­agers purely mo­ti­vated around cost and ef­fi­ciency may re­sist In­dus­try 4.0 ini­tia­tives that pro­mote con­nec­tiv­ity, trans­parency and agility.

With so many com­pa­nies look­ing to im­ple­ment their In­dus­try 4.0 strat­egy, find­ing qual­i­fied tal­ent is be­com­ing a prob­lem. Sim­i­larly, the skill lev­els of cur­rent em­ploy­ees might not be ad­e­quate, rais­ing the re­quired train­ing ef­fort.

From a tech­nol­ogy per­spec­tive, in­creased con­nec­tiv­ity and cloud projects mean that is­sues like cy­ber­se­cu­rity and data own­er­ship must be ad­dressed. Busi­ness con­ti­nu­ity plans may no longer be suit­able with the emer­gence of new risk points and over­all sys­tem threats.

what’s next?

In­dus­try 4.0 ad­vo­cates would do well to fo­cus not only on the tech­nol­ogy but also on the man­age­rial im­pli­ca­tions. The tech­nol­ogy is ex­cit­ing and will un­doubt­edly change op­er­a­tions in the years to come. But for com­pa­nies that are look­ing to par­tic­i­pate in and ben­e­fit from In­dus­try 4.0 must pri­ori­tise projects that are con­sis­tent with an ex­ter­nal busi­ness strat­egy, iden­tify what the true ben­e­fits are, and un­der­stand how ready they are to make the change hap­pen.

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