Supply Chain Transformation: Not Just Digital, But Physical Too

Over the past couple of years, we have published many blog posts and produced several video episodes on supply chain digital transformation (see our archives). What’s becoming clear, however, is that digital supply chain transformation is not enough; companies also have to transform their physical supply chain networks to adequately meet the more demanding challenges and opportunities before them.

Here are some examples from the past few months:

P&G:  P&G is undertaking “a multibillion-dollar effort to remake an antiquated and inefficient network of factories, warehouses and offices into a new model that gets goods to stores more quickly,” reported Sharon Terlep in the Wall Street Journal this past February. “P&G has consolidated hundreds of offices and warehouses across North America and set up six so-called mixing centers, where computer algorithms work with robots and humans to load trucks with the optimal mix of products to ship to retailers. Once complete, P&G said its new supply chain will enable 80% of U.S. production to reach stores within 24 hours.”

Target: “Target is testing a new distribution strategy aimed at speeding up its restocking and making the retailer more nimble at stores and online,” reported Jennifer Smith in the Wall Street Journal in May. “The aim is to pare what Target calls its replenishment cycle from days to hours and reduce inventory at stores, especially at the retailer’s new small-format stores and locations in denser urban areas. The approach, now in pilot mode at a warehouse in Perth Amboy, N.J., also uses the same pool of inventory to replenish stores and fulfill online orders, a departure from Target’s existing supply chain.”

Home Depot: At the Descartes Evolution 2018 Conference in March, Mark Holifield, Home Depot’s Executive Vice President of Supply Chain and Product Development, discussed how the retailer is investing $1.2 billion over five years to redesign its distribution and delivery network to “create the fastest, most efficient delivery in home improvement.” Jennifer Smith from the Wall Street Journal provided additional details in an article last week:

The home improvement retailer will add 170 distribution facilities across the U.S. so that it can reach 90% of the U.S. population in one day or less, said Mark Holifield, the company’s executive vice president of supply chain and product development. The new sites will include dozens of direct fulfillment centers for next-day or same-day delivery of commonly ordered products, as well as 100 local hubs where bulky items like patio furniture and appliances will be consolidated for direct shipment to customers.

UPS: The need to physically transform supply chain networks is also impacting logistics service providers. Exhibit A is this headline from the Wall Street Journal a couple of weeks ago: “UPS’s $20 Billion Problem: Operations Stuck in the 20th Century.” As Paul Ziobro reports:

As UPS tries to satisfy America’s 21st-century shopping-and-shipping mania, parts of its network are stuck in the 20th century. The company still relies on some outdated equipment and manual processes of the type rival FedEx Corp. discarded or that newer entrants, including Inc., never had.

Now, the century-old delivery giant is playing catch-up. As part of that effort it plans capital spending of more than $20 billion over the next three years. Much of that will go toward opening new automated facilities, UPS says, and technology upgrades to route packages around bottlenecks. It is a bigger annual expense, adjusted for inflation, than when UPS broadened from a ground operation and built up its cargo airline in the 1980s.

The bottom line is that there are two sides to the supply chain transformation coin: the digital and the physical. While digital transformation has been getting the lion’s share of attention from analysts and technology companies, you cannot overlook the importance of physical transformation — that is, the importance of recognizing that your supply chain and distribution networks, which were originally designed to flow truckloads of products from large distribution centers to stores, are becoming outdated in this new market where speed of delivery and inventory reduction are paramount.

As the examples above illustrate, physical transformation will be a costly, multi-year process for many companies. But the sooner you bite the bullet and get started, the sooner you’ll be able to remain relevant and competitive.