Digital supply networks promise to bring much sought-after transparency to often impenetrable supply chain relationships, but they also bring concerns over security and compliance
Part of a manufacturing risk series supported by FM Global
When a major US automotive group was concerned that it knew too little about the financial health of companies down the supply chain, it decided to seek a solution that gave it much a more accurate insight into the viability of the companies it relied on.
The result was the Alderney Scorecard, an algorithm-based programme that identifies financially distressed firms by retrieving information about their profitability, liquidity and liabilities. Having done so, it rates them on a score card ranging from “healthy” to the rock bottom “very distressed”.
“What this tool does is help customers mitigate risk,” explains Alicia Masse, co-founder of Michigan- based Alderney Advisors, which designed the programme.
A former North American finance operations manager for Ford Motor Credit Company, she adds: “With this tool [contracting companies] can get with their buyers and prepare contingency plans.”
The Alderney Scorecard, which is essentially a form of supplier-tracking software, is a recent example of developments in the increasingly urgent quest for 100% transparency, the most recent expression of which is the fully digitised supply chain.
To many, this is the Holy Grail of supply chain management as it enables parties on both sides of a transaction to understand more about each other, especially in terms of finance. As Fred Hubacker, a 36-year veteran of Detroit’s motor industry and executive director of turnaround specialist Conway McKenzie, warned recently: “The financial health of any enterprise is one of the critical elements in terms of understanding how much business you can afford to do with that supplier.”
There seems to be little disagreement that most of today’s supply chains are overdue for revolution. Capgemini Consulting notes: “Hybrid supply chain models [paper and IT] have resulted in rigid organisational structures, inaccessible data and fragmented relationships with partners.”
Degrees of digitisation
But how to improve things? According to global consultant Accenture, there’s a right and wrong way to digitise the supply chain. The least effective method is merely to “digitally enhance” it and thus fall far short of the potential.
A fully digitised chain, by contrast, creates a different and much more efficient way of doing business by tapping a variety of new-era tools – social media, mobile communications, analytics and cloud computing.
Think of it as a digital supply network (DSN), suggests Accenture. A DSN provides a holistic view of the supply chain that unites not just physical flows but also talent, information and finance in a cohesive infrastructure. A DSN “is more connected, intelligent, scalable and rapid than traditional supply chain management”, says Accenture.
One important bonus is that a fully implemented DSN is highly collaborative – it allows two-way communication between suppliers that is said to create value right along the network.
In broad terms, Capgemini Consulting would agree. “Digital supply chains enable business process automation, organisational flexibility and digital management of corporate assets,” it states.
A fully integrated DSN should move every process of a supply chain online, with hefty savings. Thus a variety of functions – procurement, invoicing, approval cycles and payment procedures – can be accessed at any time, preferably through the cloud, in a way that allows employees to see pretty much the entire relationship between a supplier and their company.
The benefits go straight to the bottom line, points out Christian Lanng, chief executive of Tradeshift, a Denmark-based e-invoicing platform that counts Air France KLM among its customers .
“Beyond the benefits of anytime access, there are many additional time and money-saving advantages to digitising the supply chain,” he says. “For example, e-invoices allow companies to save an average of $505 [€454] per invoice while eliminating inefficient and often redundant approval systems.”
Lanng cites other unexpected gains – easier and more timely payments to suppliers to help build trust, storage of useful data around every transaction, and increased security because paper documentation is eliminated.
Tradeshift co-founder Mikkel Brun summarises the added value of such a system. “If you look at your supply chain as an arena to penny-pinch, as opposed to treating your suppliers as partners, you’ll miss a competitive advantage that allows you to be better, more productive and more efficient,” he says.
However, as with any management revolution, there are dangers. As researchers from consultancy McKinsey pointed out in a study earlier this year, industry leaders are concerned about wholesale data-sharing and cyber security if they were to implement a full-scale DSN.
These fears may be justified. Beat Schlumpf, owner of Swiss based GSL Consulting, which specialises in logistics and supply chains, says: “An internationally oriented supply chain encompassing several participants involves considerable legal and IT problems.”
Among other concerns, Schlumpf cites conflicting regulations about cross-border communication and storage of data, acceptability of electronic documents in legal issues and potential conflicts over true ownership of the data.
He also points to the effectiveness of security embedded in often competing systems and, above all, fears that the data may be copied or otherwise used without authorisation, as well as outright theft.
If organisations do decide to establish DSNs, another risk could be a half-hearted approach that fails to fully integrate it into the business and organisation – a “digitally enhanced” system.
The proponents of DSN say that the bigger risk is in not in adopting it. As Capgemini explains, today’s legacy crop of hybrid supply chains is complex and unwieldy.
Most global companies operate several hundred applications whose sole job is to support the supply chain. This result is lengthy implementation cycles and high maintenance costs.
Plenty of other deficiencies are cited by businesses, including inadequate co-ordination of information between regional branches
and head office, poorly married data and large-scale data redundancy. In addition, poor insights into suppliers routinely result in extra costs, production delays and risk to the reputation of the brand.
“Localised disconnected initiatives and silo-based operations pose a serious threat to competitiveness in an increasingly digital world,” warns Capgemini.
There is little doubt that the digital supply network is the way forward. What matters now is the way in which it is implemented.
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