Sunday 22nd September 2019

Reducing logistics costs via a pull-based, vertically integrated supply chain

Published on August 21st, 2018

Neil Hamilton, VP, business development, Thingstream, says the combination of IoT and vertically integration order processes can achieve a leaner supply chain and ultimately say goodbye to the phrase, ‘out of stock’. Here’s how to get started.

The traditional supply chain model often used in retail distribution is outdated and broken. Although it works most of the time, it doesn’t work sufficiently well, Customers want more and they want it now. Businesses’ inability meet expectation can leave customers waiting or worse, going elsewhere.

Instead of the supply chain starting with the manufacturer as it has for decades, now it needs to be flipped on its head with the end-customer triggering the process at the point of order, and each stage of the process pulling from its respective supplier. Such a pull-based system can solve the problems of understocking and overstocking, ensuring that only what is ordered is built and shipped.

It’s a simple enough idea, but implementation might not be so easy. Before tackling the technicalities of vertical integration, every part of the supply chain has to be on board, which won’t happen unless it can be proven to be worth the time, effort and cost of changing processes. For all parts of the chain except the consumer, this means a lot of data collection, flow mapping and analysis. An arduous task for humans, but a piece of cake for a computer or a network of intelligent devices.

Using IoT to create a pull-based supply chain

IoT can help in both the planning and realisation of a pull-based supply chain. Perhaps the most obvious example is tracking inventory to establish lead times for initial process mapping and to show where and when stock is sitting around. Sensor networks can also monitor inventory levels at each stage, so parties can calculate the cost of standing stock. Simple tracking can map the entire material flow process from raw materials to the finished product arriving at the customer’s door.

As well as helping to set the scene for vertical integration, asset tracking provides the visibility to identify inefficiencies that could be quickly fixed, and save cost and time.

Assuming a scenario where every step of the material flow has a different owner and doesn’t already have an efficient vertical integration system in place, an end-to-end pull system could be extremely advantageous but it’s not a magic bullet and it won’t necessarily work for everyone. For example, large supermarkets already operate extremely efficient, vertically integrated supply chains where they are required.

From push to pull

Neil Hamilton

This is where the hard part begins. Getting a whole supply chain to go from push to pull will probably meet plenty of resistance: although digital integration is a huge undertaking in its own right, it is only part of the story.

There are supplier and customer relationships to consider throughout the chain and some may have valid reasons for not wanting to change. Your suppliers have other customers and your customers have other suppliers; the same is true throughout the chain. Changing their process for you could have a negative impact on other supplier/customer relations.

This doesn’t necessarily halt your progress though. Gradually upgrading parts of the supply chain based on IoT and analytics could improve efficiencies in the overall process as well as provide data for forecasting that could be useful to the overall supply chain. Data collected from doing this may also help to sway parts of the supply chain that are hesitating.

IoT and systems integration

Whereas the push process begins with manufacturing a product, a pull system is triggered by a customer’s order. In a truly vertically integrated system, the customer’s order would be processed by the retailer’s e-commerce system which would then generate an order from the wholesaler. Likewise, the wholesaler would pass this order onto the manufacturer.

In a perfect world only the right amount of product would be made to meet customers’ needs but reality is more complicated. For example, it might be too expensive for a raw materials supplier to supply one-off parts so some stock must be held. By using intelligent decision-making at device level, stock levels could be kept to a minimum, though, so that ensuring that processing only happens when certain conditions are met.

Likewise, the manufacturer may find that some processes need to be batch-based due to high costs of single unit processing. Edge computing could help by ensuring that batches are processed efficiently, only drawing upon resources or issuing parts from stock at the right time.

As well as the benefits passed down to the customer by the supply chain, the incumbent tracking can give customers information about where their product is from the moment they order.

Now is the time for businesses to identify problems and opportunities and ask “how can IoT help us fix or improve these?”. The supply chain is one of many areas where IoT could not only improve operations but underpin a complete reimagining of how business works. Like many technologies before it, we don’t fully know the scope of what IoT will bring to business but until we start asking the right questions relating to real-world problems, we aren’t going to find out.

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The author of this blog is Neil Hamilton, VP, business development, Thingstream

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