Episode 25 – Next level SCM and procurement

In part 2 of the Podcast-Session with Prof. Dr. Ronald Bogaschewsky, we talked about new technologies (e.g. AI, Blockchain) and the implications of IIoT (Industrial Internet of Things) in the context of procurement and SCM.

The rise of AI in procurement

Although artificial intelligence (AI) or machine learning (ML) are not at all new topics, they open up huge potential and opportunities for organizations as they get applied and practiced. For instance, thirty years ago, we have already seen an AI system created to test vacuum cleaners. The system was trained to identified failures of the motors just by listening to sound – an audio trained AI-network. After that approach, the discussion about AI has basically stopped. The rise of AI is connected to the fact, that nowadays technologies are available for very low prices and at a very high performance level. Computers have reached high performance levels at very low costs, algorithms are rising and some scientists even expect that computers and machines in the near future will be having a higher performance level than all human beings combined – the phenomenon of singularity. What we can say for sure is, that the leading technological companies are dealing with these technologies and are trying to develop and implement applications to stay ahead of the pack and gaining a competitive advantage.

Central vs. decentral planning paradigm

How do these approaches look like and what is the biggest advantage? Let’s imagine that every box, every machine every physical item in the value chain can autonomously communicate with other objects – a cyber-physical system with items that communicate with each other, based on algorithms. For instance, the system may autonomously calculated the shortest route for a certain box being transported from A to B – the calculation and execution of the rules runs autonomously instead of being executed by a centralized system that is responsible for the planning process.

This is only a small example. There are large opportunities to make processes more flexible, agile and decentralized in terms of faster decision-making. Therefore, decisions are made without having a centralized computer systems. How does that fit with reality? The production management tends to be very centralized in the Western world. One problem in this context is, that organizations rely on data that is already outdated when it gets into the system. In order to cope with this circumstance – where the environment is still so complex that a centralized system doesn’t work optimal – companies need to adapt algorithms and applications to their centralized approach. The development and adaption of such an ERP planning module is very expansive.

Therefore, the question will be, can we find some regulation mechanisms that handle the objects that are moved around, in a way that they organize themselves efficiently and in a better way than a central planning approach. The development, implementation and execution of such an IoT approach is extremely interesting but also highly complicated.

Does IoT change supply chains?

Here we have to take a closer look. If we talk about the regulation mechanisms between cyber physical objects, we are dealing with badges, lot sizing decisions and many more aspects on the technical level. If we talk about supply chain design we talk about aggregated decision, that are not really influenced by technical IoT issues. One exception could be seen in the field of additive manufacturing.

Internet of Things does not change so much in terms of how and the decision where to produce, which market to serve and where the supply markets and the suppliers should be. The question is how organizations use available (big) data and information to answer key questions such as:
How do I set up my supply chain? With whom do I want to work with? Where are the markets of the future? Where do I want to have my major production facilities? Where should the supply markets for these facilities be? To which customers and markets do I distribute?

Looking at all these questions, we see a highly dynamic network approach. If things change, organizations quickly have to adapt a worldwide network from inside the value chain.

There are large amounts of open worldwide data sources. Having the right tool, this data can be grabbed from the web using specific AI-based crawler tools and be combined with proper analytic tools and techniques, which leads to a significant increase in market transparency – the foundation for better decision-making.

It is now possible to derive very precise information about e.g. which supplier in this world is able to produce and deliver a certain amount of goods to certain manufacturing locations. It is even possible to create precise supplier and sub-supplier networks. Therefore, this information also supports the companies risk management. It is even possible to take into account if a supplier lies in a potential earthquake or flooding area. This information is available before deciding on the optimal supplier. In the near future, it will be state of the art that companies decide about their suppliers on a very profound basis of information.

Elements of a ROLE-MODEL SCM

Talking about supply chain management in this context, we are talking about 80% purchasing activities and 20% logistics. Looking for a best-practice model, we can actually look already what the leading companies are practicing today. Most of them have completely automated operational processes and use free resources for strategic tasks, e.g. the selection of suppliers. In this context, organizations have access to web-based tools and data analytics applications that provide a higher level of transparency. Information that are highly relevant and were not available even three years ago. Companies have the opportunity to obtain large amounts of relevant real-time data – the opportunities even rise by applying smart software applications based on AI. Smart technologies support decision makers finalizing their decisions. On a global level, the goal is to make workflow easier and efficient, resulting in a value increase for the company. That means people that run strategic supply chain activities become more important. But it is important that people get qualified and prepared to cope with these technologies in the future.

Need for education in SCM and procurement

The technological progress and the implication of new applications leads to a high need of (further) education. As the tasks of supply chain manager and controllers are shifting, organizations need to develop new education paths and programs – from vocational education training to the further education for managers and especially older cohorts of employees. Employees will have to set their focus on complex tasks, that machines cannot do (yet). But this does not mean, that in the future, organizations will only need exclusively data scientists. Organizations will need supply chain managers, that know e.g. exactly how to use an AI software to find the best suppliers around the world. The development of technological progress is fast. In order to make sure that employees in SCM are equipped with state of the art knowledge, organizations have to set up specific education plans.

Blockchain in eProcurement and SCM – limits and opportunities

Blockchain technology has also the potential to improve processes along the supply chain. But, as the technology is in an early stage, there are not much role-model use-cases in procurement and SCM, yet. The majority of people has no idea how blockchains work in general and in practice, therefore decision makers are still very reluctant dealing with these technologies. Blockchain / distributed ledger technology is a very interesting technology with lots of potential. But we have to be careful talking about something, that hasn’t really shown prove, yet.

Blockchain might be interesting, if we consider autonomous agents in a decentralized environment that negotiate contracts. These agents negotiate about certain criteria, like buying and delivering certain things. The distributed ledger technology can support in proofing these contracts. This is an interesting field, where applying blockchain technology in SCM can increase the efficiency. But, as mentioned before, we are not yet having smart blockchain-based contracts on a regular basis, yet. We closed the discussion on blockchain in procurement and SCM, talking about the challenge of merging a decentralized blockchain technology with a central ERP system and the vulnerability at the interfaces.

Thanks for reading. IF you want to hear more, listen to the full podcast Episode.

https://itunes.apple.com/de/podcast/wueconomics-podcast/id1355452141?mt=2&app=podcast

 

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