Is Customer Experience Now the Driving Force for the Supply Chain?

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1 TDC I Arkatyze the. Future -rz-a. - - _-. w. 4,11pri,J _,4 wir "'op,. IDC ERSECTIVE Is Customer Experience Now the Driving Force for the Supply Chain? Simon Ellis EXECUTIVE SNASHOT FIGURE 1 Executive Snapshot: Customer Experience as the rimary Driving Force for the Supply Chain The manufacturing industry has been going through a long evolution, from a manufacturer-dorninated environment, where the fi mi decides what to make, stock. and sell, to a retailireseller-dominated environment, with that reseller dictating the manufacturer what to make, stock, and sell, to now a consumer-centric environment. where the consumer {the ultimate end user) holds the power and demands personalization of both the product and shopping experience. Key Takeaways - Manufacturing firms must rethink their supply chains to ensure the capability to rneet increasingly complex retailer and consumer demands. IDC predicts that over the next decade, 90% of industry growth will be captured by those companies that successfully engage directly with consurners. - Many experiential capabilities that supply chain rnust have are simply not possible without modern, digital capabilities. Recommended Actions - Ensure that strategic discussions about the supply chain include the implications of chang ing customer and consumer demands both today and into the future. - Be clear about the requirements customer experience will put on the supply chain, and how will you enable these things. - The vendor community is thinking about customer experience as a core element of the future supply chain leverage its knowledge no need to necessarily "reinvent the wheel." Source: IDC, 2017 November 2017, IDC #US

2 SITUATION OVERVIEW The manufacturing supply chain is currently experiencing levels of change that are perhaps unequalled in the entire history of supply chains. There are many reasons for this, but at the very heart of this change is an informed consumer wielding enormous power over manufacturers and retailers. Indeed, the manufacturing industry has been going through a long evolution, from a manufacturerdominated environment, where the firm decides what to make, stock, and sell, to a retail/resellerdominated environment, with that reseller dictating the manufacturer what to make, stock, and sell, to now a consumer-centric environment where the consumer (the ultimate end user) holds the power and demands personalization of both the product and shopping experience. These shifting dynamics are forcing manufacturing firms to rethink, retool, and reposition their supply chain strategy in order to ensure the capability to meet increasingly complex retailer and consumer demands, maintain a competitive position, and drive profit and growth for the firm. It's not just direct-to-consumer orders either, but any order that is fulfilled to the site of primary consumption. So, in the B2B world, it's about fulfilling directly to the points of customer consumption or usage. There seems little question that supply chains are much more aware of the consumer/customer than ever before, and the questions of how to personalize products; manage "mass customization" from facilities that are not well suited for that very purpose; ensure the highest level of product quality from increasingly distributed, global supply networks; and provide consistently high levels of customer service are central to discussions of strategy and competency. Over the past couple of years, IDC's supply chain FutureScape documents (and other trends studies) have been replete with predictions either directly related to customer experience (CX) or as a direct consequence of it: Over the next decade, 90% of industry growth will be captured by those companies that successfully engage directly with consumers. The consumer rules the world he or she is ubiquitously connected, craves individuality/personalization, and is intolerant of complexity and latency. The consumer is a consumer products company's worst nightmare and greatest opportunity. It seems intuitively obvious that those companies that figure out how to best engage with these consumers will be the ones that get more than their fair share of growth. And, by the way, as older consumers give way en masse to millennials, the "problem" just gets worse. By the end of 2020, 50% of all manufacturing supply chains will have the capability, either inhouse or outsourced, to enable direct-to-consumption shipments and home delivery. For several years now, the notion of omni-channel fulfillment has been a top priority for retail organizations, but we have also noticed a significant uptick in interest from manufacturers relative to omni-channel fulfillment. The lines between manufacturing and retail continue to blur, as retailers offer branded merchandise while manufacturers increasingly move toward the capability to directly fulfill consumer demand. Discussions with manufacturers over the course of the last year displayed a significant increase in interest relative to gaining the capability to directly fulfill consumer demand and gain the ability to fulfill "eaches" rather than cases and pallets. By the end of 2018, half of the manufacturers will be using analytics, IoT, and social collaboration tools to extend the integrated planning process across the entire enterprise in real time. Complexity continues to grow for global supply chain organizations, and as requirements to be more customer (or even consumer) centric through things like customization/personalization, the planning challenge also grows. There is also pressure on 2017 IDC #US

3 manufacturers to better collaborate with suppliers and customers, and while that requirement is not new necessarily, the tools to enable more effective collaboration have improved considerably. As new data sources become available, and practical, from nontraditional sources like social media tools and IoT (sensors), the best-in-class planning companies will integrate these in real time with traditional ER-based data and they will do it across the entire enterprise in real time. By 2020, smart postponement techniques and additive (3D) manufacturing will have been deployed by one-third of the manufacturers, thus reducing delivery latency by up to 50%. Technology is fundamentally disrupting traditional business processes, and the logistics and inventory management processes are no exception. Increasingly, organizations are experimenting with ways in which to leverage modern technology in order to accelerate speed in logistics while reducing waste and managing costs. A significant driver of this change is the rapidly evolving demands of today's customers that not only expect product variety and customization but also accelerated delivery. Historically, this has been a challenge, as companies would have to either keep excess inventory in region or be able to support customers with expedited freight. These are just examples of things that we expect to see in the supply chain over the next few years that are a direct result of companies needing to raise their supply chain game to meet increasing customer and consumer expectations and experiences. Whether these specific predictions come true or not is less important than the fact that supply chains are wrestling with relevance in a consumercentric world. Digital Transformation in the Supply Chain Digital transformation (DX) is a critical element of the future of the supply chain. Many of the experiential capabilities that supply chain must have are simply not possible without modern, digital capabilities. I say "modern" to differentiate from older, established technologies; things like the fax machine. Yes, a fax machine is digital, but I don't think anyone believes that it will be core to the future digital supply chain. Over the past two years, we have done a number of surveys on DX in the supply chain and asked respondents what the principal drivers are for exploring and investing in modern, digital tools. While they differ somewhat by manufacturing subsegment, the top 3 are quite consistent: Top driver of digital transformation initiatives is about consumer/customer needs Second driver is about balancing product/service flexibility Third driver is about what competitors are doing At the end of the day, digital transformation in the supply chain is about the customer (or consumer); that's the world we live in. As companies use digital competencies in the supply chain to drive better products and services, those that do not will find themselves increasingly uncompetitive. Clearly, these changes will occur at a different pace in different industries, but those companies that compete in segments ripe for digital disruption best get started. If we accept that DX in the supply chain is driven significantly by customer and consumer experiences, then what are the different strategies that companies should pursue. While it is tempting to talk in terms of disruption, that may be overly provocative, or at least not the full story. Based on many interactions with manufacturers, IDC has heard three main approaches to transformation: Horizon 1 efficiency and effectiveness: Do the things we do today in the supply chain better. This might include improving service performance, improving product quality, or accelerating the introduction of new products or services IDC #US

4 Horizon 2 be resilient to market disruption: Have a supply chain that can quickly adapt to disruptions in the marketplace (fast follow). This might be being able to deliver directly to consumers homes, or tie usage or performance data to a physical product. Horizon 3 be the disruptor: Supply chain supports new business models or dramatically reimagined ones (leader and bleeding edge). This is more speculative, but it might be selling transportation rather than cars or printing cosmetics at home. The sky's the limit. These are all things that companies are pursuing to enhance customer and consumer experiences, seamlessly and in real time. Implications for the Supply Chain The impact on the supply chain will be significant, either in terms of the capabilities supply chains adopt internally or the degree to which it becomes necessary to partner with third-party enablers. A case in point is the evolution of supply chains that essentially move full pallets of goods on full trucks from one large building to another, to ones that have to move "eaches"(individual items) to consumers' homes. The traditional mass supply chain is not configured to be able to do this. A couple of years ago, we speculated about the notion of a micrologistics network essentially what Amazon has been doing to facilitate the efficient handling of items and home delivery not without its challenges (inventory management, for one) but at least a way to start thinking differently about fulfillment. It is also not necessary for manufacturers to own such networks; in fact, we don't think they would, rather partner with a provider like an Amazon or a US to enable the capability. Food for thought. Vendor Offerings There are a number of vendors that are, and have been, talking about the customer/consumer as a core element of the future supply chain. SA talks a lot about the "lot size of one" in terms of the need to cater to individual product and experience needs; both Oracle and JDA feature the customer/consumer prominently in their discussions of the supply chain. Many other vendors focus there as well. One recent discussion IDC had on this topic was with Tata Consultancy Services Ltd. (TCS) HiTech team, and thought it would be interesting to highlight it here. TCS HiTech Customer Experience TCS' approach was shared with IDC as part of the company's HiTech services in supply chain but, frankly, the capabilities apply to most manufacturing industry segments. As TCS notes, "Supply chain continues to be the backbone for many HiTech industries. However, in the recent past, customer experience priorities have been driving the supply chain imperatives. Added to that, digital technologies are creating newer opportunities for the supply chain like never before. Therefore, processes can be made smart at a relatively low cost and huge volumes of data can be explored for deeper supply chain insights." In many ways, this encapsulates the sentiment that we hear from supply chain organizations we must change, our customers are demanding it; and modern, digital technologies allow us to change in ways not heretofore possible. TCS HiTech gets that supply chain management (SCM) efforts must connect with the things that customers are demanding (CX imperatives). Customer requirements aren't complicated, but the supply chain competencies to deliver those things have become a challenge for many companies. Figure 2 illustrates the connection IDC #US

5 FIGURE 2 Connections Between SCM and CX SC Capabilities needed Implication CX Imperatives Customer I End to End lanning effectiveness Agile Inventory Control Increased information maturity Right roduct Quantities across channels Reduced Response Time Wider roduct Range Easy roduct selection Effective pricing Reliable romise High roduct Quality Effective Risk Management Optimized Network Innovative way of handling supplier base Simulation of SC scenahos Availability across channels Higher roduct Innovation Quick Disruption resolution Lesser Operating Cost Higher Shipment Accuracy roactive & Efficient Servicing Suitable Upgrade & Sup plementary offers Easy Warranty rocess Efficient Customer support I lan I Source Make Deliver I Source: TCS, 2017 At its essence, TCS HiTech views CX as being reliable (living up to commitments), convenient (choice, consistency, and timely), responsive (listening and responding), and relevant (personalized and meaningful). If we think about this in terms of the supply chain: Demand awareness perhaps even demand-driven MR as a way to turn real-time demand into the right capacity and the right inventory in the right place (redictive and prescriptive analytics can be very useful in demand management.) Global available to promise (GAT) inventory visibility and agility across all relevant nodes, whether component supplier, OEM distributor, or reseller; also inclusive of spare parts for post-sale support (Next-generation visibility technologies combined with planning capabilities and technologies like IoT are taking GAT to greater heights, thereby reducing inventories and enhancing customer satisfaction for global companies.) Smart planning both in terms of all enterprisewide planning activities and in how they interact to deliver supply chain capabilities (i.e., available capacity/expenditure capital, working capital, and a clear consensus plan) (In-memory computing and digital technologies in the planning domain are transforming the traditional planning space.) Supply chain visibility you cannot respond to what you don't see visibility across the entire enterprise and the extended supply chain (Companies are also exploring the usage of blockchain and social technologies combined with bots and IoT to build trusting relationships between trading partners.) Smart logistics, what we call frictionless fulfillment at IDC, where sensors, comprehensive analytics, robotics, and cloud form to seamlessly integrate warehousing and distribution (Bots, IoT, drones, robotic process automation, and voice-enabled assistants can augment human capabilities to make logistics frictionless.) 2017 IDC #US

6 Smart service, utilizing a supply chain service assistant (think IBM Watson and many similar technologies) to drive customer satisfaction and "fix it right the first time" These are all supply chain capabilities geared to the customer/consumer and a nice linkage between SCM and CX. ADVICE FOR THE TECHNOLOGY BUYER The importance of the customer and consumer has not gone unnoticed clearly, but very often the capabilities that underpin the ability to successfully deliver the experiences they crave prove problematic. It is the judgement of IDC that no function faces this challenge more than the supply chain. We believe that it will be critical for manufacturers to proactively transform their supply chains, lest they find themselves unrecoverably disrupted. We would suggest considering the following: Ensure that strategic discussions about the supply chain include the implications of changing customer and consumer demands both today and into the future. Be clear about the requirements customer experience will put on the supply chain and how will you enable these things. Leverage the knowledge of the vendor community, which is thinking about customer experience as a core element of the future supply chain, no need to necessarily "reinvent the wheel." Be clear about the role digital transformation must play in your supply chain and how it can enable customer experience. LEARN MORE Related Research IDC FutureScape: Worldwide Supply Chain 2018 redictions (IDC #US , October 2017) The Digitally Enabled Supply Chain with Manufacturing Use Cases (IDC #US , April 2017) IDC's Worldwide Digital Transformation Use Case Taxonomy, 2017: Brand-Oriented Value Chains in the Manufacturing Industry (IDC #US , February 2017) IDC's Worldwide Digital Transformation Use Case Taxonomy, 2017: Asset-Oriented Value Chains (IDC #US , February 2017) IDC's Worldwide Digital Transformation Use Case Taxonomy, 2017: Technology-Oriented Value Chains in the Manufacturing Industry (IDC #US , February 2017) IDC's Worldwide Digital Transformation Use Case Taxonomy, 2017: Engineering-Oriented Value Chains in the Manufacturing Industry (IDC #US , January 2017) Synopsis This IDC erspective examines the key role that customer experience is poised to play in the future of the supply chain IDC #US

7 "It is the judgement of IDC that no function faces a customer challenge more than the supply chain. We believe that it will be critical for manufacturers to proactively transform their supply chains lest they find themselves unrecoverably disrupted," says Simon Ellis, V of Supply Chain IDC #US

8 About IDC International Data Corporation (IDC) is the premier global provider of market intelligence, advisory services, and events for the information technology, telecommunications and consumer technology markets. IDC helps IT professionals, business executives, and the investment community make factbased decisions on technology purchases and business strategy. More than 1,100 IDC analysts provide global, regional, and local expertise on technology and industry opportunities and trends in over 110 countries worldwide. For 50 years, IDC has provided strategic insights to help our clients achieve their key business objectives. IDC is a subsidiary of IDG, the world's leading technology media, research, and events company. Global Headquarters 5 Speen Street Framingham, MA USA idc-community.com Copyright Notice This IDC research document was published as part of an IDC continuous intelligence service, providing written research, analyst interactions, telebriefings, and conferences. Visit to learn more about IDC subscription and consulting services. To view a list of IDC offices worldwide, visit lease contact the IDC Hotline at , ext (or ) or sales@idc.com for information on applying the price of this document toward the purchase of an IDC service or for information on additional copies or web rights. Copyright 2017 IDC. Reproduction is forbidden unless authorized. All rights reserved.