Reducing logistics costs by enabling a pull-based, vertically integrated supply chain through IoT

By Neil Hamilton, VP of Business Development, Thingstream

The traditional supply chain model often used in retail distribution is outdated and broken. Customers want more and they want it now but businesses’ inability to step up to the mark can leave customers waiting for product or worse - not waiting and going elsewhere. To match modern customer expectations, business needs to adopt modern methods. Changes of this type are far from easy, however, IoT could hold the key to unlocking the supply chain of the future.

Thanks to the rise in on-demand services and almost anything you want being just a click away, consumers are becoming more and more demanding. In sympathy with this, commerce and industry are responding by doing everything they can to improve the customer experience and get an edge on the competition.

In the best case scenario, the customer will wait for the goods to become available and purchase anyway; in other cases, the customer will shop elsewhere or even give up on the purchase altogether. It’s all too familiar a story and it’s as old as the concept of commerce itself. However, it doesn’t have to be the case. With a combination of IoT (Internet of Things) technology and vertical integration of the order process, businesses can achieve a leaner supply chain and ultimately say goodbye to the phrase, “out of stock”.

The supply chain as we know it

In a traditional supply chain model, the process typically begins with the manufacture of a product. For this to happen, the manufacturer will need to create a bill of materials for the product and order enough raw materials from their suppliers to make enough of the product to meet consumer demand. For this to happen, the raw materials suppliers need to have enough stock themselves to fulfil the order. If this doesn’t happen, production could be delayed which could lead to a lack of stock at the retailers.

Assuming the manufacturer receives and stores everything they need to make the product, production can begin in line with forecasts. The manufacturer will need to build and ship enough to allow wholesalers to hold enough stock to meet customer demand. The manufacturer will also have to hold extra inventory to ensure that stock doesn’t run out.

Completely separate from the manufacturing process, the retailer will place an order with their wholesaler for enough of the product to meet projected customer demand. The wholesaler will then ship the product to the retailer where it will be shipped until sold.

And finally, assuming the retailer has stock, the customer places an order with the retailer. The retailer then takes the item from stock and ships to the customer.

The traditional process is highly-fragmented, has long lead times and relies on overstocking to make sure that there is always enough product to meet demand. When the process fails, as it often does, retailers are left without stock and the customer doesn’t buy the product.

The supply chain of the future

While it’s safe to say that the traditional supply chain works most of the time, it rarely works “well” from beginning to end in a consumer, retailer, distributor, manufacturer situation. Throughout the process, there are several steps where stock can pile up or run out. The problem is that production levels and stock levels are dictated by attempting to predict the future. That’s fine for anyone with a crystal ball but for anyone else, this can be problematic.

To solve this problem, the supply chain needs to be flipped on its head with the end consumer triggering the whole process at the point of order, with each stage of the process pulling from its respective supplier. A pull-based system of this kind can easily solve the problems of understocking and overstocking by ensuring that only what is needed is built and shipped and, of course, only when that thing is requested by the consumer.

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

The use of IoT

IoT can help in both the planning and realisation of a pull-based supply chain. Perhaps the most obvious example of this is in the tracking of inventory. This can help with the initial process mapping to get a handle on lead times and where/when the stock is sitting around. On top of this, sensor networks can monitor inventory levels at each stage, thus allowing the ability to calculate the cost of standing stock. By using simple tracking, the whole of the material flow process can be mapped from raw materials right to the finished product arriving at the customer’s door.

As well as helping to set the scene for vertical integration, the visibility gained from asset tracking can immediately be put to good use by helping to identify inefficiencies within the current process that could be quickly fixed, saving costs and time along the way.

Can my business benefit?

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 the business requires.

Push to pull

This is where the hard part begins. Getting a whole supply chain to go from push to pull is no mean feat and will likely meet plenty of resistance. Bear in mind that digital integration, although a huge entity in its own right, is only part of the story. There are supplier and customer relationships to consider throughout the chain and some may have absolutely 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 their supplier/customer relations.

This doesn’t necessarily need to put an end to the process. Gradual upgrade of parts of the supply chain with the help of IoT analytics could still be used to improve efficiencies in the overall process as well as helping to provide data for forecasting that could be useful to the whole supply chain. Data collected from doing this may also help to sway any part of the supply chain that might be sitting on the fence in terms of whether or not to integrate.

Systems integration

Unlike the push process, which begins with a product being made, a pull system is triggered when the customer places an 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.

The manufacturing process begins immediately with orders being sent to the raw materials providers. The raw materials are then shipped in the right quantities to make the product. Subsequently, the product gets built and shipped to the customer.

In a perfect world, these processes would happen like clockwork, only the right amount of product would be made and the customer would be happy. However, in reality, it doesn’t work like that. For example, it might be too expensive for a raw materials supplier to supply one-off parts. For this reason, some stock may need to be held. By using intelligent decision making at device level, stock levels could be kept to a minimum by 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 also give the customer much more visibility of the where their product is from the moment they order.

IoT and beyond

We are way past “what can we do with IoT?”. Now is the time for businesses to identify problems or 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 that pertain to real-world problems, we aren’t going to find out.