Flexing IT: Supply Chain Flexibility and the need for digitalisation in the UAE – LogiSYM March 2018

LogiSYM Supply Chain Magazine - March 2018 Edition

Flexing IT: Supply Chain Flexibility and the need for digitalisation in the UAE – LogiSYM March 2018

The following is an executive summary of a report that looks at the impact of diversity of demand channels and the need for supply chain flexibility. This explores digitalisation as both a driver of the need for flexibility, and an opportunity to be harnessed in the back office to achieve service level excellence beyond operational efficiency. Supply chain flex is explored through the examination of warehousing as a resource that can be adjusted according to location and space requirements depending on demand variability. The full report will be available after 22nd March, 2018. Contact Edmund Lee at info@lscms.org if you wish to receive a copy.

Middle East and North Africa (MENA) is undergoing significant transformation, with strong political change and economic diversification. Changing demographics in the region have resulted in a rising middle class resulting in increasing levels of consumption and growing demand for luxury goods. Add to this a desire to reduce reliance on oil at a country level, and this pushes transportation and logistics to the fore, with increasing emphasis on flexibility and digitalisation to reach customers. This is further accelerated by rapid changes driven by government initiatives regionally, prioritising transport and infrastructure improvements in order to achieve their economic development targets.

Diversification in capability, and expanded infrastructure fuels a demand for increased variety in the ways that goods can be ordered, distributed and delivered, pushing this requirement for flexibility up the supply chain. As a result, digitalisation is required to increase the processing and speed of information as product moves from channel to channel, from country to country, driving growth in the region.

In line with this development to meet a new customer paradigm, the United Arab Emirates stands out as a government that is aggressively positioning itself in a region poised for growth, with strong and innovative investment in globally oriented ports, airports and airlines. This is being supplemented with robust expansion of storage and distribution infrastructure to ensure that flexibility to meet regional demand is foremost in the development of logistics solutions in the country. Furthermore, in recent years, the UAE has benefited from government initiatives, including setting up of free-zones with logistics infrastructure incorporated and providing incentives for using the air and seaports as stopovers for the transportation of goods globally – particularly in the corridors between Asia and Europe. The need for innovative solutions that draw on digitalisation and flexibility are compelling contract logistics providers to invest in capabilities that ensure that customer demands are satisfied in ways that not only meet expectations but have an eye to integrated offerings previously unavailable in the market.

The United Arab Emirates stands out as a government that is aggressively positioning itself in a region poised for growth, with strong and innovative investment in globally oriented ports, airports and airlines.

Digitalisation

The UAE is one of several countries in the region that is seeing consumers lead the charge in digitalisation, with rapid smartphone adoption (more than 100%) and social media use (more than 70%) (1). This is higher than the United States. The UAE government is leading innovation in digital adoption, seeing benefits in a number of metrics, including increased GDP per capita(1). Businesses, however, are lagging – with a survey in 2016 indicating that only 18 percent of micro, small and medium-sized enterprises (MSMEs) in the United Arab Emirates have an online presence(2). Additionally, when companies seek to go digital there can be an emphasis on the front-end processes in both business-to-business (B2B) and business-to-consumer (B2C) – the processes of promotion and order taking – and less on the back end, with there being a widely held perspective in industrial companies that digital is mostly about ERP being enhanced with some additional features (3). This disconnect is providing opportunities for more agile, progressive organisations to take advantage of new approaches to technologies focusing on integration (often termed Industry 4.0) and using 3D printing, Internet of Things, analytics and drones. These technologies allow innovators to leverage digitalisation, integration and automation opportunities and grow these with the smart infrastructure being developed by governments. Where there is innovation occurring, it is mainly in the area of process automation – service levels are still lagging and work needs to be done to increase service excellence beyond operational efficiency (3).

Being able to differentiate service offerings will affect the way that physical product is demanded – potentially increased demand at higher, more complex, individualised service levels. However, combine this with more traditional constraints on inventory and there is the possibility that digitalisation will speed up information proliferation in the supply chain, only to have the physical restrictions of distribution networks depress delivery capability when compared to expectations. Clearly there is a need to build in flexibility in distribution network design to increase dependable variety of service levels to customers without building Amazon-style networks which incorporate hundreds of fulfilment centres to meet these demands. There is also a need to do this efficiently as cost of shipping is a disincentive to purchasing, with a UPS survey finding 74% of online shoppers rate free shipping options as important when checking out online (4). As such we are seeing a symbiotic relationship between the drive for digitalisation and the need for flexibility, resulting in differentiated competitiveness.

One example of solutions delivering supply chain flexibility is the relatively new concept of flexible warehousing.

Flexible Warehousing

Traditionally warehousing has been a fixed commodity, and inventory is ordered or positioned according to network design – warehouses are in fixed locations and can store fixed amounts. Similarly when contract warehousing is employed, the space contracted is typically under static pricing with long-term lease agreements discouraging contraction or expansion of space utilised within a facility to adapt to changes in supply and demand. Positioning inventory to meet increasing demands, with that demand information increasing in velocity to meet consumer and supply chain appetites, results in bottlenecks and empty lots.

Drivers of digitalisation result in the need for supply chain flexibility

Drivers of these include:

  • Seasonal swings – anticipation for rush times of the year and dealing with peaks and bottlenecks
  • Return issues – either piecemeal due to order error, customer dissatisfaction, or for major recalls
  • Opening new markets – allowing new entrants to optimise network positions with less long-term commitment and financial exposure
  • Rolling out new products – meeting anticipated demand for new product launches to avoid creating demand for substitutes
  • Cost pressures from consumers in e-commerce market – positioning inventory closer to where it is demanded, and the location of demand may change depending on a number of factors including social media
  • Supply driven factors – take advantage of supply-side benefits and constraints associated with buying and moving product (eg. Buying in bulk or during periods of market/currency fluctuations or gluts in supply)
  • During renovations – storing furniture and equipment when adapting existing facilities to new requirements

 

In addition to these and largely due to e-commerce we are also seeing the following from supply chains impacting distribution:

  • Product proliferation – offering a higher variety of products and variants to meet consumer requirements means increased SKU tracking
  • More frequent replenishment – as delivery speed and reaction to demand changes increases, shorter replenishment time results. This will incur many periods of zero demand, combined with demand spikes.
  • Extended supply chains – downstream demand visibility closer to the end customer will increase as increased collaboration between vendors, distributors and retailers occurs. Demand will be separated into smaller streams where intermittent behaviour becomes common.

Supply chain flexibility drives digitalisation, and is driven by digitalisationThe effect of increases in demand variability means re-looking at network design to deliver as a responsive supply chain: one that requires increased warehouse flexibility and information provision. Being responsive means addressing the dynamics that cause inventory variability, or smart use of storage to iron out mismatch between supply and demand.

Inventory mixes and service levels get out of balance across the network—and out of line with business objectives. Implications for inventory planners will be that they are manually adjusting inventory levels as traditional systems do not integrate supply chain data that will forecast the granularity required – and unfortunately forecast accuracy will not be the solution. Zero demand periods could result in excess inventory and associated costs. This is not restricted to e-commerce scenarios where rapid fulfilment results in zero inventory. For example, this is common in energy industries where spare parts are held in supply networks for extended periods of time due to forecasting or contractual commitments. That is, inventory is held over long zero-demand periods. Flexible warehousing can address the positioning of inventory if and when these are needed to meet customer demand, and the use of digitalisation to address long-tail demand issues such as this through tools such as reliable demand modelling, advanced inventory modelling (that model probabilities of future demand, for example), and demand signal propagation (combining demand and inventory modelling) to optimise inventory and service levels.

Distribution and fulfilment footprints should be tailored to match the nature of the business and meet customer demand. There is potential for flexible warehouse networks that utilise short term storage contracts (daily, weekly, monthly) to take advantage of demand and/or supply volatility and ensure positioning of inventory to achieve maximum customer value. Key to this is also the requirement that these flexible locations are able to take advantage of ports, airports and processing capabilities that will increase the velocity of product movement – through utilisation of free zones and modern customs capabilities. Additionally service provisions around this inventory and the potential for facilities to adapt these must be strongly considered – whether that be staging or load reworking, addressing peaks, bottlenecks or seasonality, or e-commerce requirements.

This is an area of change as technologies develop, however with modern approaches to supply chain flexibility and digitalisation will see rapid evolution in the development of service provisions to consumers and industrial customers alike in the United Arab Emirates, and the MENA region at large.

 

Sources

(1)  2016. Digital McKinsey “Digital Middle East: Transforming the region into a leading digital economy” Available from McKinsey

(2) Sonia Ra , “Three-quarters of Middle East–based SMEs have no online presence”, customerservice.ae, accessed February 2018, www.customerservice.ae/three-quarters-of-middle-east-based-smes-have-no-online-presence.

(3) 2016 Middle East Industry 4.0 Survey – “Industry 4.0: Building the Digital Industrial Enterprise” Available from https://www.pwc.com/gx/en/industries/industry-4.0.html

(4) 2017. United Postal Service (UPS). “2017 UPS Pulse of the Online ShopperTM Study”. Available from: https:// solutions.ups.com/ups-pulse-of-the-online-shopper-lp.html

Stephanie Krishnan

Stephanie Krishnan is the Executive Director of Rutgers Business School Asia Pacific and holds a Masters of International Business from the University of Wollongong, where she is currently in the final stages of completing her PhD in Supply Chain & Cross Cultural International Business. Stephanie has more than 20 years’ experience in the areas of Manufacturing and Distribution, most recently specialising in Business Process Reengineering and Technology. Originally her concentration was within Purchasing and Inventory Management and Quality Management, but Stephanie later evolved to her current roles in Technology, Warehousing and Business Process Reengineering. Her extensive background spans multiple countries (Australia, Singapore, Malaysia, and Hong Kong among them), and Stephanie takes great pride in work that enriches her skill set, including personnel training, systems implementation, and logistics.

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