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First Thoughts
  By Dan Gilmore - Editor-in-Chief  
     
   
  April 3, 2008  
     
 

Digitization and the Supply Chain

 
 

I’ve been thinking a lot about digitization lately, both in terms of how it is and can transform how we think about supply chain management, and also how in other ways it is going to have a severe negative impact on the practice of supply chain in some industries.

After the hype and relatively slow start, the power of digitization to radically transform supply chain processes and even corporate design is increasingly understood. Linear, hierarchical information flow, with significant buffering of data, is going away. The future and, increasingly, the present are all about multi-level, real-time information.

Gilmore Says:
If your product or your customer’s product is one that can be digitized, and you don’t have retirement in sight in the relatively near future, it might be time to consider the process of looking around.

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“Reinventing business operations to exploit information technology and facilitate supply chain collaboration means examining every facet of every job,” Ralph Drayer, former Chief Logistics Officer at Procter &  Gamble, and Michigan State’s Don Bowersox, wrote in 2005. “Expanding Internet capabilities provide an information framework that potentially can replace traditional one-to-one, one-to-many, or many-to-one communication with Web-based, simultaneous, many-to-many connectivity. Within that framework, all participants in a supply chain simultaneously have access to the same strategic and operational information.”

Bowersox continued that theme in his collaboration with Nick LaHowchic in the recent book “Start Pulling Your Chain,” which I just reviewed for SCDigest.

“Digitization brings into question the fundamental commandments of how we compete in business” they wrote. Making a sports analogy, they say “Once in play, the knowledge ball is everywhere.[Supply Chain] team members take turns leading in a networked field, and the playbook is continually referenced for context so we can adjust the plays in real time.”

Most of us, including me, don’t yet fully understand how profound this change will be.

Now for the negative side of digitization – and I suspect not many of you know where I am headed here. For years we had predictions of the “paper-less” society that never really materialized, and fits and starts with digitization of other products that has only partially happened to date. Now, however, I think we are on the cusp of some dramatic changes.

The most immediate change has been and will be in the entertainment area, but (somewhat gloomily) it won’t only end there. Think of the whole media and entertainment supply chain, which in many ways has been odd for quite awhile (see The DVD Supply Chain is Tough).  How long will that supply chain really last? CDs are rapidly already going away in favor of iTunes downloads. Movies on DVD will be next. Not long after that, books (major advances are being made in e-book technology by Amazon.com and Sony). Think of the staggering costs savings. No physical product forecasting to worry about, just financial forecasting. Huge gross margins on every sale. No returns to deal with.

But the main point for me is that this is going way beyond media. If it can be digitized, it will be. Are you in the PC storage or external hard drive business? On-line storage “services” are rapidly becoming the preferred choice for consumers. Yes, those companies are using hardware too, but it’s a few huge storage systems, not millions of small ones.

Camera film is almost gone as a product category now, in favor of digital cameras. Soon the cameras themselves will be gone at the low and maybe even mid-levels, as they are simply embedded in cell phones or some other universal device. If you were running film manufacturing or distribution for Kodak in 1996, did you see this coming? Probably not.

Many may not be aware that the watch industry as we know it is also in deep jeopardy, as the ubiquitous cell phone also makes the watch a purely decorative instrument, not a needed functional one.

If you are Rand McNally, do you see a bright future for the map business, with first the on-line Mapquests and now navigation systems likely soon to be standard in most new cars?

It can go further. Traditional board games, for example, have for a long while been losing out in favor of computer games and game players such as Xbox. But this trend, combined with advances such as large flat screen televisions, probably means that at some point if you do want to play Scrabble or Monopoly you’ll simply reach for the remote, rather than the box in the closet – and you can easily save your game for another day after you tire of the Monopoly battle.

I suspect the market for home paper shredders is pretty good right now, given the identity theft crisis, but what will happen to demand when just about every statement and bill we get is only available on-line? There will simply be much less to shred.

There are surely many more examples.

None of this happens overnight, but as we’ve seen in the camera film, music CDs, and other areas, the decline starts slowly but then can turn precipitous. There are also other spillover effects. As CDs/DVDs take a plunge at some point, for example, so does demand for the specialty ABS plastic resins used to manufacture them (I did some work for Bayer’s ABS plant at one point – very interesting actually).

Luckily, we aren’t going to be digitizing Cheerios or sweat pants any time soon, so most of us can look at the bright side of digitizing the supply chain. But I think digitization will impact more areas than we realize today. If your product or your customer’s product is one that can be digitized, and you don’t have retirement in sight in the relatively near future, it might be time to consider the process of looking around.

What do you see as the opportunity for digitizing the supply chain? Do you think digitization will also eliminate the supply chain for an increasing breadth of products? What are some others that will be threatened by digitization?  Let us know your thoughts at the Feedback button below.

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