Supply Chain 4.

0 in consumer
goods
Knut Alicke, Daniel Rexhausen and Andreas Seyfert

In Supply Chain 4.0, supply-chain management applies Industry 4.0

innovations—the Internet of Things, advanced robotics, analytics, and
big data— to jump-start performance, and customer satisfaction.

Over the last 30 years, supply chain has undergone a tremendous change. What was once a
purely operational logistics function that reported to sales or manufacturing and focused on
ensuring supply of production lines and delivery to customers has become an independent
supply-chain management function that in some companies is already being led by a CSO—
a chief supply-chain officer. The focus of the supply- chain management function has shifted
to advanced planning processes, such as analytical demand planning or integrated sales and
operations planning (S&OP), which have become established business processes in many
companies, while operational logistics has often been outsourced to third-party logistics
providers. The supply-chain function ensures that operations are well-integrated, from
suppliers through to customers, with decisions on cost, inventory, and customer service
made from an end-to-end perspective rather than by each function in isolation.

Digitization creates a disruption and requires companies to rethink the way they design their
supply chain. At the same time, customer expectations are growing: recent online trends
have led to growing service expectations combined with much more detailed orders. Also, a
definite trend toward further individualization and customization is driving strong growth of
and constant changes in the SKU portfolio. The online-enabled transparency and easy access
to a multitude of options regarding where to shop and what to buy drive the competition of
supply chains.

To build on these trends, cope with changed requirements, and enable a wide range of
new technologies, supply chains need to become much faster and much more precise
(Exhibit 1).
2

Exhibit 1 Supply Chain 4.0 delivers innovation from factory to customer.

Product Promotions
Sales Events
Weather
Channel End-to-end performance management
Prices
Overarching Overarching

Full data transparency Forecasting

Integrated, ad hoc mobile planning

Influencing customers by specific, situational offerings

Factory
Automatic re- configuring of network
Machine gives feedback on current production capacity Drone delivery

Always know exact location and condition of each shipment

Drones scan stocks and support dynamic pricing
Warehouse

Customer can re- route shipment via mobile phone

Autonomous truck

Predictive shipping

Automated warehouse, robots do the picking, transporting of goods, etc.

Share capacities

Source: McKinsey

Vision of the future state

The digitization of the supply chain enables companies to address the new requirements of
customers, the challenges on the supply side, and the remaining expectations in efficiency
improvement. Digitization leads to a Supply Chain 4.0, which becomes …

◾ … faster. New approaches to product distribution can reduce the delivery time of fast
runners to few hours. How? Advanced forecasting approaches, such as predictive
analytics of internal data (e.g., demand) and external data (e.g., market trends, weather,
school vacation, construction indices), when combined with machine-status data for
spare-parts demand, provide a much more precise
forecast of customer demand. What once were monthly forecasts instead become weekly—
and, for the very fastest-moving products, daily. In the future, we will even
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see “predictive shipping,” for which Amazon holds a patent: Products are shipped before
the customer places an order. The customer order is later matched with a shipment that is
already in the logistics network, and the shipment is rerouted to the exact customer
destination.

◾ … more flexible. Supply Chain 4.0’s ad hoc, real-time planning allows companies to
respond flexibly to changes in demand or supply, minimizing planning cycles and frozen
periods. Planning becomes a continuous process that is able to react dynamically to
changing requirements or constraints (e.g., real-time production- capacity feedback from
machines). Even after products are sent, agile delivery processes let customers reroute
shipments to the most convenient destination.

New business models increase the supply-chain organization’s flexibility. Rather than
maintaining resources and capabilities in-house, companies can buy individual
supply-chain functions as a service on a by-usage basis. Service
providers’ greater specialization creates economies of scale and scope, increasing the
potential for attractive outsourcing opportunities.

An “Uberization” of transport—crowdsourced, flexible transport capacity—will

significantly increase agility in distribution networks as well. Manufacturers may
therefore see new direct-to-consumer opportunities in what once was a playing field
only for retailers.

◾ … more granular. With customers looking for more and more individualization in the
products they buy, companies must manage demand at a much more granular level,
through techniques such as microsegmentation, mass customization,
and more-sophisticated scheduling practices. Innovative distribution concepts, including
drone delivery, will allow companies to manage the last mile more efficiently for single-
piece and high-value, dense packages—fulfilling customers’ customization needs while
delivering their orders even faster than is possible today with mass-market, standard
products.

◾ … more accurate. Next-generation performance management systems provide real-time,

end-to-end transparency throughout the supply chain. The span of information reaches from
synthesized top-level key performance indicators, such as overall service level, to very
granular process data, such as the exact position of trucks in the network. The integration of
that data from suppliers, service providers, and others in a “supply chain cloud” ensures that
all stakeholders in the supply chain steer and decide based on the same facts.
4

In digital performance-management systems, clean-sheet models for warehousing,

transport, or inventory set targets automatically. To keep performance-management
aspirations in focus even if supply-chain disruptions occur, the systems will
automatically adjust targets that can no longer be achieved to more realistic aspiration
levels.

We will see performance-management systems that “learn” to automatically identify risks or

exceptions, and that change supply-chain variables to mitigate harm.
These capabilities enable the automatic performance-management control tower to
handle a broad spectrum of exceptions without human involvement, engaging human
planners only for disruptive, unplanned events. The resulting continuous- improvement
cycle will push the supply chains closer to its efficient frontier.

◾ … more efficient. The automation of both physical tasks and planning boosts supply-
chain efficiency. Robots handle the material (pallets or boxes as well as single pieces),
completely automatically the warehouse process from receiving/ unloading, to putting
away, to picking, packing, and shipping. Autonomous trucks transport the products
within the network.

To optimize truck utilization and increase transport flexibility, companies share capacity
through cross-company transport optimization. The network setup itself is continuously
optimized to ensure an optimal fit to business requirements.

To create an ideal workload in the supply chain, the system leverages the high degree
of transparency and dynamic planning approaches to drive advanced demand-shaping
activities, such as special offers for delivery time slots with low truck utilization.

Increasing operational efficiency by leveraging Supply

Chain 4.0
Supply Chain 4.0 will affect all areas of supply-chain management. This is evident in the
way the main Supply Chain 4.0 improvement levers shown in the outer circle of Exhibit 2
map to six main value drivers (the inner circle). In the end, the improvements enable a step
change in service, cost, capital, and agility.
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Exhibit 2 Supply Chain 4.0’s improvement levers map to six main value drivers.

Value driver
SC goals

SC 4.0
Predictive analytics in demand planning lever
Micro- Dynamic segmentation network
configuration
Closed-loop planning

Automation
Supply chainof knowledge
cloudwork
SC
strategy
End-to-end/ Advanced profit optimization
multitierPlanning
connectivity Colla- boration

Reliable online order monitoring

Service Scenario planning

Agility
Order mgmt
Real-time replanning Automation of warehousing
Capital Cost

Physical flow
No-touch order processing Autonomous and smart vehicles

Performance mgmt

OnlineHuman-
transparencymachine
interfaces
Smart logistics planning
Digital performance management In situ 3-Dalgorithms printing

Automated root cause analyses

Source: McKinsey

Planning
Supply-chain planning will benefit tremendously from big data and advanced analytics, as
well as from the automation of knowledge work. A few major consumer- goods players are
already using predictive analytics in demand planning to analyze hundreds to thousands of
internal and external demand-influencing variables
6

(e.g., weather, trends from social networks, sensor data), using machine-learning approaches to
model complex relationships and derive an accurate demand plan. Forecasting errors often fall by
30 to 50 percent.

Heavily automated, fully integrated demand and supply planning breaks traditional boundaries
between the different planning steps and transforms planning
into a flexible, continuous process. Instead of using fixed safety stocks, each
replenishment-planning exercise reconsiders the expected demand probability
distribution. Consequently, the implicit safety stocks are different with every single
reorder. Prices can then be dynamically adapted to optimize profit and minimize
inventories at the same time.

In the consumer-goods industry, several of the most prominent global conglomerates are
leveraging advanced planning approaches, and a strong interest in broader application can be
observed.

Physical flow
Logistics will take a huge step forward through better connectivity, advanced analytics,
additive manufacturing, and advanced automation, upending traditional warehousing and
inventory-management strategies. Easy-to-use interfaces such as wearables already enable
location-based instructions to workers, guiding picking
processes. Advanced robotics and exoskeletons could have equally dramatic effects on
human productivity in warehouses.

Autonomous and smart vehicles will lead to significant operating-cost reduction in

transportation and product handling, while at the same time reducing lead times and
environmental costs. Linking warehouses to production loading points may even enable entire
processes to be carried out with only minimal manual intervention.
Finally, as production facilities start to rely more on 3-D printing, the role of the
warehouse may change fundamentally.

Performance management
Performance management also is changing tremendously, with several major food companies
taking a lead in making detailed, continually updated, easily customizable dashboards
available throughout their organizations. Gone are the days when generating dashboards was a
major task and performance indicators were available only at aggregated levels. Instead,
performance management is becoming a
truly operational process geared to real-time exception handling and continuous
improvement, rather than a retrospective exercise on a monthly or quarterly basis.
 7

Using data-mining and machine-learning techniques, this type of revamped performance-

management system can identify an exception’s root causes by comparing it with a
predefined set of underlying indicators or by conducting big data analyses. The system can
then automatically trigger countermeasures, such as by activating a replenishment order or
changing safety-stock or other parameter settings in the planning systems.

Order management
Order management is improved through a pair of measures: no-touch order processing
integrates the ordering system to the available-to-promise (ATP) process, and real-time
replanning enables order-date confirmations through instantaneous,
in-memory rebuilding of the production schedule and replenishment needs in
consideration of all constraints. The net result is reduced costs (via increased
automation), improved reliability (via granular feedback), and better customer
experience (via immediate and reliable responses).

Collaboration
The supply-chain cloud forms the next level of collaboration in the supply chain. Supply- chain
clouds are joint supply-chain platforms between customers, the company, and suppliers,
providing a shared logistics infrastructure or even joint planning solutions.
Especially in noncompetitive relationships, partners can decide to tackle supply-chain tasks
together to save administrative costs and learn from each other.

One leading consumer conglomerate has already found that collaboration along the
value chain allows for much lower inventories through an exchange of reliable
planning data. It also slashes lead times, thanks to instantaneous information provision
throughout the entire chain, while providing an early-warning system and the ability to react
fast to disruptions anywhere.

Supply-chain strategy
Following the need for further individualization and customization of the supply chain,
supply-chain setups adopt many more segments. To excel in this setting, supply chains need
to master microsegmentation. A dynamic, big data approach allows for the mass
customization of supply-chain offerings by separating the supply chain into hundreds of
individual supply-chain segments, each based on customer requirements and the company’s
own capabilities. Tailored products provide optimal value for the customer and help
minimize costs and inventory in the supply chain.
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Impact of Supply Chain 4.0

Eliminating today’s digital waste and adopting new technologies together form a major
lever to increase the operational effectiveness of supply chains. The potential impact of
Supply Chain 4.0 in the next two to three years is huge. Expectations include up to 30
percent lower operational costs, 75 percent fewer lost sales, and a decrease in inventories of
up to 75 percent. At the same time, the agility of the supply chains should increase
significantly.
How did we calculate these numbers? They are based on our experience with numerous
studies and quantitative calculations. The three performance indicators are highly
correlated; for example, an improved inventory profile will lead to improved service level
and lower cost.
◾ Supply-chain service/lost sales. When customer service is poor, the driver is
either a wrong promise to the customer (e.g., unrealistic lead times), a wrong
inventory profile (ordered products are not available), and/or an unreliable delivery of
parts. Lost sales in addition occur if the required products are not available on the shelf
or in the system; customers will decide to switch to another brand. This is true for both
B2C and B2B environments.
Service level will increase dramatically when the supply chain significantly improves
interactions with the customer, leverages all available point-of-sale data and market
intelligence, improves the forecast quality significantly (up to more than 90 percent in the
relevant level, e.g., SKU), and applies methods of demand shaping in combination with
demand sensing to account for systematic changes and trends. With the resulting service
improvement, lost sales will decrease significantly.
◾ Supply-chain costs. Driven by transportation, warehouse, and the setup of the overall
network, the costs can be reduced by up to 30 percent. Roughly 50 percent of this
improvement can be reached by applying advanced methods to calculate the clean-sheet
costs (bottom-up calculation of the “true” costs of the service) of transport and
warehousing and by optimizing the network. The goal should always be to have minimal
touch points and minimal kilometers driven while still meeting the required service level
of the customer. In combination with smart automation and productivity improvement in
warehousing, onboard units in transportation, etc., these efforts can achieve the savings
potential.
The remaining 15 percent cost reduction can be reached by leveraging approaches of
dynamic routing, Uberization of transport, use of autonomous vehicles, and—where
possible—3-D printing.
About McKinsey Capabilities

The McKinsey Digital

walkthrough
Capturing the value is a journey that can be started right away. Where it
starts depends on the digital maturity of the current supply chain. The
McKinsey digital walkthrough helps companies understand the current
digital maturity of the organization, create a
sound understanding of the required levers to pull to reach the next
performance level by leveraging Supply Chain 4.0 tools, shape the road
map for digitization, and assess the potential impact.

The diagnostic tool assesses the supply chain systematically based on six
value drivers and five assessment dimensions, such as data and analytics
(Exhibit). It differentiates between three archetypes
of maturity levels. Supply Chain 2.0 characterizes supply chains that
are mainly paper based with a low level of digitization. Most processes
are executed manually. The digital capabilities of the organization are
very limited, and available data are not leveraged to improve business
decisions. Supply Chain 3.0 describes supply chains with basic digital
components in place. IT systems are implemented and leveraged, but
digital capabilities still need to be
developed. Only basic algorithms are used for planning/forecasting, and
few data scientists are part of the organization to improve
its digital maturity. Supply Chain 4.0 is the highest maturity level,
leveraging all data available for improved, faster, and more granular
support of decision making. Advanced algorithms are leveraged, and a
broad team of data scientists works within the organization, following a
clear development path toward digital mastery.
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◾ Supply-chain planning. The planning tasks such as demand planning, preparation of

S&OP process, aggregated production planning, and supply planning are often time
intensive and conducted mainly manually. With advanced system support, 80 to 90 percent
of all planning tasks can be automated and still ensure better quality compared with tasks
conducted manually. The S&OP process will move to a weekly rhythm, and the decision
process will be built on scenarios that can be updated in real time. This combination of
accuracy, granularity, and speed has implications for the other elements, such as service,
supply-chain costs, and inventory. Systems will be able to detect the exception where a
planner needs to jump in to decide.

◾ Inventory. Inventory is used to decouple demand and supply, to buffer variability in

demand and supply. Implementing new planning algorithms will significantly reduce the
uncertainty (the standard deviation of the demand/supply or forecast error), making safety
stock unnecessary. The other important variable to drive inventory is the replenishment lead
time: with more production of lot size 1 and fast changeovers, the lead time will be reduced
significantly. Also, long transport time—say, from Asia to the European Union or the United
States—will be reduced, due to a significant increase in local-for-local production. In
addition, 3-D printing will reduce the required inventory. We would expect an overall
inventory reduction of 50 to 80 percent (Exhibit 3).

Lost sales (service)

Exhibit Supply Chain 4.0 unlocks potential in all supply chain categories.
3 -50%
-65 to 75%
> -75%

Transport and
warehousing costs -10 to 15% -15 to 30%
-30 to 50%
Service

AAggiil SC admin costs -5 to 10%

Agility
liittyy

Capital Cost -50 to 80%

-75 to 90%

Inventories
-20 to 50%
-35 to 75% -50 to 80%

Baseline Basic Advanced Visionary

(SC 2.0) (SC 3.0) (SC 4.0)
Source: McKinsey
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Transformation into a digital supply chain

The transformation into a digital supply chain requires three key enablers: a clear
definition, new capabilities, and a supportive environment. Defining the digital supply
chain starts with an understanding of the current operation’s digital waste.
Capabilities regarding digitization then need to be built; typically they require targeted
recruiting of specialist profiles. The final prerequisite is the implementation of a
two-speed architecture/organization. This means that the establishment of the organization
and IT landscape must be accompanied by creation of an innovation environment with a
start-up culture.

This “incubator” needs to provide a high degree of organizational freedom and flexibility as
well as state-of-the-art IT systems (two-speed architecture independent of existing legacy
systems) to enable rapid cycles of development, testing, and implementation of solutions.
Fast realization of pilots is essential to get immediate business feedback on suitability and
impact of the solutions, to create excitement and trust in innovations (e.g., new planning
algorithms), and to steer next development cycles. The incubator is the seed of Supply Chain
4.0 in the organization—fast, flexible, and efficient.

Knut Alicke is a master expert in McKinsey’s Stuttgart

office, where Daniel Rexhausen is a partner. Andreas
Seyfert is an associate partner in the Berlin office.

Copyright © 2016 McKinsey & Company. All rights reserved.