25/4/2017 Supply Chain 4.

0 in consumer goods | McKinsey & Company

Consumer Packaged Goods

Article
April 2017

SupplyChain4.0inconsumergoods
By Knut Alicke, Daniel Rexhausen, and Andreas Seyfert

InSupplyChain4.0,supply-chainmanagementappliesIndustry4.0
innovationstheInternetofThings,advancedrobotics,analytics,
andbigdatatojump-startperformance,andcustomersatisfaction.

O
verthelast30years,supplychainhasundergoneatremendouschange.What
wasonceapurelyoperationallogisticsfunctionthatreportedtosalesor
manufacturingandfocusedonensuringsupplyofproductionlinesanddeliveryto
customershasbecomeanindependentsupply-chainmanagementfunctionthatinsome
companiesisalreadybeingledbyaCSOachiefsupply-chainofficer.Thefocusofthe
supply-chainmanagementfunctionhasshiftedtoadvancedplanningprocesses,suchas
analyticaldemandplanningorintegratedsalesandoperationsplanning(S&OP),which
havebecomeestablishedbusinessprocessesinmanycompanies,whileoperational
logisticshasoftenbeenoutsourcedtothird-partylogisticsproviders.Thesupply-chain
functionensuresthatoperationsarewell-integrated,fromsuppliersthroughto
customers,withdecisionsoncost,inventory,andcustomerservicemadefromanend-to-
endperspectiveratherthanbyeachfunctioninisolation.

Digitizationcreatesadisruptionandrequirescompaniestorethinkthewaytheydesign
theirsupplychain.Atthesametime,customerexpectationsaregrowing:recentonline
trendshaveledtogrowingserviceexpectationscombinedwithmuchmoredetailed
orders.Also,adefinitetrendtowardfurtherindividualizationandcustomizationis

http://www.mckinsey.com/industries/consumer-packaged-goods/our-insights/supply-chain-4-0-in-consumer-goods?cid=other-eml-alt-mip-mck-oth-1704&hlkid=02e6 1/15
25/4/2017 Supply Chain 4.0 in consumer goods | McKinsey & Company

drivingstronggrowthofandconstantchangesintheSKUportfolio.Theonline-enabled
transparencyandeasyaccesstoamultitudeofoptionsregardingwheretoshopandwhat
tobuydrivethecompetitionofsupplychains.

Tobuildonthesetrends,copewithchangedrequirements,andenableawiderangeof
newtechnologies,supplychainsneedtobecomemuchfasterandmuchmoreprecise
(Exhibit1).

http://www.mckinsey.com/industries/consumer-packaged-goods/our-insights/supply-chain-4-0-in-consumer-goods?cid=other-eml-alt-mip-mck-oth-1704&hlkid=02e6 2/15
25/4/2017 Supply Chain 4.0 in consumer goods | McKinsey & Company

Exhibit 1

Visionofthefuturestate

Thedigitizationofthesupplychainenablescompaniestoaddressthenewrequirements
ofcustomers,thechallengesonthesupplyside,andtheremainingexpectationsin
efficiencyimprovement.DigitizationleadstoaSupplyChain4.0,whichbecomes

http://www.mckinsey.com/industries/consumer-packaged-goods/our-insights/supply-chain-4-0-in-consumer-goods?cid=other-eml-alt-mip-mck-oth-1704&hlkid=02e6 3/15
25/4/2017 Supply Chain 4.0 in consumer goods | McKinsey & Company

faster.Newapproachestoproductdistributioncanreducethe
deliverytimeoffastrunnerstofewhours.How?Advanced
forecastingapproaches,suchaspredictiveanalyticsofinternaldata
(e.g.,demand)andexternaldata(e.g.,markettrends,weather,school
vacation,constructionindices),whencombinedwithmachine-status
dataforspare-partsdemand,provideamuchmorepreciseforecastof
customerdemand.Whatonceweremonthlyforecastsinstead
becomeweeklyand,fortheveryfastest-movingproducts,daily.In
thefuture,wewillevenseepredictiveshipping,forwhichAmazon
holdsapatent:Productsareshippedbeforethecustomerplacesan
order.Thecustomerorderislatermatchedwithashipmentthatis
alreadyinthelogisticsnetwork,andtheshipmentisreroutedtothe
exactcustomerdestination.

moreflexible.SupplyChain4.0sadhoc,real-timeplanningallowscompaniesto
respondflexiblytochangesindemandorsupply,minimizingplanningcyclesand
frozenperiods.Planningbecomesacontinuousprocessthatisabletoreact
dynamicallytochangingrequirementsorconstraints(e.g.,real-timeproduction-
capacityfeedbackfrommachines).Evenafterproductsaresent,agiledelivery
processesletcustomersrerouteshipmentstothemostconvenientdestination.

Newbusinessmodelsincreasethesupply-chainorganizationsflexibility.Rather
thanmaintainingresourcesandcapabilitiesin-house,companiescanbuy
individualsupply-chainfunctionsasaserviceonaby-usagebasis.Service
providersgreaterspecializationcreateseconomiesofscaleandscope,increasing
thepotentialforattractiveoutsourcingopportunities.

AnUberizationoftransportcrowdsourced,flexibletransportcapacitywill
significantlyincreaseagilityindistributionnetworksaswell.Manufacturersmay
thereforeseenewdirect-to-consumeropportunitiesinwhatoncewasaplaying
fieldonlyforretailers.

http://www.mckinsey.com/industries/consumer-packaged-goods/our-insights/supply-chain-4-0-in-consumer-goods?cid=other-eml-alt-mip-mck-oth-1704&hlkid=02e6 4/15
25/4/2017 Supply Chain 4.0 in consumer goods | McKinsey & Company

moregranular.Withcustomerslookingformoreandmore
individualizationintheproductstheybuy,companiesmustmanage
demandatamuchmoregranularlevel,throughtechniquessuchas
microsegmentation,masscustomization,andmore-sophisticated
schedulingpractices.Innovativedistributionconcepts,including
dronedelivery,willallowcompaniestomanagethelastmilemore
efficientlyforsingle-pieceandhigh-value,densepackagesfulfilling
customerscustomizationneedswhiledeliveringtheirorderseven
fasterthanispossibletodaywithmass-market,standardproducts.

moreaccurate.Next-generationperformancemanagementsystemsprovide
real-time,end-to-endtransparencythroughoutthesupplychain.Thespanof
informationreachesfromsynthesizedtop-levelkeyperformanceindicators,such
asoverallservicelevel,toverygranularprocessdata,suchastheexactpositionof
trucksinthenetwork.Theintegrationofthatdatafromsuppliers,service
providers,andothersinasupplychaincloudensuresthatallstakeholdersin
thesupplychainsteeranddecidebasedonthesamefacts.

Indigitalperformance-managementsystems,clean-sheetmodelsfor
warehousing,transport,orinventorysettargetsautomatically.Tokeep
performance-managementaspirationsinfocusevenifsupply-chaindisruptions
occur,thesystemswillautomaticallyadjusttargetsthatcannolongerbe
achievedtomorerealisticaspirationlevels.

Wewillseeperformance-managementsystemsthatlearntoautomatically
identifyrisksorexceptions,andthatchangesupply-chainvariablestomitigate
harm.Thesecapabilitiesenabletheautomaticperformance-management
controltowertohandleabroadspectrumofexceptionswithouthuman
involvement,engaginghumanplannersonlyfordisruptive,unplannedevents.
Theresultingcontinuous-improvementcyclewillpushthesupplychainscloser
toitsefficientfrontier.

http://www.mckinsey.com/industries/consumer-packaged-goods/our-insights/supply-chain-4-0-in-consumer-goods?cid=other-eml-alt-mip-mck-oth-1704&hlkid=02e6 5/15
25/4/2017 Supply Chain 4.0 in consumer goods | McKinsey & Company

moreefficient.Theautomationofbothphysicaltasksandplanningboosts
supply-chainefficiency.Robotshandlethematerial(palletsorboxesaswellas
singlepieces),completelyautomaticallythewarehouseprocessfrom
receiving/unloading,toputtingaway,topicking,packing,andshipping.
Autonomoustruckstransporttheproductswithinthenetwork.

Tooptimizetruckutilizationandincreasetransportflexibility,companiesshare
capacitythroughcross-companytransportoptimization.Thenetworksetup
itselfiscontinuouslyoptimizedtoensureanoptimalfittobusiness
requirements.

Tocreateanidealworkloadinthesupplychain,thesystemleveragesthehigh
degreeoftransparencyanddynamicplanningapproachestodriveadvanced
demand-shapingactivities,suchasspecialoffersfordeliverytimeslotswithlow
truckutilization.

Increasingoperationalefficiencybyleveraging
SupplyChain4.0

SupplyChain4.0willaffectallareasofsupply-chainmanagement.Thisisevidentinthe
waythemainSupplyChain4.0improvementleversshownintheoutercircleofExhibit2
maptosixmainvaluedrivers(theinnercircle).Intheend,theimprovementsenablea
stepchangeinservice,cost,capital,andagility.

http://www.mckinsey.com/industries/consumer-packaged-goods/our-insights/supply-chain-4-0-in-consumer-goods?cid=other-eml-alt-mip-mck-oth-1704&hlkid=02e6 6/15
25/4/2017 Supply Chain 4.0 in consumer goods | McKinsey & Company

Exhibit 2

http://www.mckinsey.com/industries/consumer-packaged-goods/our-insights/supply-chain-4-0-in-consumer-goods?cid=other-eml-alt-mip-mck-oth-1704&hlkid=02e6 7/15
25/4/2017 Supply Chain 4.0 in consumer goods | McKinsey & Company

http://www.mckinsey.com/industries/consumer-packaged-goods/our-insights/supply-chain-4-0-in-consumer-goods?cid=other-eml-alt-mip-mck-oth-1704&hlkid=02e6 8/15
25/4/2017 Supply Chain 4.0 in consumer goods | McKinsey & Company

Planning

Supply-chainplanningwillbenefittremendouslyfrombigdataandadvancedanalytics,
aswellasfromtheautomationofknowledgework.Afewmajorconsumer-goodsplayers
arealreadyusingpredictiveanalyticsindemandplanningtoanalyzehundredsto
thousandsofinternalandexternaldemand-influencingvariables(e.g.,weather,trends
fromsocialnetworks,sensordata),usingmachine-learningapproachestomodel
complexrelationshipsandderiveanaccuratedemandplan.Forecastingerrorsoftenfall
by30to50percent.

Heavilyautomated,fullyintegrateddemandandsupplyplanningbreakstraditional
boundariesbetweenthedifferentplanningstepsandtransformsplanningintoaflexible,
continuousprocess.Insteadofusingfixedsafetystocks,eachreplenishment-planning
exercisereconsiderstheexpecteddemandprobabilitydistribution.Consequently,the
implicitsafetystocksaredifferentwitheverysinglereorder.Pricescanthenbe
dynamicallyadaptedtooptimizeprofitandminimizeinventoriesatthesametime.

Intheconsumer-goodsindustry,severalofthemostprominentglobalconglomeratesare
leveragingadvancedplanningapproaches,andastronginterestinbroaderapplication
canbeobserved.

Physicalflow

Logisticswilltakeahugestepforwardthroughbetterconnectivity,advancedanalytics,
additivemanufacturing,andadvancedautomation,upendingtraditionalwarehousing
andinventory-managementstrategies.Easy-to-useinterfacessuchaswearablesalready
enablelocation-basedinstructionstoworkers,guidingpickingprocesses.Advanced
roboticsandexoskeletonscouldhaveequallydramaticeffectsonhumanproductivityin
warehouses.

Autonomousandsmartvehicleswillleadtosignificantoperating-costreductionin
transportationandproducthandling,whileatthesametimereducingleadtimesand
environmentalcosts.Linkingwarehousestoproductionloadingpointsmayevenenable
entireprocessestobecarriedoutwithonlyminimalmanualintervention.Finally,as
productionfacilitiesstarttorelymoreon3-Dprinting,theroleofthewarehousemay
changefundamentally.

http://www.mckinsey.com/industries/consumer-packaged-goods/our-insights/supply-chain-4-0-in-consumer-goods?cid=other-eml-alt-mip-mck-oth-1704&hlkid=02e6 9/15
25/4/2017 Supply Chain 4.0 in consumer goods | McKinsey & Company

Performancemanagement

Performancemanagementalsoischangingtremendously,withseveralmajorfood
companiestakingaleadinmakingdetailed,continuallyupdated,easilycustomizable
dashboardsavailablethroughouttheirorganizations.Gonearethedayswhengenerating
dashboardswasamajortaskandperformanceindicatorswereavailableonlyat
aggregatedlevels.Instead,performancemanagementisbecomingatrulyoperational
processgearedtoreal-timeexceptionhandlingandcontinuousimprovement,rather
thanaretrospectiveexerciseonamonthlyorquarterlybasis.

Usingdata-miningandmachine-learningtechniques,thistypeofrevamped
performance-managementsystemcanidentifyanexceptionsrootcausesbycomparing
itwithapredefinedsetofunderlyingindicatorsorbyconductingbigdataanalyses.The
systemcanthenautomaticallytriggercountermeasures,suchasbyactivatinga
replenishmentorderorchangingsafety-stockorotherparametersettingsinthe
planningsystems.

Ordermanagement

Ordermanagementisimprovedthroughapairofmeasures:no-touchorderprocessing
integratestheorderingsystemtotheavailable-to-promise(ATP)process,andreal-time
replanningenablesorder-dateconfirmationsthroughinstantaneous,in-memory
rebuildingoftheproductionscheduleandreplenishmentneedsinconsiderationofall
constraints.Thenetresultisreducedcosts(viaincreasedautomation),improved
reliability(viagranularfeedback),andbettercustomerexperience(viaimmediateand
reliableresponses).

Collaboration

Thesupply-chaincloudformsthenextlevelofcollaborationinthesupplychain.Supply-
chaincloudsarejointsupply-chainplatformsbetweencustomers,thecompany,and
suppliers,providingasharedlogisticsinfrastructureorevenjointplanningsolutions.
Especiallyinnoncompetitiverelationships,partnerscandecidetotacklesupply-chain
taskstogethertosaveadministrativecostsandlearnfromeachother.

http://www.mckinsey.com/industries/consumer-packaged-goods/our-insights/supply-chain-4-0-in-consumer-goods?cid=other-eml-alt-mip-mck-oth-1704&hlkid=02e 10/15
25/4/2017 Supply Chain 4.0 in consumer goods | McKinsey & Company

Oneleadingconsumerconglomeratehasalreadyfoundthatcollaborationalongthevalue
chainallowsformuchlowerinventoriesthroughanexchangeofreliableplanningdata.It
alsoslashesleadtimes,thankstoinstantaneousinformationprovisionthroughoutthe
entirechain,whileprovidinganearly-warningsystemandtheabilitytoreactfastto
disruptionsanywhere.

Supply-chainstrategy

Followingtheneedforfurtherindividualizationandcustomizationofthesupplychain,
supply-chainsetupsadoptmanymoresegments.Toexcelinthissetting,supplychains
needtomastermicrosegmentation.Adynamic,bigdataapproachallowsforthemass
customizationofsupply-chainofferingsbyseparatingthesupplychainintohundredsof
individualsupply-chainsegments,eachbasedoncustomerrequirementsandthe
companysowncapabilities.Tailoredproductsprovideoptimalvalueforthecustomer
andhelpminimizecostsandinventoryinthesupplychain.

ImpactofSupplyChain4.0

Eliminatingtodaysdigitalwasteandadoptingnewtechnologiestogetherformamajor
levertoincreasetheoperationaleffectivenessofsupplychains.Thepotentialimpactof
SupplyChain4.0inthenexttwotothreeyearsishuge.Expectationsincludeupto30
percentloweroperationalcosts,75percentfewerlostsales,andadecreaseininventories
ofupto75percent.Atthesametime,theagilityofthesupplychainsshouldincrease
significantly.

Howdidwecalculatethesenumbers?Theyarebasedonourexperiencewithnumerous
studiesandquantitativecalculations.Thethreeperformanceindicatorsarehighly
correlated;forexample,animprovedinventoryprofilewillleadtoimprovedservicelevel
andlowercost.

Supply-chainservice/lostsales.Whencustomerserviceispoor,thedriveriseither
awrongpromisetothecustomer(e.g.,unrealisticleadtimes),awronginventory
profile(orderedproductsarenotavailable),and/oranunreliabledeliveryof

http://www.mckinsey.com/industries/consumer-packaged-goods/our-insights/supply-chain-4-0-in-consumer-goods?cid=other-eml-alt-mip-mck-oth-1704&hlkid=02e 11/15
25/4/2017 Supply Chain 4.0 in consumer goods | McKinsey & Company

parts.Lostsalesinadditionoccuriftherequiredproductsarenotavailableonthe
shelforinthesystem;customerswilldecidetoswitchtoanotherbrand.Thisis
trueforbothB2CandB2Benvironments.

Servicelevelwillincreasedramaticallywhenthesupplychainsignificantly
improvesinteractionswiththecustomer,leveragesallavailablepoint-of-sale
dataandmarketintelligence,improvestheforecastqualitysignificantly(upto
morethan90percentintherelevantlevel,e.g.,SKU),andappliesmethodsof
demandshapingincombinationwithdemandsensingtoaccountforsystematic
changesandtrends.Withtheresultingserviceimprovement,lostsaleswill
decreasesignificantly.

Supply-chaincosts.Drivenbytransportation,warehouse,andthesetupofthe
overallnetwork,thecostscanbereducedbyupto30percent.Roughly50percent
ofthisimprovementcanbereachedbyapplyingadvancedmethodstocalculate
theclean-sheetcosts(bottom-upcalculationofthetruecostsoftheservice)of
transportandwarehousingandbyoptimizingthenetwork.Thegoalshould
alwaysbetohaveminimaltouchpointsandminimalkilometersdrivenwhilestill
meetingtherequiredservicelevelofthecustomer.Incombinationwithsmart
automationandproductivityimprovementinwarehousing,onboardunitsin
transportation,etc.,theseeffortscanachievethesavingspotential.

Theremaining15percentcostreductioncanbereachedbyleveragingapproaches
ofdynamicrouting,Uberizationoftransport,useofautonomousvehicles,and
wherepossible3-Dprinting.

Supply-chainplanning.Theplanningtaskssuchasdemandplanning,
preparationofS&OPprocess,aggregatedproductionplanning,and
supplyplanningareoftentimeintensiveandconductedmainly
manually.Withadvancedsystemsupport,80to90percentofall
planningtaskscanbeautomatedandstillensurebetterquality
comparedwithtasksconductedmanually.TheS&OPprocesswill
movetoaweeklyrhythm,andthedecisionprocesswillbebuilton
scenariosthatcanbeupdatedinrealtime.Thiscombinationof

http://www.mckinsey.com/industries/consumer-packaged-goods/our-insights/supply-chain-4-0-in-consumer-goods?cid=other-eml-alt-mip-mck-oth-1704&hlkid=02e 12/15
25/4/2017 Supply Chain 4.0 in consumer goods | McKinsey & Company

accuracy,granularity,andspeedhasimplicationsfortheother
elements,suchasservice,supply-chaincosts,andinventory.Systems
willbeabletodetecttheexceptionwhereaplannerneedstojumpin
todecide.

Inventory.Inventoryisusedtodecoupledemandandsupply,tobuffer
variabilityindemandandsupply.Implementingnewplanning
algorithmswillsignificantlyreducetheuncertainty(thestandard
deviationofthedemand/supplyorforecasterror),makingsafety
stockunnecessary.Theotherimportantvariabletodriveinventoryis
thereplenishmentleadtime:withmoreproductionoflotsize1and
fastchangeovers,theleadtimewillbereducedsignificantly.Also,
longtransporttimesay,fromAsiatotheEuropeanUnionorthe
UnitedStateswillbereduced,duetoasignificantincreaseinlocal-
for-localproduction.Inaddition,3-Dprintingwillreducethe
requiredinventory.Wewouldexpectanoverallinventoryreduction
of50to80percent(Exhibit3).

http://www.mckinsey.com/industries/consumer-packaged-goods/our-insights/supply-chain-4-0-in-consumer-goods?cid=other-eml-alt-mip-mck-oth-1704&hlkid=02e 13/15
25/4/2017 Supply Chain 4.0 in consumer goods | McKinsey & Company

Exhibit 3

Transformationintoadigitalsupplychain

Thetransformationintoadigitalsupplychainrequiresthreekeyenablers:aclear
definition,newcapabilities,andasupportiveenvironment.Definingthedigitalsupply
chainstartswithanunderstandingofthecurrentoperationsdigitalwaste.Capabilities
regardingdigitizationthenneedtobebuilt;typicallytheyrequiretargetedrecruitingof
specialistprofiles.Thefinalprerequisiteistheimplementationofatwo-speed

http://www.mckinsey.com/industries/consumer-packaged-goods/our-insights/supply-chain-4-0-in-consumer-goods?cid=other-eml-alt-mip-mck-oth-1704&hlkid=02e 14/15
25/4/2017 Supply Chain 4.0 in consumer goods | McKinsey & Company

architecture/organization.ThismeansthattheestablishmentoftheorganizationandIT
landscapemustbeaccompaniedbycreationofaninnovationenvironmentwithastart-
upculture.

Thisincubatorneedstoprovideahighdegreeoforganizationalfreedomandflexibility
aswellasstate-of-the-artITsystems(two-speedarchitectureindependentofexisting
legacysystems)toenablerapidcyclesofdevelopment,testing,andimplementationof
solutions.Fastrealizationofpilotsisessentialtogetimmediatebusinessfeedbackon
suitabilityandimpactofthesolutions,tocreateexcitementandtrustininnovations(e.g.,
newplanningalgorithms),andtosteernextdevelopmentcycles.Theincubatoristhe
seedofSupplyChain4.0intheorganizationfast,flexible,andefficient.

Abouttheauthor(s)

KnutAlickeisamasterexpertinMcKinseysStuttgartoffice,whereDaniel
Rexhausenisapartner.AndreasSeyfertisanassociatepartnerintheBerlinoffice.

http://www.mckinsey.com/industries/consumer-packaged-goods/our-insights/supply-chain-4-0-in-consumer-goods?cid=other-eml-alt-mip-mck-oth-1704&hlkid=02e 15/15