Digitization as a Competitive Advantage for Physical Manufacturers
Introducing technology into the supply chain, also known as ‘digitization,’ offers companies the opportunity to pull both the revenue and cost levers to strengthen their profit margins. 3M, with over 55,000 products , faces a complex supply chain and logistics environment and is thus poised to either benefit from the implementation of supply chain digitization or suffer from its absence.
Digitization comes in a variety of flavors, such as: reducing silos between links in the supply chain; information sharing and transparency between each connection point; and integration between the product lines of supplier and customer. The common factor among each of these is the creation of a supply chain that is both more resilient to change, and more responsive to opportunity, than its predecessor . Should companies elect not to participate in the digitization wave, they not only lose out on its benefits, but they put an increasing moat between themselves and their more-capable competitors who do adopt supply chain technology. With that in mind, 3M faces both positive and negative pressures to adapt to this changing environment.
With worldwide topline sales stagnating near $30 billion since 2012, 3M must look to reduce costs if it hopes to grow its bottom line . Fortunately, declining crude oil prices have decreased raw material transportation prices and allowed cost of sales to decrease from 51.7% in 2014 to 49.9% in 2016, but 3M recognizes that it cannot predict future costs. With an eye towards future profit growth, 3M has been investing in process improvements and supply chain technology to minimize its ongoing costs.
3M Uses Digitization to Reduce Costs and Increase Sales
The most immediate concern for 3M is to improve operating margins. The first goals are reducing cycle time throughout 3M’s manufacturing facilities and decreasing its inventory buffers. This war began as early as 2012, when 3M announced its goal to cut cycle times by 25% . Now armed with the tools for digitization, the company is primed to take a more aggressive stance. By connecting itself to suppliers, 3M may be able to reduce the time needed to process orders, and by creating total internal transparency among the many 3M manufacturing plants, the company can also reduce the processing time taken between steps in its supply chain. In addition, with transparency into customer networks, 3M can safely pare down its buffer.
In early 2017, Paul Keel, Sr. Vice President of Supply Chain Management, announced his plan to use technology to reduce the friction between connection points in the supply chain. One such initiative involves connecting 3M’s network with that of BASF, one of their largest chemical suppliers. 3M has created total data transparency and allowed the two systems to speak to each other and see real-time consumption and capacity. As Mr. Keel states, “This helps secure and protect supply even in instances when unexpected demand events occur” . 3M is therefore able to mitigate any possible bullwhip effect that may occur during such events.
3M is also using digitization to meet its sustainability commitments. For example, the company is partnered with a paper supplier that sources barcoded trees from certain forestry partners. By connecting to the supplier’s system, 3M can trace 85% of its global paper production supply to specific mills, and 40% to the exact forest – allowing it to be certain of the legality of its paper sources .
In the long term, 3M’s goal is to use digitization to increase sales by integrating itself into its customers’ supply chains. The ultimate vision of Mr. Keel is to engage in co-innovation and joint R&D with 3M’s largest customers. For example, 3M may engage with large phone manufacturers up to 18 months before launch in order to ensure delivery of the right type and quantity of fiber optic cabling. Whether customers allow this level of transparency depends on the trust that will be built from the shorter-term digitization steps mentioned above .
Looking forward, 3M will need a measured approach. Digitization works best when companies employ a holistic approach that considers the entire organization under a new design. Due to the massive scale of 3M’s supply chain and its breadth of products, and the high upfront cost, 3M risks beginning an immense corporate evolution that ends up half-baked – and that could be devastating.
If 3M is able to achieve its long-term vision of integrating itself into the R&D chains of its customers, one longer-term question remains. This would represent a radical shift for the company and arguably place it in an entirely new market. What new business risks, both financial and operational, does 3M expose itself to by entwining its business practices with those of its customers for close to two years before the product goes to market?
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