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Li & Fung: For Supply Chains, It’s Digitize or Die

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Last year, word on the sourcing streets was “Innovate or die.”

Now, it’s “Digitize or die.”

Retailers, it seems, are in a constant cycle of not wanting to get left behind, but few are innovators and fewer still are tapping into technology at the pace they ought to.

And it’s not just retail, sourcing companies also need to transition from age-old analog processes to meet the demands of the digital world.

Consumers have moved from pagers to flip phones to smartphones to smart watches in the last 20 years, but in that time, retail has hardly changed from the staid store model where associates with too little information try to help customers find product among floor sets with too little organization.

Shoppers in the U.S. may finally be buying a touch more, but for the first quarter of 2016, retailers were hemorrhaging and consumers are continuing to flee into the more organized arms of online retail.

The major force behind what is now—and finally—becoming a sea change, is consumers who refuse to waste their time and energy on things that aren’t innovative or efficient. And retailers taking too long to catch on to that fact are feeling it in their bottom lines.

According to Robert Sinclair, COO of Li & Fung’s sourcing business, companies need a more balanced process, and that process needs to be digitized.

Sourcing has, in the past, been very transactional, very linear. Its sequential way worked for decades, but now that the industry is maturing, the economic balance between mitigation of the product lifecycle management of a manufacturer—which is at present stressed and financially fragile—retailers and brand owners are also experiencing the same phenomenon, not making the margins they used to. The way out of the rut for either end of the supply chain, it seems, is to have a balanced process.

While manufacturers have worked to improve some efficiencies over the last 30 plus years compared to brands and retailers, many haven’t done enough to address their internal efficiency.

And now, as Sinclair explained in an interview with Sourcing Journal, the industry has reached a point where brands and retailers have little other choice than to ask themselves the pressing, fundamental question: Are we as efficient, are we as streamlined and lean as we could be?

“The answer to that question is no, they’re not,” Sinclair said. “The solution is collaboration between manufacturers of textiles, bags, shoes, in conjunction with the brand owners and retailers. Align productivity through the supply chain. It’s not looking at one as a standalone, you have to look at the supply chain holistically. Duplication, triplication, cut that out. And a digital supply chain will address that.”

Checking the checker has been the bane of many companies for years and even now, but that level of inefficiency won’t fly for much longer in today’s market.

Digitization of the supply chain means enabling it, so to speak.

“It enables movement and it enables efficiency because it provides efficiency and transparency,” Sinclair explained.

Think of it like the interstate highway network across North America, Sinclair offered. Those roadways weren’t built and connected overnight, it took decades, but their interconnectedness enabled movement in the same way that electricity enabled light.

“Fundamentally it connected things on a massive scale and ultimately, it drove costs down, and digitization will do the same for manufacturing and supply chain,” Sinclair said. “Digitization is not an end game, it’s just the beginning. Digitization of the supply chain and everything about your business is a fundamental requirement for survival. It’s only a vehicle, an enabler, to stay in the game.”

The bigger question companies have, beyond just getting on board with a digitized supply chain is what to do with the business once the supply chain has successfully been converted for the modern era.

If digitization only keeps you in the game, what’s next?

“It’s going to be up to companies and corporations to leverage the platforms,” according to Sinclair. “Digitization is the creation of a platform, and what you do with that platform becomes your competitive advantage.”

That companies will get left behind for failure to digitize isn’t just an overblown concept—those that don’t will die, with bankruptcy being their burial.

“There’s going to be a lot of casualties,” Sinclair said. “But there’s also going to be a lot of new entries and new platforms that use this new grid to build on. Your competitive advantage is how you mine it, how you monetize it.”

Right now, manufacturing is a very labor-intensive business, and also a very administratively intensive one, with “track and trace” taking up the lion’s share of time.

From receiving materials and separating materials into different bundles by size and color to be shipped off to different destinations for a brand that’s surely shipping to multiple countries—all of that needs to be tracked and traced. Then the phone calls and factory visits to find out when something is cut, where the prototypes/salesman samples/lap dips are and whether the dyeing/printing/embroidery has been done, not to mention the sending of those swatches and samples back and forth between supplier and sourcing agent or supplier and buyer, means even more activity cost for both sides.

“If you were to digitize the manufacturing process so that RFID [radio frequency identification] picks up the movement of all of the things just described, that sends it to pre-formed reports in the cloud, it’s being tracked and traced automatically,” Sinclair said. “That’s easy to view real time by the factory, ourselves. It’s powerful but it’s going to create a huge amount of technical unemployment.”

The need to digitize is transparency, or “frictionless flow,” Sinclair said citing Tom Linton, chief procurement officer and senior VP of Flextronics, who spoke on the topic alongside Sinclair on a digital supply chain panel hosted by the Economist in Hong Kong in June.

“It’s seamless, it’s real time, it’s transparent, it’s frictionless,” Sinclair explained. “The less friction there is in the supply chain, the less cost. Frictionless is economically more efficient and a digital supply chain really addresses the fundamental requirement or quest to build trust.”

And trust is what fuels loyalty, and loyalty is what keeps buyers continuing to source and consumers continuing to buy. It’s also what helps boost productivity since the constant need to check the checker is diminished.

While companies may not yet have a firm grasp on just how to digitize their supply chains or what will follow after that digitization, many are already making the steps to invest in doing so.

A study done by software firm and consultancy JDA Software Group found that more than 64 percent of supply chain professionals in manufacturing and retail plan to ramp up spending on supply chain digitization in the next three years. More than 25 percent said they would increase the spend significantly. Nearly 60 percent of those surveyed cited supply chain visibility as the driving factor behind the in-place plans.

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