Let’s be clear: Digitization is not the same as Digital Transformation

TrevorMiles

Much is being written about Artificial Intelligence (AI) and Machine Learning (ML) recently. It is the topic du jour. There is undoubtedly a lot of opportunity in this space for automating highly manual and repetitive tasks, and even for redefining tasks. But there is little evidence that we have even begun to explore the opportunity to redefine whole supply chain planning processes.

To be honest, I have some doubts about the use of AI or ML to assist significantly in this space. More importantly, there is compelling reason to rewrite many processes with or without AI/ML. Most supply chain planning process definitions date back to before the advent of computers. In fact, most organizational structures, which dictate the processes, date back to military concepts of communications.Process definition

I was prompted to write this blog based on an article published in Inc on Aug 30, 2017: This Email From Elon Musk to Tesla Employees Describes What Great Communication Looks Like. I will quote from the article quite liberally because there is a lot that Musk writes that is relevant to this discussion.

“There are two schools of thought about how information should flow within companies,” he writes. “By far the most common way is chain of command, which means that you always flow communication through your manager. The problem with this approach is that, while it serves to enhance the power of the manager, it fails to serve the company.

“Instead of a problem getting solved quickly, where a person in one dept. talks to a person in another dept. and makes the right thing happen, people are forced to talk to their manager who talks to their manager who talks to the manager in the other dept. who talks to someone on his team. Then the info has to flow back the other way again. This is incredibly dumb. Any manager who allows this to happen, let alone encourages it, will soon find themselves working at another company. No kidding.

“Anyone at Tesla can and should email/talk to anyone else according to what they think is the fastest way to solve a problem for the benefit of the whole company. You can talk to your manager’s manager without his permission, you can talk directly to a VP in another dept., you can talk to me, you can talk to anyone without anyone else’s permission. Moreover, you should consider yourself obligated to do so until the right thing happens. The point here is not random chitchat, but rather ensuring that we execute ultra-fast and well. We obviously cannot compete with the big car companies in size, so we must do so with intelligence and agility.

“One final point is that managers should work hard to ensure that they are not creating silos within the company that create an us vs. them mentality or impede communication in any way. This is unfortunately a natural tendency and needs to be actively fought. How can it possibly help Tesla for depts. to erect barriers between themselves or see their success as relative within the company instead of collective? We are all in the same boat. Always view yourself as working for the good of the company and never your dept.”

At the heart of Musk’s email is a challenge to existing company structures of command and control hierarchies. And Musk articulates the business impact very succinctly: “Instead of a problem getting solved quickly, where a person in one dept. talks to a person in another dept. and makes the right thing happen, people are forced to talk to their manager who talks to their manager who talks to the manager in the other dept. who talks to someone on his team. Then the info has to flow back the other way again. This is incredibly dumb.” In other words, Musk is talking about much leaner processes. And these changes do not require AI or ML. Notice that Musk is referring to email and human-to-human communication. He does not mention mathematics at all.

My challenge to Musk would be to change the organizational structures first and the process/communication challenge will resolve itself automatically.

Why is Musk’s email relevant to supply chain planning?

In reality, Musk’s email is all about information flow, and making this as short as possible. Notice that Musk isn’t talking about material flow through a factory or supply chain. Instead, he is talking about information flow through an organization, particularly when there is a business issue that needs to be resolved across several functional groups such as a large customer placing an unexpected order, a supplier going bankrupt, or a hurricane wiping out a large part of the supply for a particular commodity group.

Each of these situations requires rapid decision making across organizational boundaries within teams. Often in cases such as a hurricane, companies will form a ‘tiger team’ to analyze and resolve the issue. But once the crisis is over, the teams revert back to the traditional hierarchy and silos. And yet, these tiger teams contain all the aspects referred to by Musk, and they were formed specifically to overcome the issues highlighted by Musk.

As a practice, supply chains have spent a lot of time analyzing the flow of materials through a factory or supply chain. One of my heroes, George Stalk of BCG, wrote a seminal piece in 1988 called “Competing Against Time”. I have referred to Stalk’s work many times in my blogs because the key concepts simply do not fade in significance, and are only made more apparent in Musk’s email. Stalk sets out some Rules of Response very clearly:

  • The .05 to 5 Rule
    Across a spectrum of businesses, the amount of time required to execute a service or to order, manufacture, and deliver a product is far less than the actual time the service or product spends in the value-delivery system.
  • The 3/3 Rule
    During the 95 to 99.95 percent of the time where a product or service is not receiving value while in the value-delivery system, the product or service is waiting. (Stalk breaks this out into 3 components of waiting, hence the 3/3.) The amount of time lost is affected very little by working harder. But working smarter has tremendous impac
  • The 1/4-2-20 Rule
    For every quartering of the time interval required to provide a service or product, the productivity of labor and of working capital can often double. These productivity gains result in as much as a 20 percent reduction in costs.
  • The 3 x 2 Rule
    Companies that cut the time consumption of their value-delivery systems turn the basis of competitive advantage to their favor. Growth rates of three times the industry average with two times the industry profit margins are exciting – and achievable – targets.

Stalk describes both the costs and benefits of operating in silos, in the manner Musk described in his email. In supply chain, we have paid tremendous attention to the flow of materials through factories or the entire supply chain. But all too seldom do we sit down to analyze the process by which we plan for the information flow. These processes are stuck in the 1950s, and are based upon the organizational hierarchies we inherited even earlier than that.

Did I mention that getting rid of the silos does not require AI or ML?

So how then does this topic relate to AI and ML?

I attended the Constellation Research Connected Enterprise conference earlier this autumn and was very fortunate to hear Tricia Wang speak. I felt as if I had come home. For one thing, Tricia talks about “thick data” and contrasts this with “big data”. Thick data is all about defining new operating models and new business models. As Tricia states “your surveys and questionnaires have been designed to optimize an existing business model”, which is a big data approach. As Tricia states, “[Companies are] so focused on getting the right data to fit their models, that they never even bothered asking the right questions.” Tricia also commented on the manner in which decisions are made in organizations, which I could not resist tweeting:

And of course, this wraps all the way back to the email from Elon Musk. To be fair, the author of the Inc article states:

“There’s only one problem with Musk’s proposed solution: It’s extremely difficult to cultivate in the real world.”

But that is only because we have been conditioned to operate in hierarchical command-and-control organizations. Let’s not forget that digitization is not the same as digital transformation. AI and ML are the former. I’m talking about the latter, which I think is a lot more interesting.

The question of course is what is meant by digital transformation. I think the terms transparency and visibility are over-used and don’t go far enough. The Sloan Management Review has a comprehensive discussion “The Nine Elements of Digital Transformation” published four years ago. Interestingly, the article breaks digital transformation out into three buckets:

  • Transforming Customer Experience
  • Transforming Operational Processes
  • Transforming Business Models

In this context, I’d like to focus on the operational processes. After all, that is at the heart of Musk’s email. But it is in the section of business models that they make the point in which I’m most interested:

Companies are not only changing how their functions work, but also redefining how functions interact and even evolving the boundaries and activities of the firm.

In the section called Worker Enablement they state that:

The tools that virtualize individual work, while implemented for cost reasons, have become powerful enablers for knowledge sharing. Salespeople and frontline employees, for example, are beginning to benefit from collaborative tools in which they can identify experts and get questions answered in real time. They are also increasingly gaining access to a single, global view of the company’s interactions with a customer.

But it is to Tricia Wang and others that I turn for pithy statements. I asked on Twitter how several analysts would distinguish between digitization and digital transformation, to which Tricia replied:

A lot of companies treat digital as if they are “doing digital” – this is “digitization” at its worst – as if it’s some checklist of things to do. It’s very transactional, and people are so busy doing digital they don’t even know WHY they are doing it in the first place!

Whereas companies that embrace “being digital” – this is “digital transformation” at its best – it’s a total paradigm shift in the culture and operations – it’s not just about buying the latest digital tool, but about creating a new system, new cadence, new mindset.

Amen to that.

What’s the role of Kinaxis?

Our purpose at Kinaxis is to revolutionize supply chain planning for all the reasons outlined by Musk and described by Stalk: because it makes sense. While undoubtedly we need all the mathematics that has formed the basis of the individual supply chain planning functions such as demand, inventory, and capacity planning, it is how the functions are linked that defines the processes, and where the opportunity lies for digital transformation. Applying yet more mathematics or AI/ML algorithms may make individual functions more efficient, which is what Tricia Wang describes as “doing digital”, but doing so will not make the overall process of supply chain planning and response management more effective. That is the prize.

We have long described the value of Concurrent Planning, which is our term for the digital transformation of supply chain planning, in our tag line of “Know Sooner. Act Faster.” One of our customers, Atul Tandon of Mylan, described the result of digital transformation best to his senior team when he said:

Two to three years after deploying RapidResponse we will no longer have demand planners, and capacity planners, and inventory planners, and material managers. We will just have network planners.

That is what digital transformation looks like, and how we achieve this is by connecting data + process + people:

  • Data: Until you have the data connected, you don’t even know that you have a problem.
    • We do this with a single data model that spans the supply chain across multiple ERPs and functions.
  • Process: Until you have the processes connected, you don’t know the scale of the problem because you cannot calculate the knock-on effect on other areas of the supply chain.
    • We do this with a single set of very fast in-memory analytics and scenarios that give a “before” and “after” picture.
  • People: Until you have the people connected, you have no-one to take action and no team to resolve the issue in “earth time”.
    • We do this by codifying self-declared responsibilities and providing an in-context adaptive collaboration capability.

SCM World Concurrency ModelSCM World, a division of Gartner has described the future of supply chain planning in a white paper titled “Concurrency”, in which they outline the core capabilities required for Concurrent Planning. In the white paper they state:

One benefit of democratizing decision-making is that the ability to simulate various scenarios can be distributed across the entire organization. … Further, the democratization of decision making will equip all areas to better understand the end-to-end financial impacts of decisions and, therefore, make more informed trade-offs.

These capabilities are available and deployed today.

Like everyone else, Kinaxis has active projects in AI and ML. These projects in isolation would be “doing digital”. However, when coupled with the concept of Concurrent Planning, we are enabling our customers to “become digital”.

TrevorMiles

As vice president of Thought Leadership, Trevor serves as an expert source for Kinaxis customers, prospects, industry analysts and journalists. Known throughout the supply chain field, he has published many articles, presented at various industry events, and is the primary contributor to the Kinaxis 21st Century Supply Chain blog. Trevor helps Kinaxis seek new market opportunities within the company’s distinctive competence and is instrumental in the company’s competitive and market intelligence. He helps key customers achieve the operational control tower vision, guiding their priorities and architectures to realize the full potential of RapidResponse.

Having lived, worked, and studied in Canada, the United States, Europe and Africa, Trevor brings a global perspective to market needs and customer requirements. Prior to joining Kinaxis, Trevor worked for i2 Technologies where he held a number of sales & marketing roles and worked with global industry leaders such as Continental, Volkswagen, Nokia, and Thomson. Previous to i2, he worked for Coopers & Lybrand performing several studies in supply chain reengineering for companies such as Levi’s, Burmah Oil, TNT Logistics, AGA Gas, and Schneider Electric, among others. Trevor has degrees in Chemical Engineering and Industrial Engineering.

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