A Collaboration Between National University

of Singapore and Georgia Institute of Technology

Supply Chain Digital

Transformation:
Insights and Tools
Robert De Souza Linda William Giuseppe Timperio White paper
Contents
01 AUTHORS ............................................................................................................................... 01

02 INTRODUCTION .................................................................................................................... 02

03 DIGITAL BUSINESS TRANSFORMATION IMPACTS ON SUPPLY CHAIN ........................ 03

04 USING OPTIMIZATION AND SIMULATION TO NAVIGATE

INFRASTRUCTURE AND LOGISTICS ASSETS .................................................................... 06

05 CASE STUDY: RE-DESIGNING DISTRIBUTION NETWORK

FOR A LOGISTICS SERVICE PROVIDER ............................................................................. 09

06 CONCLUSION ........................................................................................................................ 12

07 ADDITIONAL RESOURCES .................................................................................................. 13

Authors

DR. ROBERT DE SOUZA DR. LINDA WILLIAM GIUSEPPE TIMPERIO

is the Executive Director and Chief Executive of The is a Research Fellow and Manager (Industry is a Research Engineer with The Logistics Institute-
Logistics Institute – Asia Pacific, an award-winning Research and Development) in The Logistics Asia Pacific, National University of Singapore (NUS).
unit based at the National University of Singapore. Institute-Asia Pacific, National University of He obtained his MSc (Managerial Engineering), with
Prior to joining TLI – Asia Pacific, Dr. de Souza was Singapore (NUS). She obtained her PhD (Information magna cum laude from the University of L'Aquila
Executive Vice President for V3 Systems in Asia Systems) from the School of Information Systems, (Italy). He has been a visiting researcher at the
Pacific, Corporate Senior Vice President and Global Singapore Management University. Her research Department of Industrial and System Engineering,
Chief Knowledge Officer at Viewlocity Inc., and interests are intelligent systems, decisions and National University of Singapore (NUS), and a
Vice Chairman and CEO of SC21 Pte. Ltd. Dr. de data analytics, machine learning, metaheuristics visiting student at Luleå University of Technology,
Souza is a Senior Fellow at the National University algorithm, urban logistics & supply chain, LTU (Sweden). His main research interests are supply
of Singapore. He has published extensively and is a e-commerce logistics, and industry applications. She chain strategy, humanitarian logistics, systems
member of several editorial boards of international has published a book and articles for international modeling and simulation, and last mile connectivity.
journals. Dr. de Souza is a chartered engineer and conferences and in academic journals such as the He has published several articles for international
serves on multiple industry and academic boards. He Journal of the Operation Research Society and the conferences and in academic journals such as the
has been awarded many honors for his work in urban Journal of Urban Sciences. Asia Pacific Journal of Marketing and Logistics and
logistics, risk management, and humanitarian logistics. the Journal of Humanitarian Logistics and Supply
Her email address is [email protected]
Chain Management.
His email address is [email protected]
His email address is [email protected]

01
Introduction
Digital technologies are advancing at an ever-greater speed. For example, by 2020, it is
predicted that there will be over 50 billion interconnected devices1, which equates to
approximately 6.58 connected devices per person. The growth of cloud computing is also
increasing at an average rate of 19% per year, reaching almost $162 billion in 2020, as
illustrated in Figure 12. The advancement of digital technologies, ranging from Big Data,
cloud, data analytics, the Internet of Things (IoT), Blockchain, and artificial intelligence
enables and accelerates digital changes in all aspects of human society and affects
everyone in their daily lives.

From a business perspective, digital transformation can be described as using digital

technologies to create innovations in services and products. It is not just digitalizing
existing routine business processes and moving from traditional sales to e-commerce.
Digitalization is the cause of large-scale and profound transformations across multiple
aspects of business, providing great opportunities for value creation and capture, but it is
also a major source of risk. In today’s business climate, with all industries being disrupted
at every turn, companies must be able to quickly change their products and processes to
take advantage of new market opportunities.
* = prediction — Figure 1. Growth of Cloud Computing
In this paper, we will underline the significant differences between traditional and digital
supply chain networks, mention challenges you can face during the digital transformation
of your supply chain, and run through solutions and tools that can address these kinds of
challenges.

1 Evans, D., The Internet of Things: How the Next Evolution of the Internet Is Changing Everything, CISCO
Whitepaper Series, April 2011.
2 International Data Corporation (IDC), The Salesforce Economy: Enabling 1.9 Million New Jobs and $389
Billion in New Revenue Over the Next Five Years, IDC Whitepaper, September 2016.

02
 DIGITAL BUSINESS TRANSFORMATION IMPACTS ON SUPPLY CHAIN

Digital Business Transformation

Impacts on Supply Chain
Digital business transformation requires companies to rethink all of their business and online, focus has shifted from handling product complexity to handling service
operations and ecosystems, including partners and stakeholders in their supply complexity. It creates significant differences between traditional and digital supply
chain network. As business shifts from traditional offline methods to being digital chain networks and logistics as summarized in Table 1.

Aspect Traditional Supply Chain Networks Digital Supply Chain Networks

Depends on the product, but Greater variety of commodities, especially

Product variety
is relatively uniform. in e-commerce business.

Delivery cycle Weekly. Anytime, anywhere. Higher frequency of orders.

Package size Uniform package size. Generally large and consolidated. Large volume of small packages.

Customers consider the lead time and delivery time as important

Service importance (in terms
Quality of service does not affect the customers. as the quality of goods itself. Reliable and on-time delivery according
of lead time and delivery time)
to the customers’ preferred time windows are required.

Bundle packing (in boxes, cases etc.). Packing is just for easy Individual packing. Careful packing is essential for the products as it is being delivered
Packing requirement
handling of the products and can be cost efficient. directly to the end customer.

Retailers and distributors are generally the end node of the

The end customers are the end node of the deliveries. Their locations are more
Delivery processery Process deliveries. The customers would purchase and pick-up from the
widespread compared to retailers/distributors.
retailers/distributors.

Minimum failed delivery since the deliveries are scheduled and

Delivery failure High delivery failure rate. expected at the defined time and thus there are less failed
deliveries.

— Table 1. Differences between Traditional and Digital Supply Chain Networks and Logistics

03
 DIGITAL BUSINESS TRANSFORMATION IMPACTS ON SUPPLY CHAIN

All these differences lead us to an obvious conclusion – traditional supply and provide on-demand service. So, it has to be transformed through digital
chains may no longer be sufficient for the digital transformation era. Modern interconnected devices and complex networks (as illustrated in Figure 2). This
markets demand from supply chains not only efficiency, but also agility and digital supply chain would link different stakeholders (including customers) more
flexibility. Today’s supply chain is evolving from the traditional model of linear, efficiently, enabling them to react faster and to better adapt to a fast-changing
individual, dis-synchronized relations into a more connected and harmonized market.
network of trading partners. This renovated supply chain is expected to be digital

— Figure 2. Shift from Traditional Supply Chain to Digital Supply Chain 3

3 The Logistics Institute – Asia Pacific (TLI-AP), Digital Transformation of Supply Chains – Perspective, Cases and Applications, THINK Executive White Paper Series, March 2018.

04
 DIGITAL BUSINESS TRANSFORMATION IMPACTS ON SUPPLY CHAIN

Digital technologies provide businesses with capabilities that can completely

transform the way their supply chains operate. At the organization level, digital
transformation means utilizing analytics, artificial intelligence, robotics, IoT, and
other advanced technologies to collect and process information automatically,
support decision making, and further enable automation.

Supply chain digital transformation is about using digital applications to improve

service, cost, agility, and inventory levels, and implementing changes that use
these technologies to drive operational excellence and competitiveness 4. An
effective transformation depends on a forward-looking concept for the future
supply chain. This means thinking about the outlook for the company, forecasting
the pressures and trends, as well as the changing expectations of customers. The key
point is that the supply-chain vision should correspond to the company’s strategic
goals. Companies that consider supply chain as a strategic asset work much more
effectively than their competitors and achieve much higher financial results.

The effect of focused goals is that industry leaders continue to develop their
lead, while those behind keep losing their competitiveness. Leaders give
direction to their development and their supply chains are fast and effective.
This allows them to efficiently serve customers in volatile markets, understand
the needs of different consumer groups, and outclass the competition.

4 Enis Gezgin, Xin Huang, Prakash Samal, Ildefonso Silva, “Digital transformation: Raising supply-
chain performance to new levels”, November 2017, https://www.mckinsey.com/business-functions/
operations/our-insights/digital-transformation-raising-supply-chain-performance-to-new-levels

05
 USING OPTIMIZATION AND SIMULATION TO NAVIGATE INFRASTRUCTURE AND LOGISTICS ASSETS

Using Optimization and Simulation

to Navigate Infrastructure and Logistics Assets
To shift toward the digital supply chain, companies have to place emphasis on
Aspect Potential Impacts
the design of their supply chain and logistics systems, including navigating and
monitoring their assets to ensure distribution efficiency and customer satisfaction • Higher demand for floor area
Greater product variety
• Higher ceilings are needed
with quality, speed, reliability and flexibility in deliveries, as well as identifying
and mitigating risks. Moreover, all changes require thorough evaluation before Higher volume of small More intensive labor requirements due to increased
introduction. If not, they can be costly and lead to even greater losses than if the size packages picking intensity

supply chain is kept as it is.

• Increasing need for forward areas to facilitate item-level picks
Higher frequency • More amenities for personnel
To deal with all these challenges, many interdependent processes inside and of orders • Space for order consolidation
• More loading bays
outside the organization must be considered, and most commonly these are
issues of a different scale: from locating new warehouses to optimizing space at Shorter delivery lead times
Increasing need for urban consolidation centers to meet lead
a manufacturing site. This makes the digital transformation process even more and shorter delivery time
times
windows
unpredictable, forcing supply chain managers to accomplish many different tasks
and make many decisions in a short space of time and with great uncertainty.
— Table 2. Impact of Digital Supply Chain on Navigating Infrastructure and Logistics Assets

For example, let us look at the several potential impacts of supply chain digital
transformation that are summarized in Table 2.

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 USING OPTIMIZATION AND SIMULATION TO NAVIGATE INFRASTRUCTURE AND LOGISTICS ASSETS

As we have already seen, variability creates complexity in supply chains. Supply

chain managers must forecast how these problems will impact their company’s
operational performance as a whole and decide how to manage it. They should
understand what the outcome will be for each decision taken and calculate how
their actions affect KPIs. Only after thorough analysis should these decisions be
put into effect.

The task is complicated even more by the fact that the most commonly adopted
tool, spreadsheet-based modeling, is often not capable of handling complex,
interdependent, and time-related systems, such as supply chains. More powerful
forecasting and analytics tools are needed.

Apart from the spreadsheet-based approach, there are solutions that can
empower supply chain experts with an exhaustive set of tools for detailed
end-to-end network analytics, supply chain design, and optimization. These are
analytical optimization and dynamic simulation modeling. With these two
methods, a digital prototype is created to model the real-world supply chain.
Analytical Methods
It takes into consideration the criteria or success factors of the supply chain,
logistics design, and processes.
Placing logistics assets, such as freight facilities, in the correct location is one of
As these methods are different in their nature and the technology used, they the key elements of improving the efficiency and effectiveness of a supply chain.
are utilized to solve different kinds of problems. Many factors must be considered, including market trends, proximity to existing
customers/demands, access to suppliers or vendors, transportation costs, and
travel times. This can be done using Greenfield analysis. When the best locations
for new facilities are determined, it is necessary to conduct master planning
including the quantity of goods to produce and order, where to stock them,
and how to foresee seasonal peaks/falls in demand. For solving supply chain
challenges at the network level, and when considering low-level operational logic
is excessive, the analytical optimization method should be used.

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 USING OPTIMIZATION AND SIMULATION TO NAVIGATE INFRASTRUCTURE AND LOGISTICS ASSETS

Dynamic Simulation Modeling

With dynamic simulation modeling many challenges can be addressed: dynamic inventory, sourcing, or transportation policies. It does not produce
one optimal solution from multiple combinations, but it allows the analyst
1. Implementing new supply chain configuration to comprehensively study particular dynamic scenarios and supply chain
If analytical optimization is perfect for getting the most appropriate supply chain interdependencies and come to an informed decision.
plan, then dynamic simulation is helpful in finding out how to implement this
plan while avoiding risks and losses. After the optimal supply chain structure 4. Risk assessment
is determined, it is important to find the safest way to implement it. For this Dynamic simulation models allow users to integrate randomness into supply
purpose, it is crucial to see how the new supply chain network will operate in chain inputs and processes, empowering analysts to estimate all risks related
the real world: how it will behave over time, in conditions of randomness and to supply chain structure and consider such random factors as the disruption of
volatility. Dynamic simulation modeling helps carry out detailed analysis and supplies, contract breakdowns, natural disasters, and more.
foresee the possibilities before implementation.
5. Inside the four walls business process assessment
2. Experimenting with innovations Modeling inside four walls enables the change and customization of any supply chain
With dynamic simulation, it is easy to experiment with a supply chain and decide component, such as warehouses, distribution centers, factories, customers, and the
on the best solutions to implement. A dynamic simulation model can serve as a market. It helps solve in-depth supply chain problems related to manufacturing or
digital twin of the supply chain that allows experimentation with improvements distribution center processes, resources, scheduling, layouts, and costs. Moreover,
and the tracking of all the important metrics: costs, revenue, inventory dynamics, it gives an opportunity to figure out how the internal processes in supply chain
service levels, bullwhip effect, capacity, utilization, incoming/outgoing orders, facilities influence operational excellence across the whole supply chain.
and products. Managers can try many scenarios of supply chain transformation,
While analytical optimization has been around for a while and is used by many,
vary parameters, and come to business decisions based on the testing and
dynamic simulation modeling is only now becoming mainstream for supply chain
evaluation of results in a risk-free virtual environment.
practitioners, and the process of adoption has begun with industry leaders. To
3. Policy planning stay competitive, it is crucial to introduce digital technologies and innovation.
Dynamic simulation describes the real logic of supply chain element interaction, Analytical optimization and dynamic simulation modeling provide a platform for
while analytical methods just represent the system as flows between facilities. organizations to stay efficient and competitive.
Simulation models describe the actual behavior of a supply chain, taking into
Analytical optimization and dynamic simulation modeling were implemented
account time and resource utilization rates (fleet, people, equipment). So,
on a real-world case study carried out by the institute in collaboration with a
with dynamic simulation, supply chain managers are empowered to model any
Logistics Service Provider (LSP) in Indonesia.
process in a supply chain, including aspects beyond other methods, such as

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 CASE STUDY: RE-DESIGNING DISTRIBUTION NETWORK FOR A LOGISTICS SERVICE PROVIDER

Case Study: Re-Designing Distribution

Network for a Logistics Service Provider
Problem
A Logistics Service Provider (LSP) seeking competitiveness in the digital economy
needs to efficiently and effectively redesign a supply network. It should reduce
transportation costs and optimize transportation routes. This case study focuses on
the distribution network of an LSP company that operates a countrywide logistics
network for both B2C (business to customer) and B2B (business to business). The
scope of this case study covers last mile delivery in a major urban area whereby
the company runs a two-tier network encompassing one large Distribution Centre
(DC), several intermediate DCs, and the end customers. It clearly demonstrates the
challenges of changing from a traditional to a modern digital supply chain.

The two main research questions are framed as follows:

• What is the optimum number of intermediate DCs to serve a particular city?

• Where to locate these DCs?

An integrated approach encompassing Greenfield analysis and Network

optimization was implemented to address these two questions.
The LSP also wanted to optimize supply chain policies and cost-to-serve. Cost-
to-serve analysis yields information about the true cost of servicing individual
customers by quantifying specific business activities and overhead costs. In our
case, cost-to-serve changed due to a change in the number of DCs and transport/
storage costs. For policies optimization and cost-to-serve analysis, LSP used the
dynamic simulation method.

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 CASE STUDY: RE-DESIGNING DISTRIBUTION NETWORK FOR A LOGISTICS SERVICE PROVIDER

Solution
The case study began with structural data gathering. The data included network
data as well as operational information such as demand patterns, cost, and
resources. An initial analysis of data led to the identification of bottlenecks
and criticalities, as well as areas for improvements. Next, the existing network
was modeled, including its main supply chain costs, such as manpower for
warehousing and delivery operations. Greenfield analysis was used to identify a
list of locations and the coordinates for potential network nodes. Then, Network
optimization was used to determine the optimal configuration of the supply
network for minimizing costs.

Cost-to-serve optimization improves the network by enabling visibility of

profitable solutions and finding a configuration that drops fixed costs at a
greater rate than it drops margin. So, it was decided to calculate the cost-to-
serve rate for different numbers of DCs and supply chain configurations.

Based on transportation costs only, the Greenfield analysis, carried out in

anyLogistix supply chain software, determined that by increasing the number of
intermediate DCs, the cost-to-serve would be reduced, as shown in Figure 3. Figure
3 also shows the marginal returns for operating additional DCs. The marginal
return is the investment return for operating additional DCs. As shown in Figure
3, the curve suggests that six intermediate DCs would be the optimal number. Six
DCs would give a minimum cost-to-serve while having the highest marginal return.
The marginal reduction when adding a sixth DC is significant (at 5%).

— Figure 3. Flow cost estimate by number of intermediate DCs.

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 CASE STUDY: RE-DESIGNING DISTRIBUTION NETWORK FOR A LOGISTICS SERVICE PROVIDER

The next step was Network optimization. To do this, the model included costs Using the Network optimization approach, the most appropriate set of
for both transportation and warehousing. Analysis of the locations suggested facilities was identified. The chosen scenario made it possible to enhance
by the Greenfield analysis combined with the company’s existing network and cost effectiveness by reducing almost 18% of the total cost in transportation
cost structure (transportation and warehouse costs), determined that only and warehousing. These results showed that traditional supply chains can be
five, and not six, intermediary DCs would be the optimal number of DCs for successfully adapted to meet the demands of the digital economy.
minimizing transportation costs and supply chain costs overall. Consequently, the
The next stage will be the optimization of inventory, sourcing, and transportation
input of warehousing costs into the model showed that the six DC supply chain
policies using the dynamic simulation approach. Dynamic simulation will also help
configuration was inefficient, expensive and unprofitable. The results of the
avoid risks and losses while implementing a new supply chain configuration into
Network optimization experiment are illustrated in Figure 5.
the real world. Moreover, using dynamic simulation, LSP can recalculate the cost-
to-serve, taking into account transportation and warehouse costs cut.

— Figure 4. Sample results from Greenfield analysis (for illustration purposes only) — Figure 5. Sample results from Network optimization (for illustration purposes only)

11
 CONCLUSION

Conclusion
Supply chains are undergoing significant transformations, with digital technologies offering
opportunities to create new business models and competitive advantages across all kinds of
industries. In this new digital era, customers expect more and more from the supply chain in terms
of service, including shorter delivery windows, free shipping, full order status visibility, and more.

Modern supply chains will be required to provide anytime, anywhere delivery to customers. That
means that a company must always be online and digitally connected. Retail stores, e-commerce
sites, inventory control points, distribution and fulfilment centers, upstream suppliers and
manufacturers all must align with consumer demand. This new reality will present many challenges
for supply chains managers in the near future.

Analytical optimization and dynamic simulation modeling can help managers solve these complex
supply chain problems. Analytical optimization allows the selection of the best solution from among
many (for example, site location), while dynamic simulation makes it possible to test multiple
specific scenarios that consider more in-depth details and enables robust risk analysis. Targeting
different kinds of problems, these two techniques together offer new supply chain analysis
opportunities for evaluating assumptions and testing innovations before they are introduced.
A company can then implement innovations in the real business system while using the tools to
minimize accidents and risks.

Digital transformation makes everything complex. To stay competitive and hande this complexity,
supply chain leaders must introduce innovations to their business processes. One solution is to
utilize optimization and simulation techniques. Both methods together provide an efficient supply
chain analytics toolset, which helps them quickly react to disruptive changes, adopt new strategies,
and improve what must be improved. Overall, these technologies provide the ability to take
advantage of new market opportunities.

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Additional resources

• anyLogistix Webinar • Related white papers for this work:

• Selected Cases in Urban Logistics and Land Transport Using
• anyLogistix Demo Video – tutorials
Multi-Method Decision Analysis
• anyLogistix PLE – free version for self-study and education
• Navigating Infrastructure and Assets in Digital Economy
• Related white papers for this work:
• TLIAP white papers
• Supply Chain Optimization and Simulation: Technology Overview
• TLIAP Master of Science in Supply Chain Management
• Simulation-Based Inventory Planning for The Digital Supply Chain Era
• TLIAP serious games
• White papers

• Case studies

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 Contacts
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[email protected]

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