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Digital Transformation in Logistics and SCM

Victoria Puzhevich
Published: February 7, 2023

While many industries swiftly embrace digitization, adjusting to fast-changing economic environments and growing customer demands, the logistics and SCM (supply chain management) companies have always been quite sluggish in utilizing logistics software development services and, therefore, transitioning to a new manufacturing and service provision paradigm – Industry 4.0. Although many companies start incorporating digital technologies in the logistics sector, the adoption rate across big and small companies still remains relatively small.

According to Accenture’s recent research, the digitization process in the industry looks rather patchy with ¾ of survey participants believing that the industry is slow in its digitization maturity. But at the same time, 76% of respondents have agreed that failing to enhance digital capabilities can “seriously endanger their business.

Implementation of digital technologies allows logistic and SCM businesses to significantly improve their efficiency, flexibility, and timing, as well as better address their customer demands. So, why are businesses so slow in adopting digital transformation? The same Accenture research states that 72% of respondents agree that the lack of implementation roadmaps and digitalization ignorance are among the main reasons for that.

In this article, we’ll have a closer look at the reasons for faster digital transformation in logistics and SCM industries, explore the technologies that drive the digitization process in this sphere, and address the main constraints of the industry digitization.

What Is Digital Transformation in Logistics and SCM?

Digital transformation in logistics and SCM is a practical approach of adopting digitalization at all levels of the company business processes from optimizing logistics in physical flows, streamlining data exchange, to customer services and more.

However, when an industry is undergoing any profound changes such as digital transformation, it experiences them at several levels:

  • Process automation – this is the first level of digitization that starts with stand-alone businesses. It’s when companies attempt to improve their back-office processes, including analytics, transportation, accounting, and others with the help of digital technologies.
  • Transformation of business models happens when the accumulated experience of digital technologies implementation becomes sufficient to transform traditional business models. At this level, the use of new models starts delivering more value to businesses and their customers than the old ones.
  • Domain transformation involves the use of new technologies to give a new look to the offered products and services. Often, this involves companies from different industries working on the development of a new product.
  • Cultural transformation – when companies can’t work relying on the old paradigms anymore and they have to shift their mindsets to adapt the existing technologies to be successful in the market.

Currently, most of the companies in the logistics and SCM sector are at the first two levels of digital transformation – process automation and business model improvement. To effectively progress in line with these levels, businesses should use a wide range of technological advancements that will help them improve their workflows. These technologies include cloud-based systems for inventory management, GPS tracking for shipments, drone delivery, blockchain for enhanced data protection and transparency, predictive analytics for demand forecasting, and more.

Main Reasons For Digital Transformation

It’s expected that global spending on digital transformation in the Logistics industry will grow from $52.2 bln in 2022 to $75.5 bln by 2026, increasing at a CAGR of 8.8 during the forecasted period.

While the digitization process encourages competition between the companies in the logistics and SCM domains, the main driving factors that trigger digitization can be defined as follows:

  • Better meeting customer expectations – customers’ demands increase together with technological advancements that offer faster services and more convenience. Today, customers require from businesses uninterrupted hours of service, ease of return or compensation, faster delivery, and much more. As they can obtain quick and convenient services from other industries and spheres, they will expect logistics and SCM companies to adopt the same approach.
  • Flexible response to any changes – today’s ongoing economic and socio-political events worldwide create an unstable and quickly changing environment. To survive in this environment, businesses have to quickly respond to these changes and adjust to them accordingly. When it comes to logistics and supply chain businesses, the recent pandemic showed how fragile they can be – 94% of Fortune 1000 companies stated that they witnessed serious supply chain disruptions due to the Covid-19 outbreak. Without proper adoption of digital technologies, many companies operating in these spheres will continue experiencing significant adjustment difficulties with a new outbreak be it a pandemic or another recession.
  • Enhance data visibility and protection – the amount of data businesses and individuals handle is growing year by year. Provided that, the issue of data protection becomes especially important. By using the latest digital technologies such as blockchain, companies can improve the safety of their data, while increasing the visibility of the right data to the right business partners. This way, those companies that strengthen their data protection also ensure the stability of their business.
  • Lowered operational costs – digital technologies provide automation at different levels of business operation. For example, the implementation of robotics and IoT allows businesses to streamline their product storing and delivery along the route. Whereas Artificial Intelligence and Blockchain can ensure the accurate automated performance of routine operations connected with data management. Having all the processes well-tuned, companies improve their working efficiency, speed-up the product delivery, and, therefore, provide better customer services.

Digital Technologies That Drive Logistics and SCM Transformation

Competent implementation of the latest digital technologies quickly brings positive results to businesses. Let’s have a closer look at how each tech advancement can enhance the logistics and SCM processes for businesses.

IoT

The Internet of Things is the technology that ensures efficient transportation and monitoring for logistics and SCM. More and more companies start realizing the value of IoT for their business, therefore, investments in this area also grow.

IoT technology operates at the intersection of the physical and digital worlds. It provides businesses with connected hardware infrastructure for the physical transportation of goods and a software network that ensures smooth monitoring of ongoing processes and data exchange. Manufacturing, transportation, and retail companies can adapt IoT solutions to effectively address their business issues. Here are some examples of how IoT could be implemented in different spheres related to logistics and SCM.

Connected fleet and monitoring. With IoT, companies can use GPS trackers to monitor the position of each vehicle in their fleet around the globe. Apart from that, various built-in vehicle trackers can provide real-time data on the state of each truck, including fuel level, wear of spare parts, delivered goods condition, and more. Also, the delivery of simple-to-damage goods becomes much easier with IoT as the technology can create and support certain conditions so that the products won’t spoil during the delivery process.

Autonomous delivery. Self-driving cars and autonomous package delivery are slowly becoming a new norm for the world. Autonomous driving cars started with Tesla have been used for a while – Uber is already using self-driving trucks and Torc Robotics are working on the improvements of Daimler Truck. Meanwhile, autonomous delivery has been performed only by land, though until recently. By the end of 2022, Jeff Bezos, the founder of Amazon, started an experimental goods delivery by drones in California and Texas. Although technology is facing many concerns, these are just the first steps toward cultural transformation in the logistics and SCM industries.

Smart warehousing. The use of FRID and barcode technologies in IoT brings warehouse management to a new level. With the help of these digital solutions, companies can significantly automate order management and streamline order processing at warehouses. IoT-empowered robots can accurately manage the inventory, quickly find the right packages, and ensure their timely delivery to customers.

Blockchain

Blockchain technology has a wide range of implementations across industries and for logistics and SCM it can become a real lifeline when it comes to data management, protection, and exchange. Blockchain-based applications can help companies automate many routine processes such as goods purchasing, automated contract fulfillment and payments, and more.

Apart from automation services, Blockchain provides access to larger amounts of valuable information. For example, it’s easy to monitor several suppliers for one company – compare their goods prices and simply close trades. Also, the technology improves data transparency which means that all the supply chain participants from manufacturers to transportation, to buyers can quickly access the needed information and track the state of their goods or agreements in real-time.

At the same time, Blockchain ensures increased security of shared data. The data can be accessed only by the intended companies or individuals. This means that no third parties can view the sealed information and cause any sensible data leakages.

Find out in more detail how companies can benefit from Blockchain when building their supply chain in our How Is Blockchain Improving Supply Chain Management article.

AI & ML

Artificial Intelligence and Machine Learning are the technologies that provide strong analytics support and build predictive models for IoT and Blockchain. There is a wide range of AI&ML-based applications that are developed for the Logistics and SCM industries today. Some practical examples can include applications for customer behavior analytics and customer service applications, predictive analytics for machinery, Big Data analysis for further business development insights, automated warehouse management, applications for enhanced workforce management, planning and back office document processing automation, and much more.

The technology is so commonly used in Logistics and SCM that businesses may not even realize that they use AI&ML in their work. GlobeNewswire predicts that the share of AI in the supply chain market reached $5,610.8 mln in 2021 and is expected to reach $20,196.6 mln by 2028, growing at a CAGR of 20.5% over the period of 2022-2028. This way, Logistics and SCM companies should expect deeper integration of AI&ML into their working processes.

Main Constraints in ​​Digital Transformation in Logistics

While emerging digital technologies offer much, many logistics and SCM companies frequently experience various obstacles on their way to digital transformation. Let’s have a closer look at the most common ones.

Limited IT capacity

According to the recent McKinsey&Company survey, over 99% of respondents agree that they’re lacking in-house digital supply chain talent to support their steps in planned digitization. Lack of the required digital technology skills and expertise can be a significant barrier and many businesses seek ways to re-skill and re-deploy their workforce.

Given this, staff re-training and education can take years and many businesses can’t afford to extend these processes this long. Therefore, along with staff training, many businesses search for outsourced IT talents to enhance the existing teams and to continue their digitization efforts.

Complex Processes, Structures & Networks

Digital transformation is a complex procedure and often quite challenging to understand. Unfortunately, it’s common for many organizations to develop and integrate digital solutions without detailed analysis, not realizing the implementation scope and the expected results.

As digital transformation affects third parties involved in supply chains, it results in disruptions in functioning across businesses. Therefore, to avoid the situation when digitization results in no improvements, companies have to analyze the ongoing processes inside and outside their business carefully.

Technology Constraints

Ensuring connectivity in the supply chain is another major challenge often met by logistics and SCM companies. The connectivity difficulties may include constraints in technology mass adoption, technology shortcomings, security challenges, and others.

Therefore, before implementing a particular technology, apart from estimating the value it can bring, businesses should also precisely know how it should be implemented, what it’s capable of, whether it complies with all the local and international legislation, and if it works well for their supply chain partners.

To effectively tackle these difficulties, many logistics and SCM businesses prefer to augment their local teams with professionals from other spheres to ensure a faster and more stable digitization process. When it comes to IT, they search for specialists who can develop the right solutions empowered with the latest advancements and help effectively integrate them into the existing digital infrastructure.

Explore our Why Custom Software Development Is Better for The Logistics Industry article to find out how custom solutions can help your business to successfully undergo digital transformation.

Conclusion

Digital transformation is an ongoing and long-term process. Although now it’s happening rather slowly in the logistics and SCM industry, businesses from other spheres will eventually impact logistics and SCM companies in their drift toward Digital Transformation and Industry 4.0 and encourage them to undergo these changes faster.

For those businesses which want to keep their competitive edge in the market, it’s natural to consider further steps in their digital transformation. Therefore, they should think in advance about how to upgrade their existing digital infrastructure and where to find specialists who could help them undergo these changes more easily and smoothly.

Source: scand.com