SUPPLY CHAIN INTELLIGENCE: DESCRIPTIVE, PRESCRIPTIVE, AND PREDICTIVE OPTIMIZATION February, 2015 Bob Heaney, Research Director Supply Chain, Wholesale and Retail Practices Report Highlights p1 p5 p8 p9 65% of companies The move from historical Top performers are Leaders are twice as believe that they descriptive analytics to a 1.54 times as likely likely to invest in need to improve culture of organizational to accrue landed analytical intelligence and the use cost updates as an technologies and to their analytics of prescriptive analytics order or shipment follow 5 key process capability. Only is a differentiating factor progresses. These steps. These steps 50% believe that for top performers that dynamic analytic help them harness they are spending allows them to OPTIMIZE capabilities lead to raw data and allow enough on and break away from the balance and them to deploy analytics competition superior metrics predictive and prescriptive optimization in each stage and on both current and future state networks Top performing companies are transforming and harnessing data adopting advanced analytical and dynamic optimization capabilities. Starting with descriptive analytics of the current state, they are moving to predictive analytics to describe the future or alternate states, and prescriptive analytics to optimize outcomes during the supply chain planning and execution phases. Supply Chain Intelligence: Descriptive, Prescriptive, and Predictive Optimization 2 Big Data and Analytics: Trends and Challenges 65%Distributor of companiess’ Almost two thirds (65%) of companies now believe that they believe that they need need to improve their analytics. The use of optimization and customers are data analysis to turn big data into intelligence and drive business toexpecting improve the their same decisions cannot be ignored any more – not if a business wants analytics(easy) experience capabilities in . to be successful. Today’s enterprises are looking to reduce costs and improve operational performance in the context of their Onlybusiness 50% as believe they that increasingly complex and multi-tiered global supply-demand theyexperience are spending in their networks. The importance is only amplified for those with global supply chains and partners (Figure 1). enoughpersonal on on alinenalytics . shopping. With Recent Aberdeen research suggests that contributing factors Only 30% of include 1) the growing availability of business data to analyze, 2) market boundaries companies are the high velocity and complexity of business decisions and rules, blurring and with B2B 3) technological improvements in data collection and analysis, developing new and B2C and 4) the increased need to determine total cost-to-serve strategies to address across new logistics, transport channels, and lanes. requirements changing customer converging, All of these factors have driven the need and desire for requirements. businesses to base decisions on optimization of the company’s distributors and supply-demand network, spanning both the current and future Top performers are state scenarios. Today’s optimization challenge goes beyond the investing in change & current state. Companies need to provide more future-looking answers and recommendations to execution decisions that technology at twice cannot be addressed by historical analysis. Indeed, this requires the rate of their peers. a move from current state, descriptive analytics to analytical optimization that applies prescriptive and predictive intelligence during both the planning and execution phases. Yet only 30% of companies state that they are capable of, and operationally ready to, develop new strategies to address the changing customer requirements. Businesses large and small are embracing the movement and, according to our research, high performing businesses are 3.5 www.aberdeen.com Supply Chain Intelligence: Descriptive, Prescriptive, and Predictive Optimization 3 times more likely to embrace analytics than low performers. These trends are transforming business operations from inbound source-to-pay and outbound order-to- fulfill/transport/deliver. Figure 1: Lack of Supply-Demand Orchestration Equals P&L Impact 010101 International visibility through satellites and cloud technology DEMAND Global Air Home Customers Delivery Retail Store Raw Materials Supplier Component Global DC Supplier Retail Store Ocean Component Global Supplier DC Raw Materials Supplier SUPPLY Source: Aberdeen Group, February 2015 Global Omni-Channel Demands Require Increased Control Tower Synchronization and a Control Tower Approach Approach New logistics formats have emerged to address B2B and B2C Defined as a set of integrated eCommerce in a global supply-demand network (Figure 1) and processes and technologies that are more fully described in the sidebar on the next page. These support a seamless flow of new formats are having an impact on physical order, inventory, product from source to end consumer, regardless of the and fulfillment processes and beg for evolved analytics and the global complexity or the sales Control Tower Approach. and logistics channel preferences of customers www.aberdeen.com Supply Chain Intelligence: Descriptive, Prescriptive, and Predictive Optimization 4 Key areas of change under new omni-channel fulfillment trends New Omni-Channel (sidebar) include: Shipment Trends eCommerce and multi-channel or cross-channel across B2B & B2C demand impacts 87% of companies Companies 65% bypass their own DCs and ship direct-to-store via others (vendors, suppliers, 3PLs, break-bulk) • 61% shipping direct-to- consumer 61% have direct-to-home delivery models (this is up • 60% shipping to or through a from only 30% as little as 2 years ago) traditional distribution center • 56% shipping through vendor Inbound-to-outbound segmentation and cost-to-serve DC bypass, 3PL, or e- (CTS) require higher degrees of big data, collaboration, fulfillment provider and analytics then have ever been required before. Even • 53% shipping through a break- more rigor is required to proactively perform inventory bulk facility (i.e. cross dock, transload, or DC flowthru and item level rebalancing in-transit, which only 23% of facility) low performers can do • 43% shipping through a free port, free port zone, FTZ for Managing costs and rates by lane, mode, customer, customs and product for proper omni-channel fulfillment is • 38% shipping direct-to-store limited. Fragmented collaboration and data sharing • 15% plan to add capabilities in other areas not checked restricts visibility into events and rates. Linking these components from inbound to outbound is even severely Source: Aberdeen Group, 137 curtailed at top preforming companies; only about 35% Companies, Crossborder Transport of top performers can segment their logistics/transport Survey rates and costs (for more details on segmentation see Supply Chain Visibility and Segmentation: Control Tower Approach) Such changes are truly transformational and inspire investment in new, streamlined, and collaborative technologies within the industry and across the supply-demand network (Figure 1). www.aberdeen.com Supply Chain Intelligence: Descriptive, Prescriptive, and Predictive Optimization 5 The Use of Analytics to Optimize Business A key prerequisite of orchestration and end-to-end optimization Maturity Class is analytics. Analytics facilitate the realization of business Definition: objectives through the reporting of data to analyze trends, and Leaders - Top 30% predictive models for forecasting and optimizing business processes for enhanced performance. • 95.4% of outbound orders delivered to customers Aberdeen used four performance criteria, covering key cost and complete and on-time • 94.6% of orders received service metrics, to distinguish Leader and Follower organizations from suppliers complete (see Maturity Class Definition sidebar). The gaps in performance and on-time between Leaders and Followers are significant, particularly in • 0.5% decrease in total today's global market, where 88% of companies are involved in landed per unit costs in the past year global supply chains and address new requirements of • 7.5% decrease in the convergence in B2C and B2B channels. frequency of out-of-stock inventory in the past year Our data shows that Leaders are more capable, automated, and advanced. As they strive to become more analytically evolved, Followers - Bottom 70% they become more organizationally intelligent and have • of outbound orders aggressively moved up the analytics hierarchy to optimize their 86.4% delivered to customers business and operational processes. The research shows that the complete and on-time move from historical descriptive analytics to a culture of • 84.8% of orders received organizational intelligence, coupled with the use of prescriptive from suppliers complete and on-time analytics, is a differentiating factor for top performers, which • 8.5% increase in total allows them to optimize and break away from the competition. landed per unit costs in the The typical progression or hierarchy of analysis and optimization past year is detailed below and further illustrated in Figure 2 on page 7: • 0.9% increase in the frequency of out-of-stock Descriptive analytics: what HAS happened – the use of inventory in the past year data to figure out what is happening now or what happened in the past. Descriptive analytics prepare and analyze historical data and identify patterns. This type of intelligence looks for trends at the micro-, the macro-, or the aggregated-levels