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Why Real Time Data and AI is Critical to Supply Chain Optimization

Let's contemplate the world of supply chain optimization for a few minutes. Optimization tools underlie most of our decision-making in both supply chain planning and execution. We in supply chain management could not do what we do without the tools we use every day. But are we really getting the most out of our execution and planning tools? Are there other capabilities that could be incorporated into these tools to improve their performance?

Let's start with the underlying engines of these tools--optimization algorithms. There are a significant number of these exotic solution tools available, Academics spend careers fine-tuning these tools to produce better solutions. But algorithmic improvements often yield only tiny improvements in performance. Of course, some tools do provide significant improvements in performance but often only in very specific situations, not necessarily in the broad range of supply chain applications.  How can we enhance the capabilities of optimization tools with new approaches?

Perhaps one of the most important advances over the last few years has been the emergence of real-time data that can enhance the information available to decision-making tools. Examples include weather, traffic, social media, customer behavior, driver behavior, among other information. Adding these data sources to optimization calculations can yield significant improvements in efficient route structures and demand forecasts. Foxtrot Systems,(in full disclosure, an SCV portfolio company), has incorporated real-time data into their optimization tools for local delivery results, yielding improvements in route efficiency of over 30% compared to tools that just use historical data to optimize across cost and service constraints. Similarly, www.solvoyo.com uses social media data on what consumers are saying about products to enhance forecast reliability, often reducing forecast error by 10% or more.

Finally, artificial intelligence (AI) tools can glean important insights from historical data to improve execution and forecast accuracy in supply chains. By carefully examining freight movement and product demand data, AI can reveal hidden trends and tendencies not clear from the raw data. These new insights can be used to develop new constraints on the optimization tools to prevent common errors, such as 'Johnny can't deliver eight stops on rainy Thursdays, only six, so why continue to schedule him with eight'? Similarly, AI can expose trends in product consumption by region or customer segment that may not be obvious from the basic data sets.

We have a long way to go before real-time data and AI become a major part of supply chain decision-making. The principal reason is that legacy supply chain decision support tools generally cannot incorporate real-time data nor utilize AI capabilities. New tools are being developed that sit on top of the legacy systems, drawing out the data they need, then adding real-time data and AI insights to produce better solutions, and returning data back to the systems of record, such as inventory management and freight payments to make the CFO happy.

Finding startups that incorporate new data and data evaluation capabilities is what Supply Chain Ventures spends a lot of time looking for in the supply chain software ecosystem. Many startups promise they use new data sets and AI in their tools, but few do much beyond simple basics which yield only minor performance improvements. You have to kiss a lot of frogs to find a prince, but we'll keep at it. 

Getting Real #1: Is Real Time Data Really Useful?

Let’s start with a multiple choice question. The real-time data revolution is: a) already here, or b) right around the corner, or c) will not happen for a long time. Which is right? Are they perhaps all right? Predictions of a major revolution in supply chain management due to the availability of real-time data have been around since the millennium. So far, these predictions have not come true. Real-time data has been making its way into some supply chain analysis, such as shipment visibility. But supply chain technology, processes and people are a long way from being able to use real-time data on a consistent and pervasive manner. Depending on your point of view, you are probably correct no matter which answer you chose.

As they say, the real-time data revolution will not be advertised. It will happen slowly. Early adopters will begin to report major improvements in cost and service performance in their supply chains as their real-time data use ramps up. Supply chain leaders, like Wal-Mart, will begin to make real-time data usage mandatory in partner communications (after all, they are already leading the RFID revolution). Technology vendors will increasingly add real-time data use capabilities to optimization, planning and execution software. Companies will begin to modify supply chain processes and train people to operate in a real-time world.  Before you know it, real time data will have been embraced as the new, new thing in supply chain by early adopters, like P&G and H-P.

Are you skeptical? I don’t blame you. The world is full of pundits and predictions. What we do know is that real-time data has the potential to radically transform businesses and supply chains. The first question is whether we have any evidence that real-time data will become critical to supply chain operations.

Why Can't You Do Something to Help Me?

With apologies to Laurel & Hardy, supply chain professionals remain under intense pressure from all fronts to consistently perform at high levels of customer service while controlling or reducing costs.

     Your customers

Your customers are increasingly looking to develop demand driven operations. Simply put, many of them want products on a just-in-time basis, requiring much more responsive vendor supply chains and tighter performance standards. But wait, we are not done. Demand driven operations also implies changing orders, carriers, delivery dates and ship to locations, often when the shipment is ready to go or even en route. And did we mention that we want it done now, not in some efficient order change process you have developed in house.

     Your company

Your company can also play the real-time management game. The CFO is on your back to better monitor facility, transportation and overhead costs, sometimes on a daily basis. The CEO is fielding all those call from customers with demand driven operations wondering why your company can't keep up with the new business requirements. And the CCO (Chief Customer Officer-if you don't have one now, you soon will) wants hourly reports on key customer deliveries and critical order status so that they can anticipate issues with top customers.

     Your vendors

Finally, your vendors are asking for help in making their operations more efficient, so that they can reduce costs and improve service. This includes asking for more data, in advance; more frequently to help them better plan your deliveries. It may also include requests to form task groups to work collaboratively to enhance collective operations. The expectation is that is vendors are going to reduce prices; you are going to have to work with them on collaborative, cost-reducing initiatives.

So, real time data can potentially be very useful in managing many aspects of a supply chain, as well as helping you better serve your customers.  Next week, we will examine how you can use real time data to begin revolutionizing your supply chain operations.