Why digital twins are not the future of supply chains, they are the present

We’ve endured global epidemics, OPEC crises, industrial action, robots taking over and yet we recovered and thrived. We posit that far from unprecedented, these disruptions are perhaps more redolent of cyclic times, admittedly unpredictable and highly impactful, but nonetheless echoes of the past that return in a subtly mutated way to challenge us. Maybe the only truly unprecedented feature of today is the free flow of social media chatter, 24/7 news reporting and an ‘always on mindset’ that document every minute of every day.

However, as with challenges past, it is our ability to problem solve and create new ways of working that allows us to navigate through. Today, in a time of increasingly volatile supply chains, that means taking advantage of the ‘real time visibility’ that connected technology enables and using it to rapidly assess how to mitigate disruptions, take advantage of customer opportunities or meet changing service requirements.

This dynamic visibility can transform supply chains, but only when it is translated into recommendations and actions. Increasingly, advanced planning solutions such as o9 can dynamically re-cut and optimise plans for service and/or cost using a combination of machine learning and demand/supply sensing modelled through integrated digital twins of a company’s network.

Digital twins are not new. Since the concept was introduced in the early 2000s, they have been deployed in several industries including manufacturing, construction, urban planning, and healthcare, among others.

A digital twin is, simply put, a replica of the physical world and its interactions. However, the concept is often misunderstood as “sensors, 3D models, or applications of AI” (something out of a sci-fi movie like “Minority Report”), or as something “largely theoretical and not relevant for supply chain management”, or also as something “that can only be built only after the physical twin has been created”(1).

The reality is quite different.

Digital twins are a combination of technologies that can unlock value and new ways of working in supply chains across industries. More importantly, the enablers required to implement digital twins, including highly scalable computing power and storage, availability of historical data, advanced algorithms, ability to integrate external data, and the technologies to make sense of it all, are already available and being used.

This article explores where the value from digital twins lies, why organisations struggle to capture it, and what companies can do about it.

The value digital twins bring to supply chain management

Supply chains are anything but linear; in the modern world, even in small and medium organisations, supply chains have evolved into a complex network of interconnected elements including suppliers, customers, employees, warehouses, distribution centres, etc., each of those with specific constraints and unique features. In addition, and as COVID has painfully highlighted, these networks are highly dynamic: suppliers’ capacity dwindles, shipments get delayed, demand fluctuates with inflation, and employees get sick.

This intrinsic complexity has led some companies to believe that end-to-end supply chain visibility and optimisation is an intractable problem (see next section on ‘Why do companies struggle?’), or that the value is not clear.

We see, however, an increasing number of companies harnessing digital twin technology, as the unifying platform, to deliver business capabilities with tangible bottom-line impact. Some examples include:

Long-term planning. The ability to rapidly simulate multiple what-if scenarios, from a surge in demand to the effects of standing up a new DC, leads to better strategic decision making and bottom-line impact.

Case study: A global chemical player was unable to conduct real-time scenario planning and could not evaluate supply chain supportability and financial impact without high levels of manual effort. They went through a digital transformation to address this. You can read about this here.

Control tower (execution horizon). The ability to ‘sense’ disruptions in the execution horizon (up to 12 weeks) by combining internal and external data sources, paired with the ability to rapidly evaluate responses within a set of constraints (e.g. source from an alternative supplier, reroute a shipment, transfer raw materials between warehouses), leads to cost reductions and prevention of revenue losses.

Case study: A multi-level global marketing company was unable to sense supply chain disruptions (spikes in demand, purchase orders delayed) and act fast. This was costly. They transitioned to a technology platform integrating internal and external data sources, paired with collaboration and machine learning capabilities that advise users on what to do next when an issue arises. More details here.

Figure 1 - Control tower capabilities

Inventory optimisation. Although digital twins can be very impactful to model and simulate warehouses and optimise factors like layouts, its true business value is achieved when optimising inventory holdings across the entire supply chain network.  This is called multi-echelon inventory optimisation (MEIO) and, although it is not a new concept, a supply chain digital twin is a critical enabler allowing companies to rebalance inventory constantly and automatically across tiers, highlighting the financial, environmental and operational implications of doing so.

Case study:  A consumer electronics retailer was experiencing frequent inventory excess and shortages, with only 10% of the SKUs having healthy inventory levels across the network. You can read about what they did here.

Truly integrated business planning. The concept of integrated business planning, seamlessly aligning financial and strategic goals with operational considerations such as service levels or inventory levels, often falls short of its promise. Teams rush to meetings with a plethora of slide decks, usually based on data that does not reconcile, which leads to delays and frustration. Modern supply chain digital twins, providing both operational and financial lenses, can help bridge the collaboration gap between teams, achieving the coveted ‘once source of truth’.

Case study: A large food and beverage organisation made a transition away from scattered spreadsheets and towards a unified platform to run their IBP process for all categories, brands, channels, and countries. Read more here.

In each of these cases, a different solution (Control tower, advanced planning, MEIO) resolves the problem, but in each case the unifying platform that underpins them is the digital twin of client supply chains.

Why do companies struggle?

The examples above are only a handful of the potential business capabilities that digital twins can enable.

This begs the question: if the value proposition for supply chain digital twins is so compelling, what is holding companies back from adopting this technology?

By engaging with supply chain executives in Australia and globally, we have identified three key themes, outlined below.

Not using the ‘right tool for the job’.  Many companies tackle building some of the business capabilities mentioned above using spreadsheets or extensions to ERP systems that, although designed to keep business information organised and secure, are not designed to provide the analytical and modelling features that a supply chain digital twin provides.  As the complexity of those in-house built spreadsheets grows, some companies transition to data lakes and BI tools, which provide the ability to manipulate larger volumes of data but are not designed to resolve the specialised challenges addressed by supply chain digital twins.

The right time never comes. Some companies find implementing a digital twin is too challenging, or it is something that should be tackled after upgrading an ERP system, building a data lake, or addressing data quality issues. While these may be valid concerns, we find companies can ‘start small’ and use the digital twin as a catalyst to accelerate complementary initiatives (e.g., help with prioritisation of data quality efforts). We have also seen organisations that successfully upgrade their ERP systems with a parallel supply chain digital twin implementation: if the interdependencies are planned carefully, as part of a unified value-oriented roadmap, it can help deliver ‘business wins along the way’ in what otherwise may be a multi-year effort with value captured only at the end.

Failing to articulate the value. In some instances, companies fail to articulate the value at stake from implementing a supply chain digital twin, which slows down decision making. This is often due to lack of familiarity with the technology, or a lack of access to benchmarks that can be used to quantify the opportunity. In this scenario, the best course of action is to get help and inform your analysis with data points from vendors, consultants, research firms, or non-competing organisations.

How can companies realise this vision?

Deloitte and o9 Solutions have partnered with dozens of organisations implementing supply chain digital twins globally. These are some of the ‘success factors’ we have distilled from that work:

Focus on a rapid path to value. We believe that by ‘thinking big, starting small and acting fast’, companies are better set up for success. Successful implementations of supply chain digital solutions are typically characterised by a value-led approach, not a technology-led one. They define a roadmap that includes three elements: a) the uses cases that will be implemented in each phase, with associated value estimates (e.g., implement inventory optimisation in a specific geography as part of phase 1); b) the technical enablers required (e.g., specific digital twin capabilities, data availability); c) the change management activities needed to succeed (in the form of training, communications, process redesign, phasing etc.).

Starting with ‘clear wins to work towards’ and minimum viable products helps keep the organisation aligned and positive, as opposed to committing to a large technology implementation where value is only perceived at the end.

Think platform over point solutions. There are a myriad of specialised supply chain planning solutions in the market, and it can be tempting to pick and choose and integrate them, as opposed to adopting a more holistic platform that can be extended as business needs evolve. This choice usually stems from fear of vendor lock-in, paired with an underappreciation of the effort involved in making point solutions work cohesively. While it is never black or white, we find that organisations that adopt a platform play, adopting an open and extensible solution that integrates digital twin, planning and analytics capabilities, have the opportunity to gain competitive advantage through connected, data driven, AI enhanced decision support, allowing rapid scenario analysis and testing of options in near real time across the connected platform. This is a result of reducing implementation risk, achieving economies of scope, benefiting from fostering a partnering relationship with a software vendor, and easing adoption by having ‘one interface’ for the user community. By allying the platform approach to the ‘think big, start small mindset, your speed to value is rapidly accelerated and amplified as you scale the solution.

Figure 2 - Areas that need to come together to maximise value from advanced planning

Take everyone on the journey.  Supply chain planning is a discipline that has not changed much in the last decade; as a result, there are highly entrenched behaviours and ways of working, which can result in teams protecting their turfs and challenging new concepts. If not managed, some of these behaviours can torpedo the adoption of a digital twin which is, by definition, designed to integrate functions, time horizons, and parts of the supply chain.  Companies that do this well overemphasise change management efforts, investing on training programmes, change narratives, role redefinitions in an inclusive manner so that all the stakeholders get to own the change.

About Deloitte’s Supply Chain and Procurement practice

At Deloitte, we deliver end-to-end optimisation across the full breadth of your supply chain to help you drive exceptional performance. Drawing from deep global expertise and experience, from strategy through implementation, our specialists empower your business to achieve world-class outcomes and thrive in the new economy.

About o9 Solutions

o9 Solutions is a leading enterprise AI software platform for transforming planning and decision-making. o9 has been named a Leader in The Forrester Wave™: Collaborative Supply Networks, Q4 2022, and a Leader in Gartner’s Magic Quadrant™ 2022 for Supply Chain Planning solutions.

About the authors

Steve Kyle is a Principal in Deloitte Australia’s Supply Chain and Procurement practice. He lives in Sydney and has more than 25 years’ experience in leading supply chain operations, network design, and optimisation programmes across different industries.

Alejandro Rosales is a Director at o9 Solutions, based in Sydney, Australia. A former management consultant, Alejandro has nearly 20 years’ experience leading digital and analytics transformations across Australia, Asia, and the Americas.

References

1. “Unlocking the potential of digital twins in supply chains”, MITSloan Management Review, August 2022.