Manufacturers and their networks of partners are desperately seeking more supply chain resiliency, agility, and sustainability. Those imperatives require innovation and change—but even much-hyped technologies often fail to deliver improvement needed: 80% of leaders surveyed by PWC say their supply chain tech projects haven't delivered the expected returns.

Why are supply chain efficiency issues so intractable? Is it an IT problem? A classic business-IT disconnect, suffering from distorted expectations? What are companies doing wrong? And how can you do it right?

Spoiler alert: It’s the people and organizational issues that will get you every time. Supply chain innovation hinges more on trust than technology, according to a panel of three experts convened by SAP Insights contributor Lauren Gibbons Paul. Better data sharing and mutually beneficial relationships are puzzle pieces for putting together supply chain projects that work.

The transcript has been edited for length and clarity.

Our panelists:

SAP Insights: What are the hotspots for supply chain innovation right now?

Richard Howells, SAP: Even in the past 12 months, we've had the war in Ukraine, climate change, political instability, and inflation—we’re now in a state of “permacrisis,” an extended period of instability and insecurity. So resiliency became the key word for the last two or three years. Supply chains need to become more risk resilient.

I think sustainability will join resiliency as equally important, because sustainability is driven by mandates from governmental and regulatory bodies, from us as consumers, and even employees and shareholders are demanding it.

And third, I'm seeing lots of companies looking to move from selling a product to selling a service. The term “servitization” is coming up in discussions. We're really talking about an as-a-service model to build better relationships—longer relationships with customers—by dealing with them on a monthly or quarterly basis, rather than a one-time transaction.

Matt Littlefield, LNS Research: Anybody can have a resilient supply chain—just make everything double redundant, and you're good!—but at a high cost. If I can get agility and flexibility going, that gives me resiliency in a relatively low-cost way.

And sustainability is huge. Commitments have been made; CEOs have pledged to be carbon neutral by 2030 or 2040. But it's going to take a lot more than just power-purchase agreements for renewables. We talk a lot about operationalizing sustainability. For that you need to innovate. You've got to transform your operations to pull carbon out and get more efficient. That’s going to take real change and real investment.

I’d add another challenge: the frontline labor crisis. There’s a huge labor crisis, especially in manufacturing, warehousing, and transportation logistics, especially in North America and Europe.

Mike Lackey, SAP: No question—there are disruptions every day, some small, some much larger, like the pandemic. Before we started experiencing all this, supply chains were very linear. That doesn't work anymore. We're seeing them become more distributed. We’re starting to see companies come back to non-low-cost markets where microfactories bring production closer to where products are used.

The good news is, in manufacturing, sustainability equals profitability. If I improve my processes, my quality, and I reduce the amount of scrap, that means I don’t have to order additional products or materials. That means there will be less energy being consumed at my suppliers, fewer trucks on the road, planes in the air, ships in the ocean. The more efficient I get, the more I reduce my carbon footprint.

Five years ago, companies would report on their carbon footprint once a year for the annual report. Then it got to be quarterly. But today, they report every day back to corporate. Sustainable manufacturing is becoming the way we can really impact the bottom line of the company.

We’re going to have to do a lot of innovating to get around the labor shortage. Things like additive manufacturing or 3D printing can really simplify the supply chain. We're at an inflection point for these technologies.

Q: What role do contract manufacturers (CMs) play in terms of increasing supply chain agility?

Lackey: For a large company that has 40 factories, probably four to six of them are CMs. But you can't treat them as separate, because without them, you don't meet all your customers’ expectations. Cloud applications help original equipment manufacturers (OEMs) get better visibility into their CMs’ processes. CMs are becoming a big part of the whole global operations for manufacturers, so OEMs need to have the same visibility, the same quality, the same understanding of cost structure, the same forecasts, the same understanding of capacity, as their own factories. Cloud computing and cloud applications are really making that possible today, and reducing the risk.

Q: Sometimes CMs are reluctant to give OEMs that visibility, because they are afraid it will just lead to more demands for cost reductions, right?

Littlefield: Right. Visibility is a necessity for system-wide efficiency optimization. Technology is not what stands in the way of sharing this information. It's really about trust between trading partners. And the idea of shared benefit. It’s the supply chain masters who stand to benefit the most from this visibility.

So, how do you drive that shared information? You could mandate it. But that doesn't always go the way you might hope.

Most manufacturers, as the brand owners, are closer to the customer than their suppliers. There might be information they could share with the CMs to build that trust, to build a relationship that benefits the CMs, too.

Sharing knowledge and know-how are ways the big brand owners can drive system-wide visibility.

Take the lead, be the first to share.

Q: Manufacturers have been trying to bring together IT with their operational technology (OT) counterparts for years. Has the time for IT-OT convergence finally arrived?

Littlefield: I would say it 100% has.

IT-OT convergence is all about smart and connected machines. That's the driver. Everyone realizes the products are getting smart, and that you have to bring together automation technology and information technology to do that. That's nothing new. But the harder stuff is actually the cultural and organizational issues that come up when companies try to bring these groups together. We’ve seen that the companies that do this really well do it well almost by accident. Maybe there are a few individuals that have grown through the organization and have spent time on both sides of the fence—manufacturing and supply chain. They said, ‘Hey, I really like it. I want to get involved in this technology bit.’ They take a role in technology, and then vice versa. On their own, just happenstance, they get cross-trained.

Traditionally in IT, there are siloed, very specialized tracks that are not cross-functional. Some of the leading companies are saying, actually, we do need our technologists to have business experience and knowledge. They are breaking down the silos between corporate and operations, supply chain, and technology and really doing it proactively. We have seen this drive innovation.

Lackey: IT-OT convergence to me is at the heart of digital transformation. Every one of our customers is working on Smart Factory. To get there, they all have initiatives where they are working on bringing about this IT-OT convergence, because that’s what productivity is going to look like in the future.

Howells: Manufacturers are getting OT involved much earlier. They have to, because they’re the ones who know the business context, the problems you’re trying to solve. With predictive maintenance, for example, you could put thousands of sensors on a piece of equipment but still not have the data that you need to solve a specific problem. You have to know which are the key components—all the other information is just noise. You have to start from the business context of, ‘What are my key problems?’ before you can then determine if you have the data available to do that. If not, how do you get that data?

Q: PWC recently published a survey finding that 80% of the respondents said investments in supply chain have not delivered the expected ROI. Does this sound right?

Littlefield: Our data at LNS Research is around the same ballpark: mid-70s to mid-80% have not realized the value they expected. They see a productivity plateau. There are a number of contributing factors. Our research shows that a lot of things you can do in the early stages to inspire the organization and to build momentum can actually inhibit the scaling of these technologies across the broader organization. It’s a very different thing to get a pilot or a site transformed versus getting a network of 30, 50, or hundreds of sites transformed.

Another example: In the early phases, it is good to have a chief digital officer to paint the art of the possible. But you do have to hand the reins over to the business, as you want to scale this over time. You have to let the business side drive it. And that's the hardest part to do. Because the technology leaders who jumpstarted this thing, when they finally get traction, they want to hold on and drive it to the end. But they actually have to give it away at that point.

Lackey: You have to execute quickly on a proof of concept to gain the political capital you will need to carry it forward. But then you have to know what to say when you get everyone in the room: ‘Here’s exactly what we need to do next.’ You need to keep your foot on the pedal so you can go from 35 to 90 now without going back down to zero first. You need to be showing return over and over again. The companies that fall in transformation, often it’s because they drop it at the end; they don’t have a plan to keep rolling forward.

Q: Is the problem a lack of collaboration? Or where is the disconnect?

Littlefield: It's not one answer. Is transformation something that's happening to the business? Is it something that's happening for the business? Or is it something that's happening with the business? It really should be something you do with the business. IT has to select the technologies and build those solutions, but in a way where the business ultimately has a sense of ownership over those solutions.

If you can accomplish that, you will be well ahead of the competition in achieving ROI.

Howells: The funding model is also important. Pilots are generally funded from centralized technology budgets, but then really quickly the model should move to infrastructure plus co-funding, with shared goals to get the plants to invest. Because if all you do is wait for the plants to invest, you'll be waiting for a long time. There's a whole bunch of infrastructure that has to be put in place. We always hear connectivity and networking are the challenges that hold companies back from scaling.

Q: What about expectations for supply chain investments—are they too high? Is there too much hype about ‘game-changing innovations’?

Littlefield: Manufacturing and supply chain are not like other industries, when it comes to productivity. You can't just digitize and get better productivity. If you're in finance, banking, or media, you can digitize and get huge savings. In manufacturing and supply chain, you have to actually move atoms, not just bits, to improve productivity. And that's where I think companies have struggled; it's well documented as a productivity paradox. You have to actually reorganize capital labor. And digital can be an enabler, but it really is only an enabler.

Right now we’re on the cusp of major capital deployment in manufacturing, when you consider the repatriation or nearshoring of semiconductor manufacturing to the U.S. or the tens of billions of dollars going into automotive manufacturing for electric vehicles. Billions of dollars of new capacity. Tesla just announced $3.6 billion in new capital spend to expand U.S. manufacturing, to make that a digital factory versus a traditional factory. Companies might make a capital investment of $600 million and only have 200 new jobs. That is crazy productivity for that new capital investment.

Q: What are some of the most compelling supply chain innovation use cases you’ve seen lately?

Lackey: The big use case for me is the connected factory. Bringing in business context, a movement away from linear production to modular production. Places where you don’t have assembly lines, you have automated guided vehicles moving products throughout the plant to the next available work cell. This is huge in an industry like automotive. You have plants that are never down.

Howells: We know of a German steel manufacturer that is taking a circular manufacturing approach that changes the production and manufacturing processes of steel to become less wasteful.

There’s Allbirds, the shoe manufacturer, which is capturing the carbon footprint of their product and putting that information on the shoes themselves so consumers can see.

Colgate and other large CPGs [consumer packaged goods companies] are doing a lot around design, to design plastic out of their supply chain and to make sure all their packaging is recyclable, reusable, or compostable by 2025.

Q: Do you agree supply chain innovation will continue to be a focal point for investment going forward?

Lackey: Supply chain is critical. If I can't deliver for you, at the time and cost you want, you're going to find alternatives. New competitors pop up. Companies that were partners yesterday are competitors today. Increasingly, competition is between supply chains, not companies. It's all about delivering on that customer's expectations. That comes down to supply chains becoming strategic to a company’s future.

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