Part 1 - In the beginning...
While it was slightly before your time, the Industrial Revolution in the 1760s marked a massive turning point for human society. Catapulted into a world of machines, factories, automation and global trade, our daily lives and standard of living were changed forever.
Fast-forward nearly 200 years, and IBM, UNIVAC and others came along and shook things up again. The commercialisation of the mainframe computer in the 1950’s heralded the start of the Digital Revolution and it’s mind-boggling to think that just 30 years later, in the early ‘80s, computers would morph from giant centralised mainframes to accessible Personal Computers.
Of course with the digital age came increased automation – both in business and domestically. Industrial computers were installed to control everything from power plants to cooling stacks and factory machines. Our homes became automated as we embraced dishwashers, washing machines, and clothes dryers. With each labour-saving device, machines became more entrenched in our lives.
In the early 1990s we got the World Wide Web, and in 2000, we moved into relatively modern times - even for the millennials amongst us. But even then it was almost inconceivable that anyone apart from large business would expand a simple web page into a functioning eCommerce site. And yet here we are. Intel co-founder Gordon Moore could’ve been talking about technology as a whole when he predicted that integrated circuits would become twice as powerful (and half the price) every year.
eCommerce has absolutely exploded in 20 very fast years.
The next revolution
Now 2019, we stare into a new age - the age of AI and Robotics. Of course robotics has been with us for 50 years or more …… I grew up on the factory floor in a family business where fitters and turners made our machines perform incredible functions that had been impossible only a few years before. Back then we were only scratching the surface. Now the opportunities for automation are wider and deeper - combined with AI, machine learning, and responsive robotics, the possibilities are endless.
This is the environment businesses find themselves in today. Not just the big end of town (miners, retailers, government and financial intuitions), but also the small and medium enterprises amongst us. SMEs make up the vast majority of all business in Australia, produce one third of total GDP, and employ almost 5 million people. That’s no small potatoes.
So how can SMEs harness the power of automation for themselves?
Part 2 - Wait but how?
One of the challenges for SMEs today is the mindset that automation is not relevant to them. That it’s too hard, too costly, and really only feasible for the big players. Procrastination is a common course of (in)action. But waiting a few years “until costs come down” or “everyone else is doing it, too” presents its own problems... mainly the risk of being left behind. There’s nowhere to hide in the information age - the opportunity is here today and the competitive threat is too big to ignore.
Perhaps Bob Dylan said it best: “you better start swimmin' or you'll sink like a stone. For the times they are a-changin'.”
Where to begin?
Accepting the premise that automation IS accessible to all businesses begs the question: where do you look for projects that deliver ROI?
My approach is to look at the business type and determine which key processes hold automation potential:
• First – what is the business type? Retailer, distributor, manufacturer, or supplier?
• Next – what is your strategic advantage / how do you compete? Removing product uniqueness from the equation, your business will either focus on cost and driving efficiency, or you’ll be focussed on responsiveness – catering to demand, product options and service levels.
Assuming you’re a Distributor and your strategic advantage is cost/efficiency, in today’s environment you’ll ultimately be looking to automate all across your internal supply chain. From procurement --> inventory control --> sales --> distribution, your aim will be to drive cost out of all your processes. Start with the process you estimate to have the highest potential value and lowest cost/effort to change, and baseline your current unit cost for that process. Work with your financial and supply chain teams to identify constraints. Then calculate - if these constraints were removed, what would the new unit cost be?
Alternatively, if your strategic advantage is responsiveness, you’ll look to automate those elements of your value chain which won’t compromise on responsiveness. Again, begin with the process estimated at the highest potential value and lowest cost/effort to modify, but in this case being mindful not to compromise your key advantage. Utilise your business intelligence to identify pre- and post- constraint unit costs.
After completing the above exercise, you can start to build your automation business case, including projected ROI. Obviously the process goes much deeper than I’ve outlined above, but the key points remain:
• Understand your business and your strategic advantage;
• Look at processes that have potential constraints;
• Baseline the current unit cost of the process; and
• Determine what the cost of the process would be post-automation.
In the third and final installment, we’ll see the above process illustrated in an automation case study.
Part 3 - Telling the story
In our conceptual case study, we meet Dave – Operations Manager for a distribution business –as he walks us through the process of identifying an automation project that will deliver ROI.
“Pleased to meet you. I'm Dave Stone - Operations Manager for Electrical Parts. My management team comprises the Managing Director, Financial Controller, Sales/Marketing Manager and myself. I’m responsible for the order-to-cash and procure-to-pay functions of the business – basically everything coming in and going out of the warehouse.
For context: we’re a pretty typical business in that we manufacture offshore and import to our Melbourne warehouse. We sell to electrical parts retailers, repairers and distributors across Australia. We turn over around $50 million per annum and employ 75 people - including 8 Reps on the road and 5 in our Customer Service team.
Technology-wise, we’ve been running an ERP system to support our business for the last 20 years. Approximately 5 years ago, we implemented a shiny new B2B eCommerce system. It allows our customers to order online, access rich product content and data sheets, and do self-service for functions like order tracking, account payment, and invoice reprints.
Whilst our eCommerce site is a success and our customers love the convenience and the functionality, our challenge has been growing the number of mid-size customers who order online.
Our 2 largest customers (who represent 20% of our business) are now using EDI, which works well. Everything flows from their ERP as a PO, straight into our ERP without anyone touching it. EDI took quite a while to set up and cost a bomb, but now it’s basically set and forget.
Similarly, our smaller customers are going well…… I call them our ‘mum and pop’ shops. They represent another 20% of our business and they almost exclusively order online now. The transition for them was relatively easy, as support for their special pricing was the dangling carrot we used when switching them to our online system. They’ve been pretty happy to stop faxing and emailing orders, as they were using the website to check availability and product info anyway.
That leaves us with the rest – almost 60% of our market who just don’t order online. This is a real constraint in our business and reducing it somehow would have huge benefits for our order-to-cash process (not to mention ensure I get the bonus I’m hanging out for...).
Some of our current challenges?
- Although we run a nationwide, coast-to-coast business, our office is only open 8am - 4pm. Automating order entry would enable our warehouse to start fulfilment from 6am when they start their day. We’d be able to get capital city metro orders in before 11am out for same-day delivery - something we’ve been struggling to execute on.
- Sam, our Sales & Marketing Manager, has been trying to get our 5 Customer Service reps to focus on sales of a new range we’ve brought to market. But the team just don’t have much time to speak to customers or promote the new range because order entry takes up around 50% of their time.
- Margin pressure is having an increasing impact. Whilst our overseas suppliers and our factory have locked in pricing, it looks like our landed costs are going to increase in the midterm… not good for profit. We’re also starting to see signs in the US of Amazon and other mega-competitors eyeing the B2B market. We need to inoculate ourselves against this competitive pressure, which means driving efficiency up and cost to serve down.
To better understand our constraint, Sam had Marketing conduct a survey of about 50 of our mid-size customers, asking them questions about our eCommerce site and why they didn’t order online. Here’s what we found:
- Whilst this majority group of customers (comprising retailers, repairers and distributors) loved the self-service functions of our website, they ran ERP or Point of Sale systems within their own business.
- The demand for our product was based on their own procure to pay process, which generally started with some replenishment function they ran, that dictated what to order and how much.
- This function would turn the demand into a Purchase Order, and their system would automatically email it to us as a PDF order.
Sam and I looked at each other and it all made sense. There was no way in the world our customers would want to manually punch an order into our eCommerce system after they’d automated the segment of their procure-to-pay process that created the purchase order. They’d done their work!
From there it became our order to cash process, and right there at the beginning was a manual step (data entry) required to link our customers’ supply chain to ours. The challenge was on – we’d need to remove this order entry constraint if we wanted to reap the rewards.
That month, Sam and I presented our findings at the management meeting. We gained approval to initiate a project to automate order entry and address a major break in our extended supply chain.
Today, three months in, our automation project is showing some promising results:
- Approximately 50 of our 300 mid-size customer orders are being handled by our automated order processing system.
- Just based on those 50 customers alone, we’ve clawed back roughly 15% of the total time spent by Customer Service on order entry. And that number will grow as we automate further customers.
- Freeing up this time has allowed Customer Service to be proactive about educating customers on our new product range, and it’s gaining a bit of traction out in the market.
- The CSRs are enjoying bonus system incentives for the new range, which Sam believes will be a winner.
Automating our sales order entry has benefited the business enormously already and we’re keen to expand it to even more of our customers.”
Dave and his distribution business, while fictional, are typical of what’s occurring out there. Companies today have invested in tools like ERP, workflow systems, and eCommerce to support automation across their businesses, but their value chains are still broken in key places between customer and supplier – both internal and external.
As we approach the third decade of this new century, there are massive opportunities for improvement across all facets of the supply chain. Automation, AI, machine learning and robotics are becoming more accessible, both in function and in cost.
Strap yourselves in, my friends. The future is now.