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ILP Institute Insider

February 17, 2014

Digitization, Decentralization, and Omni-Channel Retail: The Future of Supply Chains

Chris Caplice directs research to help companies around the world respond to the latest developments and disruptions in supply chain management.

Eric Brown

Business executives spend a lot of time fretting over the supply chain, and for good reason. Making the right decisions about mobile commerce and web-based logistics can make or break a company. Yet just when you think you've got a handle on it, the supply chain goes and changes again.

Chris Caplice
Executive Director, MIT Center
for Transportation & Logistics
"In the U.S. today, consumer products are typically manufactured offshore, brought in through a handful of ports, and then delivered through a three-tier distribution system," says Dr. Chris Caplice, Executive Director for MIT's Center for Transportation & Logistics (CTL). "Yet the recent trends of decentralization and digitization look like they might really disrupt this design and change the way we've been doing supply chain for 20 years. These two trends are feeding into each other, and could dramatically change the way we manufacture and distribute finished products."

The key disruptors are 3D printing and other additive manufacturing technologies, which digitize and reproduce tangible goods. There's no reason to believe that digitization's impact on manufacturing will be any less significant than what it has done to books, music, and movies. 3D printing is already disrupting business as usual in manufacturing products like prosthetics and medical implants, says Caplice, who is also founder of MIT Freight Lab.

Companies are now looking to apply 3D printing to a whole range of products. For example, UPS is piloting 3D printing services in selected UPS Stores, and Motorola's Project Ara aims to use the technology to help build highly user-customizable smartphones.

"For an increasing number of items, there's a growing bifurcation of the intellectual property from the physical product," says Caplice. "By digitizing a product you can more easily customize it. Items can be manufactured layer by layer to fit an individual exactly. It's really going to tap into our desire to be different."

According to Caplice, the move toward customized 3D printed products will not only change the number of stock-keeping units (SKUs) a company provides, but also the scope of inventory. "Generally, customized 3D printing is going to increase the number of SKUs, but in the end, it could also reduce the total inventory level for certain products like spare parts," says Caplice. "If you are Cummins or Caterpillar, you have to maintain a 1940's tractor that's still out in the field, even if that spare part gets used only every 10 years. With 3D printing, instead of keeping them in stock, you have a machine that can make them on demand. So the total quantity of inventory will go down while the number of unique items will dramatically increase."

As the demand for customization increases, companies will be motivated to decentralize manufacturing, says Caplice. "The trend toward decentralization has been spurred on by an increase of customization options toward the end of the manufacturing cycle," he says. "As demand for customization increases, the size of the main manufacturing plant can shrink. As it gets smaller, you can move it closer to points of consumption, closer to where most of the people live. This will have a significant change on distribution of goods because you won't have as much long haul, you won't have as much volume coming in through the ports."

Omni-Channel Retail
The changing supply chain picture is complicated by the evolving role of the Internet in e-commerce. Not only does e-commerce represent an increasing percentage of retail sales, but with the growth of the mobile Internet, the retail channel is evolving into an "omni-channel" approach. The trend is "changing how we handle orders and delivery," says Caplice.

Instead of having isolated online and bricks and mortar businesses, companies are beginning to integrate these silos, says Caplice. There are many more options now for purchasing and delivering products. You can now order a product on a smartphone, and pick it up at the store, or alternatively, see something you like at the store, place an order for it, and have it delivered at home.

"The blending of where you place your order and where you get it delivered is changing the way retailers set up their supply chains," says Caplice. "They're putting more inventory into their stores, which are now acting as advanced warehouses. It's hard to blend these inventories together because they don't always know where everything is. It's not isolated into these distinct channels, which is how they set up their retail chains."

CTL: A Global Scale Network for Supply Chain Research
Helping companies respond to new supply chain trends like digitization, decentralization, and omni-channel retail is the central charter of the 40-year old Center for Transportation & Logistics (CTL). In addition to offering Masters and Phd programs, the Center offers executive education. About 50 companies ranging from WalMart to BASF to Proctor & Gamble send their executives to CTL to learn the latest concepts. These partners also recruit and work with CTL students.

The CTL also does about $10 million in funded research, mainly from the private sector, says Caplice. "The projects range from resilience of supply chain to sustainable supply chains to humanitarian logistics to freight transportation and more," he adds.

Over the last decade, one of the biggest projects has been the MIT Global Supply Chain and Logistics Excellence (SCALE) Network. The SCALE Network essentially duplicates the education, corporate outreach, and research programs of CTL in other countries. The first center was set up in Zaragoza, Spain, followed by one in Bogota, Colombia, in 2008, and one in Kuala Lumpur in 2011. This year over 100 students enrolled in the SCALE Network graduate programs.

Corporate interest in the SCALE Network is high, says Caplice, as it gives companies hands-on experience with how supply chain practices might differ in Europe, Latin America, and Asia. "We have partners like BASF and Ralph Lauren that are involved in all four programs to give them a larger, more global solution," says Caplice.

MIT Freight Lab and a World of Uncertainty
Caplice also founded the MIT Freight Lab six years ago to research freight transportation issues, including planning, design, procurement, and management. MIT Freight Lab's Future Freight Flows project, for example, applies scenario planning and a "softer qualitative approach" to long term planning, says Caplice. Funded in part by the U.S. Department of Transportation and various state governments, the project is attempting to come up with tools and strategies to assist local governments in making long-term freight transportation investments.

Several other MIT Freight Lab projects focus on planning under uncertainty. In a project with WalMart, for example, the researchers used stochastic optimization to "determine when to use a private fleet or a for-hire carrier for selected lanes, depending on the variability of demand within their stores," says Caplice.

A separate Freight Lab project with the Defense Department's U.S. Transportation Command is "looking at the frontier between being robust and flexible," says Caplice. "How much effort should you put into building a very resilient plan that won't break versus having something that's more flexible with real-time operations?" Procurement has been another major research focus. "The takeaway is that the method of procurement should match the economics of the underlying vendor," says Caplice.

In the end, freight planning always comes down to risk management, which can be complicated by wild cards like fluctuating energy prices and increasingly unstable weather. "Whenever you're doing a planning model for supply chain and logistics, you always want to watch out for where the uncertainties lie," says Caplice. "There can be uncertainty of demand, of input, price of fuel, or availability of resources. Every domain has a different set of uncertainties, so you can't have a cookie cutter approach. You have to understand the uncertainties affecting that business and then model and plan around them."