Minimize Costs with Supply Chain Agility and AI

The era of ever-liberalizing trade that began in earnest in the 1950s (albeit with periodic ups and downs) came to an epochal end in the 2010s. Over the past decade, the ever-more demanding environment for supply chain planning and execution has forced enterprises to take a more strategic approach to managing these processes. The need for resiliency and adaptability in a rapidly changing world economy almost always raises costs unless organizations devise ways of mitigating the impact. Some of these incremental costs are directly related to the bill of materials because the parts, materials, transportation and logistics are more expensive and, in a sense, unavoidable. But other costs that are a result of poor planning processes and their downstream impact on operations and sales can be addressed by supply chain planning software.

Since the 1980s, software allowed enterprises to better align inventories with demand, improve sourcing and optimize distribution and transportation. Artificial Intelligence (AI), generative AI (Gen AI) and agentic AI amplify the inherent capabilities of well-developed business applications. The technology enables organizations to plan, react and execute with greater precision in shorter time frames to promote agility. Agentic AI can shorten planning and execution cycles by reducing entrenched inefficiencies when executing highly complex processes, thereby enabling companies to adapt faster to disruptive events in supply chains while being more responsive to market demands. ISG Research asserts that by 2027, almost all providers of supply chain planning software will incorporate agents to speed response to events in order to optimize cost and customer satisfaction.

Some enterprises began to adjust to the new era of trade in the late Teens as tariff skirmishes mounted, and the trend was accelerated during the pandemic. What was once a simple strategy of minimizing landed cost has become a dynamic optimization exercise that addresses an ever-shifting landscape of factors affecting sourcing, purchasing, receiving and shipping goods.

Especially for businesses that make complex products with parts and supplies sourced globally and handled through multi-tier distribution systems, supply chain planning and execution have never been simple. These processes can be complex, requiring the coordination of efforts of disparate groups within an organization and between numerous enterprises. The multiple variables involved and shifting facts on the ground result in perpetually juggling timetables, priorities and costs. Supply chain planning software is designed to limit the number of balls dropped in this juggling exercise and minimize the impact on cost and customer satisfaction when dislocations occur.

To illustrate the sources of avoidable supply chain costs, consider a made-to-stock manufacturing company that purchases parts and materials to create a product and then ships it out of inventory to fulfill the order. Ideally, enterprises would have just enough product on hand to satisfactorily fulfill all orders as they come in. Yet, since demand forecasting is inevitably inexact, enterprises build in safety stocks of parts, materials and finished goods to be able to satisfy demand. The objective is to optimize the size of those buffers, trading off the cost of lost revenue, customer relationships and potential manufacturing inefficiencies against the financial cost of holding excess inventory, its potential spoilage and obsolescence, along with costs incurred when shortfalls take place to expedite the acquisition of materiel and transporting it to the customer.

Because of inherent business characteristics, some enterprises have a greater tendency to incur excess supply chain costs than others. At one extreme, organizations with access to unlimited supplies, simple and short production cycles and direct-to-customer distribution have limited exposure. It’s relatively easy to adapt quickly to changes caused by unplanned demand, unavailable supplies or factors affecting transportation and logistics. Inventory turnover is rapid, and inventory changes can be made swiftly.

At the other end of the spectrum are enterprises that have some combination of long-lead parts or supplies (a three-month or longer lag from order to receipt), single-source or limited suppliers, multiple production and distribution locations and multiple-step sales and distribution systems. These factors are more vulnerable to disruption. To deal with issues that can complicate matching supply and demand, organizations need to support greater volumes of inventory along the supply and demand chains to achieve an optimal level of demand fulfillment. So long as the commercial and trading environment supported straightforward cost-minimization strategies, supply chain planning and execution for these types of businesses was simpler, albeit not simple.

We live in an age of uncertainty, not unpredictability. Lately, the increased probability of events that amplify uncertainty is forcing enterprises to use software to achieve better coordinated planning across business silos, make forecasts more accurate and compress decision cycles to support faster adaptation when reality diverges sufficiently from plan.

To achieve performance and profitability objectives, enterprises must be mindful of the volatility and, therefore, greater uncertainty in supply chain planning and operations. Increasing safety stocks across supplies, parts and finished goods to deal with this means higher carrying costs in the form of financing working capital (due to lower inventory turns) and the potential losses from spoilage and obsolescence. When shortfalls inevitably occur, costs are incurred to expedite the acquisition of materiel and transporting it to the customer. In transportation and logistics, macro factors such as port strikes, tariffs and terrorism affect pricing, availability and routing, and therefore costs, including compliance and risk management, especially insurance. Some of these costs are inevitable, but some are avoidable by using supply chain planning and execution software.

A better planning process, one supported by supply chain planning software, allows enterprises to improve situational awareness by continuously monitoring divergences between expected and actual results, keeping tabs on demand and supply signals in the markets, while scrutinizing useful leading indicators to consider how best to respond to potential scenarios. By orchestrating more timely, accurate and coordinated planning, enterprises can avoid delays in decision-making due to slow planning cycles, often caused by the time required to find, collect and validate data used for analysis. The use of predictive planning and modeling supported by AI can address the common problem of not being able to simulate enough scenarios and their impact with any useful detail.

Inventory turns have been increasing over the past several decades, in part because enterprises have been able to manage them with greater precision. Once common, inventory-led economic recessions are now rare. Software alone cannot improve performance, but progress is difficult to achieve without it. AI, GenAI and agentic AI can enable organizations to plan, react and execute with greater precision in shorter time frames to promote agility. Agentic AI can also devise new ways to shorten cycles, reduce inefficiencies in executing highly complex processes, and enable organizations to adapt faster to disruptive events in supply chains while being more responsive to market demands. The full impact of these technologies will not appear overnight. We have learned from past innovation cycles that the diffusion of technology into business processes and practices is a gradual process. Typically, enterprises that figure out early how to make use of new tools achieve a sustainable competitive advantage. I strongly recommend that supply chain executives and senior leadership teams make a concerted effort to assess and implement supply chain software to avoid costs caused by a more challenging business environment. They must also focus on the process redefinition and change management aspects of technology to ensure they achieve the fastest time to value from their software investments.

Regards,

Robert Kugel